Archive - Jun 2015 - Story

Capital should always be allocated to the “marginal cost of capital”. The stock market in its most simple form is really an input–output black box: In goes the “cost of capital” – out comes “profit”. No one can disagree that, over the long- and medium-term, it’s the profit which both explains and drives stocks best. The most profitable companies get the best stock returns... which brings us to the “dilemma” of today’s market: The marginal cost of capital is significantly higher.

"House of Cards" indeed...

While everyone now knows that the 2amET European-open hour is the most profitable to be long the US equity market, there is an even easier way to make money in stocks (without the need to wake up early). As Nanex shows, "Buy Tuesday" is the best-performing strategy - outperforming such foolish trades as "Buy Wednesday" or "Sell On Friday and Go Away" by a considerable amount. One thing though, just like The Boomtown Rats, stocks don't like Mondays (or haven't done for a decade).

President Obama is due to take the lectern to gloat address the decision of "the most liberal Supreme Court since the 60s" upholding his healthcare tax...saying that subsidies do not violate state law. Drink every time he smiles, says "right decision", "bipartisan", and neck the whole bottle of tequila if mentions that "justice was done," or uses the term "SCOTUSCare."

There has been some confusion why Germany and the Eurozone are so strict in negotiating with France and unwilling to concede even to the smallest of what they deem as outlandish Greek demands. The reason is not so much whether Spain or even Italy, both countries with soaring unemployment, a lost generation and a sweeping movement against "austerity", follow with comparable demands should Europe concede to Tsipras, but France, where the frontrunner for the next president, the National Front's Marine Le Pen, has just warned that not only is a Grexit inevitable, but that France would follow shortly.

Following meetings with EU officials and then with IMF chief Christine Lagarde and ECB chief Mario Draghi on Wednesday evening, Greek PM Alexis Tsipras is back at it on Thursday, in a frantic attempt to salvage a deal with creditors. He'll need to win over EU finance chiefs (who are collectively losing their will to keep Greece in the currency bloc) and the IMF as the EU summit kicks off in Brussels.

Missing by the most on record (as serial extrapolators expected a rise to 56.5), Markit US Services PMI (following weakness in the Manufacturing PMI) printed 54.8 - the lowest since the middle of weather carnage in January. As Markit notes, with the exceptions of the weather-related slowdown at the turn of the year and the 2013 government shutdown, June saw the weakest pace of economic growth since May 2013 as the Composite PMI slipped to 54.6 - its lowest since January 2015 (as employment tumbled and cost burdens surged the most since Oct 2013). As Markit conludes, hopes for a 3.00% growth are receding as "there has clearly been a loss of momentum in recent months."

Just when you think we have finally hit "peak farce" this happens:

NO EUROGROUP AGREEMENT IN SIGHT ON GREECE: EU OFFICIAL
EUROGROUP HAS BEEN 'INDEFINITELY SUSPENDED:' EU OFFICIAL
EUROGROUP MAY RECONVENE ONCE GREECE PROPOSAL RECEIVED: OFFICIAL

“Any of these events would likely trigger asset price volatility [and] attempts by institutional investors to redeem illiquid corporate bonds in crisis circumstances would amplify volatility.”

After 6 straight months of decline in annual spending growth, May saw YoY spending pop 3.6% (the most since Dec 2014). After an unchanged April, May expectations for spending were a 0.7% jump but the data blew that away, printing a 0.9% MoM jump - the biggest since August 2009 and biggest beat since Jan 2013. Personal Income only grew at 0.5% (still the highest MoM jump since March 2014) driving the savings rate down to 5.1% - the lowest since December. Before Steve Liesman and his buddies get too excited - spending was driven mainly by a 4.72% surge in spending on Energy goods & services - not exactly what the discretionary buying consumer-oriented society that is required to keep the dream alive was looking for. Spending Ex-Energy is the lowest since March 2011. Finally we note non-durable spending topped durables and this exuberant GDP-boosting spendfest (un-save-fest) provides more ammo for an earlier Fed rate hike.

The Bundesbank's Jens Weidmann unleashed a litany of cticisim on the Eurosystem (read the ECB) when he said that Greek banks should not continue to buy the short-term debt of their government, which is then repoed back to the ECB in exchange for precious cash. "The Eurosystem must not provide bridge financing to Greece even in anticipation of later disbursements," said Weidmann, who also sits on the European Central Bank's Governing Council, which approves such funding to Greece. "When banks without access to the markets buy debt of a sovereign which is likewise locked out of the market, taking recourse to ELA raises serious monetary financing concerns," he said in a speech to be delivered at a conference in Frankfurt.

With 10% declines following the past 5 occurrences, the after-effects of this development have not been kind to the Nasdaq.

• This headline needs updating: Creditors set bailout ultimatum for defiant Greeks (Reuters)
• Greece’s Fragile Banks Leave Alexis Tsipras Few Options in Bailout Talks (WSJ)
• Dueling Greece Plans Presented as Ministers Race for Aid Deal (BBG)
• Icahn Cashes In His Netflix Chips (WSJ)
• Meet the Health-Law Holdouts: Americans Who Prefer to Go Uninsured (WSJ)
• ECB holds Athens lifeline unchanged as Bundesbank protests (Reuters)
• Supreme Court Guide: Six Big Decisions Remain (WSJ)
• The Rise of the Compliance Guru—and Banker Ire (BBG)

Chaos reigns, with contradictory headlines pushing and pulling futures in any one direction, only for the next headline to undo the previous one. And only headline scanning frontrunning algos have any chance of trading any of this...