Archive - Feb 24, 2012 - Story

No. No way. If we have to go through one more year of endlessly repetitive and utterly worthless European bullshit, rumors, headlines, and other subterfuge whose only point is to extend and pretend the fact that Europe is utterly broke, just so the effete Greek citizens can pretend they give a rat's ass about their independence, when in reality they will gladly pay 80% of their salary to keep European banks solvent simply to retain the illusion that their retirement funds are still worth more than diddly squat, we are done.

In his most recent quarterly letter titled appropriately enough "The Longest Quarterly Letter Ever" GMO's Jeremy Grantham literally kills it. Well, maybe not literally but certainly metaphorically.

Silver and Gold remain the major outperformers year-to-date but the rest of commodities - most notably oil is catching up very fast having over taken stocks this week. It appears that the new-found flood of liquidity that we have been so passionately banging the table on for weeks, has found its way into the energy complex as European Sovereigns, European Financials, European Stocks, and US Stocks have all flattened or turned down as Crude and WTI surge. And as a hint to anyone who hasn't jumped on this tidal movement yet, one thing to note is that unlike stocks, commodities always have the risk of marginal or weak hands being shaken out via CME...margin hikes.

There have been numerous media stories out over the last couple of weeks about the recovery in housing at long last.   Of course, this is the same housing bottom call that we heard in 2009, 2010 and 2011 - so why not drag it out again for 2012.  Eventually, the call will be right and they will be anointed with oils and proclaimed to be the gurus that called the bottom.  In the financial world you only have to be right once. However, back on earth, where things really matter, housing is a major contributing component to long term economic recovery.  Each dollar sunk into new housing construction has a large multiplier effect back on the overall economy.  No economic recovery in history has started without housing leading the way.  So, yes, housing is really just that important and we should all want it to recover and soon.  The calls for a bottom in housing now, however, may be a bit premature as I will explain.

Both NYSE and ES (e-mini S&P futures) volumes were the lowest of the year so far. This is the lowest non-holiday trading day on the NYSEVOL (from Bloomberg) since its data began a decade ago and eyeballing ES volumes, this appears to be one of the lowest ever volumes of the last few years. For those who think this is irrelevant as the market's price has risen and so total USD volume remains approximately equal - wrong! Today is the lowest USD volume day since the mid 2009 (which tended to coincide with holiday trading volumes around July 4th) - making today's USD trading volume less than 50% of their 2004-2007 average!

The record volatility, and 400 point up and down days in the DJIA of last summer seem like a lifetime ago, having been replaced by a smooth, unperturbed, 45 degree-inclined see of stock market appreciation, rising purely on the $2 trillion or so in liquidity pumped into global markets by the central printers, ever since Italy threatened to blow up the Ponzi last fall. In short - we have once again hit peak complacency. Yet with crude now matching every liquidity injection tick for tick (and then some: Crude's WTI return is now higher than that of stocks), there is absolutely no more space for the world central banks to inject any more stock appreciation without blowing up Obama's reelection chances (and you can be sure they know it). Suddenly the market finds itself without an explicit backstop. So what are some of the "realizations" that can pop the complacency bubble leading to a stock market plunge, and filling the liquidity-filled gap? Here are, courtesy of David Rosenberg, six distinct hurdles that loom ever closer on the horizon, and having been ignored for too long, courtesy of Bernanke et cie, will almost certainly become the market's preoccupation all too soon.

For our quote of the week, we go to the man who almost brutally cut the meal between breakfast and brunch (it was formerly supposed to be German demand #39 for Greece but was mysteriously cut in the final draft) in the name of fiscal austerity and setting a shining example of calorific sacrifice. We repeat almost. Quote Busineweek: "No one pays attention to the activation of the CDS." Venizelos told lawmakers in comments broadcast live on state-run Vouli TV........     :0

As gold strengthens on the back of the extreme experimentation of the world's (now-sheep-like) central bankers' easing and printing protocols, it does no real harm to the world, but as John Burbank (of Passport Capital) notes, the painful unintended consequence of all this liquidity is energy costs skyrocketing - and it won't stop until the economy breaks. The negative feedback loop, that we pointed to yesterday as potentially the only thing to stall a magnanimously academic response to the insolvency we see around the world (and the need for deleveraging at this end of the debt super-cycle), of oil prices into the real economy will be devastating not just for US but for EM economies, though as the bearded-Burbank reminds us - Saudi benefits greatly (and suggests ways to trade this perspective). Flat consumer incomes while costs are rising is never a good thing and while we make new highs in oil in terms of EURs and GBPs, he warns we may soon in USDs also. Summing up, his perspective is rising tensions in the Middle East combined with central bank liquidity provision are a huge concern: "We're actually quite bearish. The only reason all this liquidity is coming into the market is because things are really bad. It's not because things are good. It's hard to know where things are going to go. The point is, just because they're putting liquidity in the market doesn't mean the economy is improving."

Update: Brent just passed $125

Asia-Pacific Tapis Crude Oil tends to be the benchmark grade for oil and gasoline pricing throughout AsiaPac. As WTI cracks $109, the Tapis crude spot price has just seen the largest 3-week rise since last February and is back to July 2008 highs - over $134. In dollars. This seems like perfectly bad timing for China's RRR cut last week, just as real inflation starts to flare in the real economy, and perhaps helps explains Gold's surge as China unapologetically unleashes inflationary pressures.

Three days ago we recoiled in terror at the stupidity of Greek leaders, when we learned that the Greek exchange offer would be deemed satisfactory if only 66% of bondholders accept it as valid, as it would mean an immediate abrogation of UK-law bonds which have a 75% minimum covenant threshold as specified in the indenture. Apparently this was a "small oversight" on behalf of the gross amateurs in charge of this process as according to the just released full exchange offer doc, this threshold was mysteriously raised to the proper minimum acceptance threshold of 75%. Of course, it is needless to say that at least 25% of Greek bondholders will decline the offer, either in the current Greek law exchange, or the forthcoming UK-law one, which would throw the whole process into a tailspin.  Because here is the kicker, from the release: "if less than 75% of the aggregate face amount of the bonds selected to participate in PSI are validly  tendered for exchange, and the Republic does not receive consents that would enable it to complete the proposed exchange with respect to bonds selected to participate in PSI representing at least 75% of the aggregate face amount of all bonds selected to participate in PSI, the Republic will not proceed with any of the transactions described above." So here's the math: if one has 25% +1 of the €177 billion in Greek-law bonds, they can smash the entire process (and give Germany a way out, wink wink). At today's price of about 20 cents on the dollar, this means that one can hold Greece, and thus Europe (assuming Europe wants Greece in the Eurozone and Germany itself is not the biggest shadow hold out) hostage for less than €9 billion. Or better yet, since the total bonds subject to PSI are about €206 billion, this means UK law bonds of just €29 billion are part of the deal, and one can buy a blocking stake there, at roughly 30 cents on the euro, for a meager €2 billion in cash out today. Furthermore since many hedge funds already have built up blocking stakes, this almost certainly means that Greece will not get the requisite needed votes to pass the exchange. Wondering if these hold-outs are actively shorting the market knowing they can bring Europe to its knees with virtually no capital at risk? You should be.

The decoupling/recoupling we discussed earlier in the EURUSD pair seemed the biggest deal in Europe this week as the 2.5% gain is thge most in a month and takes the cross back to near 3-month highs. Not to be outdone, the VSTOXX (Europe's VIX equivalent) dropped notably and now stands at its lowest in 7 months - dramatically outperforming equity and credit markets on its way as selling vol appears the easiest trade ever (until of course your arms and legs are ripped off by a risk flare). Credit markets outperformed this week as equity underperformed - bringing the two asset classes closer into sync after last week's plunge in credit. Sovereign credit markets were mixed but clearly the high-beta compression trend has stalled as Portugal underperformed dramatically followed by Belgium with the rest generally tracking sideways (and Spain outperforming modestly). JPY weaknes balanced the EUR strength to keep the USD (DXY) from getting completely crushed on the week -1.35% (as Oil has rallied over 5%).

Yes, the Federal government can cover up the damage by borrowing 10% of GDP each and every year ($1.5 trillion, and don't forget to add in the off-budget "supplementary appropriations"), and the Federal Reserve can add trillions in quantitative easing stimulus, but even adding $8 trillion of borrowed/printed money to the economy over the past four years has had remarkably little effect on the private-sector economy. That does not bode well for the "recovery."

As the Greek PSI deal rears its ugly head on our screens once again with Merkel, Schaeuble, and Papademos all pulling from one angle or another (and Dallara disquietingly silent in his uselessness), BNP created a simple flowchart of the various steps and probabilities of participation rates, retroactive embedded CACs, CDS triggers, and actual debt reduction that may (or may not) occur in the next week or two. The price action in Greek CDS and Bonds strongly suggest the CDS will trigger (as we have been vehemently explaining for weeks/months now) but there is a long way between here and there.

Below is some more hard data where you won't find the much anticipated, 'any minute now', housing recovery. While the first chart shows the annualized new home sales sold data, which came in at meaningless 321K in January on expectations of 315K, and a meaningless drop from an upward revised 324K, all this shows is that 3 years after the "recovery", there is zero improvement in housing. In non-SAARed terms, there were just 22K homes sold in January. Naturally, this is to be expected because as long as the government continues to prevent true price discovery, there will be no real housing market. Which is just what the second chart  shows: Completed houses for sale at the end of period dropped to 57K - this is the lowest point in the 40 years of this data series. Said otherwise nobody has any hopes that there will be a pick up in housing demand. And why should they - after all as the third and final chart shows, shadow inventory is at a record, and about to be unleashed on the market at bargain basement prices courtesy of the Robo-settlement, which in turn will drag down prevailing prices far, far lower everywhere. Welcome to the latest housing non-recovery.