Archive - Oct 2013 - Story

Just as everyone expected, the Fed (absent its Press Conference) statement confirms they are data-driven, data is not good 'enough', therefore, no-taper:

• *FED SAYS IT WILL AWAIT `MORE EVIDENCE' BEFORE QE TAPER
• *FED SAYS ECONOMY `CONTINUED TO EXPAND AT A MODERATE PACE'
• *FED SEES IMPROVEMENT IN ECONOMY EVEN WITH `FISCAL RETRENCHMENT

There were no clear comments that markets are growing a little too comfortable with the Fed's free-money. Full Redline below...

Despite what the talking heads continue to spew to justify all-time high stock market valuations, the 'fact' is that year-to-date, US Macro data has now performed the worst of all global macro indices. Furthermore, the pace of collapse in the last 4-weeks is the fastest in 8 months. What is perhaps most ironic is that US Macro peaked at the last FOMC meeting (when the Fed decided that data was not supportive enough to Taper) so any surprise today simply supports the fact that the Fed's decision is anything but fundamentally driven (and instead perhaps driven by the four 'bad' reasons for a tapering.)

In the latest blow, and a new low, for the US spying agency, earlier today Italian magazine Panorama blasted a preview of an article due for publication tomorrow, with the simple premise: "NSA had tapped the pope." According to a Reuters report, the "spy agency had eavesdropped on Vatican phone calls, possibly including when former Pope Benedict's successor was under discussion, but the Holy See said it had no knowledge of any such activity. Panorama magazine said that among 46 million phone calls followed by the U.S. National Security Agency (NSA) in Italy from December 10, 2012, to January 8, 2013, were conversations in and out of the Vatican." But while it is unclear just what divine information the NSA had hoped to uncover by spying on the Vatican, what is an absolute headbanger, is that according to Panorama one of the reasons for the illegal wiretaps was to be abreast of "threats to the financial system." We can only assume this means keeping on top of Goldman's activities around the globe: after all, when one intercepts god's phone calls, one is mostly interested what the bank that does god's will is doing.

In the last of this week's auctions, the Treasury just sold another $29 billion in 7 Year paper, which priced through the When Issued 1.873%, at 1.870%, the lowest yield since May, and at a Bid to Cover of 2.66, substantially higher than the 2.46 in September, and above the trailing twelve month average yield of 2.61%, once again reversing the recent trend in declining BTCs seen recently in both the 2 and the 5 Year auctions. And while the auction was largely non-remarkable, where it stood apart was that the Direct take down of 23.93% was the highest in history, with Indirects taking down 42.30%, above the 12M average of 42.3%, and the remaining 33.77% - the lowest since December 2010 - left to the Dealers, which will promptly flip this particular CUSIP WC0 back to the Fed.

Saxo Capital Markets’ latest infographic explores the long-term value of quantitative easing (QE) and, surveying the effect on the US economy, asks whether the US Federal Reserve will ever taper QE.

While BTFATH has caught on as the new normal meme, Cti's Tobias Levkovich has another that is just as critical to comprehending the current euphoria: LMNOP = "Liquidity, Momentum, Not Operating Performance." In essence, Levkovich notes that the recent sharp move has come about as liquidity concerns have shifted to the sidelines; upward momentum for stock prices following the shutdown ending is just pulling in more short covering while long-only investors also have been buyers given the need to meet alpha generation or benchmark requirements; but operating performance by companies is simply not there in the manner that is perceived. As he concludes, "we have not seen this kind of deviation before and it is troublesome to us... we must admit to being a bit worried that investors might be facing some near term volatility."

In what can only be characterized as a stunning moment of transparency for the Obama administration, now 5 years into its reign of "unprecedented transparency" not to mention hope and change, US Health Secretary actually did the unthinkable: she took responsibility.  "Hold me accountable for the debacle," Sebelius said in response to accusations at a congressional hearing today that her deputies failed to do their jobs. "I’m responsible."

UPDATE: VIX just spiked again to 19.53%

While we have already heard this morning of numerous Nasdaq options markets prices being crossed, the latest SNAFU involves nothing less than that ultimate lever of market performance - the VIX - which just flash-smashed:

*VIX EARLIER SURGED TO 21.26 IN SINGLE TRADE THAT WAS ERASED
*VIX SURGES TO 15.27 BEFORE IMMEDIATELY DROPPING TO 14.17

It would appear that fist-stomping the "Sell VIX" button too many times on the Fed's Bloomberg terminal keyboard temporarily exposed reality. Or did the Fed realse its statement prematurely once again?

"We now rely on social structures that barely existed 150 years ago. The order and functioning of modern societies, economies and militaries depend upon tight coordination of logistics and operations. Disrupt the synchronization, and the whole system of systems becomes unreliable—thus diminishing the nation’s power and influence."

"The century-old dream and nightmare of crippling a modern society by wrecking its infrastructure—or just by disturbing its synchronization of functions—is now a reality others are dreaming of employing against the United States"

"The NSA and USCYBERCOM operate under multiple layers of institutional oversight that reinforce our commitment to privacy and civil liberties."

"Far from imperiling civil liberties and privacy, the tight links between the NSA and our growing cybercapabilities help to ensure professional, sober and accountable consideration of potential impacts from our operations."

"Building that extended cyberenterprise now is indispensable to our ability to deter and defeat enemies in cyberspace so that they do not threaten our security, prosperity and way of life."

• History tells us that when the Fed tightens, bad stuff happens. The bond sell-off this summer on the mere announcement of QE ‘tapering’ is a case in point.
• Bonds will suffer when actual ‘tapering’ is announced. When it starts, we are likely to trade through the previous high for yields.
• Equities may look fairly immune at first, but as QE buying fades and eventually stops, take care. Any equity sell-off will have a knock-on effect on bonds and the economy.
• How large the effect on the markets will be will depend on how much the markets rally while QE is ‘on’. The bigger the rally, the worse the sell-off will be.

US and European stock markets (and European sovereign bond markets) have been sliding since early in the European morning overnight. The blame for the weakness appears to be coming from a double-whammy in Germany. First the German government resolved to push for the financial transaction tax (despite banks rejection of the proposal - well they would wouldn't they) and then later in the day when Germany's emerging coalition rejected the last-best-hope for shared sacrifice (or using more of Germany's balance sheet) - The Debt-Redemption Fund - leaving more pressure back on Draghi to save the day. Anxiety in the US is clear with VIX (and credit spreads) rising as hedgers are active - and of course, markets are broken with NASDAQ options prices 'crossed' acording to some sources.

There was a time when the Fed's QE was, at least on paper, supposed to generate jobs (the broad inflation will come on its own, in due course). After all, the prospect of injecting $85 billion in liquidity into  a market with the sole goal of pushing the stock markets that benefit the purchasing power of about 10% of the population would hardly have received broad approval even by the co-opted Congress. So, to all those who still naively claim Fed is not the sole reason for the market's relentless march higher, those billions in liquidity must go into the economy, and specifically into job creation, right? As a result, we decided to back into what the average private sector job has ended up costing the US population in pure dollar terms (which in turn ultimately manifests itself in terms of unsustainable government debt and pent up inflation) via the Fed's monetary pathway. Well, according to the ADP data released earlier, in which a paltry 130K private sector jobs were created in a month in which the Fed, as always, injected $85 billion, the bottom line came to a whopping $654K per job! And taking the average job growth throughout 2013, this number, as can be seen on the chart below, is a laughter-inducing $553K!

Another day, another broken market microstructure:

• *BATS OPTIONS HAS DECLARED SELF-HELP VS INTL SECURITIES EXCHANGE
• *NASDAQ OMX PHLX HAS DECLARED SELF HELP AGAINST ISE, ISE GEMINI

Perhaps we should rename the US equity (stock and options) markets - NasdaCare

It's painfully obvious that real estate valuations are once again at asset-bubble extremes. Defenders of current real estate valuations can draw upon an array of justifications, but they boil down to the same one used to justify valuations in every asset bubble: this time it's different.