Archive - Jul 2012 - Story

All day long we are bombarded with surveys of sentiment. When positive; all is well. When negative they are used by any and every long-only manager as yet another money-on-the-sideline-like as justification to be the contrarian and buy-the-dip. There are however many times when the survey of people's 'views' is quite different from their positioning (cognitive dissonance aside) and we prefer to look at real market sentiment indications for our signals. Case in point is CSFB's Fear Index - which, unlike VIX, measures the sentiment skew in options prices (how much more bearish or bullish put options are relative to call options). In general, it shows a slight leading indication for larger-trend equity movements but most critically - it can signal when real market positions have become too bullish (or overly confident) or too bearish (overly conservative). The fact is that the options markets are NOT currently overly bearish here - as they were in Q4 (green oval) - providing the short-squeeze-levered ammo for a rally here; just as options markets were overly bullish (red oval) as the end of LTRO2 began - which provided the initial levered-long-squeeze ammo for the current sell-off. So the next time you hear someone saying how negative sentiment is - and that's a reason to buy - show them this chart (of real positions - not a survey!) and tell them to move along.

Much has been said about the evil crony capitalism inflicted upon America as a result of PAC, SuperPACs, corporate donations, and just general bribery on behalf of America's corporations in broad terms, and Wall Street in narrow (and Private Equity firms in uber-narrow) terms. But is there an even bigger destabilizing force of "cronyness" in America? According to the WSJ, there well may be: labor unions. Yes: those same entities that are so critical for Obama's reelection campaign that the president abrogated property rights and overturned the entire bankruptcy process in the case of GM and Chrysler, to benefit various forms of organized labor at the expense of evil, evil bondholders (represented on occasion by such even more evil entities as little old grandmas whose retirement money had been invested in GM bonds), appear to have a far greater impact in bribe-facilitated decision-making than previously thought.

After surging away from risk-assets into Friday's close (only to revert yesterday) and once again surging into yesterday's close, broad derisking among most risk-assets finally saw US equities catching-down to that reality in the short-term today - as they broke the EU-Summit/Spain-Bailout/Greek-Election shoulder and ended comfortably below the 50DMA. Short-end Treasury yields made new record lows as belly to long-end all fell notably close to those record lows (with 10Y back under 1.50% and 30Y under 2.60%). The USD rallied back from a 0.3% loss on the week to a 0.1% gain - thanks mostly to EUR's new 2Y low at 1.2235 intraday and AUD weakness (as JPY remains better on the week - more carry unwinds). Commodities plunged - far exceeding the USD-implied moves - with WTI down over 3% from yesterday's highs and Gold and Silver in sync down around 1% on the week. Staples and Utilities were the only sectors holding green today (marginally) as Industrials, Materials, and Energy (all the high beta QE-sensitive sectors) took a dive. It seems the message that no NEW QE without a market plunge is getting through and the reality of a global slowdown looms large. Credit outperformed (though was very quiet flow-wise) but HYG underperformed  - cracking into the close - as it just seems like the most yield-chasing 'technicals-driven' market there is currently. Slightly below average volume and above average trade size offers little insight here but a pop back above 19% in VIX (and a 2-month flat in term structure), a rise in implied correlation, a rise in systemic cross-asset class correlation, and the leaking negatives of broad risk assets suggest there is more to come here (especially given the BUBA's comments this morning and a lack of real progress in Europe). The ubiquitous late-day ramp saw aggressive trade size and volume (with a delta bias to selling) as it remained far below VWAP.

Peak employment is the theory that due to factors such as efficiency, driven by technological innovation, and demand, developed economies may have already passed beyond the highest point of employment and that from this point onwards employment will continue to fall and unemployment inexorably rise causing increased social tension. Employment is falling, unemployment is rising but hidden behind those headlines is the fact that part time Employment is rising. Less people have full time jobs, more people have part time jobs, which means that the hours of work are being spread increasingly more thinly across the population. Some might argue that it is only because of the economic slump that all of these things are happening and that it is only temporary. But there is enough evidence to suggest that this is a long term trend that has just been disguised by the boom of the last ten years and is only now really becoming apparent. The fear is that we have already passed Peak Employment and the downward trend will continue, perhaps disguised by increasingly more part time employment.

Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, spoke with Bloomberg Television’s Tom Keene today and said that, "What we said back in December was that the most likely start date for the recession would be in Q1 and if not then, by the middle of 2012. I’m here to reaffirm that. I think we’re in a recession already." And just like us, the anagrammatic ECRI economist believes that "It is not all about GDP. It is about jobs. It is about income and sales. A recession is a vicious interplay among output, input, employment, income and sales" noting that recessions don't generally start with a cliff (that everyone looks for) adding (rather ominously): "there is this belief that somehow government or a central bank will stave off a recession. For the last 220 years, you do some history with Hamilton, which ended in a duel by the way... you have had 47 recessions. Why are we going to avoid the 48th?"

S&P 500 futures have broken the shoulder and are off over 20 points from the day-session open highs but it seems that CMI's cut has spurred derisking reality in many industrials and that has knocked into everything else. WTI has plunged back under $84 and the 10Y Treasury yield just broke back under 1.50% for the first time in a month - heading close to record-lows. Equities remain at least 70pts or so rich to where Treasuries trade for now (short-term) and considerably more longer-term.

There are those who say gold may go to $10,000 or to $0, or somewhere in between; in a different universe, they would be the people furiously staring at the trees. For a quick look at the forest, we suggest readers have a glance at the chart below. It shows that just in the first five months of 2012 alone, China has imported more gold, a total of 315 tons, than all the official gold holdings of the UK, at 310.3 according to the WGC/IMF (a country which infamously sold 400 tons of gold by Gordon Brown at ~$275/ounce).

Digging into the details of US and UK Liebor duing the crisis period is stirring both bad memories and some very clear disclocations from reality. While we noted many of these at the time, they seem even more egregious now and as Peter Tchir of TF Market Advisors notes, outliers seem to be Citi, RBS, and to a less extent UBS. Our perception was that RBS was viewed as a worse credit than Barclay’s. CDS seems to confirm that, yet they are posting LIBOR significantly tighter. UBS always seemed to have some decent government support, so while maybe a stretch that they were quoting LIBOR close to JPM and DB, it isn’t totally unreasonable. DB if anything looks conservative relative to other prices. Citi just seems ridiculous. The CDS market was trading it as the worst of the credits, yet here they are with the best LIBOR. That looks consistent throughout the entire the period. Maybe there is something we're missing and just don’t remember, but it does seem surprising that Citi thought they could fund at the same level as JPM at the time in the unsecured interbank market. At this point it is all just speculation where the information Barclay’s has provided the FSA leads, but so many people have been talking about LIBOR so long, that we would be shocked if it ends at Barclay’s and there is enough data, in our mind, to warrant some much deeper investigation.

It's early, but as we pointed out yesterday in our Q2 earnings preview, the background noise is starting to grow louder. With near record levels of negative pre-announcements post the financial crisis (most recently AMD and Cummins), we are shocked (shocked we tell you) that analysts could have got it so wrong. Expectations for Q2 2012 EPS Growth have dropped from a Viagra-based 'its-always-better-two-quarters-out' view in August 2011 of +11% to -1.8% today. What is not surprising is the hope-filled 14% S&P 500 EPS growth rate expected for Q4 2012! With EURUSD down almost 11% from Q2 2011, we can only imagine the FX translation impacts that analysts are desperately trying to goal-seek into their forecasts - which we presume accounts for the surge in Q4 when Europe will be 'fixed'. With negative macro surprises so disconnected from equity market performance (and implicitly hope for earnings), it seems there is notable room for disappointment.

In yet another negative pre-announcement, following AMD, MAKO and AMAT (just to start, many more coming), Cummins (common bellwether among the talking-est heads) has just cut its revenue guidance dramatically. From expectations of a 10% jump in 2012 revenues, they have cut the full year to breakeven with 2011 now. S&P 500 futures dipped on this news and remain at the cliff's edge. CMI is down over 4% but thanks to a 25% boost in their dividend (makes perfect sense when cutting forecasts?) it's not more (yet - we expect more) - though this confirms some of the signals of increased leverage in credit land as cash piles get burned through just to support dividends or share prices.

We have discussed at length the need for the equity market to be significantly lower in order for Bernanke to step in with his munificence. Critically, this is less about the absolute level of the S&P 500 (though anyone expecting the Fed chairman to step in with the S&P 500 within a few percent of multi-year highs is dreaming) but, as Barry Knapp from Barclays notes - based on Bernanke's writings - additional monetary stimulus is a function of a significant drop in inflation expectations (as opposed to a shallow drop in the S&P 500). It is the risk of deflation that will trigger a policy reaction. Current conditions are not even close to levels that have warranted additional stimulus in the past - which we estimate to be a 2% 5Y5Y forward inflation breakeven rate. In order for that level to be triggered - based on the post-crisis relationship between equities and inflation expectations - the S&P 500 trailing earnings yield would need to rise over 8.2% implying an S&P 500 level near 1200. Tracking inflation expectations is critical to any NEW QE hope - and for now, there is none on the horizon, no matter how much everyone clamors for it.

The last time the US navy sent three aircraft carriers into the Arabian Sea/Persian Gulf was just a few short weeks before WTI broke above $110, and aggressive military tensions, coupled with concerns of an imminent invasion of Iran by Israel and/or 'others', were running  high. Then summer arrived, as did the need to lower the price of gas and crude ahead of a veritable cornucopia of central banks easing into June and July, not to mention the need to keep gas as low as possible into the July 4th holiday. Now that the peak summer months are behind us this is all changing, and 4 months ahead of the presidential election, the need to have the "Wag the Dog" put option to round up the troops, not to mention votes, has arrived, as has the need to return to an outright aggressive military stance where Iran is concerned. Which is why we were not very surprised to learn that that Middle East veteran aircraft carrier, the CVN-74 Stennis, is going right back into Mordor, a few short months after it came back from its long stint in the Fifth Fleet, and will shortly complete the trio of aircraft carriers stationed within miles of Iran.

A question on the minds of many people today (increasingly those who manage or invest money professionally) is this: How do I preserve wealth during a period of intense official intervention in and manipulation of money supply, price, and asset markets? As every effort to re-inflate and perpetuate the credit bubble is made, the words of Austrian economist Ludwig Von Mises lurk ominously nearby: "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner, as the result of a voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the currency system involved." Because every effort is being made to avoid abandoning the credit expansion process -- with central banks and governments lending and borrowing furiously to make up for private shortfalls -- we are left with the growing prospect that the outcome will involve some form of "final catastrophe of the currency system"(s). This report explores what the dimensions of that risk are.

Scoffing at the smugness of a CNBC talking head suggesting he is long-term bullish because of the Bernanke Put, TrimTabs' CEO Charles Biderman empirically analyses the effects of QEs-past and just as we have noted again and again - highlights the fact that without at least a 15% drop in stocks, Bernanke will not ride to the rescue. Based on his analysis of wage and salary growth, he believes the US economy is now starting to contract in line with what is going on in Europe and the rest of the emerging world. Earlier this year in the US, portfolio managers hoped and prayed that what looked like rapid growth was real, "It Wasnt!" and, as we have noted, Charles adds that with earnings season starting we will see future guidance cut and this will kick the leg out from the bullish stool - leaving only the hope for another QE flush to save us. However, with the effects of Bernanke's beneficence diminishing with each round, he suspects that we will be lucky to see a 10% rally on NEW QE.