Archive - Jan 15, 2012 - Story

UPDATE: ES leaking lower as Packers fans sell (and China's Shanghai Composite -0.8% at open and Hang Seng -1%)

Following EURUSD's modestly weak opening (though managing to hold above Friday's lows and inching higher), EURJPY has pushed to fresh new 11-year lows (and JGB yields at one-year lows). Asian equities are trading notably lower with Japan's Nikkei down 1.6% in early going (coming back a little now) and South Korea's Kospi down 1.1% so far. ES (the e-mini S&P 500 futures contract) opened lower, tried to get back up to Friday's close, failed and is now down around 6pts (at 1285) - still shy of where broad risk assets (CONTEXT) would expect - around 1280 for now - though AUD weakness (housing data bad not totally dire though carry being lifted), JPY strength (government comments on the flatness expected in Japan's recovery and safety flow) and Treasuries not open is undermining support for stock futures so far. The economically-sensitive commodities are leaking lower with Silver having given back its earlier gains and Copper down 0.75%, Oil is holding near $99 and Gold is down a smidge (and more stable than the rest) at -0.23% ($1635). The market's message is risk-off for now and we would expect Bunds to benefit (as JGBs are for now while corporate credit leaks wider) as without Treasuries open, where is risk capital going to flow.

Just like back in the first half of 2011, when GDP experienced a premature climax to coincide with the end of QE2, only to tumble promptly afterwards, so just as two thirds of the S&P by market cap prepare to announce earnings starting tomorrow, Q4 EPS forecasts have hit the lowest they have been at in the past 12 months. While the general economy has been lagging the contraction of Europe and Asia, yet finally hit a downward inflection following the disappointing data of the past week (more on that shortly, as we explain why with the Fed set to begin an easing bias in 10 days, all economic indicators are about to take a dive), it has been corporate results that have so far managed to keep the market afloat. This may be coming to an end, courtesy of a perfect storm of negative earnings preannouncements (which have soared to a ratio of 3.5x compared to positive ones; the highest since Q1 2008) together with outright coincident misses. Because as the chart below shows, at $24.09 and pointed decidedly downward, Q4 EPS and its transition to Q1 2012 does not portend anything good for the world economy or markets. In fact, with the EUR plunging, while the news is welcomed by German exports, the adverse impact to US companies, via FX losses and otherwise, is about to be unveiled.

It is not what the few do but what the many don’t do. That really represents what we are all about, co-conspirators in a sea of silence. Marines who view despicable acts committed by other marines remain silent; the officers, who are well aware of this behavior, condone it, invariably following the “ethical criminal” attitude in war morality of “when in war, shit happens”; and the nation prefers to play the part of Pontius Pilates.

It would appear that the German public (and political class to some extent) are beginning to see the European project in the same manner as we described back in July. As the increasing burden of saving the eurozone from its own excess falls on the shoulders of every Tobias, Dirk, and Heike taxpayer in Germany, even industry leaders, such as Wolfgang Rietzle, the CEO of Linde, this weekend according to Reuters, are suggesting a line in the sand has to be drawn and that "if we do not succeed in disciplining countries then Germany needs to exit." This has been very much a view we have held for months, that instead of the periphery limping away one-by-one, the very core of the foundation will simply decide enough is enough or as Reitzle notes (among many other critically insightful comments) "the willingness of countries to reform themselves is abating if, in the end, the European Central Bank steps in." This morning Germany's FinMin Schaeuble added to the potential separation rhetoric with his comments, via Bloomberg:

• *SCHAUEBLE SAYS ECB AS LENDER OF LAST RESORT WOULDN'T CALM MKTS
• *SCHAEUBLE SAYS JOINT EURO REGION BOND SALES NOT A SOLUTION

Hardly reassuring given the dreams of every GGB owner and BTP-exposed insurance company are banking on the ECB cranking the presses to 'secure' nominal returns in the real world. Friday's mass downgrade (and S&P's more interesting Q&A) have perhaps left Germany on the hook for up to 56% of its GDP via the EFSF support mechanisms and as we noted six months ago, the moment for Atlas to shrug draws closer with every downgrade and SMP action.

It has been a busy weekend for Wall Street, which has been doing all it can to spin the S&P downgrade in the best favorable light, although judging by the initial EURUSD and EURJPY reaction, so far not succeeding. Below we present a quick report written by Goldman's Lasse Nielsen on why in Goldman's view the downgrade's "impact is likely to be limited" and also the quick notes from an impromptu call MS organized for institutional clients (which had just two questions in the Q&A section, of which only one was answered - it appears virtually noboby believes that global moral hazard will allow anyone to fail at this point, so why bother even going out of bed).

Back in August 2010, we presented an idea proposed by our friends at SK Options trading for a very simple trading strategy: being long gold in the overnight session, and shorting it during the day. At the time of writing, such a strategy would have returned $2.16 billion from a $100 million initial investment in 10 years, a 37.46% annualized return. Today, we provide a much needed follow up to this quite stunning divergence. As SK notes: "we have revisited the article and written an update. Not only does the discrepancy still exist but it has been actually increasing. That fund would now be worth $5.26B, way up from $2.16B when we last wrote about it - in other words an increase of 143% in just over a year. When we wrote about this in August 2010, the annualized return of the Long Overnight/Short Intraday gold index was 37.46% since the start of 2001. However if we measure from now the annualized return since 2001 is 43.24%, with the annualized return of the Long Overnight/Short Intraday gold index standing at roughly 64.4% since 2009." So for those who wish to layer on an additional alpha buffer on top of what is already the best performing asset of the past decade, the SK Options way just may be the strategy. As for the reasons for this gross arbitrage - who cares. Is it manipulation? is it the early Asian buying offset by London pool selling? It is largely irrelvant - the point is that this is "the divergence that keeps on giving" - kinda like a Stolper trade, or an inverse Tilson ETF, and until it doesn't, or until something dramatically changes in the precious metal market, it is likely that this trading pattern will continue for a long time.

To those who woke up on Saturday to images of a massive cruise liner keeled over following a very peculiar Friday night accident off the coast of Italy, no, this was not a prop for the latest James Cameron movie: it is the Carnival Corp's Costa Concordia, which carried over 4,200 passengers and crew, and foundered after hit a submerged rock off the Tuscan  island of Giglio in very calm conditions. At last count 11 passengers and 6 crewmembers were missing, with at least 6 confirmed dead as of last night. Here is what is known as of right now.

First we had news that out of the blue, the Western embargo against Iranian oil exports would be delayed by 6 months, and now, in the aftermath of last night's developments out of Iran which blamed the CIA for the murder of its nuclear scientist we get this (from Bloomberg):

• ISRAEL, U.S. POSTPONE MILITARY EXERCISE, ISRAEL RADIO SAYS
• JOINT EXERCISE POSTPONED FOR BUDGET REASONS, RADIO SAYS
• U.S.-ISRAELI EXERCISE PLANNED TO BE BIGGEST EVER, RADIO SAYS
• EXERCISE WAS TO TAKE PLACE IN NEXT FEW MONTHS, RADIO SAYS

And just so it doesn't look like a total cave in:

• ISRAEL SAYS JOINT U.S. MILITARY EXERCISE STILL UNDER DISCUSSION

As a reminder Iran made it very clear an escalation in joint US-Israel war game cooperation would be met with yet another miliary exercise out of Iran.