Archive - Jul 2013 - Story

Those expecting a massive, epic miss in Initial Claims to keep the critical Baffle with Bullshit narrative going into NFP, did not get it, with Initial Claims printing at 343K, in line with expectations of a 345K print, following the obligatory upward revision in last week's print from 346K to 348K. Continuing claims dropped from an upward revised 2987K to 2933K, below expectations of a 2958K number. And as has been the case for the past year, Americans collecting Emergency and extended claims continue to drop, with 1 million less Americans on EUCs now, at 1.66 million, compared to the 2.62 million a year ago. These are all people who ultimately drop out of the labor force and lead to a "better" unemployment rate. And while ADP and Claims were better than expected, it was the trade deficit that offset the good news, soaring 12% from a revised $40.1 billion to a whopping $45 billion, far above expectations of $40.1 billion, the worst miss in 7 months, and dragging all Q2 GDP forecasts lower with it. This was driven by a drop in exports of $0.5 billion offset by an increase in imports by $4.4 billion. The total May imports were $232 billion - the highest since March of 2012.

Now that good economic news is horrible news for the market, the last thing stocks needed today, with Europe and Egypt imploding fast, was a strong harbinger of Friday's NFP number. And in the first part of today's jobs preview duo, the ADP report, it got just that, with the ADP private payrolls rising to 188K from 134K in May, and modestly above expectations of a 160K print. Will this transform into a 200K+ print on Friday sending the market into a tailspin, or will the initial claims due in minutes fix everything by missing horribly, we will find out shortly.

The algos could have a problem getting out of this one. From Mrs.Watanabe (JPY -170pips, NKY -500 points from highs) getting hammered (and the Hang Seng -5%) to European sovereign bond spreads exploding (Portugal +170bps - biggest spike in 2 years to 8 month highs) and financial stocks collapsing (-4%), safe-havens are heavily bid from gold and silver (+3% from lows) to US Treasuries (10Y dropped 8bps) and global equity markets are taking it on the chin. Not pretty...

It appears that all it took for Spain to finally grant Bolivian president Evo Morales a green light to fly in its airspace was a thorough Austrian check of its cargo hold, a la Millennium Falcon, to make sure it does not hide Barack Obama's public enemy number 1. Sure enough, the plane has left Vienna and at last check was about to fly over Madrid in a few short minutes.

• Portuguese bond yields soar amid political turmoil (FT)
• Portugal Resignation Rocks European Markets (WSJ)
• Portugal, Greece risk reawakening euro zone beast (Reuters)
• Egypt’s military chiefs hold crisis meeting as Mursi snubs ultimatum (Al Arabiya)
• Egypt Crisis Deepens as Mursi Refuses to Step Down (BBG)
• Hidden microphone found in London embassy: Ecuador (AFP)
• Health Law Penalties Delayed (WSJ)
• Rise in mortgage rates cut into homebuyer demand last week (Reuters)
• Bolivia angered by search of president's plane, no sign of Snowden (Reuters)
• Olympus ex-chairman gets suspended sentence (FT)

Presented with little comment aside to note that with all eyes squarely focused on this Friday's payroll data (and today's ADP and claims), it is worth reminiscing of the hope that we felt in 2006 and 2007 when it was "different this time" and the divergence between a plummeting ISM employment index and non-farm-payrolls meant nothing...

And just like that things are going bump in the night once more. First, as previously reported, the $100+ WTI surge continues on fears over how the Egyptian coup will unfold, now that Mursi has a few short hours left until his army-given ultimatum runs out. But it is Europe where things are crashing fast and furious, with the EURUSD tumbling to under 1.2925 overnight and stocks sliding on renewed political risk, with particular underperformance observed over in Portugal, closely followed by its Iberian neighbor Spain, amid concerns that developments in Portugal, where according to some media reports all CDS-PP ministers will resign forcing early elections, will undermine country's ability to continue implementing the agreed bailout measures. As a result, Portuguese bond yields have spiked higher and the 10y bond yield spread are wider by over a whopping 100bps as austerity's "poster child" has rapidly become Europe's forgotten "dunce." The portu-litical crisis has finally arrived.

Barry Ritholtz is convinced that once the current short-term bounce is over with, the recent cyclical bear market in gold will resume. The reality is of course that neither Mr. Ritholtz, nor anyone else actually knows the future. Therefore, he cannot know whether the bear market is or isn't over. However, judging from the remainder of his post, he actually seems to think that the secular bull market in gold is over. In our opinion there is no evidence for that, and we will explain below why we think that he and others in the  long term bear camp are wrong. Further below is the evidence marshaled by Mr. Ritholtz (actually, apart from the technical analysis he provides, it isn't really evidence at all – it reads like an unsupported opinion). Sure enough, gold has no yield, no conference calls, and no income statements (paraphrasing Jim Grant). That is actually the beauty of it. But that does not mean it 'has no fundamentals', nor does it means that it 'cannot be an investment'. We comment on his article (and its errors) further below.

WTI Crude futures just topped $102 per barrel (the highest price in 14 months) as Reuters reports 16 dead and Egypt's high command saying the army was ready to die to defend Egypt's people against terrorists and fools, in a response to Islamist President Mohamed Mursi. Their comment (via Facebook) read "We swear to God that we will sacrifice even our blood for Egypt and its people, to defend them against any terrorist, radical or fool," was issued 3 hours after Mursi's TV statement.

As already reported, the Dassault Falcon 900EX that is the Bolivian Air Force 1 was prohibited from flying over Italy, Portugal, Spain and France, due to suspicions it was harboring the "democratic world's enemy #1" Edward Snowden, trapping FAB1 above Austria, and forcing to land in Vienna. Watch the animation of the flight path below how effective the "democratic world" is in making a mockery of due process, diplomatic immunity and all those other highly valued qualities that make living in the "democratic world" such a joy. As for Europe: what can we say - the continent that over the weekend was furious at the NSA for spying on it, expressed its anger by blocking Snowden's airpace.

In the Oval Office on May 16, 1973, Mr. Buzhardt told Nixon about his discussions with the deputy director of the National Security Agency, Louis W. Tordella, about the Huston plan. The N.S.A. conducts international electronic eavesdropping, but like the C.I.A., it is not supposed to spy on Americans at home.

''Anything the N.S.A. did is totally defensible,'' Nixon said, referring to the Huston plan.

Mr. Buzhardt replied: ''They move into a broader category with respect to domestic affairs'' -- an illegal realm.

''What do you mean?'' Nixon asked. ''Electronic surveillance?''

Mr. Buzhardt replied, ''Yes, sir, targeting U.S. citizens' conversations.''

We have discussed the apples-to-unicorns comparisons of returns between stocks and treasuries in the past making the critical points that a) risky corporate equity returns should be compared to risk corporate equity yields/spreads (as opposed to Treasuries), and b) they must be adjusted for risk. However, as we also pointed out, and in no way suggesting one is better than the other, there is one other major real risk that is so often overlooked it is remarkable. That risk is 'drawdown'. As the following chart summarizes over the past 33 years, it's been quite a roller-coaster ride for those anchoring-biased human beings looking at their account statements. More interestingly, it is exactly this drawdown of recent days in bond markets that is supposedly setting off the great rotation - even though the order of magnitude relative to stocks is dramatically lower.

Following Mursi's TV and Twitter statement earlier, when WTI crude futures re-opened and immediately started to accelerate higher, breaking decisively through the Maginot Line of $100 (on their way to $4.00 gas at the pump in the US). The tensions are escalating between pro- and anti-Mursi protesters as Reuters reports 3 more dead and a further 90 wounded today.

With less than three months before the German elections take place, Chancellor Merkel's party is still, by a wide margin, the most popular with voters. However, based on the latest polls, Goldman Sachs notes that Chancellor Merkel would need a coalition partner to form a government. Her current coalition partner, the FDP, has weak support, making a so-called 'Grand Coalition' with the Social Democrats still the most likely outcome - if Europe can just hold itself together for a few more weeks that is.

Update: Italy and Spain have also been confirmed as a state that refused passage above its airspace to Bolivia's Morales.

Moments ago a rather surreal episode of international diplomacy, or rather lack thereof, took place when the airplane of Bolivian President Evo Morales was forced to land in Austria over suspicions that NSA whistleblower Edward Snowden was on board, a claim Bolivian authorities denied. The reason: France and Portugal reportedly refused to allow the flight to cross their airspace due to concerns that Snowden may have been aboard the plane. It is what international law allows countries to deny their airspace to presidents of sovereign countries, when the only transgression is unproven speculation of harboring a whistleblower. Of course, with both insolvent countries bent over and in dire need of some all too precious Uncle Sam liquidity, we can see how they would do anything and everything to gain some favor with Obama.