Archive - Jan 13, 2015 - Story

In a globalized and financialized world, financial disruption, which is what a “rising” dollar signifies, is not an independent paradigm. The more prices trend exactly opposite of how “stimulus” is supposed to work, the less these convolutions will hold up whereby, eventually, reality sets in. The significance of the action in December is that there are no more lines in the sand left to defend the “honor” of monetarism; copper isn’t anywhere near $3 anymore and the long-predicted crude oil bounce to $70 is instead $45 and falling. Only equities remain, and at these valuations they signify nothing but the folly of the artificial economy. The more this goes on, the more it looks like 1937 lives again.

Now that even the pundit brigade has confessed that crashing crude may not be the "unambiguously good" event all of them had sworn as recently as a month ago it surely would be, and stocks are finally comprehending that plunging oil may well be rather "unambiguously bad" because without EPS growth (energy is well over 10% of S&P EPS), without multiple expansion (rumor has it the Fed will hike this year), without a jump in stock buybacks (energy companies account for 30% of the buyback growth in 2015 according to Goldman) and without a boost to GDP (energy capex plans are imploding), the only way is down. But there was one key element missing from the "bad" scenario: impaired banks. At least until now, because as Reuters reports, Asia-focused bank Standard Chartered is the first (of many) bank facing billions in losses resulting from the crude crash.

From almost $30 differentials in 2011, today's bounce in WTI has pushed the Brent-WTI spread negative for the first time since July 2013 briefly (and August 2010 consistently). This is, as the chart below shows, more 'old normal' as pre-QE the Brent-WTI spread oscillated in a very narrow range...

While there was good news in today's JOLTs report, the bad news is that it will likely take another 3 years before the labor/skills mismatch in the labor market renormalizes. Some time in 2017. So will Yellen be "patient" for another three years?

"Don't fight The Fed" A mantra echoed loud and proud by America's asset-gatherers and commission-takers... except there is a caveat that is not often heard... "don't fight the fed... unless they say sell." Just six short months ago, Janet Yellen's Federal Reserve had their 'irrational exuberance' moment when they warned "valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year." Since then, despite a small dip (that was bought), Biotechs have soared to new record highs... up over 35% since her warning...

A little over a year ago, Ocwen was the darling of hedge funds everywhere, with such luminaries as Steve Eisman pitching it at the Ira Sohn 2013 idea conference. Since then things went downhill and fast for the mortgage servicer, which after being branded "the "Next Generation Subprime Lender" by Moodys earlier in 2014, become the primary target of the NY State regulator. However, while the company's troubles with the state of New York were not life ending, as one major settlement could put everything in the past, the latest development out of the state of California may have just killed Ocwen's (whose disingenuous name comes from spelling Newco backward) business model, after the LA Times reported the state was "seelomg to suspend the mortgage license of Ocwen Financial."

Sure... why not. US equity markets went vertical in the pre-open and followed through as cash indices opened. This ramp drags stocks back to unchanged from the pre-payrolls level on Friday... It should not surprise anyoine that the ramp coincided with a USDJPY liftathon and yet another bounce in crude oil prices...

The Greek general election is just around the corner, and as expectations for a Greek overhaul, if not outright Grexit, rise so does the rhetoric by the man who, barring an act of god or Diebold, will be the next Greek premier: Alexis Tsipras, who some see as the catalyst for a Grexit, while others describe as merely yet another apparatchik of the Troika. Overnight Tsipras wrote an op-ed article in Germany’s Handelsblatt newspaper, summarized by Bloomberg, in which he said the notion that Greece’s economy has stabilized is an “arbitrary distortion of the facts.” He said that while the economy grew 0.7 percent in the third quarter, the recession isn’t over because of 1.8% deflation.

In Germany, citizens are increasingly worried, with 57% of non-Muslims seeing Islam as a threat; and these fears prompted, as Bloomberg reports, about 25,000 people to turn out for an anti-Islam rally last night in the eastern city of Dresden. Protesters demanded tighter immigration laws, measures to fight 'religious preachers of hatred' and a zero-tolerance policy for immigrants who commit crimes. Angela Merkel has urged tolerance after the rally, warning that some of the organizers have "hatred in their hearts," but it appears the slippery clope has begun, summed up by one 73-year-old German, "I want lots of money for a program to pay Muslims to go home."

Despite the collapse of several key industries (cough Steel & Construction cough), as we have discussed in detail related to the record number of VLCCs charging towards China, Chinese crude oil imports surged by almost 5 million barrels in December - the most on record. This 19.5% surge MoM (and 13.4% YoY) indicates significant efforts to fill the nation's strategic reserve but - absent this 'artificial' demand - spells problems for an already over-supplied global oil market (and its near record contango).

• Oil Drops Below $45; U.S. Stockpiles May Speed Collapse (BBG)
• Pound Drops as Traders Write Off Higher Rates on Inflation Slump (BBG)
• Oil prices down again as UAE defends holding production (Reuters)
• The Politics Behind the ECB's Threat to Cut Greece Funding (BBG)
• France dispatched thousands of police and military personnel to protect synagogues and Jewish schools, as the government warned of continued terror threats after three days of deadly violence (WSJ)
• Chinese Car Dealers Find Days of ‘Printing Money’ Ending (BBG)
• Gold Rises to Highest Since October as U.S. Rate Outlook Weighed (BBG)
• Divers retrieve crashed AirAsia jet's cockpit voice recorder (Reuters)

So far today has been a replica of yesterday, with the crude rout continuing and pushing WTI under $45, but largely ignored by the FX carry pairs, and thus equity futures, which have seen some positive momentum from overnight trade data out of China where exports jumped 9.7% beating the 6% expectation, while imports fell 2.4% compared to a projected 6.2% decline as the trade surplus narrowed from November’s record $54.4 billion. For the full year, however, Chinese trade grew at just 3.4%, missing the government’s target of 7.5% growth for the third year in a row as the government quick to blame the slowing global economy. In any event, the USDJPY is well off the overnight lows which means the EuroStoxx is up some 0.8% which, just like yesterday, the E-mini is up some 9 points and rising. It remains to be seen if, just like yesterday, US equities will crash at a precipitous pace after the open, once algos realize that nothing at all has changed.