Archive - Sep 6, 2012 - Story

The chart below by way of Grant Thornton shows something rather disturbing: in recent months, the number of IPOs that are trading "at or above their issue price 30 days after IPO pricing" has been collapsing in virtually a straight line since the early 1990s, and in 2012 was just shy of all time lows (which have been recorded during periods of great market crashes, not when the S&P is about to hit its yearly highs). As such the lack of success of such prominent recent names as FaceBook, Zynga, Groupon and many others, is not simply a function of valuation and investor sentiment, but related to the ongoing deteriorating in the underlying market structure for a variety of reason, many of which have been written about here in the past.

Today's announcement of the third-coming of the messiah-like Draghi's Bond-Buying program - even if under a different, more catchy, name - brings to mind a chart we offered by way of genuine concern the last time he mentioned this as an option. While he insists it's different this time (because they'll tell us the CUSIPs? we already knew when they were in; because its conditional? and revocable and who trusts their data; because its at the short-end? simply crushing up sovereign funding capabilities and leaving the roll/liquidity needs even greater; Unlimited? we don't remember a limit before?), it is clear that the immediate gaps tighter in bond yields (and spreads) on the announcement of the program was the best it ever was and bonds sold off through each of the previous two SMP efforts. Just saying...

While partying like its 1999 is still a way away, the NASDAQ has managed to get back to December 2000 levels as it has only dropped by more than 1% once in the last six weeks #yay Retirement-On!

While illiquid short-dated Spanish bond yields plunge and short-sale-banned Spanish stocks (IBEX) surge back above their 200DMA the most in 16 months, one could be forgiven for falling into the age-old CNBC-trap of "well the market is up so it must be good" belief. Rick Santelli and Mark Grant, in a brief few minutes attempt to get below the surface of the actual words and perception of today's Draghi statement and explain just how the conditionality and size/roll constraints make this supposed unlimited "we'll fix it all" scenario rather ridiculous in that "The ECB is never going to be allowed to do anything." Perhaps just as IBEX fell 17% in 3 weeks after rallying 5.6% on EUR Summit-day hope, we will see some sense of reality sink back in to the circularity of this support.

China and India have always been crazy for gold, and the yellow metal remains the choice store of value in those two countries, says Don Coxe, a strategic advisor to the BMO Financial Group. In an exclusive interview with The Gold Report, Coxe explains how demographic shifts are affecting the price of gold and delves into the logic of investing in gold as a long-term strategy. Coxe also draws an important lesson in economics from his reading of Lenin.

Forget the conditionality, Draghi said it would be solved and we should believe - and believe everything in Europe did! Equity markets soared 3-5% (with EuroStoxx catching up to Gold YTD), credit spreads - which had outperformed in the last few days - rallied rather notably, European sovereign bond yields (2Y yield down 15-20bps) and spreads tumbled dramatically (10Y spreads down 30-50bps), Europe's VIX collapsed 4.5 vols to 23%, and EURUSD surged back to the highs of the day into the European close (after being down immediately after the press conference). Capitulation? who knows? Reality? not even close.

Did the German Bundesbank roll over and die as Die Welt suggest, by yielding to the will of the ECB and Goldman? Or is it merely setting the stage for the inevitable German referendum? Many claim the Italian head of the ECB won today in his ever escalating confrontation with the last remaining German on the ECB governing council, although in reality he is merely doing what he has already done twice before. The outcome will be the same: abject failure to contain the crisis which will not be resolved until and if Europe succeeds in creating a united, Federal state, with one bond issuance authority. That will never happen: after all, 17 European states will never hand over their sovereignty to a third party, especially one which is backstopped by German cash. But it can pretend. In the meantime, Buba will not quietly go, instead it has already stated what it thinks, and what it thinks is that what the ECB is doing (once again) is "tantamount to financing governments by printing banknotes" and that monetary policy is now subjugated to fiscal policy. Full text of the Buba's response below.

In case you missed it. Here is Draghi's two minute diatribe, courtesy of Bloomberg TV, sprinkled liberally with every algo-headline-seeking word required to raise the perception that something actually just happened other than smoke, mirrors, and and conditional help best summarized by the phrase we used earlier to explain the Catch 22 Europe finds itself in now: "Spanish bonds soar on expectations Spanish bonds will plunge to allow Spanish bonds to soar on ECB purchases... but only after Rajoy hands in his resignation and gives the key to Spain to the IMF"

Several months ago we first suggested that the only outcome of the ongoing antagonism between Germany, the now Goldman-controlled European central bank hell bent on generating inflation at any cost, and the rest of Europe's insolvent states, would be a German referendum in which the German people themsleves are asked what they think of the current mess Europe finds itself in. Naturally, days like today, when the ECB does away with inflationary caution and returns to tried and failed methods - because as a reminder conditional secondary market bond purchases are nothing new, and were last tried in the summer of 2011 when Italy became the latest entrant to the SMP program, and failed - is when the impetus for referendum would be highest. Sure enough, German Spiegel has come out with an article pulling precisely on this increasingly more festering wound for the German population.

Today's move can be summarized in one word: euphoria. The same euphoria every previous instance of central planning intervention has engendered, only to fade days, weeks or months later. But for the time being it will suffice, and send the S&P to fresh post 2008 highs. In the meantime, below is the definitive note summarizing what has just happened, courtesy of Pierpont Securities via Bloomberg.

The S&P 500 index just touched 1427.83 (up 1.75%) - surpassing the recent highs and back to the local swing highs of 5/19/08 (1440.24 highs that day)... that is all. VIX is down 1.5 vols at 16.25%

For the fifth week in a row, MBA mortgage applications fell - dragged lower by a notably consistent drop in the refinance index - which dropped 3% this week alone and represents almost 80% of the total number of loans. Surely if rates are rising - as they have in general in the last few weeks - we would expect the 'rational homeowner of olde' to rush to his friendly local mortgage broker and refinance immediately for fear of missing the turn and the 'opportunity of a lifetime' to lock-in low rates. Unfortunately, just as retail equity investors appear to the be the smartest players in the room as they sell into strength, so the homeowner has now become conditioned by the Fed's central-planning and repression to expect rates to remain low - and QE3 to be implemented later in the year - and therefore will wait for the 'expected' lower rates rather than accept a periodically rising rate. Yet another unintended consequence that hints at the fact that should we see 'real' recovery (we know, but go with the thought experiment) then higher rates will act as a drag on a burgeoning mini-stimulus from refinancing and normalize us back to lower growth.

One of the primary purposes of a government, any government, is to sustain itself. In its final hours it will do almost anything possible for its self-preservation. While everyone stares at Frankfurt and the last ditch effort of Mr. Draghi there have been other events which are part of this play and merit your attention. Austria has come out and stated quite succinctly that no more Austrian money will be used for other countries; any other countries. Yesterday the Netherlands stated in absolute terms that no more of their money will be used for Greece. If the condition of any ECB funding is to be the approval of the EU and the use of their Stabilization Funds then what Mario Draghi is proposing may never come to pass, may never happen and may just be a rhetorical exercise in wand waving. To us, the world seems askew at present. China is in serious decline, Europe is in a virtual recession as Eurostat releases the numbers today and points to a -0.2% contraction of the EU-17. The markets rally based upon the supposed three Saviors of the world, the central banks of the United States, Europe and China and so the worse that it gets the larger the rally as the central banks will ease and ease again until some kind of wall is hit.

Remember rule #1 of central planning: when in doubt, baffle with BS.  Sure enough, after a very ugly Manufacturing ISM hit the tape two days ago, today we get a big beat out its sister tracker, the Non-manufacturing ISM, which printed at 53.7 on expectations of a decline from last month's 52.6 to 52.5, in the process topping the highest Wall Street forecast for the August number. Compounding the 'confounding' is that while the mfg Employment indicator dropped, the non-manfucaturing employment rose from 49.3 to 53.7. Perfectly logical? Exactly. At least there was some symmetry in the Prices Paid indicator, which jumped both here as it did two days ago, from 54.9 to 64.3: the largest component bounce of the August series. And finally, whereas the manufacturing respondents were uniformly bearish, those who rely on services are still full of hopium.