Archive - Jan 9, 2014 - Story

Stifel Nicolaus has been fined more than $1 million by FINRA for the "unsuitable sales of leveraged and inverse ETFs." While the fine in de minimus compared to the JPMorgan-esque amounts, the remarks by FINRA raise considerable risks for any apparent fiduciary bucket-shop promoting these popular instruments... "performance can quickly diverge from the performance of the underlying index or benchmark. It is possible that investors could suffer significant losses even if the long-term performance of the index showed a gain. This effect can be magnified in volatile markets." Nothing we don't already know but this time from a regulator...

According to Bill Gross the outlook for 2014 is all about inflation, and how it will impact bonds in the 1-5 maturity bucket: "I am amazed at the fascination and emphasis placed on the u-rate during employment Fridays. Bond prices will move (in some cases by points) with a minor up or down change in unemployment relative to expectations, but when it comes to the third little pig of the litter – inflation – no one seems to care. This number – the PCE annualized inflation rate – is released near the 20th of every month but you will not see CNBC or Bloomberg analysts waiting with bated breath for its release. I do. I consider it the critical monthly statistic for analyzing Fed policy in 2014. Why? Bernanke, Yellen and their merry band of Fed governors and regional presidents have told us so. No policy rate hike until both unemployment and inflation thresholds have been breached and even then “they’re not thresholds,” they’re forks in the road that may or may not lead in a different direction. If so, then 1-5 year bonds, combined with credit, volatility, curve rolldown, and a dollop of currency should float a bond investor’s boat in 2014 and avoid breaking the buck in total return space.... If PCE inflation stays below 2.0% and inflationary expectations don’t rise appreciably above 2.5%, then a 3-4% total return for 2014 is realistic. "

Financial markets have become increasingly obviously highly dependent on central bank policies. In a follow-up to Incrementum's previous chartbook, Stoerferle and Valek unveil the following 50 slide pack of 25 incredible charts to crucially enable prudent investors to grasp the consequences of the interplay between monetary inflation and deflation. They introduce the term "monetary tectonics' to describe the 'tug of war' raging between parabolically rising monetary base M0 driven by extreme easy monetary policy and shrinking monetary aggregate M2 and M3 due to credit deleveraging. Critically, Incrementum explains how this applies to gold buying decisions as they introduce their "inflation signal" indicator.

First Janet Yellen makes the cover of Time, and concurrently so as not to be left behind, Businesweek, well-known for its suggestive covers (housing, hedge fund managers, the Tea Party), has posted an even more provocative creature on its own cover: a Unicorn - one which is supposed to symbolize, you guessed it, Bitcoins - and serves as the anchor for the Bloomberg-owned magazine's extensive profile of the digital currency, with the following teaser: "Why are investors so crazy for an alterantive currency invented by a phantom?"

Between his downbeat "more downside risks" outlook, "extended low inflation" perspective, and strengthened "forward guidance," Draghi has, once again, managed to talk down the EUR (for now). EURUSD has dropped almost 100 pips since he began speaking..."we firmly reiterate our forward guidance that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time," adding that "the Governing Council strongly emphasizes that it will maintain an accommodative stance of monetary policy for as long as necessary." US Treasuries are rallying alongside this tumble.

The Department of Labor states that there is no indication that the winter storm affected this week's numbers (though they are likely to remain volatile through January) as jobless claims dropped from a ubiquitously revised-upwards 345k to 330k this week - the lowest level since the end of November (even as NSA data jumped from 451k to 486k on the week). Continuing claims rose modestly back into the middle of the range of the last 4 months just like initial claims. The emergency claims data is lagged so we will not see the impact of congressional decisions on that until 2 weeks from now but its worth noting that the data we alreayd have shows 104,000 dropping off the rolls. California, Pennsylvania, and Michigan topped the initial claimants list with California worse than this time last year.

Despite record unemployment, record loan delinquencies, and record low loan creation, Mario Draghi and his merry European men decided now was not the time to cut rates to "help" the real economy. Of course, with peripheral bond and stock markets exploding higher why would he - Europe's 'problems' are solved if the market is to be believed. Of course the ECB press conference will have its smattering of negative rate discussions, QE teases, and OMT confidence-inspiration but the multi-year highs in EUR will continue to hurt Europe's exporters means he'll have to try sometime to jawbone it down.

It looks like Time just hinted at who its man, er woman, of 2014 will be with its just released cover showcasing Janet Yellen "The Sixteen Trillion Dollar Woman" which wraps her first interview since being confirmed as Fed chair.

The nation may be slowly thawing from its deep freeze "polar vortex", but that is no comfort for tens of thousands of Ohians, whose water supply has literally frozen in the past day after the valves at the Avon Lake Municipal Utility plant were planted in ice, dramatically lowering the supply of water. NBC reports that "tens of thousands of customers in several counties in Ohio are facing a dramatic water shortage after the intake valves at a key plant that draws water from Lake Erie apparently froze amid the wild winter weather." As a result, the mayor of Avon had a modest proposal as a response to the caticestrophy: don't flush your toilets. At least there is toilet paper, which is more than Venezuela, and its 480% returning in 2013 stock market can say.

As was broadly expected, and contrary to November's surprising announcement, the ECB kept its rates unchanged. No response in the EURUSD. In 45 minutes Mario Draghi will explain just how he plans on reviving Europe's moribund and record low loan creation.

• Carney Guidance Threshold Strained as BOE Holds Policy (BBG)
• Does one laugh or cry: China Tells Banks to Improve Disclosures in Shadow-Lending Fight (BBG)
• Big Business Doubles Down on GOP Civil War With Tea Party (BBG)
• CIA sued for records on possible role in Nelson Mandela arrest (RT)
• Bridge Scandal Destroys Christie's 'Nice Jerk' Image (BBG)
• Borrowers Hit Social-Media Hurdles (WSJ)
• U.S. Leverage in Iraq Tested As Fears of Civil War Mount (WSJ)
• Austerity drive cuts into Chinese inflation (FT)
• Dish Pulling Its Bid for LightSquared (WSJ)
• BlackRock agrees to end analyst surveys (Reuters)
• Germany defends economic policies after US criticism (FT)
• Bank of Korea Holds Rate Even as Yen Clouds Export Outlook (BBG)

The overnight session began on a dour mood, with both the Shanghai Composite and Nikkei sliding (the former once again just barely above 2,000,  latter once again dropping below 16,000), even though Chinese CPI came below expectations suggesting the PBOC has some more room to ease and not rush into liquidity extraction (which just happens to blow out repo rates like clockwork), while in Japan BOJ board member Shirai implied the Japanese QE can be extended and expanded as needed. Europe had a weak start although shortly after 3 am Eastern staged a dramatic turnaround supported by a bounce in the EUR (and ES driving EURJPY) leading to broadly higher stocks, supported by solid demand for Portuguese 5y bond syndication, as well as oversubscribed debt auctions by the Spanish Treasury which sold above the targeted amount and consequently saw SP/GE 10y spread fall to its tightest level since April 2011. At the same time, having been propped up by touted redemption flows ahead of Spanish and French bond auctions, absorption of supply shortly after 1000GMT resulted in an immediate selling pressure on Bunds. Helping lift spirits was a rumored $1 billion trade order in September S&P futures, as well as chatter by the Greek PM that the country was like Portugal and Ireland, prepared to get back into the bond markets.