Archive - Jan 18, 2012 - Story

Amid the best start of the year for the S&P 500 since 1987, Nic Colas of ConvergEx offers some deep thoughts on how behavioral finance concepts can help us understand the dichotomy between last year's derisking and this year's rerisking in terms of market participant psychology. Between delving into whether a short-sharp or long-slow colonoscopy is 'preferable' Nic reflects (antithetically) on 10 bullish perspectives for the current rally and how the human mind (which still makes up maybe 50% of cross-asset class trading if less in stocks) processes discomfort in very different ways. Critically, while it sounds counter-intuitive to him (and us), focusing on the pain of recent volatility is actually more conducive to investors' ability to get back on the horse especially when the acute pain is ended so abruptly (intervention). As studeis have found, "subjects who actually focus on a painful experience while it is happening are more willing to immediately undergo further pain than those who performed some distracting task"

Earlier today we got our first clue that the smart money has stopped "distribution" and is now offloading to retail after we saw the first equity fund inflow, however tiny, in months, and only the second one out of 37 outflows since April, as reported by ICI. The second and far more important one comes from today's Goldman sales roundup, which confirmed that following today's latest borderline ridiculous meltup, retail investors looking for the sucker at the poker table, wouldn't be able to find one. Here's why. Quote Goldman: "As has been the recent trend, our cash flow remains better to sell, both from long-only and hedge funds." And there you have it: smart money (well, relatively so) has "recently" been using every melt up chance it gets to dump the bags with the E*Trade baby. Third and final proof: "ETF flow however skewed toward better buying." At this point retail investors may want to ask themselves: what do they know that the others, who are actively selling to them, don't.

Ignoring, momentarily, that the U.S. has already adopted international law which seeks to curtail online piracy (see, e.g., DMCA), and that these new bills seek to do little more than enact what amounts to police powers over foreign companies, it looks like the studies cited in support of piracy-gone-rampant may have never have existed. Julian Sanchez, a researcher at the Cato Institute, did his level best at tracking down the research behind the near-absurd numbers (the industry claims nearly $250B lost in revenues a year, and 750,000 lost jobs), but instead found only circular references.

If anyone feels like voting for Newt Gingrich after watching this interview, we only have one question: do whips, chains, and a skin-tight leather outfit await the return from the voting station?

Update: the NYT chimes in, just to make the point all too clear: "Hedge Funds May Sue Greece if It Tries to Force Loss"

Five minutes before market close yesterday, Bloomberg came out with an "exclusive" interview with Marathon CEO Bruce Richards, who may or may not be in the Greek bondholder committee any longer, in which the hedge fund CEO said that the Greek creditor group had come to an agreement and that the thorniest issue that stands between Greece and a coercive default (and major fallout for Europe) was in the bag, so to say. To which we had one rhetorical comment: "Well as long as Marathon is talking for all the possible hold outs..." As it turns out, he wasn't. As it further turns out, Mr. Richards, was just a little bit in over his head about pretty much everything else too, expect for talking up the remainder of his book of course (unsuccessfully, as we demonstrated earlier - although it does beg the question: did Marathon trade today on the rumor it itself spread, based on information that was material and thus only afforded to a privileged few creditors, especially if as it turns, the information was false - we are positive the SEC will be delighted to know the answer). Because as the supposed restructurng expert should know, once you have a disparate group of ad hoc creditors, which is precisely what we have in the Greek circus now, there is nothing even remotely close to a sure deal, especially when one needs a virtually unanimous decision for no CDS trigger event to occur (yes, ISDA, for some ungodly reason, you are still relevant in this bizarro world). Which also happens to be the fascination for all the hedge funds, whom we first and then subsequently repeatedly noted, are holding Europe hostage, to buy ever greater stakes of Greek bonds at 20 cents on the dollar. Because, finally, as the FT reports, the deal is nowhere in sight: "Several hedge fund managers that hold Greek debt have said they have not been involved in the talks and will not be agreeing with the “private sector involvement” (PSI) deal – which centres on a 50 per cent loss on bondholders’ capital and a reduction in the interest they receive... Even members of the committee concede the process is unlikely to succeed in time for the crunch date: a €14.5bn bond repayment falling due on March 20." But, wait, that's not what Bloomberg and Bruce Richards told us yesterday, setting off a 100 point DJIA rally. Time to pull up the Einhorn idiot market diagram once again.

A short time ago, the House of Representatives rejected (by 239-176 though not enough to avoid Obama's veto) the $1.3tn increase in the federal debt limit. As Reuters notes, this vote seems like 'a largely symbolic vote aimed at staking out election-year positions on government spending' as we know by now that Timmy G will underfund yet another pension plan (on the promise to transfer-pay it all back very soon) if it ever came to that. The Hill also adds Democratic comments that this was clearly 'a political stunt' as the House Minority Whip Steny Hoyer says "This is a game that will say, see, I voted against debt." Where the sound-and-fury is laughable of course is that both the House and Senate need to 'disapprove' of the debt ceiling hike that is already 'pre-approved' in last year's Budget Control Act (and the Senate is widely expected not to disapprove). As politician after politician sought media-time, Ron Paul echoed his sensibilities (though not really helpful in this situation) that "we're in denial", and "you can't solve the problem of debt by accumulating more debt."

The slippery slope of lower volume continued today in the NYSE (cash/stock trading markets) despite ES (the e-mini S&P futures market) seeing its 2nd highest volume since 12/16 as that futures market has only seen 1 day of the last 11 with a negative close-to-close change. Driven seemingly by yet another rumor that the Greek PSI deal is close (yet GGBs are lower?), risk assets broadly went into overdrive and while ES held 1300 (on very large average trade size and volume as broke that stop-heavy level), the shifts in commodities, FX, and Treasuiries all helped sustain the euphoria into the close where we stabilized at yesterday's pre-market highs. Copper, Silver, Gold, EURUSD (and all FX majors aside from JPY), Treasury yields (and 2s10s30s) all closed at their highs of the day and while oil dropped early (around the Keytsone news?) it also limped back higher to $101 by the close. Equity markets were slight leaders on the day but credit caught up into the close. We do note that while the high-yield credit index has rallied dramatically but worry that the optical compression of spreads (bullish) is hiding the bear flattener in 3s5s that is seemingly dominating flow for now (relative to underlying credit).

The big news of the day, aside from the idiot rally finally being back on full bore, is that the Obama administration finally pushed Canada's hand in telling it to sell its crude to China instead of the US, which we are confident it will gladly do. Much of this was largely priced on, as was the fact that opportunity for significant job creation was just kicked to the curb. What was not however expected, is that in keeping up with the fine tradition of taking responsibility for his decisions and actions, kinda sorta, America's president said that it was really the republicans whose fault it is that Keystone XL is now and will remain in its blueprint stages. From The Hill: "Obama said he was not acting on the merits of TransCanada Corp.’s plan, but instead was forced to make the decision based on the “arbitrary” deadline mandated by GOP provisions in December’s payroll tax cut extension deal. "As the State Department made clear last month, the rushed and arbitrary deadline insisted on by Congressional Republicans prevented a full assessment of the pipeline’s impact, especially the health and safety of the American people, as well as our environment," Obama said in a prepared statement. “As a result, the Secretary of State has recommended that the application be denied. And after reviewing the State Department’s report, I agree,” Obama added. In other words, do you remember where you were when the republicans blocked the Keystone Pipeline?

We discussed the bullish themes (and Nomura's skepticism) earlier today but as the S&P 500 cracks 1300 once again and banks (GS cost-cutting sustainability?) and builders (NAHB Index? context please) are off to the races once again, we thought it might be appropriate to see just how well the worst of the worst has outperformed the market. Using our standby GS index that tracks the most shorted names in the broad market, we see that year-to-date, the most-shorted names are up 5.8% against the Russell 3000 which is only up 4%. Furthermore, since late yesterday, the most-shorted names have doubled the market's performance (+2.1% vs +1% from 1430ET yesterday).

Presented with little comment except to note that Bloomberg's Chart-of-the-Day highlights specifically what we have been discussing for weeks as in this earnings season, only 47% of companies in the S&P 500 have so far exceeded analyst expectations - the lowest since before the credit crisis. S&P 1300 FTW.

One reason for the severity of the financial crisis, and the losses incurred by banks, is that bankers and financial analysts were using linear tools in a non-linear, highly complex environment otherwise known as the financial markets.The models didn’t work. The problem we face now as investors will end up being existential for some banking institutions and sovereigns. Our (uncontentious) core thesis is that throughout the west, more debt has been accumulated over the past four decades than can ever be paid back. The question, effectively to be determined on a case-by-case basis, is whether bondholders are handed outright default (which looks increasingly like the case to come in Greece) or whether the authorities, in their understandable but misguided attempts to keep the show on the road, resort to a policy of inflation that could at some point easily spiral out of control. As Rothbard wrote, “The longer the inflationary boom continues, the more painful and severe will be the necessary adjustment process… the boom cannot continue indefinitely, because eventually the public awakens to the governmental policy of permanent inflation, and flees from money into goods, making its purchases while [the currency] is worth more than it will be in future.” “The result will be a ‘runaway’ or hyperinflation, so familiar to history, and particularly to the modern world. Hyperinflation, on any count, is far worse than any depression: it destroys the currency – the lifeblood of the economy; it ruins and shatters the middle class and all ‘fixed income groups;’ it wreaks havoc unbounded… To avoid such a calamity, then, credit expansion must stop sometime, and this will bring a depression into being.”

The Greek PSI is once again (still) hitting the headlines. Here is what we think the most likely scenario is (80% likelihood). Some form of an agreement will be announced.  The IIF will announce that the “creditor committee has agreed in principle to a plan.”  That plan will need to be “formalized” and final agreement from the individual institutions on the committee and those that weren’t part of the committee will need to be obtained.  The headline will sound good, but will leave a month or so for details to come out.  In the meantime every European and EU leader (or employee) with a press contact will say what a great deal it is.  That it confirms that Europe is on the path of progress and that they are doing what they committed to at their summits. That will be the hype that will drive the market higher (or in fact has already done so). However, the reality (as we noted earlier in Einhorn's market madness chart) is that this still leaves hedge funds to acquiesce (unlikely) and furthermore focus will switch to Greece's actual debt sustaianability post-default (yes the d-word) and as we are seeing recently, Portugal will come into very sharp focus. If they cannot bribe and blackmail and threaten their way into something they call PSI, then we will see Greece stop making payments, and then the markets will get very ugly in a hurry.

CNBC's lonely realist took just over three minutes of his busy day today to explain in language that even the e*Trade baby could understand, why he fears for his First Amendment rights. As more sites take a stand against 'top-down' decision-making and who decides what is fair, Santelli veers from SOPA to Obamacare to the EPA in today's well-warranted and reasoned rant at the top of a slippery slope.

Who needs actual jobs when you can have crony solar companies which go tits up in under 2 years at a cost to taxpayers of over half a bill. From Bloomberg: "The Obama administration will likely announce rejection of TransCanada Corp.’s Keystone XL pipeline later today or tomorrow, according to two people familiar with the matter. The decision will probably come from the State Department, which has been charged with reviewing the project, and a joint statement will come from some of the larger unions and environmental groups in support of the decision, according to one of the people, who spoke on the condition of anonymity before the announcement is made. It wasn’t immediately clear whether the administration would continue studying alternative routes for the pipeline from Canada to the U.S. Gulf Coast."