Archive - Feb 2014 - Story

Until around 3pmET, stocks had been slowly but surely rising - albeit disconnected from credit's reality - in a slow dead-cat bounce of a day. When the Puerto Rico news hit, stocks tumbled to reconnect with credit and VWAP and looked like things were going to get ugly when we were 'supposed' to have a green day of hope. VIX was instantly smashed lower again and the machines lifted the S&P 500 cash index to the highs of the day just into the US close... and then on no news, no blaring headline of catalclysmic regime change, S&P 500 futures tumbled 6 points to the day-session's late lows. That's why the big boys play late...

US (and Japanese) stocks began their dead-cat bounce around the European open tracking USDJPY (once again) and rising in reverse order of yesterday's selloff as Nikkei, Trannies, Nasdaq and so on (in order) recovered around 25-35% of yesterday's losses. For Fibonacci-watchers, S&P futures ticked 38.2% retracement and stalled and VWAP was support all day. Credit markets did not buy it and stocks caught down to them. Silver, having underperformed since the taper, outperformed today back over $19.50 and +1.7% on the week as gold slipped modestly today (but +0.8% on the week). Treasuries sold off modestly leaving yields -2-3bps on the week. AUD stength and JPY weakness supported stocks but the USD flatlined ahead of tomorrow's ECB meeting. MUB, the Muni ETF, was smashed lower on the Puero Rico junking (and that triggered a quick waterfall in stocks) but that was quickli BTFD'd. VIX fell an impressive 2.9 vols to 18.5%.

Following the evaluation of liquidity needs (and availability) for the Commonwealth of Puerto Rico, S&P has decided that "it doesn't warrant an investment-grade rating":

• PUERTO RICO GO RATING CUT TO JUNK BY S&P, MAY BE CUT FURTHER
• GOVT. DEVELOPMENT BANK FOR PUERTO RICO CUT TO BB FROM BBB-:S&P
• PUERTO RICO GO RATING LOWERED TO 'BB+': S&P
• PUERTO RICO REMAINS ON WATCH NEGATIVE FROM S&P

Both the G.O.s and the Development Bank have been cut. Note that 70% of muni mutual funds own this - and it is unclear if a junk rating forces (by mandate) funds to cover. Worst of all, S&P warns Puerto Rico could now face a $1 billion collateral call on short-term debt - the same waterfall collateral cascade that took down AIG.

Last week brought two important pieces of news: one deceptive, the other fraudulent.  The deceptive news was that the Fed, in its last Ben Bernanke moment, would stay the course. The fraudulent news was that US economy grew at a 3.2% annualized pace in the last quarter of 2013. We're still in the weakest recovery since the end of World War II. But since 1950, the composition of the US economy has changed so substantially that GDP 'growth' no longer means what it used to mean...

Earlier we reported how, in the CBO's own words, Obamacare would result in (at least) 2.5 million (soon to be revised much higher) workers departing the labor force over the next decade, that would stay there were it not for the skewed incentives provided by this latest welfare Ponzi scheme. Sure enough, it took the White House mere moments to share its canned retort seeking to control the major fallout this report generated as it goes, once again, against all of Obama's promises. From Reuters: "The White House on Tuesday refuted arguments that Obamacare reforms will hurt jobs, and said a new report from the Congressional Budget Office finds the reforms will spur hiring during the 2014-2016 period. "Claims that the Affordable Care Act hurts jobs are simply belied by the facts in the CBO report," the White House said in a statement about the report, contradicting assessments that said the CBO showed reforms will result in a cut to hours." So job losses after 2016, but before then the surge in hiring - of part-time workers - offset by mass layoffs of full-time workers as employers seek to game Obamacare. Just say that then.

The incidence of cancer worldwide is growing at an alarming pace. A new report by the World Health Organization finds that, as USA Today reports, new cancer cases will skyrocket globally from an estimated 14 million in 2012 to 22 million new cases a year within the next two decades, the report says. During that same period, cancer deaths are predicted to rise from an estimated 8.2 million annually to 13 million a year. The total annual cost globally of cancer was estimated to reach approximately $1.16 trillion in 2010, which is damaging the economies of even the richest countries and is way beyond the reach of developing countries.

As we noted previously there is a race to the bottom between the Argentine currency and its central bank's reserve balance as day by day both slide seemingly unceasingly. However, as JPMorgan notes in a rather aggressive note, a local press article sheds doubts over Argentina's 'honest' reporting of international reserves. Though long used to the lies about inflation (that ended up with the economy minster being fired and it being deemed 'illegal' to tell the truth), JPMorgan blasts that during a balance of payments crisis - as Argentina is undergoing - such manipulation of official statistics (and one so critical for market sentiment) is detrimental to the needed confidence building around the transition in the FX regime and is "a very very bad idea". Simply put, Argentina is over-stating its reserves... considerably.

If it seems like it was exactly a year ago that turmoiling retailer Radioshack shut down 500 stores due to lack of consumer interest in its wares (and or consumer disposable cash), it is because it was. So how does Radioshack demonstrate its morbid sense of humor on the one year anniversary of said announcement? Well, by closing another 500, or about 12% of the retailer's total 4500 outlets currently in existence. The WSJ reports that the company which once was the butt of all LBO-rumor jokes (and still is, only this time in the context of an M&A-rumor with JCPenney and/or the Joseph A. Wearhouse joint venture), is "planning to close around 500 stores in the coming months as the electronics retailer continues working with advisers to restructure the company."

"It's not just tapering that is putting pressure on markets," Marc Faber warns in thie brief clip. "Emerging economies have practically no growth and we have a slowdown in China that is more meaningful than strategists are willing to believe," he adds and this is "causing a vicious circle to the downside" in inflated asset markets as most of the growth in the world over the last five years has come from emerging markets. Faber suggests Treasuries as a safe haven in the short-term; but is nervous of their value in the long-term as "debt is becoming burdensome on the system."

With the world's focus on emerging markets and anxiously trying to bring the narrative back domestically as a reason to buy US stocks, we thought this simple chart would help clarify just how 'great' the US economy (70% of GDP is consumption we are constantly reminded) is doing...

How many times in the last few days have we been told that Turkey - or Ukraine or Venezuela or Argentina - are too small to matter? How many comparisons of Emerging Market GDP to world GDP to instill confidence that a little crisis there can't possible mean problems here. Putting aside this entirely disingenuous perspective, historical examples such as LTCM, and ignoring the massive leverage in the system, there is a simple reason why Emerging Markets matter. As Reuters reports, European banks have loaned in excess of $3 trillion to emerging markets, more than four times US lenders - especially when average NPLs for historical EM shocks is over 40%.

There are two major concerns that everyone should be concerned about that we see taking this sell-off further and faster than anyone else expects...

When the "impartial" Congressional Budget Office first attempted to predict the impact on the US labor force as a result of the administration healthcare ponzi scheme, also known affectionately as Obamacare and less affectionately by other names, it estimated that 800,000 Americans would drop out of the labor force by 2021. Moments ago it just revised that projection, admitting that it was off by the usual 100% or so: the hit to the US labor force due to Obamacare is now estimated to so0ar to 2.3 million through 2021, and furthermore the CBO just admitted that the enrollment rate will be dramatically below the White House's baseline estimates, with 2 million fewer people signing up this year than previously estimated.

UDPATE: At today's Treasury auction - 4-week bills yield 13bps, 52-week bills yield 11.5bps... 1.5bps inverted!

Whether Treasury Secretary Lew's words were meant to calm and chaosify the markets yesterday, his comments on the debt ceiling have sparked a notable sell-off in ultra-short-dated Treasury Bills. As we noted previously the 2/28 ish date appears to be the market's bogey for now with the yield more than tripling from 3bps to 11bps in the last 2 days. CDS on the USA has also risen notably in the last few days with the 5Y now trading inverted to the 1Y cost of protection once again.

The 10Y yield closed below its 200-day moving average and should test down to 2.47% in the short-term; and Citi's FX Technicals believes the Dow will test its 55-week moving average at 15,214, S&P 500 at 1,707; and Gold's consolidation/correction is over - the uptrend has resumed.