Archive - Mar 2012 - Story

As the S&P 500 reaches new multi-year highs and VIX touches multi-year lows, there is one rather large and risk-appetite-proxying market out there that is not as excited. The high-yield bond market has seen record in-flows dropping off recently and for the last four-to-six weeks high-yield spreads, yields, and bond prices have been very flat as stocks have surged ahead. Despite US earnings yields at near-record highs relative to high-yield bond yields, we see little pick-up in LBO chatter suggesting a notable preference for higher-quality junk credit (and/or lack of belief in sustainability of earnings yields) and the recent 'dramatic' outperformance in investment grade credit is a notable up-in-quality rotation (as well as early spread-compression reaction to Treasury weakness recently) that strongly suggests less risk appetite among real money managers (given how 'cheap' high-yield appears across asset classes). Lastly, the ratio of HY bond prices to VIX is near its extreme once again, something we saw occur before the risk flares of 2010 and 2011 surrounding the end of the Fed's QE sessions.

Courtesy of Jalopnik comes a slightly different perspective on what Apple could do with its $100 billion (and over by now) cash horde. Obviously due to the publication's automotive bent, the emphasis is on uses of funds that tend to be related to the 'horsepower' space. In short, the consumer company, which is now far bigger than the entire US retail sector as noted before, could purchase 435,113 Ferrari 458 Italia's and/or some permutation of the other options indicated below. That said, while it is well-known what conventional wisdom says about any gentlemen who feels the need to redirect attention to his red blazing sport car from other, ahem, issues, we wonder what would be said about an entity that feels the urge to procure not one, but 435,113 Ferraris (or 41,667 Bugatti Veyrons for that matter)...

If you were head of Central Planning (howdy, Ben!) and were tasked with crippling the real estate market, here's what you would recommend.

1. Choke the market and banking sector with zombie banks.
2. Have the central bank (the Federal Reserve) buy up $1 trillion in toxic, impaired mortgages.
3. Lower the rate that banks can borrow from the Fed to zero, and then pay the banks interest on all funds deposited at the Fed.
4. Try to prop up the housing market by giving poor credit risk buyers loans with only 3% down.
5. Load young people up with the equivalent of a mortgage in student loans.

OK,let's see how our Organs of Central Planning are doing: check, check, check, check, check: a perfect score! they're doing everything possible to cripple the real estate market. Do they care? Of course not; the only goal is to keep the zombie banks alive, regardless of the cost to the nation. Great work, Ben, Barack, Timmy and the rest of the gang at Central Planning: thanks to your policies, the real estate market will never clear and therefore it can never be restored to health.

The Hellenic Republic Greek CDS Auction has ended, pricing at 21.5%, just slightly less compared to the Initial Market Midpoint of 21.75 of par. As explained back in January 2009, those who had bought the Cheapest to Deliver Greek bonds trading in the teens coming into the auction, made a quick buck, as these will be taken out at a nice premium to purchase price. For those who bought at par, we can only hope they have arrangements with the ECB to fund the shortfall, especially since only the ECB can "book a profit" by buying up Greek bonds at 80 cents on the euro and seeing these terminate at 21.5. Limit buy orders that were satisfied ranged from 22.75 (where there was just under 70 million in bids by accounts using JPM and DB as dealers), all the way to 21.625, where the breaking bid was courtesy of 120 million in indicated bids, spread evenly between HSBC and Barclays: these satisfied the 291.6 Million in outstanding Open Interest. Overall, there was 3,362.7 million in total limit buy orders across the stack. The laugh of the day once again comes courtesy of an account using JPM, which submitted a total of €135 million in bids between 8 cents and 1 cents (50 million at the former). If they had been hit on that it would have made quite a payday. On the offer side, the dealers showing the biggest Physical settlement requests were HSBC with €332 million, and BNP at €158 million. And the joke of the day once again comes courtesy of RBS, which as usual seems to have one of the most "entertaining" bond trading desks: the reason for the RBS "Adjustment Amount", as speculated earlier, was that the bank's Bid of 22 was above the market midpoint of 21.75: the good news is that unlike before at least they did not confuse price and discount.

Today VOX has released an engaging report titled "Central banks and gold puzzles" which looks quite simply at holdings of gold by central banks over the past 50 years. It breaks down the two buckets into countries that broadly fall into the Developed World category, and countries that make up the up and comers known as BRICs. The charts serve to merely confirm the latest "decoupling" in the world - that regarding views on gold by the insolvent developed world, and the economic powerhouses that make up true intrinsic global growth.

...We find, in the case of Belgium, a 40% Debt/GDP miss from what is bandied about by the Europeans. Then it should be noted that in the case of Dexia, Fortis et al that the guarantee of contingent liabilities may not be the amount of money that is required and so the situation could still worsen from here. Belgium, in fact, is not much better off than Greece and, as their economy sinks into recession, the numbers and ratios are bound to get worse. Not only do I expect further downgrades for this country by the ratings agencies but I also expect a further rise in yields as the more sophisticated investors grasp the reality of Belgium’s issues and respond accordingly.

As macro data trends deteriorate and Dudley demurs, it is becoming increasingly clear that the risks for the US equity market are skewed to the downside as we head towards the end of Operation Twist (and seasonal factors subside). The Fed's 'upgrade' from modest to moderate growth certainly spooked Gold and Treasuries and saw small caps notably underperform but given historical precedence, if Operation Twist ends without a new program beginning, investors will likely expect a drop in equities (broadly) of 8-10% (which coincides with the QE1 and QE2 ends as well as the 1983, 1994, and 2003 normalizations in policy). Reiterating our recent theme, in order to avoid the end of Operation Twist, the Fed's economic outlook would need to deteriorate - which itself is a scenario likely to result in falling stock prices and just as the cause of a 'crash' in PCE towards the end of QE1 and QE2 was a function of higher inflation, we have the current spike in energy prices to ensure this time is no different.

For today's definitive example of peak cognitive dissonance and self-delusion among those who determine the monetary fate of the world no less, look no further than the Dallas Fed's Dick Fisher, who just said the following according to Reuters:

• No one presently believes that the Fed is going to proceed with QE3

Funny considering earlier, we got this from Goldman's Bill Dudley:

• No decision yet on QE3, New York Fed's Dudley says

And that is why central planning always fails. Because a room of these terminally confused people sits down and determines the fate of the world based on their naive academic interpretation of what they perceive is reality.

Americans have an illogical love affair with their vehicles. There are 209 million licensed drivers in the U.S. and 260 million vehicles. The U.S. has a higher number of motor vehicles per capita than every country in the world at 845 per 1,000 people. Germany has 540; Japan has 593; Britain has 525; and China has 37. The population of the United States has risen from 203 million in 1970 to 311 million today, an increase of 108 million in 42 years. Over this same time frame, the number of motor vehicles on our crumbling highways has grown by 150 million. This might explain why a country that has 4.5% of the world’s population consumes 22% of the world’s daily oil supply. This might also further explain the Iraq War, the Afghanistan occupation, the Libyan “intervention”, and the coming war with Iran. Automobiles have been a vital component in the financial Ponzi scheme that has passed for our economic system over the last thirty years. For most of the past thirty years annual vehicle sales have ranged between 15 million and 20 million, with only occasional drops below that level during recessions. They actually surged during the 2001-2002 recession as Americans dutifully obeyed their moron President and bought millions of monster SUVs, Hummers, and Silverado pickups with 0% financing from GM to defeat terrorism. Alan Greenspan provided the fuel, with ridiculously low interest rates. The Madison Avenue media maggots provided the transmission fluid by convincing millions of willfully ignorant Americans to buy or lease vehicles they couldn’t afford. And the financially clueless dupes pushed the pedal to the metal, until everyone went off the cliff in 2008.

We (and Charles Biderman) have previously discussed the seasonal adjustments to NFP data, which while potentially credible in a releveraging context, is far less meaningful when used on apples to apples basis for months in which there is material wholesale deleveraging and record warm weather. Yet the rub lies precisely in the seasonal adjustment, which for January and February has "added" nearly 4 million jobs based on nothing but historical regression patterns, and the "beats" represented less than 5% of the total addition, implying even a modest miscalculcation would have had a huge impact on market, and political, interpretation of the data (as explained here). Today, it is the turn of Art Cashin, quoting Lakshman Achuthan, to provide his take on "unadjusted seasonal adjustments."

Much has been made of the positive impact that seasonal adjustments have made to the crop of supposedly better than expected macro prints that remain anecdotal evidence of why the S&P 500 is trading above 1400 again. Unfortunately the pleasant after-glow of a time-series-based adjustment that has become increasingly unstable and hard to justify post-crisis is starting to fade. Morgan Stanley's Business Condition Index dropped a very significant 5 points in March to 51%. Just as pointed out here (in Bernanke's scariest chart) the seasonal factors are almost entirely responsible as the trend of recent data is just not meeting expectations (both in analyst and market perceptions). Under the surface, things are a little gloomier also as their Hiring Plans Index dropped for the first time in six months and the business conditions expectations plummeted 11 points to 57% in March. Given this (leading) data, is it any wonder MS believes QE3 is inevitable and imminent? Though as we have noted again and again, until the market starts to get the sad joke that unless market momentum chasers start to defect from the current strategy, we suspect the impact of QE3 (if it comes) will be far more muted (in stocks) than the previous acts of exuberance by the Fed (and their buddies) - as implicitly the cost of the much-higher-than-normal strike price of Bernanke's put means ever-increasing QE needs to counter underlying weakness/perception.

UPDATE: As call begins AAPL is trading $592

After hitting $605 in pre-market, and halting at $599.32, we see AAPL reopened at $580 -down from Friday's close. Volume is relatively low, so we can assume AAPL is not buying its stock just yet. More importantly, could this be the start of rotation from hedge funds to dividend funds? Those who wish to join the Apple call can do so at (877) 616-0063, passcode: 592016. As a reminder, and as updated on the call, of APPL's $98 billion in cash, $64 billion is offshore - this means that $34 billion is available for immediate distribution and so to cover the $45 billion program, we assume some healthy repatriation will occur? In this context, Apple admits it has has spoken to Congress and the administration about tax issues relating to cash repatriation. One can imagine the plot layout.

And so Steve Jobs legacy is now gone as Apple goes Jamie Dimon. At least Apple was not part of the stress test. And as announced yesterday, we for one, can't wait to find out if it was JPM that advised Apple, to pull a JPM. Finally, we hope that AAPL's cash creation rate remains the same, as $45 billion in 3 years may put quite a large dent on the company's onshore cash, which according to reports is one-third of total.

For now, these are isolated incidents. But in Europe events of this kind have an unpleasant tendency of recurring just when it is darkest...