Archive - Nov 2012 - Story

Early macro data that was mixed (retail sales, Kansas Fed, Claims, some GDP ugly) saw stocks limp a little off the overnight hope highs but once the day-session opened in the US we were off to the races with stop-runs galore triggered by Boehner (down), Reid (up and down), Schumer (up) as the fiscal cliff idiocy hangs Damocles-like over every algos trigger finger. Treasuries largely ignore the afternoon schizophrenia - trending lower in yields as once Europe closed the USD drifted lower and bonds and stocks were bought in a 'we-heart-USA' style. High-yield credit had outperformed in the mid-afternoon but stumbled a little - notably after news of the SVU PE deal failed to fund. Commodities had a good day in general though we note that Gold/Silver is at its lowest level in nearly nine months as Silver has significantly bounced off its spike lows this week. Gold and stocks continue to recouple with the latter more volatile but the anchoring on VWAP and spike-to-stop-run swings are making the intraday behavior of equity indices become a little more farcical by the day.

In a recent article at the NYT entitled 'Incredible Credibility', Paul Krugman once again takes aim at those who believe it may not be a good idea to let the government's debt rise without limit. In order to understand the backdrop to this, Krugman is a Keynesian who thinks that recessions should be fought by increasing the government deficit spending and printing gobs of money. Moreover, he is a past master at presenting whatever evidence appears to support his case, while ignoring or disparaging evidence that seems to contradict his beliefs. Krugman compounds his error by asserting that there is an 'absence of default risk' in the rest of the developed world (on the basis of low interest rates and completely missing point of a 'default' by devaluation). We are generally of the opinion that it is in any case impossible to decide or prove points of economic theory with the help of economic history – the method Krugman seems to regularly employ, but then again it is a well-known flaw of Keynesian thinking in general that it tends to put the cart before the horse (e.g. the idea that one can consume oneself to economic wealth).

Whiting Petroleum just experienced a 'fat-finger' as we are sure Pisani and his ilk will describe it. What clearly happened was the headline/story scraping algos were tripped up by a sentence containing a bullish start and a bearish finish...

Whiting Petroleum Corp. explored selling itself [BULLISH buy buy buy] earlier this year but decided not to proceed after buyers balked over the oil producer’s asking price [BEARISH sell sell sell], according to people familiar with the sale efforts.

By the time the algos had read that first sentence of a WSJ Deal Journal blog post, the stock had pumped-and-dumped over 8% in 250 milliseconds - at which point humans entered the party (and sold). Efficient liquidity providers indeed.

When Warren Buffett claimed that a lot of secretaries pay higher tax rates than the super-wealthy, JPMorgan's Michael Cembalest wanted to take a closer look, and sure enough Buffett’s assertion is only the case in a minority of situations (like his own). We would therefore not expect to see large revenue estimates from an analysis of the fiscal impact of the proposals in the Fair-Share Act of 2012, since there are not that many people that would be impacted by a minimum 30% effective tax rate. Sure enough, the incremental revenue raised by the Fair-Share Tax Act is around $8 billion per year. This is real money and may be sound public policy, but in the context of a $1 trillion budget deficit expected for FY2013, it’s a rounding error. To convey this zoologically, we show two animals whose volume is proportionally the same (125 to 1): a hippopotamus, and its symbiotic companion, the yellow-billed oxpecker. We would like to think that elected officials and political commentators would avoid grandstanding and not mislead anyone on the fiscal impact of their proposals, but right now, there are some people who need help distinguishing between birds and hippos.

Nobody can doubt that (in)famous short seller Muddy Waters, whose initial research pieces received broad distribution on the virtual pages of Zero Hedge, does sufficient due diligence on the companies they designate as targets of their ire. And just for humiliating John Paulson with the utter debacle that was Sino Forest they will forever live in the pantheon of "out of the blue", ad hoc bearish research analysts with a chip on their shoulder. Furthermore, right or wrong, Muddy Waters and their fraudcap peers do a great benefit to the investing society by testing, often repeatedly, the weakest links in the "story" of any one company (especially those out of the increasingly more criminal orient) - if right, it merely precipitates the bankruptcy of what will be a dead end corporate story and thus the misallocation of capital by lazier investors; if wrong, they allow management to generate higher IRRs by buying back their stock in the open market (a far better use of funds for honest management teams than suing independent third party research analysts who may or may not have a short stake). Yet sooner or later, everyone peaks. Has Muddy Waters? This is perhaps a relevant question now that the shorters have taken up another campaign, this time against Singapore agri-processor Olam. The raw data, compiled by Bloomberg is below: decide for yourselves.

Three visualizations describe the breakdown of PSMs--previously successful models: S-Curves, Supernovas and Rising Wedges. A successful model traps those within it; escape becomes impossible.  We see the immense power of previously successful models. Straying from the previously successful trajectory looks needlessly risky, even as the trajectory has rolled over and is heading for unpleasant impact. Anyone who questions the previously successful model (PSM) is suppressed, fired or sent to Siberia as a "threat" to the enterprise's success. Anyone who realizes the Titanic will inevitably sink and abandons ship leaves behind all their sunk capital: they leave with the figurative clothes on their back.

We noted the debacle that occurred at midnight Eastern last night but the impact of this sudden and completely unfounded voluminous surge in buying activity (on no news or rumors) was much more widespread than just e-mini S&P 500 futures. The other equity indices also tagged along and we saw volumes and quote-rates jump in EURUSD futures, but more so in Crude futures and AUD futures. Thanks to NANEX, the charts below show the millisecond-by-millisecond reality of a broad and deep-pocketed algo liftathon as most of the East coast was tucked up in bed and Europe had still to wake. PPT - who knows? But it seems unusual at best or someone somewhere getting a rather large tap on the shoulder to shut their entire futures book?

This memo on the official whitehouse.gov website was released the other day and as Mike Krieger notes, it deserves wider discussion. It implies that the Obama Administration may be very worried about the truth getting out about all of their crimes, potentially via leaks from high places.  Read it for yourself, but the language is pretty clear.

In America we face our fiscal cliff or perhaps our bungee jump and while no resolution is in sight the one thing that we can hang our hats on is that we will face higher taxes. These may be the ones currently proposed or they may be totally new ones as defined by some sort of compromise. Given this 99% possibility it may be wise and in my opinion it is wise to take some profits now before the end of the year. We would start with bonds that are trading within a hairsbreadth of Treasuries or even through them and redeploy further out the curve in bonds that have some reasonable chance of continued compression. We think the compression will continue as the policy of the Fed and the ECB does not change for some period of time and the flows of money keep forcing the compression. We suggest taking some profits now because of two common sense principles.

Harry Reid's rebuttal full transcript - ES 1410 as he speaks...

*REID SAYS `WE'RE NOT GOING TO KICK THE CAN DOWN THE ROAD'
*REID SAYS HE HAD `NICE MEETING' WITH GEITHNER
*REID SAYS STILL WAITING FOR `SERIOUS OFFER' FROM REPUBLICANS

We are stunned... S&P 500 futures traded 1415 when Boehner began speaking. By the end of his first paragraph we had dropped 8 points and gone red for the day...and further...

• *BOEHNER SAYS `THE WHITE HOUSE HAS TO GET SERIOUS'
• *BOEHNER SAYS DEMOCRATS `COMFORTABLE' GOING OVER FISCAL CLIFF
• *BOEHNER SAYS `NO SUBSTANTIVE PROGRESS' MADE IN TALKS
• *BOEHNER SAYS DEMOCRATS RULING OUT `SENSIBLE SPENDING CUTS'
• *BOEHNER SAYS DOESN'T KNOW WHAT WHITE HOUSE WILLING TO DO

It seems the algos are not amused...

We warned yesterday that European equity's surge was not supported by credit and that truism is massively obvious in today's market moves. European stocks soared (especially Italy and Spain) to new cycle highs as corporate and financial credit capped in its recent range - actually widening from its opening gap tights. European sovereigns also gapped tighter on the open and then proceeded to bleed wider all day long - most notably in Spain, Italy, and Portugal. Spanish 2Y jumped over 25bps from low to high yield today (and we suspect Spain bond yields have bottomed in teh short-term). EURUSD remains practically unch on the week - having dropped from over 1.30 earlier when Van Hollen let some truth out on the US fiscal cliff deal. Oil recovered from its spike lows yesterday (as did Silver). GGBs were very quiet and stable at around 35 but Weidmann's comments into the close on transfer unions and not rewarding failure did spook some weakness into risk-assets. Europe's VIX, meanwhile, closed at 16.49% - its lowest since June 2007!

More platitudes is what we would expect. More boiler-plate 'working hard', 'looking for compromise', 'rising above' rhetoric when deep down inside we all know the two parties are as far apart as ever. What will matter as Speaker Boehner talks - live webcast below - is how the algos inspect the flashing red headlines. Then, and only then, can us mere humans know what to think. Equities are limping back higher in anticipation after rising on macro data and falling on Van Hollen's comments.

As of late there has been a flood of commentary written about the housing recovery pointing to the bottom in housing and how the revival in housing will drive economic growth in the years ahead. It is true that the revival in the housing market is a positive thing and is certainly something that everyone wants.  However, the hype surrounding the nascent recovery to date may be a bit premature. Much of the current buying in the housing market has come from speculators and investors turning housing into rentals.  This, however, has a finite life and rising home prices will speed up its inevitable end as rental profitability is reduced.  Furthermore, the majority of home building has come in multifamily units, versus single family homes, and that segment has been growing faster than underlying demand. It is important to understand that housing will recover - eventually.  However, the reality of that recovery could be far different than what the current media and analysts predict. The point here is that while the housing market has recovered - the media should be asking "Is that all the recovery there is?"

Senator Reid’s frustration that progress had stalled as he blamed the Republicans for not bargaining fairly in trying to iron out a compromise signaled to Speaker Boehner that the Democrats will play hardball as well. However, yesterday’s Wall Street Journal article, via quotes from Erskine Bowles, claimed the White House will be flexible when proposing a raise to the top marginal tax rate.  This perceived increase in the probability of a near term accord appropriately rallied stocks aggressively. We question why Mr. Obama would leak his best alternative to a negotiated agreement (BATNA) so early in the process, for classic bargaining strategy suggests keeping that information close to the vest as long as possible. Complicating matters, Mr. Obama declared a preference to strike a deal by Christmas which approximates the Friday, December 21 “zero barrier”.  Ironically, if the Republicans acquiesce to yesterday’s posturing by Mr. Bowles, then the likelihood of a Moody’s and/or Fitch downgrade rises, for the ratings agencies would almost assuredly be disappointed by a lower than anticipated level of incremental revenues.