Archive - Apr 9, 2014 - Story

While quick to explain how next year will be better (even though he keeps his year-end 1900 target for the S&P 500), Goldman's chief US equity strategist David Kostin warns there is a good chance of a 10% drop sometime in the next 12 months. The recent 6% pullback (sparked by EM concerns) is only one-third of typical historical corrections and as Kostin notes, the market has gone way too long without a so-called correction (10% from peak to trough). It's been 22 months (and 50% gains) since the last 10% drop and, based on Kostin's quant work, there is a 67% probability that we'll see that correction - which would take the S&P to around 1700.

We’ve covered the militarization of the domestic police force on several occasions but today's absurdity takes the proverbial biscuit. the tiny city of Washington, Iowa with a population of 7,000 and 11 police officers, will be receiving a Mine Resistant Ambush Protected (MRAP) vehicle. These things normally cosy $500,000, but will be given to Washington, Iowa for free under a Defense Department program that gives surplus military equipment to domestic law enforcement.

One sees a market reaction such as this, and what can one say but... alpha!

We wondered earlier whether Kevin Henry would achieve his goal.. and he did. VIX is now sub-14 once again and thanks to a lift-off in EURJPY, stocks are surging. The Dow Industrials (and almost the Transports) have recovered all their post-FOMC losses in this reaction to the apparently more dovish minutes. Gold is maintaining gains. Bond markets ripped lower in yield and the USD is tumbling. The ammo, of course, for all this, is "most shorted" stocks which are spiking post-FOMC.

With all eyes fixed on any mention of the length of time post-taper before rate hikes, stocks and bonds slid gently in the last few minutes before the minutes release - and sure enough...

• *SEVERAL FED OFFICIALS SAID FORECASTS OVERSTATED RATE RISE PACE

In other words, we are way more dovish than you thought we were... Weather was blamed for any slowdown and the pace of tapering appears set. Bear in mind these minutes reflect a discussion that took place - at least from a chronological standpoint - before Janet Yellen's "six months" statement.

With today's 10 Year auction just an hour ahead of the traditionally negative for rates FOMC Minutes, it was no surprise that the just completed issuance of $21 billion in 10 Year paper was nothing to write home about. Sure enough, with a high yield of 2.72% tailing the When Issued by 0.8 bps or the biggest tail for a 10Y auction in 2014, the reception was hardly impressive. That said, the yield was still 1 bp lower than the March auction when bonds sold for 2.73%, which in the aftermath of yesterday's wider 3Y, confirmed that flattening is still on everyone's mind.The Bid To Cover was also hardly notable and while it was below March's 2.92, it was well above the TTM average of 2.66 at 2.76.

Of all the Fed’s communication tools, BofA notes that the minutes seem to be the most confusing to the markets. They should be “old news," Ethan Harris comments, and yet, investors look to the minutes for nuggets of insight. The result, in our view, is a steady stream of “head fakes” and a regular pattern of weakness in the bond market. The results are striking and more consistent than we had expected: the bond market sold off on 18 out of 20 days. Of course, this time could be different but the last 2 years of FOMC Minutes releases have seen bond yields rise on average 3.5bps (bonds are already 3bps higher in yield) and effective Fed watching these days appears mainly a matter of avoiding misleading messages and fading "misinterpretation" of their communications.

Even Germany's vice chancellor Sigmar Gabriel realizes that there is no alternative to Russian gas for Germany, at least not in the near future.

 “In the debate over Europe's dependence on Russian natural gas it is often falsely pretended that there are many other possibilities. This is incorrect.”

But keep hanging on that "we'll export LNG to fix Putin" meme anyway

In top place, for many years in a row, remains that HFT and quant wolf in fundamental analyst sheep's clothing, Chicago's very own HFT champion Citadel, followed closely by perpetual SAC pod-PM wannabe, Millennium.

The woman at the center of the IRS-Tea-Party-Targeting debacle is back in the limelight once again as the House Ways and Means Committee voted 23-14 to formally ask the Justice Department to investigate the ex-IRS official. As Fox notes, this appears to be an escalation by the Republicans to confront Lerner over her role in the agency's controversial practice of singling out conservative groups seeking tax-exempt status for extra scrutiny. On another front, a separate committee will vote Thursday on whether to hold her in contempt of Congress for twice refusing to testify on the scandal. Democrats called the move "unprecedented." The question, of course, is just how more 'da fifs' can she plead.

For the first time since the 'recovery' began, Gallup reports that consumer's average daily spending flatlined year-over-year. As Gallup concludes, at a daily rate of $87, Americans' average daily spending in March looks positive by comparison to spending over the past five years. But the stall in spending, both month-over-month and compared with a year ago, most likely signals a continuation of the lackluster retail sales seen so far in 2014. While government data suggested that retail sales rebounded in February (though still the weakest YoY since Nov 2009), the Gallup data appears to confirm the post-weather pent-up-demand has failed to arrive.

The Fed sacrificed the foundation of middle class wealth - stable housing values - to boost bank profits. Middle class wealth was Fed to the sharks. As the current housing bubble deflates, the investor-buyers who fueled the rally are exiting en masse: what's the value of an asset when the bid vanishes, i.e. there's nobody left who's willing to pay today's prices? The Fed has failed to restore middle class wealth with its latest housing bubble, and the costs of the bubble's collapse will fall not on the Fed but on those who believed the recovery was more than Fed manipulation.

Another day another dismal headline of some killing spree and while the American people is becoming almost numb to these dreadful occurrences, this one was different. As Reuters reports, twenty people were injured, at least nine seriously, when a student at a Pittsburgh-area high school went on a stabbing rampage early on Wednesday. We are sure the administration is closely watching the events and considering what actions to take to ensure this does not happen again. The good news, for now, is that no one has died but indications are that these are very serious injuries.

If you listen very carefully, you will still hear absolutely nothing from any talking-heads of the utter collapse that the last few weeks have witnessed in the Baltic Dry shipping index. The Baltic Dry has dropped 12 days in a row and plunged back to $1061 - its lowest since August 2013. This is the worst start to a year on record... must be the weather.

The market has had a rough start of the year flipping between positive and negative year-to-date returns. However, despite all of the recent turmoil from an emerging markets scare, concerns over how soon the Fed will start to hike interest rates and signs of deterioration in the underlying technical foundations of the market, investors remain extremely optimistic about their investments. It is, of course, at these times that investors should start to become more cautious about the risk they undertake. Unfortunately, the "greed factor," combined with the ever bullish Wall Street "buy and hold so I can charge you a fee" advice, often deafens the voice of common sense. "Not surprisingly, lessons learned in 2008 were only learned temporarily. These are the inevitable cycles of greed and fear, of peaks and troughs."