Archive - May 2014 - Story

There is an old Wall Street axiom that goes "Sell in May and go away, come again after St. Leger's day."  Of course, as with all Wall Street axioms, they are viewed by the media to be "valid" only if they work every single year. The reality is that no axiom, investment discipline or strategy works all the time. It is the cumulative effect over long periods of time which defines success or failure. Today's selected readings, both for and against this particular "Wall Street wisdom," provide some statistical insight.

Filed under - WTF Headline of the day. The FAA, for the 2nd time in its history, has fined someone (David Zabdlidowsky) for operating (and crashing) an unmanned drone in Midtown Manhattan:

FAA FINES DRONE OPERATOR FOR FLIGHT OVER MANHATTAN IN SEPTEMBER
FAA RELEASES LETTER CHARGING NY MAN WITH DANGEROUS FLIGHT
FAA SAYS DRONE HIT 2 BUILDINGS IN MIDTOWN NYC THEN CRASHED

The drone was operated in a "careless and reckless" manner, according to the letter below, which is hardly surprising given it took off from 38th near what locals call "Pub Alley."

Based on Markets revenue results to date, which reflect a continued challenging environment and lower client activity levels, expect 2Q14 Markets revenue to be down approximately 20%+/- versus 2Q13.
Higher levels of mortgage interest rates are expected to continue to have a negative impact on volumes
Expect pretax production loss of approximately $100–$150 million in 2Q14 and pretax margins to be negative in 2H14
Expect net servicing revenue of $600–$650 million in 2Q14 and declining by approximately 10% (not annualized) per quarter for 2H14

Stocks just could not figure it out - good jobs data, bad jobs data, WWWIII? But Treasuries and gold did. 30Y yields tumbled to fresh 11 month lows (lot of desk chatter of GPIF buy orders ahead of their holiday), 10Y to 2014 lows, but the short-end sold off as 5s30s flattened to 5 year lows (under 170bps). Despite some smackdowns this week, precious metals bounced back notably today with gold's best day in a month, back over $1300 and unch on the week. Despite yields tumbling, Utility stocks were the week's losers (-1.2%) while homebuilders were best (oh yeah because lower mortgage rates is all that is holding back pent-up demand for homes!!). On the week, Trannies outperformed but Russell 2000 was worst of the major indices (the opposite of today's action). The USD pumped and dumped around the jobs data, but ended the day unch (down 0.25% on the week). Credit markets closed at their wides of the day, notably divergent from stocks on the week. A massive VIX-selling effort began late in the day (because with 38 dead in Odessa who would need to hedge?) - but stocks ignored it.

Treasury Futures markets on the CBOT were halted this morning for about 10 seconds following the release of the April payrolls data. While somewhat stunning all by itself, given that the move was not massive, Nanex notes that what is unsual about this event is that quotes also stopped updating - indicating a possible system issue at the exchange. Of course, in these "unrigged" markets, what more would we expect?

Oil prices have increased recently as tension in Ukraine has escalated and raised concerns about the risks of disruption in Russian energy exports. There is a risk that the security situation in the east Ukraine will worsen even further ahead of the 25 May elections. As Nordea notes, Russia is as important an oil exporter to Europe (of both crude and refined products) as it is a gas exporter, and the consequences of a cut in Russian oil supplies could be as grave since the global oil market has little back-up capacity to lean on. As a result, a halt in the oil deliveries from Russia to Europe will spark a sharp spike in oil prices (potentially to $150/bbl) and in a worst case scenario an oil crisis and European recession (and major slowdown in global growth) and US shale oil or an SPR release will prevent the spike.

A leaked recording by the vice-chairman of Vanke Group (China’s biggest property developer), confirms, as The Telegraph's Amrbose Evans-Protchard reports, what the bears have been saying for months, 'it is a dangerous bubble, and already deflating'. Mao Daqing's words, translated, are ominous: "In 1990, Tokyo’s total land value accounts for 63.3% of US GDP, while Hong Kong reached 66.3% in 1997. Now, the total land value in Beijing is 61.6% of US GDP, a dangerous level... China has reached its capacity limit for new construction of residential projects... and I don’t see any possibility for a rise in home prices." The simple chart below highlights all one needs to know - inventory is exploding - and as Mao concludes: "housing production per 1000 people reached 35; even when the housing market is hot, no country has a figure of greater than 14 - this should cause alarm."

UPDATE: Up to 38 reported choked to death in the burned buildings of Odessa.

Wondering why Treasury yields plumb new depths, gold's having its best day in a month, and stocks can't keep a bid no matter how many times JPY or VIX is slammed? The answer lies in these disturbing images from Odessa which show Pro-Russian forces under attack by Ukrainian forces, buildings burning, deaths, and of course - most critically - the kind of anti-Russian actions that Vladimir Putin said was the red-line for him taking action... it's a long way to Tuesday

Italy’s central bank, the Banca d’Italia, has recently published an important document detailing the storage locations and composition of the country’s gold reserves. The document confirms that Italy’s gold is held across four vault locations, three of which are outside Italy. This is a significant announcement given that the Banca d’Italia is the world’s third largest official holder of gold after the U.S. and Germany. Italy officially holds 2,451.8 tonnes of gold, worth more than €72 billion (US$ 100 billion) at current market prices. In the detailed three page report focusing exclusively on its gold reserves (and only published in Italian), the Banca d’Italia reveals that 1,199.4 tonnes, or nearly half the total, is held in the Bank’s own vaults under its Palazzo Koch headquarters on Via Nazionale in Rome, while most of the other half is stored in the Federal Reserve Bank gold vault in New York. The report also states that smaller amounts are stored at the Bank of England in London, and at the vaults of the Swiss National Bank in Bern, Switzerland.

The world's most expensive apartment sale has been 'consumated'... in London (of course). As The Evening Standard reports, an Eastern European buyer (has anyone seen Yanukoych recently?) is believed to have paid £140 million (~$235 million) for the 16,000  square feet apartment — more than 10 times the size of a typical London three-bedroom home — at the One Hyde Park scheme near Harrods. This values the apartment at a 'mind-blowingly-desperate-to-launder-my-money-and-get-my-assets-away-from-potential-bank-freezes' $17,000 per square foot.

Obama won't be happy! "It would harm everybody, the Europeans and the Russians," warned Olli Rehn, the European Commissioner for Economic Affairs, adding that "any 'sensible' European Union citizen should oppose further sanctions on Russia because of the economic cost for Europe." As Merkel and Obama cozy'd up for discussions this morning, we can only imagine the promises being made if only she would support his crusade (which she clearly indicated she did not want to). Perhaps she should check in with her nation's CEOs (who have vociferously demanded no more sanctions) and, as Rehn acknowledges, the slowing Russian economy is already having a “negative impact” on Finland and Austria, and "that economic fallout probably will spread to Germany, Poland and the Baltic countries."

If we only voted for unbuyable candidates, money would become poison in politics rather than mother's milk.

Two months after Obama first mentioned the "costs" to Putin should he continue to do what the Russian leader has been doing for, well, the past two months, namely copycatting how the US would act if in the exact same situation, Obama today will be assisted by Germany's Angela Merkel on her first visit to D.C. in three years, to further reinforce the US deterrence idea of "costs" (perhaps to Germany in the form of a third of its gas imports being cut off?), just in case Obama alone can't handle Putin. Somehow we doubt Russia will pay much attention - after all it has been revealed time and again that Russia has all the trump cards.

First Kiev, now Odessa? The answer to the question of who is doing the shooting and who is being shot at will need to wait until another Victoria Nuland phone recording is released.

30Y yields have plunged back below 3.40% for the first time snce June 2013 and have retraced over 50% of the "Taper tantrum" sell-off. Yields have accelerated lower this morning after spiking on the jobs data, as a combination of blood on the streets of Ukraine and the reality of the jobs data send investrs to safe havens. JPY is aggressively bid (with AUDJPY ruling US equity weakness) and Gold and silver are in heavy demand. Remember, it's not Tuesday!