Archive - May 16, 2013 - Story

It is only logical that when one of the smarter people in finance warns that he "sees bubbles everywhere" that he should be roundly ignored by those who have no choice but to dance. Because Bernanke and company are still playing the music with the volume on Max, and if not for POMO there is always FOMO. However, if there is any doubt why this "rally is the most hated ever", here are some insights from the Bond King from an interview with Bloomberg TV earlier today: "We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions. It doesn't mean something like 2008 but the potential end of the bull markets everywhere. Not just in the bond market but in the stock market as well and a developing one in the house market as well."

Presented with no comment...

Confirming what we explained recently, Morgan Stanley explains that among its equity long-short fund activity, the short activity (the net of shorts added and shorts covered) reached a minus-2 z-score indicating massive covering over the past 20 days. The last 3 times this occurred were April 2010 (S&P then fell 13% in 8 days), July 2011 (S&P then fell 19% in 23 days), and Oct 2011 (S&P then fell 10.5% in 20 days). Across sectors, Consumer Discretionary has been the most covered over the past week and month. Due to heavy covering, Discretionary short activity fell below a minus-3 z?score as of yesterday (now the highest long/short ratio of all sectors). It is worth keeping in mind, MS add, that historically speaking, the sector with the highest long/short ratio has often gone on to underperform over the following 6?12 months. This covering has driven median net leverage up to 64% (its 97th percentile of post crisis levels). Money-on-the-sidelines!! not so much... Massive short-covering rally - yes...

We have long discussed the problem that the Japanese government faces if interest rates in the troubled nation rise (cost of debt financing will swamp revenues in a vicious circle); but now it seems there is another - just as vicious - problem (that the BoJ is set to discuss according to Nikkei). The inability of the BoJ to 'control' Japanese interest rates (JGB rates spiking unprecedentedly day after day) has put the banking system in a lot of trouble. As we explained recently the banks appeared to initially 'hedge' their huge JGB positions but now appear to recognize that first out wins and are reducing exposure overall (YTD -3.7% according to local data). The reason - simple - as the IMF explains via the BoJ - according to BOJ estimates (footnote 4), a 100bp (parallel) rise in market yields would lead to mark-to-market (MTM) losses of 20% of Tier-1 capital for regional banks and 10% for the major banks. He who sells first wins...

We are sure every effort has been undertaken to ensure Mr. Erdogan's visit (Iran Gold or not) was a success but just in case there was any confusion if the administration has learned anything as a result of the scandals in the past week, the following tweet from CBS' White House correspondent Mark Knoller should add insight on just how much more transparent the administration is and how seriously it takes the freedom of the press...

Questioners pre-chosen and I'm not one of them. Again.

— Mark Knoller (@markknoller) May 16, 2013

While there are a plethora of Wall Street analysts calling for much higher levels for the S&P 500; most of these calls are based simply on the belief that the current trajectory must continue indefinitely.  While you certainly cannot "fight the Fed" the underlying fundamentals and economics that support the markets long term are not present for the party.  What is very important to understand, and can be clearly seen in the chart below, is that despite repeated calls for "ever rising" stock markets in the past eventually left investors devastated.  Markets do not, and cannot, continue indefinitely in one direction. Unfortunately, for most individuals, by the time they realize what is happening it will likely be far too late to act. Could the catalyst be 'language' changes from the FOMC as they see bubbles and froth in high-yield credit and margined stocks?

The US is moving to broaden its 'blockade' efforts of Iran to the movement of pure gold into the Islamic Republic. The US-led embargo of Iranian crude succeeded in slowing the flow of petrodollars into the nation but as Foreign Affairs committee chairman Edward Cohen remarked, there is "no question that there is gold going from Turkey to Iran." While the official line from US elite such as Bernanke remains that 'gold is not money' it appears that increasingly other nations would disagree, as Cohen admitted, "in large measure what we're seeing is private Iranian citizens buying gold as a protection against the falling value of Iran's currency." It would seem somewhat self-evident that the US is admitting, by attempting to embargo this gold flow, that outside the US, the Dollar is becoming increasingly irrelevant (see China's gold demand); and that for many countries the petrodollar no longer exists, having been replaced by 'Petrogold'.

After an almost non-stop decompression in yields post-NFP, Treasuries are ripping today on the back of dismal economic data. After testing up to the 2.00% Maginot Line for 10Y, today's 6.8bps yield drop is the largest since mid-February. Taper or no Taper, bonds 'want' to reflect the real economy it seems... of course, as Treasury yields surge to the lows of the day so stocks - in their inimitable manner - are pushing to new all-time highs...

Earlier we reported that the US has now officially landed a Marine force in Israel as well as an assault ship, in a visit that the US Navy promptly assured "is not associated with, nor a reaction to, any world events." It seems we were not the only ones who read this justification somewhat skeptically: so did Russia. And in a historic event, the Russian Pacific fleet, for the first time in decades, crossed the Suez Canal and entered the Mediterranean, direction Cyprus' port of Limasol (hi Cyprus - Russia will be arriving shortly) in what is now the loudest implied warning to the US and Israel amassing military units across Syria's border that Russia will not stand idly by as Syria is used by the Israeli "Defense" Forces for target practice. “The task force has successfully passed through the Suez Channel and entered the Mediterranean. It is the first time in decades that Pacific Fleet warships enter this region,” Capt. First Rank Roman Martov said. This is what is also known as dropping hints, loud and clear.

Gross: AP, IRS? Ask not what you can do for your country, ask what your country can do TO you.

— PIMCO (@PIMCO) May 16, 2013

It's just getting plain stupid out there. Just as stocks were exploding into the green (perhaps on expectations of an epic Philly Fed miss), the Philly Fed did not disappoint, printing at -5.2, down from 1.3, and crushing expectations of an increase to +2.0, the biggest miss since February and confirming that the Empire Fed index plunge was not a fluke. Virtually every components in the Philly Fed was red except for Inventories (up to 4.1 from -22.2 in March) and Prices Paid (up to 6.9 from 3.1 in March). Among the plungers, the key New Orders tumbled from -1.0 to -7.9, Shipments crashed from 9.1 to -8.5, Average Workweek slide from -2.1 to -12.4, and the Number of Employees imploded from -6.8 to -8.7, the lowest print since September 2009. And if all of this doesn't send the Stalingrad & Poor 500 to new historic highs, we don't know what will. All one can do now is just laugh at this "market."

The S&P 500 has managed to get back into the green; VIX is back above 13; and 10Y yields are down 4bps... 'new normal'

China's demand for gold jumped 20% to 294 tonnes in the first quarter of 2013, while global gold demand overall slid 13% thanks to the dramatic rotation of demand from paper to physical. Chinese demand in gold bars and coins grew to 109.5 tonnes - more than double the five-year quarterly average of 43.8 tonnes. Central banks added 109.2 tonnes of gold to their reserves in Q1 2013, the ninth consecutive quarter of net purchases. But it was the Q1 ETF outflows of 176.9 tonnes, equating to a 7% decline in total gold ETF holdings that obscured the strong rise in investment for gold bars and coins at the retail level. In the face of the huge 'paper' gold ETF outflows, 'physical' gold demand surged to its highest in 18 months...

It is no secret that in addition to the well-known phenomenon of "foreclosure stuffing", one of the primary drivers of the artificial housing "recovery" has been the surge of hedge funds and asset managers into purchases of rental units courtesy of near-zero cost REO-to-rent federal lending facilities, which have taken out distressed inventory from the market in hopes of converting it into rental. This has manifested in a surge in multi-family starts which have been the primary driver behind the rise of housing starts in the past several years, even with single-family units barely moving higher. All this despite Och Ziff making the case loud and clear late last year, that the days of profitability of this strategy have come and gone. Today we got the first confirmation that other asset managers may have finally given up on the rental conversion strategy, following the observed collapse in multi-family housing starts which crashed from 376K to 234K in April (the lowest since last summer), a drop of 142K and the worst monthly drop since 2006 when the housing market had once again peaked and was about to undergo a very serious correction.

We didn't really need a confirmation that the economy was deteriorating and completely disconnected from the "market", but we got it nonetheless. First, Initial Claims coming at 360K, on expectations of 330K, the worst print and worst miss in six weeks, confirming that weekly data is largely noise and that there is no sustainable downward trend. The May 11 weekly print adjusted and unadjusted were 360K and 318K respectively, virtually unchanged from a year ago at 373K and 325K, showing that in one year there has been essentially no progress, and that weekly initial claims of 350K is the new normal. Of course, the last week's print was also revised higher from 323K to 328K, while initial claims also missed expectations of a round 3MM print, instead printing at 3009K.