Archive - Jan 2013 - Story

It is funny what one finds when one actually looks at the data behind the headlines, such as in this case the trumpeted amazing return of investors to the US stock market. Because what one does find is that after that one blistering week after the new year, in which wealthy individuals dumped cash they had put aside (for lack of knowledge of what the dividend tax would be in 2013), we now have, for the second week in a row, seen a material outflow from US equity funds as tracked by Lipper, bringing the total two week outflow from the domestic equity sector to some $5.8 billion. Oh, and the great non-rotation out bonds continues with some $8.5 billion pumped into taxable bond funds and $2.3 billion into municipal bonds in the past two weeks.

• Fed Pushes Into ‘Uncharted Territory’ With Record Assets (BBG)
• Next up in the currency wars: Korea - Samsung Drops on $2.8 Billion Won Profit-Cut Prediction (BBG)
• China Warns ‘Hot Money’ Inflows Possible on Easing From Abroad (Bloomberg)
• BOJ Shirakawa affirms easy policy pledge but warns of costs (Reuters)
• Merkel Takes a Swipe at Japan Over Yen (WSJ)
• Wages in way of Abe’s war on deflation (FT)
• Italian PM under fire over bank crisis (FT)
• Senior officials urge calm over islands dispute (China Daily)
• Spain tries to peel back business rules (FT)
• Rifts Over Cyprus Bailout Feed Broader Fears (WSJ)
• Soros Says the Euro Is Here to Stay as Currency War Looms (BBG)

At this point it has gotten painfully tedious, and the one phrase to describe trading is - Same Pattern Different Day. With equity futures closing decidedly weak on earnings reality after US market close, the slowly, steady overnight ramp seen every single day for the past month has returned as always, this time on yet another largely expected German confidence indicator beat (following the just as irrationally exuberant ZEW some time ago, and yesterday's far better than expected PMI), this time the IFO Business Climate, which printed at 104.2, on expectations of 103 and up from 102.4. This was driven by both the current assessment rising from 107.1 to 108 and the Expectations rising from 97.9 to 100.5. Naturally, all confidence indicators will be skewed in a way to prevent the market from doubting for a second that Germany may actually succumb to the same recession that has gripped all other European countries (which Germany is an inch away from after its negative Q4 GDP). In other words: there is hope. As for reality, UK Q4 GDP came in at -0.3% on expectations of a far lower drop to -0.1%, and down from the olympics-boosted 0.9% in Q3. The UK certainly can't wait for Mark Carney to come and show them how cable devaluation is really done, cause this time it will be different, if only it wasn't different for everyone else.

As expected, moments ago the ECB announced the results of the first LTRO repayment option. According to media reports, a total of €137.2 billion will be repaid as 278 banks participate in the repayment. The consensus expectation was for a repayment figure of €84 billion, so a figure substantially more than both the expected, as well as the whispered goldilocks number of €100 billion. The banks that will free themselves of the LTRO stigma will be disclosed in time - there is no public list, however as a reminder some 523 banks participated in the first LTRO. Since Europe is currently in the risk on phase, don't expect an immediate retaliation against the primarily non-core banks that opt to keep the LTRO funds. The market response so far has been one of risk on, due to the perceived implication that the interbank market is healhtier than expected, coupled with a push up in the EURUSD as the repayment is, as noted previously, a gross deleveraging of the ECB balance sheet coming at a time when every other bank is explicitly devaluaing their currency. Indeed, moments after the announcement the EURUSD ramped up to 1.3460 despite some ugly UK GDP news earlier.

The platinum group of metals (PGMs) have received some perhaps unwarranted attention in recent weeks as the 'coin' idiocy came and went; but, it is noteworthy, as Eric Sprott points out that with demand rising and supply under pressure, the outlook for investment in physical platinum and palladium is increasingly compelling. The following infographic (and various supply and demand dynamics) provides a succinct picture of what these metals are used for, where they are produced, and the supply/demand imbalances.

The robosigning/fraudclosure fiasco came, saw, and eventually left following a comprehensive slap-on-the-wrist settlement with all mortgage originating banks. In the process, it gave an inadvertent hint to the banks how they can boost house property values: by keeping homes from exiting the foreclosure pipeline, and off the market due to a legal mandate forcing them to do just that, it created a shortage of homes available for sale and thus provided an explicit subsidy funded by the banks themselves. The resulting "foreclosure stuffing" remains with us to this day. Yet while it did manage to artificially boost prices, the process succeeded in one thing: making a mockery out of property rights, as it became quite clear that nobody knows who owns what, hence demanding a global settlement release from the very top. But not even the 10th incarnation of Linda Green could possibly conceive of the following episode showing just how surreal U.S. housing reality can be, when one mixes combustible and outright idiotic property laws, with a real estate market that, when one pulls away the facade of "made for TV pundtiry", is in absolute shambles.

The attack on BP-operated Amenas gas facilities in the Algerian Sahara was a spectacular lesson for the energy industry: No amount of high-tech security is invulnerable to Sahelian militants. Billions will now be spent on securing Western energy interests across the region and investment will take a hit at a time when the big news was that the industry’s junior players - particularly American and Canadian - were growing ever so bold and willing to take risks in unstable regions. Their markets may not be able to sustain this bravery much longer. The biggest mistake the industry makes is to ignore regional and geopolitical dynamics. The markets - like the industry - do not respond to complicated geopolitics. They respond to specific incidents and there will be another one. That is to say, the markets will not take the Algerian incident as seriously as it should.

Apple lost a remarkable $59.63bn in market cap today sending even the most ardent of bullish sell-side analysts scrambling for cover. However, there is a silver-lining, this is not (as many expected) the greatest market cap loss ever in history in one day for any company - it is in fact 3rd!! The holder of the Number 1 and Number 2 spot is none other than AAPL's awful analog - Microsoft (which is itself having a tough night). MSFT lost an enormous $77.18bn on 04/03/2000 and then 3 weeks later followed it up with another epic $61.81bn drop on 04/24/2000. As AAPL drops perilously close to losing the top spot of global market caps to XOM, we note that even that prestigious name had a 'moment' when it lost $52.5bn in a single-day on 10/15/2008. So, good news all around then.

If there was any confusion where New York's uberwealthy were scrambling to dump their money in December ahead of the now official tax hike on the wealthiest, we now know: some two hours north on the Long Island Expressway, or the Hamptons to be precise. Bloomberg reports: "Home prices in New York’s Hamptons, the resort towns on the Long Island coast, rose to the highest on record as deals at the upper end of the market surged before expected tax increases for sellers. The average price of homes that sold in the fourth quarter jumped 35 percent from a year earlier to $2.13 million, the highest since Miller Samuel Inc. begin tracking Hamptons sales in 1999." Needless to say the when a handful of the 0.001%, and quite close to the New Normal discount window - i.e., the Fed's excess reserves - purchase homes with no price discrimination, it has the same impact as when foreign oligrachs come to the US to launder illgotten cash (with the NAR's blessings), sending prices up some 35% in one year. And since the average price of all houses is dragged higher as a result, TV pundits can spin it as a housing recovery, and get consumers to consume even more by "charging it", making the abovementioned Hamptons' home purchasers even richer: there's your recovery. And it is a recovery, all right, for some: like Lloyd Blankfein who just parked another $32.5 million in prime 8,000 square foot Bridgehampton mansion set on some 7.3 acres.

It is a well-known phenomenon that quiet markets, low volatility and a lack of visible risks on the horizon can lead to complacence and increasingly dangerous, leveraged positions. In doing so, these market conditions set the stage for the next cycle of deleveraging and losses. What has also become apparent is a predictable behavioral response to this cycle: when the markets experience large losses, tail risk hedging comes back into fashion; on the other hand, when markets are quiet, investors can quickly forget the pain suffered during prior crises. As PIMCO's Vineer Bhansali points out, the current hedging characteristics are comparable to 1/15/2008, right before the crisis.  He adds that, for many investors, it paid to have tail hedges then. If investors believe we are still investing in a dangerous, potentially even more dangerous, environment, they should consider hedging; adding that in their view, tail hedging is not just a trade, but an asset allocation decision for robust portfolio construction. In this light, today’s valuation levels make it easy to be countercyclical and add to tail hedges. Perhaps today's VIX-SPX decoupling is the first sign?

While we doubt either Eye-Kaan or Ack Man will engage in open shootouts on the Las Vegas strip, we can't help but applaud when the "smartest guys in the room" openly talk shit about each other, such as what Ichan said about Ackman earlier on Bloomberg TV: "Look, it's no secret to the world and to Wall Street... I don't like Ackman. I have no respect for him and I don't like him and that's not a secret.... I wouldn't even say this, but it's no secret, I dislike the guy, I don't respect him." We get it, and we also get that the clear winner of Round 1 of Talking Smack is Eye-Kaan. We look look forward to the Ack Master's response with or without Titney Wilson chiming in.

If there is one concept on Earth that has been the absolute bane of human existence (besides global elitism), it would have to be the concept of the “majority opinion”.  The moment men began refusing to develop their own world views without first asking “What does everyone else think?”, they set themselves up for an endless future of failures. Human beings desperately want to belong, but, they also desperately want to understand the environment around them.  Often, the desire to belong and the desire to know the truth conflict.  In some societies, in order to be accepted, one must give up on his search for truth and avoid eliciting the anger of others. The idea of the majority view or the “mainstream”, gives people the sense that they are a part of a group, and at the same time, gives them the illusion of being informed.

... that's not true. The Fed's balance sheet, from a transaction basis, topped $3 trillion some 5-6 weeks ago. The only reason the Fed reported a $3 trillion number in today's H.4.1, or $3.013,333 trillion to be precise, is because all those MBS purchased in September and October following the September 13 reactivation of QE4EVA finally settled. In reality, the Fed's balance sheet is now some $3.12 trillion as there is about a $80-$120 billion lag between what the Fed has actually purchased, and what has settled. Luckily, at least Treasury purchases take far less to settle.

Updated for the summary of MSFT, SBUX and T earnings.

Amid the deafening screams of hundreds of hedge fund managers looking for any hedging port in an AAPL storm, stock indices (expect the Nasdaq) surged to new highs from the moment the US day-session began until POMO was complete and European markets closed. Volume and block size was large as we took out S&P 500 highs up to 1500 and it appeared we ran out of the short-term proverbial great fool. In general, risk-assets and stocks were well correlated though the big disconnect today was a rising VIX. HY Credit did not play along with the exuberance early on either - as it seemed relatively clear that any and every trick in the book was being used to enable more out of the AAPL boat as we ramped up to VWAP. Once Europe had closed, AAPL slid, stocks slid (with S&P 500 dropping its most of 2013 so far), and risk-assets in general slid lower. JPY weakness and EUR strength helped support risk but Treasury yields falling back and a drop in commodities overall (Gold -0.9% on the week) had the opposite effect. The typical late-day ramp failed despite the best efforts of vol compression as stocks closed almost unch, at VWAP, in line with risk-assets (ahead of tomorrow's LTRO news). AAPL at lows as ramp failed...