August 14th, 2011
As usual, the most comprehensive stack of technical analysis comes from Goldman's John Noyce who is rarely afraid to go out on a limb. Among the key charts to track, number one is the VIX which recently blew out to prior resistance levels at the 49 mark, which happens to have been the peak during the October 1997 Asian Crisis, the October 1998 LTCM crisis, September 11, the July 2002 equity bear market, and the first Eurozone insolvency in May 2010. For now this level has held, and with major central planner intervention it appears that a base is now being built below it. Of course, all this means is that when the current round of global intervention fails the deferred risk will simply send the VIX to new unseen heights. The only question is when.
In his latest ruminations in ruination, Diapason's Sean Corrigan does nothing short of a brilliant post-modernist collage of all the fragments of our broken economic reality and capital markets which, just like the defining 20th century poem by TS Eliot (further exemplified by the Flesch-Kincaid reading complexity of Max+1 inherent in both works), summarizes the terminal situation that we currently find ourselves in. And while in The Waste Land, Eliot focused more on the existential breakdown of society in the "entre deux guerres" period, Corrigan does the same for the trader/financial archetype of the 21st century. But all is not lost. Just like the Waste Land ended on a glimmer of an optimistic note by invoking the Three Principal Virtues of the Brihadaranyaka Upanishad (be self-controlled, be charitable and be compassionate) wherein according to the Nobel winning author the germs of social salvation lay in understanding of our own intractable and self-destructive complexities, so too does Corrigan provide an outcome to our mangled reality based on a trio of our own actions which may one day save us from the economic, financial and capital destruction we (through the creeping dictatorial pervasiveness of central planning, but not only) have brought upon ourselves. "What lies broken, we can surely fix, but only if we break in turn the habits of mind and the tyranny of the man-made institutions which we first allowed to break the things we value - our freedom of association, our independence of action, and our individual chance of prosperity."
The new double AA credit status assigned by S&P has put the U.S. in the same category as China. But one consolation for the United States is that the country's high socio-economic resilience has placed the U.S. at a more favorable investment risk position than major emerging economies like China and India.
Freedom on funding, shorting, positioning and more.
Excuse the rant. But Ms Romer is just misleading the country. We will pay a big price for her lies.
HFT Update after last week's volatile trading sessions.
For your entertainment on a slow August weekend...
The Ames Straw vote results out of Iowa are in, and Michelle Bachmann appears to have won with 29% of the votes, or 4,823 of the 16,892 votes cast. Bernanke nemesis Ron Paul placed second, just 150 votes behind Bachmann, at 4,671, or taking down 28% of the total. For those stupefied by this result, a source on the ground informs us that Bachmann proceeded to hand out 6000 free tickets at $30 each with a mandatory registration at her booth to gain concert entrance. Furthermore, final results were probably tabulated by the BLS. As for other frontrunners, Pawlenty came in a distant third with 14% or 2,293 of the votes. The Hill has more: "A House member has never finished in the top two; extraordinarily, two House lawmakers finished nearly neck-and-neck toward the top. Bachmann is the first woman to ever win the straw poll. "We’re very excited," said Alice Steward, a spokesman for Bachmann. "it’s a very emotional night for her, she’s excited and thankful all the hard work of the supporters and volunteers paid off...Former Sen. Rick Santorum (R-Pa.) won about 10 percent, pizza magnate Herman Cain finished at about nine percent, and Rep. Thaddeus McCotter (R-Mich.) drew just 35 total votes. Murmurs of huge crowds at Waterloo native's splay on the campus of Iowa State University persisted throughout the day, suggesting that momentum was with — and never waned — from Bachmann's campaign." Rounding off the field were Santorum with 10% of the vote, Herman Cain with 9%, write ins Perry and Romney with 4% and 3%, respectively, and Gingrich getting 2%. We are not quite sure if this is the cue to laugh or cry. Our money is on the latter.
It is assumed without question that the stock market is some quasi-sacrosanct barometer of the U.S. economy. But who even cares if the market crashes? Only the top 10% who own it. Yes, millions of (generally government) workers have an indirect stake in stocks and bonds via their state/union pension funds, but it's still informative to look at the distribution of who actually has a stake in the market's rise and fall.
Two years after the bailout, the Treasury Dept. already declared milestone reached in June, 2010 when "Repayments to Taxpayers Surpass Tarp Funds Outstanding." But a recent analysis done by the Center for Media and Decmocracy (CMD), pointing to an actual total still outstanding at $1.5 trillion.
Listening to David Greenlaw and/or Jim Caron as they strike out again, and again, and again, with delusions of economic grandure over US GDP and some historic 2s10s bull steepener which is never, ever coming, one would be left with the impression that Morgan Stanley has inherited the title of most permabullish sell side advisory from Deutsche Bank's economics department. Nothing could be further from the truth. Like any other bank, MS has perfectly hedged its rosy outlook by spoonfeeding its retail clients with the rosy view, while whispering the apocalypse case to its institutional clients (judging by last week's pummeling in MS stock, there is not that many of them left). Below we present the view of MS' equity strategy team under Adam Parker, who gives not only a distribution range for his year end S&P target (1004-1425), but a matrix specifying the probability outcome of either case. Bottom line, "while there is 18% upside to the year-end bull case and 16% downside to the year-end bear case, we assign a higher probability to our bear case than bull case, preventing us from becoming increasingly optimistic." When even Morgan Stanley tells you (or rather the whale clients who are now more than happy to sell into every low volume, retail driven rally) there is little to smile about, it is high time to look for the exits.
Now that even the likes of Joe LaSagna are starting to throw out the R-word about as casually as they did a 4% 2011 GDP target as recently as 2 months ago, it is becoming increasingly clear that the market is pricing in the fact that post a few more historical BEA revisions, the prior two real GDP reads will end up having been, shockingly enough, negative, i.e., your garden variety recession. So where does that put us on a market performance continuum, for those wishing to extrapolate how much further stocks and, yes, bonds (because credit is and always has been a far better indicator of objective market reality) have to drop before we hit the proverbial floor. Well, according to Morgan Stanley, quite a bit lower: "Despite the recent decline in risk assets, we do not believe that recession is in the price. Exhibits 3 and 4 show the typical declines in developed market risk assets in recession. Compared to corrections in past recessions, S&P prices and corporate credit spreads would have more to go, though spreads are starting from a higher level than typically precedes recessions." What is startling is that should central planners lose all control (and with central bank intervention upon intervention, one can argue that should all artificial props be removed, the market really ought to plunge in a Great Depression-style tailspin), the drop from the April 29 peak to the bottom will be roughly 4 times greater... which means the S&P would hit the proverbial "S&P 400" which is the long-term target of the likes of some more popular skeptics such as Albert Edwards and Russell Napier. As for credit: watch out below.
While it is true that following an epically volatile week , the S&P closed down only 2.2% (down 11% MTD and 6% YTD), the traditionally homogeneous distribution in domestic and global beta is starting to get unhinged. Stated otherwise, if one were to gauge by the S&P alone, one would massively underestimate the divergence between different sectors and countries. Therefore, we have summarized last week's performance in just two charts, which show the substantial dispersion in performance, and just how much more painful the week has been for those long financials and/or Korea. As central planners briefly lost control of the markets, is relatively value, gasp, coming back, if only for a short time?
The dust has far from settled on the Washington stalemate over setting a new debt limit. As Thomas Sowell pointed out, so logically, were an increase in the debt ceiling only “routine”, held up by pesky Congressional Tea Partiers, as the spenders charged, then what would be the purpose of having a ceiling at all? But while an indecorous debate encapsulated the larger ideological divide, America rapidly moves on, remorselessly, to threatening politico-economic issues cascading in from Europe and Asia as well as at home.
I am beginning to feel a bit like one of the French unfortunates stumbling through the fog in the Ardennes, circa 1914. Except that, instead of Germans full of deadly intent coming at me in the gloomy forest, it is a flock of black swans. As it was for the French in the Ardennes, the number of problems – then Germans, now black swans – is becoming overwhelming. Consider just a little of what we as investors, and as individuals looking forward to retirement in accommodations more commodious than a shipping box, must contend with...