Archive - Feb 3, 2014 - Story

The Nasdaq plunged by the most in over 8 months today and broke all the way back to unchanged from the December taper decision of the Fed. All major US equity indices are now negative from the time the Fed decided to slow its flow of free money. The Dow closed below its 200DMA for the first time since December 2012. The S&P 500 closed the furthest below its 100DMA since QE3 started. USDJPY was in charge and everything was higher or lower beta off of that as it broke 102 early then 101 later in the day (with the Nikkei -700 points from the day's highs). Treasuries rallied around 5bps to fresh 7-month low yields for 30Y. Gold and Silver surged, adding 1% on the day as the USD lost 0.25% on the day (led by the 1% strength in the JPY). VIX smashed to 14 month highs over 21%. Credit deteriorated but stocks are catching down.

Confirming the floating rumor from last week that yet another Wall Streeter from a bailed out company is going to set US economic policy, moments ago the Treasury announced that indeed the Citigroup economist Nathan Sheets - the bank's global head of international economics - will start working next week as a counsellor to U.S. Treasury Secretary Jack Lew.  This is the same Sheets, who ten days ago wrote that "our empirical work presents evidence that over the next few years, 10-year U.S. Treasury yields are likely to move toward 5 percent (slightly above our projections for nominal GDP growth) and to stabilize near that level. Our work suggests that Japanese rates may be on a sharply rising trajectory as well, if policymakers there get traction in taming the deflationary demons that have plagued the economy." We already know why the Treasury likes him so much.

It's just getting worse for global interconnected, correlated markets where every expression of risk is the USDJPY, and of course for the Nikkei and for Japan's PM Abe, who is now on strict Imodium watch.  Should the USDJPY tumble to double digit range, we are officially in "global central banker intervention is imminent" territory. And yes, for those asking, there is nothing quite as efficient as the "fair value" of stocks being determined by currency stop losses at even, round numbers.

While the bulk of retailers are blaming plunging kitchen sink sales on unprecedented and completely unexpected cold winter weather, and shocking snow - that defunct relic in a global cooling warming world - one company apparently did not get the "scapegoat the weather" memo: Mercedes. "Mercedes-Benz USA (MBUSA) today reported the highest January retail volumes in its history with sales of 24,413 units across the Mercedes-Benz, Sprinter and smart model lines, a 1.5% increase from the 24,059 vehicles sold the same month last year."

A month ago, none other than Conan O'Brien exposed the un-independent PR-sponsored propaganda-fest that is the local news mainstream media in America. Well, it's happened again... this time proclaiming "Don't worry... be Happy." As Liberty Blitzkrieg's Mike Krieger reminds, we all know the mainstream media is a joke but sometimes its inherent idiocy can be best highlighted with a little humor...

With today's plunge, Latin American currencies have collapsed by over 5% in th elast 2 weeks - the fastest drop in almost two years. Year-over-year this is a 15.75% drop, the largest such drop since Lehman. This drop breaks the 2009 lows and presses the currencies to their weakest since 2003... Bond markets are being crushed as short-dated Argentine BONARs have collapsed to 14 month lows...

It really doesn't get funnier than this, and explains the 7 figure comp for the Bank of America authors who can certainly get matching compensation in the comedy circuit. From BofA's Naeem Wahid:

We recommend closing the short EUR/SEK trade that we initiated last week. While Swedish economic data have improved, as we expected, the global outlook has deteriorated – caused by a larger than expected weather effect in the US (the US ISM has fallen to 51.3, from December’s 56.5). As such we close out the trade at  8.8300 (entered at 8.8100) and look to reinitiate once risk appetite turns positive again.

In other words, the outlook for the global economy - that would be the economy of the entire world - has just taken a hit due to cold weather and snowfall during the US winter....    .....    .....

US equities are pressing fresh lows of the day as USDJPY tests 101. The Nasdaq just broke 4,000 - its worst drop in 8 months; The Dow trading back under its 200DMA; and now every major index is in negative territory from the December Taper. Most notably though, Treasury yields are tumbling as weak data and safe-haven flows have pressed 30-year yields to their lowest sicen July 5th 2013. VIX is trading 20.7% - its highest in 4 months.

With an unofficial tax rate for healthcare and college tuition that makes Scandinavian countries look like low-tax havens, no wonder the middle class in America is vanishing like mist in Death Valley. The political class is now bleating about the erosion of the middle class and rising wealth inequality. There are two primary sources of rising inequality in America: the Federal Reserve and the higher-education and healthcare cartels that so generously fund the campaigns of the bleating politicos.

A few days ago Bloomberg made a big splash with a story about an unknown trader who was so enamored in the BTFD mentality, or for whatever other reason, that he sold a substantial $18 million in VIX calls, betting that the market downdraft would promptly normalize. Alas, while he may have pocketed the cash up front, since then things have not worked out quite as expected for the variation margin requirements of the intrepid seller of vol.

We touched upon the disappointing GM car sales number reported earlier, which were promptly blamed on snow in the winter in some part of the country, which supposedly also meant that California's ravenous car buyers didn't purchase vehicles due to drought or something. Either way, one thing is clear: there was a big drop in auto demand which was to be expected from an overextended consumer whose plight we have been following for years. However, where GM did surprise, is that despite its apparent realization of climatic conditions, the company decided to plough through with abnormal production levels and flooded its dealer network with inventory. So much inventory, in fact, that in January, GM's channel stuffing pipeline rose by another 42K cars (a quarter of total sales in January), increasing the stock of cars parked at dealer lots and collecting dust to 780K from 748K in December, the second highest ever!

Many fear that a decline of between 1,500 to 2,000 points in the Nikkei to raise doubts about 'Abenomics' (i.e., hoary inflationism combined with deficit spending). We are still wondering what Abenomics is supposed to achieve. With a graying population and consequently a shrinking work force, inflationary policies seem especially ill-conceived in Japan. Maintaining the market's calm is predicated on the belief that the inflationary policy pursued by Abe/Kuroda will actually fail. Moreover, Japan's government can simply not afford higher borrowing costs, as 25% of its tax revenue is already going toward merely servicing interest costs on its current outstanding debt. In other words, Japan's government bond market is a glaring example of a Ponzi scheme and only a rising stock market maintains the media's complicitness in this mirage.

It was only a few days ago that Emerging Market FX was rallying on the back of a Turkish Central Bank rate hike that "fixed" everything. It was only a few days ago that investors were told they were "stupid" if bearish on US stocks because of EM weakness. Things have not gone as planned. That temporary blip has been demolished and EM FX has crumbled lower to fresh 5-year lows with many hitting record lows... and no, this does not mean money will flow back into US stocks (as we exclaim below).

Following today's crash in the US Manufacturing ISM, we now have the following snapshot of global manufacturing: only three countries are currently in contraction (sub 50 PMI) mode: Australia, Russia and France. Look for many more to join them if today's US print is a harbinger of things to come to the global manufacturing space.

The event horizon of bad faith is the exact point where the credulous folk of this modern age, from high to low, discover that their central banks only pretend to be regulating agencies, that they ride a juggernaut of which nobody is really in control. The illusion of control has been the governing myth since the Lehman moment in 2008. We needed desperately to believe that the authorities had our backs. They don’t even have their own fronts. Is the money world at that threshold right now?