It took the algos a good hour of digesting the Fed's PR before slowly and surely, as we observed when noting the stealthy action in the VIX, the crowd shifted suddenly from the right side of the boat to the left. In the process, it pushed the TICK indicator well below 1000. But it is probably more notable that a modest 1% drop in the S&P is enough to bring up rumors of a "Markets in Crisis" special, and force all those who were buying on the low-volume levitation into a coordinated sell-off. New York Fed's Kevin Henry better show up soon or the last hour of trading will get messy without an invisible hand propping it up.
UPDATE: Minutes after the post - Stocks getting ugly now, catching down to VIX and USD's move
Bonds were sold instantly as the more hawkish comments from the FOMC hit - as was Gold. The USD rallied and stocks dipped modestly. Once that initial knee-jerk settled, stocks have gone largely sideways to modestly lower, Treasury yields have pushed back towards the day's highs as the USD strength and Gold weakness are tracking each other perfectly for now. Unfortunately, this is not helping the price of Oil - which is higher post-FOMC. Notably, while this is clearly being viewed as hawkish for bonds, commodities, and the USD, stocks appear unphased - but it seems VIX is soaking up the equity uncertainty for now (VIX +1.1 vols at 13.40%) indicating considerably more concern than the market itself (for now). The 'bond-like' Utilities sector is the most pressured (as rates rise) for now.
It would appear that even though the relative dovishness of the FOMC has increased, a realization that the party has to stop sometime is dawning on the PhDs - though for now, the printing will continue until morale improves...
- SEVERAL FOMC PARTICIPANTS SAID EASING MAY PROMPT EXCESSIVE RISK
- MANY FOMC PARTICIPANTS VOICED CONCERN ABOUT RISKS OF MORE QE
- SEVERAL ON FOMC SAID FED SHOULD BE PREPARED TO VARY PACE OF QE
- FOMC PARTICIPANTS SAID ECONOMY WAS ON 'MODERATE GROWTH PATH'
- SEVERAL FOMC PARTICIPANTS SAW IMPROVED U.S. CREDIT CONDITIONS
- A NUMBER OF FED OFFICIALS SAID TAPERING QE MAY BECOME NECESSARY
Pre-FOMC: ES 1521.00, 10Y 2.01%, EUR 1.3337, Gold $1580, WTI $94.18
As we have discussed in detail (here, here, and most recently here), many college students face repaying a mountain of debt upon graduating, and many college graduates end up working jobs that don't require a degree. Even worse, 40 percent of college students drop out without earning a degree, but that does not free them from the debt they have accumulated. In this brief clip, Professor Daniel Lin argues - rightly - that government subsidies are to blame for the continually rising costs of higher education. Although such subsidies are supposed to help defray college costs, they are making the situation worse. A policy that worsens the problem it is supposed to fix should be eliminated - even if it is the government's only credit inflating tool left.
While most mainstream market watchers will pontificate wildly on the VIX as indicative of whatever their whimsy of the day tends to be, we prefer to look at relative performance. The forward-looking implied vol is currently only just below its multi-year average premium to realized volatility (so a low VIX is not that exciting standalone). Realized volatility is pretty much as low as it has been in the last four years, courtesy of the Fed - and each time has been followed by a resurgence soon after. However, there is one more indicator of potential over-exuberance that offers some hope for traders - the spread between SPY (S&P 500) implied vol and HYG (high yield debt) implied vol is at its lowest since the crisis - and each of the previous four times this spread has been this narrow, we have seen notable weakness in stocks soon after. With HYG so 'cheap' to stocks, it seems being long HYG vs. short SPY, or long SPY vol vs. short HYG vol makes some sense for some low vol cheap protection.
We have noted the incessant slamdown in the precious metals markets, and highlighted that the only thing that can slow the flood of liquidity into each and every market is a rise in energy prices. The former represents 'trust' in the system; the latter represents 'real economics' as it squeezes the global economy forcing the central banks to pull back or tighten (see China's lack of rev repo recently). To wit, we just noted the plunge in WTI this morning; but Nanex, given their depth of data, noticed something considerably more concerning... "Because the circuit breaker tripped after the market had somewhat stabilized, we think another large sale appeared that would have decimated prices - which CME's circuit breaker logic picked up on, causing the halt." Did someone intentionally try to crash the WTI Crude contract? And if so, who? We don't know, but the usual suspect (singular) does emerge, considering that with gas prices hitting new February daily record every day, and every dollar in increase in WTI means even less (seasonally adjusted) GDP, and less consumer purchasing power, those evil speculators who are taking the Fed's free money to buy commodities (and very unpatriotically not the S&P or Russell 2000) must be promptly punished.
In another brilliant move aimed at destroying the few table scraps of economic freedom which remain in the Land of the Free, a bipartisan group of esteemed lawmakers in the United States Congress has introduced the Marketplace Fairness Act of 2013. Remember the golden rule of legislation: the more noble the name of the law sounds, the more disastrous its results. This one is no exception. It’s the most insidious form of deceit – creating new taxes masquerading as ‘fairness’. It’s a total fraud, brought to you by the same people who tell us that there is no inflation, and that we must sexually assault airline passengers in order to protect ourselves from men in caves. Have you hit your breaking point yet?
Update: FRANCE'S MONTEBOURG TELLS TAYLOR REMARKS `IGNORANT, INSULTING' - And now we know Taylor was spot on.
The French industry minister is not amused. The CEO of US tire-maker Titan International has explained to the French unions (who think he belongs in an asylum) why his company is not interested in any deal - noting "you can keep your so-called workers," adding that he would have to be stupid to take over a factory whose staff only put in three hours work a day. Maurice 'Grizz' Taylor went 'postal' at the suggestion his company invest in France: "Titan is going to buy a Chinese tire company or an Indian one, pay less than one Euro per hour wage and ship all the tires France needs." His truth-filled reality letter concluded: How stupid do you think we are? Titan is the one with the money and the talent to produce tires. What does the crazy union have? It has the French government." The flustered Frenchman refrained from immediate reply but gallicly noted, "Don’t worry, there will be a response; it's better written down." Indeed, just as long as its not the labor minister.
It would appear that the combination of the last day of trading for the March futures contract and some earlier concerns (via CAT) over global growth are enough to warrant a huge block of selling in the April futures contract for WTI crude. Of course, the now standard rumor of a commodity fund liquidation is doing the rounds - 'standard' in so much as whenever there is a sudden unexplained sharp sell-off in the commodity space it is trotted out. As an aside, this drop in WTI perfectly recouples it with gold -1.7% on the week. It appears, as Nanex notes, that this 'two-second 2500 contract block' ~$250mm plundering of all resting market orders then caused CME to halt trading for 10 seconds. Human? hhmm
Think the Walmart "disastrous" sales memo was a one-off event, which net of Walmart's damage should be completely ignored (something the market has been perfectly happy to oblige with)? Then listen to a separate perspective on the US consumer, this time from a very different angle: that of Town Sports International which operates such gyms as New York Sports Club, and specifically its CEO David Gallagher, who in last night's conference call just confirmed what everyone knows: "As we moved into January membership trends were tracking to expectations in the first half of the month, but fell off track and did not meet our expectations in the second half of the month. We believe the driver of this was the rapid decline in consumer sentiment that has been reported and is connected to the reduction in net pay consumers earn given the changes in tax rates that went into effect in January."
As the markets once again approach historic highs - the overly exuberant tone, extreme complacency and weakness in the economic data, bring to mind Bob Farrell's 10 investment rules. These rules should be a staple for any long term successful investor. These rules are often quoted yet rarely heeded - just as they are now. Farrell became a pioneer in sentiment studies and market psychology. His 10 rules on investing stem from personal experience with dull markets, bull markets, bear markets, crashes and bubbles. In short, Farrell has seen it all and lived to tell about it. Despite endless warnings, repeated suggestions and outright recommendations - getting investors to sell, take profits and manage your portfolio risks is nearly a lost cause as long as the markets are rising. Unfortunately, by the time the fear, desperation or panic stages are reached it is far too late to act and we will only be able to say that we warned you.
While CAT's CEO puts on a brave face, the results from his company are clearly indicative of the slowing global growth that everyone (apart from nominal equity indices) knows is occurring. For months, talking heads have used CAT's results as a proxy for growth and as they are rising confirming their inherent BTFD biases; however, this month's terrible results - with Asia/Pac down 12% on a 3-month rolling basis and North America down 11% - appears to confirm what has been evident in the lagging global GDP data for over a year - things are not picking up.
As noted yesterday, the paper precious metal 'slamdown' window remains open for another two hours as Gold trades under $1600 and Silver below $29. In other news, US Mint reported physical gold and silver sales through yesterday have already surpassed the 2012 February total.
Confused by the latest Chinese military hacking scandal? The cartoon wizards from Taiwan's New Media Animation have it summarized for in just 150 seconds for all those US dummies who were not hacked by the Chinese.
The divide between the 'givers' and the 'takers' is well known across the broad European Union, but it is just as prevalent in the next risk-flaring centre - Italy - and this chasm between the two sides of fiscal profligacy will mark a critical separation in the pending elections. As the chart below shows, the North of the country tends to be the net tax contributor and the South the net receiver of fiscal benefits. At the very top is Lombardia (the richest state), a northern region that sends a net EUR44bn to the rest of the nation - and unsurprisingly perhaps is very pro-Berlusconi (in the polls) and has the most seats allocated (at 49 of 315). Interestingly, the region at the other end of the scale (the most broke state) - Sicilia - which receives net EUR 12.8 from the rest of the nation is also pro-Berlusconi's centre-right party. So it seems the rich and the mafia want Silvio though current opinion polls suggest Sicily is too close to call. The Italian election, for now ignored by all but the Italian sovereign bond market, remains a key risk event for confidence that Draghi's promise can really hold things together - no matter how profligate a nation becomes.