Archive - Jul 2013 - Story

Following Friday's ugliness in bond-land, today saw the Treasury market's best day in around 13 months as UST are starting to look a lot like JGBs in terms of volatility regime - which really won't help collateral. Gold and silver also had a positive day (both up around 1.1%) as the USD leaked 0.3% lower (led by a surging AUD that recovered a lot of Friday's gap-down losses). The Nasdaq underperformed on the day (as AAPL tumbled 3% from pre-open highs) but remains in the green (just) post-FOMC while the Dow, S&P, and Trannies are all holding red post-FOMC. Discretionary and Financials are now in the green post-FOMC as Builders continue their open-high-close-low regime (now down 7% from FOMC). WTI trod water around $103. Credit markets modestly outperformed on the day but remain significantly below pre-FOMC levels as stocks have almost regained it and VIX slid back to its lowest in 6 weeks (under 15%) though slipped higher from the open today.

Last week, in a very, very quiet release, the US Federal Court system published its annual Wiretap report to Congress. This is something that is required by law; the Administrative Office of the United States Courts (AO) must annually report the number of federal and state applications for court orders to “intercept wire, oral, or electronic communications.” The report gives a lot of eye-popping details about these official, court-ordered wiretaps, including:

• Riverside County, California is the most spied-on county in the United States
• The average cost of a wiretap order last year was $50,452
• Only 18.19% of these wiretaps actually led to a conviction

So using the numbers from this report, for every conviction they get from wiretapping, the government wastes $277,361.19 on other wiretaps that produce absolutely nothing (based on their own metrics for success).

As if predicting the jump in interest rates in June, consumers took advantage of cheap credit condition two months ago to load up on credit, pushing the May Consumer Credit higher by $19.6 billion, well above expectations of a $12.5 billion jump. This was the second highest sequential jump post the consumer credit data set revision, only second to the $19.9 billion from last May. And just like a year ago, revolving credit jumped by $6.6 billion following months of stagnating levels. It did the same in May 2012 when it rose by $6.8 billion when consumers also appeared to be prepaying summer purchases. The balance of credit expansion was once again driven by a surge in student and car loans, which amounted to $13 billion of the total May increase. Whether this credit growth continues into June is skeptical following the jump in interest, and especially following the doubling of the prevailing subsidized Stafford Loan rate which will likely cripple future student loan extraction.

Ahead of this evening's earnings report (and Alcoa outperforming today), and amid Alcoa's ongoing capacity reduction, the yawning chasm between production (of aluminum) and price continues to suggest significant pain ahead. With China and the Middle East seemingly unwilling to follow the market's signals and reduce production (helped un-economically by their respective governments no doubt), the 'if you produce it, demand will come' view of the world is just not working out (and hasn't for 18 months). As Bloomberg reports, "the market is still looking at over-capacity, over-production and an unprecedented overhang of metal," and furthermore, while prices have plunged 12% in recent weeks, there is doubt that producers will follow-through on planned production cuts. Of course, we are sure the Alcoa CEO will be on CNBC to tell us all how great it is and how the world economy is about to pick up... this chart suggests otherwise...

Five days ago the latest episode of the endless "Europe pays Greece to pay Europe" charade played out when the Eurozone gave Greece its latest three-day "ultimatum" to fix itself or else. Obviously, Greece did not fix itself, but since the three day ultimatum ran out two days ago, and since the BBG ticker for the Greek currency is still not XGD, one can assume that the latest European bluff, especially one coming 2 months before Merkel's reelection when nothing is allowed to disturb the precarious European house of insolvent cards, was just that: a bluff.

The Guardian has released the second part of the Edward Snowden interviews with Glenn Greenwald and Laura Poitras. Snowden contemplates the reaction from the US government to his revelations and gets their play-book eerily correct.

From the world's suddenly most confused State Department:

• PSAKI WON'T CONFIRM IF U.S. RECOGNIZES MURSI AS EGYPT'S LEADER: it did in this picture
• PSAKI: WE EXPRESSED CONCERNS ON ARBITRARY ARRESTS IN EGYPT: but unconcerned by un-arbitrary arrests of politcal opponents
• PSAKI: U.S. HAS NOT BEEN IN TOUCH WITH MURSI SINCE HIS ARREST: the whole "under arrest" part may the reason why
• PSAKI: US CALLS ON EGYPT'S MILITARY TO EXERCISE "MAXIMUM RESTRAINT" IN RESPONDING TO PROTESTERS: just harsh language instead of live ammo?
• PSAKI: US "DEEPLY CONCERNED" BY INCREASING VIOLENCE ACROSS EGYPT: because the tear gas used is Made In Russia (or Taiwan) and not American

One wonders, however, at this point what difference does it make?

Today, as per the latest ICAP data, the collateral shortage is back on, with the 10 Year moving from -0.10% in repo yesterday to 0.85% ahead of Wednesday's second re-re-opening of 912828VB3. But what is more curious is the repo shift, because while the On The Run shortage was to be expected with the 10 Year getting pounded to 2.75% on Friday, it was the 3 Year that saw a plunge in repo, with the repo rate soaring from -0.13% to -1.45%: ostensibly the widest it has been in our records database. In other words, the collateral shortage just ahead of the 3 and 10 Year auctions is back and while the shortage of the 10Y OTR is somewhat more manageable than last month, it is the 3 Year, or the short-end, that is now in very short inventory supply.

Looking at the banners in the massive Egyptian protests last week, we saw many anti-American slogans. Likewise, the Muslim Brotherhood-led government that was deposed by the military last week was very critical of what it saw as US support for the coup. Why is it that all sides in this Egyptian civil war seem so angry with the United States? Because the United States has at one point or another supported each side, which means also that at some point the US has also opposed each side. It is the constant meddling in Egyptian affairs that has turned Egyptians against us, as we would resent foreign intervention in our own affairs. So, successive US administrations over the decades have supported all sides in Egypt, from dictator to demonstrator to military. There is only one side that the US government has never supported: our side.

On occasion of an address to economists at a conference in France, Bundesbank  president Jens Weidmann reminded the audience that 'the ECB cannot solve the crisis', because it is due to structural reasons and therefore requires structural reform. Weidmann rightly fears that governments will begin to postpone or even stop  their reform efforts now that the ECB has managed to calm markets down. In a Reuters article on the topic, a number of people are quoted remarking on ECB policy. What is so interesting about this is how far removed from reality general perceptions are when it comes to judging current central bank policies. In short, Weidmann wants to end the three card Monte, whereby commercial banks buy the bonds issued by governments because they don't have to put any capital aside for the purpose, which bonds they then can in turn pawn off to the central bank for refinancing purposes. Weidmann wants to see the connection between banks and sovereigns severed, a connection that has been fostered by governments over many centuries in order to enable them to spend more than they take in through tax revenues.

Despite terrible negative-to-positive pre-announcements, global earnings revisions fading fast, and plunging analyst' earnings downgrades, according to Bloomberg data, S&P 500 Earnings are expected to grow over 8% in Q2 2013 as we head into this season with top-line revenues growing almost 5% (with Consumer Discretionary expected to deliver around 10% growth). With Alcoa kicking us off this evening and likely being extrapolated for at least one trading day (although it is the lowest market cap name in the Dow by far), we note the top-down and bottom-up fundamental trends that 'support' this market. With only 20 names reporting this week, it is relatively quiet, though Friday may have some fireworks when JPM and WFC report their realized losses and loan-loss-reserve-subsidized gains.

The EUR is fading fast (-0.3% on the day) as Draghi re-iterated his commitment to lower, longer, forever, he promises... Germany's DAX was the best performer across the region today as there was a sea of green in European stocks. Even with a late-day drop, the DAX gained 2.3% - its best run in 10 weeks - as Bunds underperformed Treasuries by over 5bps on the day even as exports and production data collapsed. Spanish and Italian stocks rallied but bond yields rose (and Spanish bond spreads rose around 5bps). Portuguese bonds improved around 18bps - marginally positive compared to the collapse in the last week or two - as it seems the market is not convinced that all is fixed again.

With spot gold prices down 28% year-to-date, it appears John Paulson's Gold Fund has managed to create some epic high-beta losses. In a letter to investors, Paulson explains his fund fell 23% in June, is down 65% in 2013; but do not fear - as he concludes time and time again, the gold fund will "produce outsized returns in the long-run".

Think the $90 million sale of the penthouse duplex at the still unfinished One57 to an undisclosed buyer is a milestone for New York real estate? Then you haven't looked at the asking price for Steve Cohen's duplex on the 51st story of the Bloomberg building aka One Beacon Court. At $115 million, if sold, this will represent the most expensive New york real estate transaction in history.