Archive - Mar 13, 2013 - Story

Bhutan's guiding national policy is Gross Domestic Happiness, as a reference point for Net Value. Here in the U.S., we give lip-service to all these values, but ask yourself: where do we spend most of our time? Serving our masters in the State/market economy, creating Net Worth for ourselves or someone else. Yes, we all still need to earn a livelihood, but imagine a society constructed around generating Net Value and Gross Domestic Happiness instead of Net Worth. The power structure would collapse because none of these activities or accomplishments generate enough profits or taxes to keep the Machine operational. A brush with mortality has a way of stripping away the superficial and the false. How many ghosts are we living with while our real lives have been abandoned as insufficiently ambitious and net-worthy?

Moments ago white smoke emerged from the Sistine Chapel which means that the Cardinals of the Catholic church have elected a new pope on the second day of Conclave. The identity will be revealed shortly. Stocks take this as a bullish signal and hit intraday highs, and for the DJIA, new all time record highs. All is well in the world.

Aside from a very much vacated President's Day trading market, for 1400ET, today is the lowest volume day of the year (in line with Monday's scarcity)... given this lack of real market, the algos are let loose to ply their levitation magic - and sure enough, Dow Transports reach new highs and the S&P pushes on towards that record...

"The air is thick with denial in this chamber," is how UKIP's Nigel Farage begins his truthiness rant at the most recent European Council meeting. Reflecting on the Italian election and overwhelming success of 'Eurosceptic' political parties, Farage barks that it "is absolutely clear that Eurozone membership is completely incompatible with nation-state democracy." The complete denial (and "unutterable drivel") about the Eurozone crisis incenses him as he says "you'd think listening to everyone this morning that it's over." The real problem, he explains, is that they won't face up to the reality that "You are not facing up to the consequences for what you've done," as he tries to make the technocrats comprehend, "the Eurozone has been a complete economic disaster," because of the Euro - and the disaster is still coming down the tracks.

The meme of the moment appears to be that sliding gas prices (which by the way merely fell back to mid-February levels) will no longer hamper the over-taxed and under-incomed consumer providing yet more upsided-ness for stocks. Sorry to burst another fictional bubble but Gas prices have now risen for the 3rd day in a row as RBOB (wholesale gas prices) surge to new 2013 highs and crude oil prices push back to one-month highs. Perhaps that is why today's retail sales data (unadjusted) is not providing the pop that so many talking-heads believe is warranted. Between RBOB highs and the RIN issues, is it any wonder the CME just hiked 'crack spread' margins in an effort to keep prices under control?

Those expecting to see any indication of that mythical, if completely non-existent rotation out of bonds into stocks (which is really originating out of money markets and savings accounts, and has already tapered out), will not find it in today's US bond auction, which saw the Treasury sell $21 billion in Treasury paper at the low, low yield of just 2.029% (70.31% allotted at the high), below February's 2.046% auction yield, and stopping well inside the When Issued of 2.053% at 1 PM, indicating massive buyside demand and confirmed by all the internals. The Bid To Cover jumped to 3.19, the highest since October's 3.26, and far above the TTM average of 2.96. The Indirect take down was a massive 47.7%, the highest December 2011, when it printed at 61.9%, leaving 30% for Directs, and a tiny 22.3% for the Dealers, which was the second lowest Primary Dealer take down in history, higher only than July 2012's 14%. Overall a whopper of an auction, and confirmation that if anyone has lost interest in frontrunning the Fed, they sure were not in today's auction roster.

Europe saw red today. Italian equities and bonds traded notably off (with FTSEMIB now -2.7% on the week) amid their biggest drop in over a week and heading back to post-election lows. The driver was a less-than-desirous auction at the short-end of the Italian bond curve (the part of the curve that Draghi 'promised' would be fine) as the 12-month bill went out 43bps above the January lows. This sparked weakness overall as across the board weakness was evident in stocks and bonds in Europe. EURUSD dropped back below 1.2950 for the first time in 3 months. Commerzbank's recap also stumbled markets a little even though it was widely rumored and Europe's financials underperformed broadly. A late-day ramp - oddly starting at 1130ET (when Europe used to close pre-DST) - just like we saw yesterday - saved the day for stocks and crediy overall.

It turns out that when peddling a flaming paperweight (recall "Total Karma Recall: Fisker Pulls All Cars Due To Fire Risk", "As Another Fisker Karma Spontaneously Combusts, "Green" Dreams Go Up In Smoke" and of course "Fisker Karma Is First Car To Burn Underwater"), even if it is a very pretty and streamline paperweight, not even $529 million (or perhaps due to) in government subsidies can lead to a Hollywood ending and everlasing prosperity. As the WSJ reports, "The founder and executive chairman of electric-car start up Fisker Automotive Inc. said he resigned Wednesday because of "disagreements" over business strategy with the ailing company's management." The founder, "said in an email sent to a small number of journalists that has "left the company." Reached by phone, Mr. Fisker confirmed that he sent the email and that he had resigned."

With the marked shift in "coolness" surrounding smartphones away from Apple and toward Samsung (one of the primary reasons why AAPL is trading at or near its 52 week low and at the price target set for it by Jeffrey Gundlach back when the Smart Money crowd was advising their soon to be broke viewers to sell AAPL puts day after day), many wonder if this is merely a drop in innovation by Apple under it new, less visionary and far more Wall Street-friendly CEO, or is it something else? A possible answer is that is may be something as trivial as marketing. As the WSJ reports, in 2012 Samsung for the first time outspent AAPL in advertising dollars, handing out $401 million to raise brand awareness compared to Apple's $333 million.

Worried about potential bankruptcy next week, buy the stock. Concerned at slumping top- and bottom-line misses, buy the stock. Regulatory oversight, buy the stock. Over-leveraged, buy the stock. Fortress-like balance sheet, not so much... Since the mid-November lows at the start of this liquidity-fueled rally de luxe, the most-shorted names in the Russell 2000 have risen an impressive 27% - even more impressive is that this is a 1150bps outperformance over the index itself. As we warned a few times, the list of most-shorted stocks is often a place to find epic (and ridiculous) returns but with our macro hats on for one second, if this kind of 'capital' is flooding into these kinds of companies - we can only imagine the landscape of mal-investment that will be exposed if and when the tide ever ebbs even modestly. For now, the dash-for-trash continues - though today is the first 2-day drop in 3 weeks (but still outperforming the not-most-shorted names).

Steven Spielberg gave us Pre-Crime; Ben Bernanke gave us Pre-Monetization. Moments ago, as part of today's concluded $1.464 billion market funding POMO operation, one of the issues purchased by the Fed was the 30 year Treasury identified as CUSIP 912810QZ4. Why is this CUSIP interesting? Because at 1 pm tomorrow, the US Treasury will issue $13 billion in the form of a 29 year 11 month bond reopening. The CUSIP of the issue: 912810QZ4. Because the only thing better than monetizing the US debt is, well, pre-monetizing the US debt.

The latest release of the National Federation of Independent Business Small Business Survey was a bit of dichotomy of interpretation. Is the inventory increase really a sign of optimism or is it an unwanted buildup as sales have slowed as shown by the latest wholsesale inventory report?  Are capital outlays really a sign of optimism or is it simply just required maintenance and upkeep?  The interpretation of the data is key to understanding the direction of the overall economy. Economic confidence still remains at levels lower than in 2011 or in 2008 during the depths of the financial crisis. Concerns for businesses remain weighted toward the consumer and the government.  Weak sales, government regulations and taxes are the top 3 biggest headwinds curtailing small business currently.  With the upcoming debates over the debt ceiling and the budget it is unlikely that these concerns are going to improve much anytime soon.

"Clearly, the USDA has made up its mind that Big Sugar is going to trump the American consumer," is how industry exec perceives the news that the government is considerng buying 400,000 tons of sugar, as WSJ reports, to stave off a wave of defaults by sugar processors that borrowed $862 million under a government price-support program. Since these 'loans' were given nine-months ago, sugar prices have plunged 18% - and could leave the government's price-support program with an embarrassing $80 million loss given the additional sugar-to-ethanol purchase losses. Of course, rather than pass on lower prices to a struggling consumer, the government's decision is to avoid a loss for corporations such as American Crystal Sugar Co., Amalgamated Sugar Co. and U.S. Sugar Corp., and, as Sen. Jeanne Shaheen notes "unfairly leaving consumers and businesses on the hook to foot the bill and that is unacceptable." Moar Big Gulps...

I would say that we are in the void; a place where not much matters. The actions of the world’s central bankers have created not only a global financial bubble but a market assumption that everything is backstopped and that nothing can go seriously wrong. Equities rise, bonds compress and everyone plays along. The last time I felt so strongly about this was in the infamous era of “money for nothing, checks for free” just prior to the subprime prick that sent the financial markets into the balloon careening around the room event. It is Ben and Mario’s ice cream store; open twenty-four seven, dessert for breakfast, lunch and dinner and the “full faith and credit” promise that you won’t put on an ounce. It is a world full of “non-conforming loans” and you might wish to remember what happened last time.