Archive - Apr 2014 - Story

"The fallacy is that this reasoning completely ignores the countless ways in which the state’s own intrusions and engagements in the economic system in effect “break the legs” of private-sector actors by distorting prices (including interest rates), penalizing productive actions, and subsidizing destructive actions."

Over 300 years ago, the South Sea company was created (and successfully IPO'd) "for the purpose of rivaling the East India Company." It had no actual operations as of yet but the buying panic for shares was driven by greedy investors seeing the government's elite doing so well and wanting a part of the prospects of a company with no operations becoming a world leader (or just finding a greater fool). Today, the first IPO of shares on Dubai's main stock market for 5 years was 36 times over-subscribed for a company called Marka (which is a "cash shell" which does not have any current operations). Nope, no bubble here.

The Russell 2000 tumbled to its worst month since May 2012. 30 Year bond yield had the 2nd best month in a year (with the entire bond complex lower and curve flatter for 5th month in a row). Gold rallied for the month as high-yield credit spreads widened for the 2nd month in a row. US economic growth collapsed. But what really matters... what is key for the headline-makers, story-tellers, and asset-gatherers... is that the Dow Jones Industrial touched new record highs. On the day, early equity weakness gave way to exuberant buying as the Fed admitted its forecast for Q1 was shit but everything it says about the future is spot on - stocks urged, the Dow hit new all-time-highs (and green for the year) but once that level was hit, stocks began to fade but were rescued by the always-happy-to-help 330 Ramp which closed us at record highs and green year-to-date. By the close, the day saw Stocks Up, Bonds Up, Gold Unch, USD Down

We can finally close the book on the "mystery" (if there ever was one) behind the Fed's fixed-rate reverse repo operation.

One hour after announcing that the Fed would, as expected, cut its monthly Treasury purchases, aka stock market liquidity injections to $25 billion (and $20 billion in MBS), the NY Fed released its POMO schedule for the month of May. The key highlights:

• "The Desk plans to purchase approximately $24 billion in Treasury securities over the month of May. This amount is approximately $1 billion less than the stated pace of $25 billion per month, given that purchases conducted in April exceeded the target by approximately $1 billion."
• There will be "only" 16 POMO days, down from the usual 18.
• The largest POMO days will be Monday May 12, when the Fed will inject $2.25-$3.0 billion into the market and Thursday, May 29, when another $2.50-$3.25 billion will be allocated to stocks.
• There will be no POMO on Wednesday May 7, Thursday May 15, and Wednesday May 26. Needless to say, for those so inclined, these may be the better shorting entry points.

As the Buddha taught, “This is like this, because that is like that.” Extraordinary long-term market returns come from somewhere. They originate in conditions of undervaluation, as in 1950 and 1982. Dismal long-term returns also come from somewhere – they originate in conditions of severe overvaluation. Today, as in 2000, and as in 2007, we are at a point where “this” is like this. So “that” can be expected to be like that." As Seth Klarman from Baupost Capital recently stated: "Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared."

In what can only be explained as a massive oil pipeline derailment, because trains are obviously so much safer when transporting flammable commodities, moments ago another train derailed in Lynchburg, Virginia with numerous railcars falling in the river, and a massive fire erupting with flames that are "storeys high" according to ABC13. And moments ago it was also announced that the train belongs to CSX and the burning product is, expectedly, crude oil.

Great news, Q1 was much worse than ourt awesome forecasts expected.. but that was all weather so our forecasts about the future are likely dead correct and that means escape velocity is coming... Stocks are rallying (and gold is fading)... but bonds ain't buying it as they press the low yields of the day... .what is mst worrisom for stocks, is that it's not Tuesday.

In one of his most voracious tomes, The Wall Street Journal's Fed-see-er Jon Hilsenrath prepared 726 words and published them in 5 minutes to explain that the Fed's forecasts for Q1 were dismally wrong, that the future will all be rosy, and their forecasts spot on, and that the Taper is steady..."Fed officials acknowledged the first-quarter slowdown was worse than expected by saying activity "slowed sharply." Previously, they had just said activity merely slowed...Still, officials nodded to signs of a pickup in economic activity in March and April, suggesting they aren't too worried about the winter slowdown."

Everyone who thought today's FOMC statement would, like the Fed's own balance sheet, set a new all time high record in verbosity, has lost. At 811 words, today's Fed message was 66 words shorter than the March one, and the "briefest" since October. It appears we may have passed the point of peak Fed complexity, and it is all downhill from here - so first a reduction in the pace of liquidity injections, then the communication. All that's left is the "rigged, manipulated" market.

Despite dismal data (or the potential for great escape velocity is around the corner data), major event risks, and a Treasury market that just won't buy the dream of recovery that they are selling; the Fed stuck to its tapering guns... with a consensus $10bn taper...

• *FED TAPERS BOND BUYING TO $45 BLN MONTHLY PACE FROM $55 BLN
  
• *FED: ECONOMY PICKED UP, CONSUMER DEMAND RISING `MORE QUICKLY'

Shifting from "the economy slowed due to weather..." to "consumer spending is rising more quickly" the Fed is in full consensus "everything's gonna be alright " mode. This leaves the Fed buying $25bn a month of Treasuries and $20bn of MBS each month and facing the tough reality that their trillions did not generate enough momentum in the US economy to overcome some snow...

Pre-FOMC: S&P Futs 1874, 10Y 2.66%, EURUSD 1.3865, Gold $1295

Having decided counter-sanctions are useless for now, reflecting on the uselessness of Western sanctions against his nation, Vladimir Putin warned, however, that if they continue he would "have to think about who is working in the key sectors of the Russian economy" - in other words, protectionism is coming. However, it is his ominous words regarding Washington's involvement in the crisis that appear to have fallen on deaf ears among the mainstream media... though will be no surprise to ZH readers "what is happening now shows us who really was mastering the process from the beginning. But in the beginning, the United States preferred to remain in the shadow." As Seregy Lavrov also added later in the day, the way the situation in Ukraine is reported in mainstream media indicates that "unfortunately, the information machine of our Western colleagues is working at full capacity."

Today's FOMC announcement may be one of the more anticlimatic (if long-winded) in a long time: consensus largely expects the taper to continue by another $10 billion, and the Fed will, erroneously, suggest that the economy is growing at a "modest" pace (if only one ignores such things as a complete collapse in US GDP growth due to harsh weather: who knew that all it takes to stop a $17 trillion juggernaut economy was cold winter weather), but it doesn't mean there can't be surprises. Courtesy of Bloomberg, here is a list of the key things to look for in today's statement.

As we showed in the map earlier, the spread of pro-Russian-held cities is rapid across eastern Ukraine and it seems things are reaching a very dangerous head very quickly. As RIA reports, the Central Election Commission of the "Donetsk People's Republic" has agreed to hold a referendum (covering 55 territorial election commissions, more than two thousand polling stations, and more than two million ballots) on May 11th. Citizens will answer one simple question, "Do you support the act of the proclamation of independence of the Donetsk State People's Republic?" As RIA adds, leadership have stated that region of Donetsk will not vote in the May 25 presidential election in Ukraine if the majority of residents support independence.

For today's Pop QEez: will the most recent FOMC statement due out in under two hours, be a new record of over 877 words, or will the Fed finally begin tapering, not only of its bond purchases, but of the confused message it is trying to send to HFT algos and whatever carbon-based traders are left?