Despite a grumpy open in the major cash equity indices - which opened pretty much in line with where S&P futures had closed on Friday morning - equity indices provided some BTFD reassurance for any and everyone who wanted to get on TV today. In sad reality, a lot of this equity index performance was due to Apple's 2% rally off pre-open lows, as it made new highs and vol continued to push higher. Financials, Industrials, and Materials all underperformed on the day (and Utes outperformed but still lost 0.5%). The majors were hurt most once again but remain notably expensive still to their credit-market perspective. On an admittedly quiet volume day (with Europe closed), the credit market (especially HYG) underperformed equity's resilience open to close but an after-hours reality check dragged ES down to VWAP once again on notably above average trade size and volume for the day. VIX managed top almost reach 19%, leaked back under 18 before pushing back up to near its highs of the day by the close - breaking back above its 50DMA (as the Dow broke below its 50DMA but the S&P remains above). Treasuries shrugged off the equity resilience and stayed in very narrow range near their low yields as stocks diverged once again (until after hours). FX markets were very quiet with JPY crosses getting some action as EUR and AUD managed to drag the USD down a little. Commodities were mixed off Thursday's close with Copper the major loser and Gold outperforming. Oil managed a decent intraday recovery today most notably back over $102. The weakness after-hours in ES (the S&P 500 e-mini future) is worrisome as its lost the support of AAPL and its options. At the cash market close, ES peaked for the day at 1382.75 and has since drifted back all the way to 1374.25 - just shy of the day's lows.
Now that the world is covered in at least $707 trillion in assorted unregulated Over the Counter derivatives (as of June 30, the most recent number is easily tens of trillions greater) and with at least one JPMorgan prop|non-prop trader exposed to having a ~$100 billion notional position in some IG-related index trade, pundits, always eager to score political brownie points, are starting to ruminate over ways to put the half alive/half dead cat back into the box. Unfortunately they are about 20 years too late: with the world literally covered in various levered bets all of which demand hundreds of billions in variation margin on a daily basis, the second the one bank at the nexus of the derivative bubble (ahem JPMorgan) starts keeling over, it will once again be "the end of the world as we know it" unless said bank is immediately bailed out. Again.
There is no free-lunch - especially if that lunch is liquidity-fueled - is how Gluskin-Sheff's David Rosenberg reminds us of the reality facing US markets this year and next. As (former Fed governor) Kevin Warsh noted in the WSJ "The 'fiscal cliff' in early 2013 - when government stimulus spending and tax relief are set to fall - is not misfortune. It is the inevitable result of policies that kick the can down the road." Between the jobs data and three months in a row of declining ISM orders/inventories it seems the key manufacturing sector of support for the economy may be quaking and add to that the deleveraging that is now recurring (consumer credit) and Rosenberg sees six rather sizable stumbling-blocks facing markets as we move forward. On this basis, the market as a whole is overpriced by more than 20%.
At the end of January we first discussed the rolling over of corporate margins and sure enough the consensus for 2012 margin compression has turned our way with only 42% of the S&P 1500 now expected to increase net margins YoY. What is simply 'incredible', in the words of Morgan Stanley, is the jump from 2012 to 2013 expectations of net margins as this chart so well indicates. In 2013, 89% of firms are expected to miraculously rediscover their pricing power and increase net margins. Our word for this is 'magic'.
Four months ago we presented what was easily the clearest and most undiluted by media propaganda clue about the future of the European experiment, when we noted that even immigrants from places such as Afghanistan and Bangladesh, using Greece as a stepping stone onward to the gateway Shengen country of Italy, no longer have the urge to pursue their European dreams, and instead return home. As Art Cashin explained, "Over the decades, immigrants from Afghanistan, Bangladesh and other poor nations would work their way to Patras. They would stay for days or weeks awaiting a chance to smuggle themselves on to a freighter headed for Italy. Once there, they could make their way north into Europe to find hope and opportunity and maybe a job. Last week his relatives told him that things were changing. The immigrants still come to their way station of Patras (hope still blooms). But now, after a couple of weeks in Greece, they are trying to hop ships going the other way. They are going back home. Life was better, or at least no worse, where they came from and they had friends and family for support back there." It appears that the immigrant boycott is spreading, only this time instead of "discretionary" immigrants, or those that have not been fully assumed by society (think "cheap labor" along America's south, such as California, Texas and Arizona), it is starting to hit the core of the cheap PIIGS labor force: the migrant workforce, and in this case the Albanian diaspora working out of Greece at a fraction of the normal cost. And as one Albanian migrant worker, so critical to keeping the Greek construction sector supplied with cheap jobs puts it, "It looks like there's no money left," he said of Greece. "It all dried up." As a result even the Greek illegal-yet-symbiotic-aliens are giving up and going back home. Yes folks: the "indicators" on the ground are telling us that it is now easier to make money in Albania than in Greece.
Facebook has not even collected the cash from going public and it is already precommitting funds to expand growth (what's wrong with its organic growth? Not good enough?) by purchasing tangential services, such as everyone's favorite photo filtering application Instagram for the ridiculous price of $1 billion (a company which completed its Series A round 14 months ago for a $20 million post-money valuation). In other words, FB hasn't even flash dashed (or crashed - thank you BATS) yet, and it is already facing Traffic Acquisition Costs, because with 30 million users, assuming none of them use Facebook, each user just cost Facebook $33.333 (and realistically much more since virtually everyone who uses Instagram uses Facebook). Shutterfly stock not happy as one more greater fool drops out of the race. That said, we read to encounter the inescapable labyrinth that shutting down one's Instagram account is set to become in a few short days.
The place that worries Michael Cembalest, of JPMorgan, the most is Spain. Historically, the kind of dismal position it finds itself in currently has not ended well with 13 defaults since 1500 A.D. and he suspects its going to take a lot of bilateral aid and ECB financing to prevent another one.
Just last week we highlighted the behavioral bias writ large in the Mega Millions lottery via Dylan Grice's boredom discount concept. The same psychological tendency that overprices lottery tickets (relative to their expected value) seems very evident in the price action of everyone's favorite economy market tech-stock, Apple (and most specifically Apple Options). Since the price of Apple's shares skyrocketed above $500 (around early February), two rather significant (and very concerning) patterns have emerged. The first is the rotation from Apple stock into options as Apple options volumes erupted - almost tripling since the start of the year (from very stable levels for the past few years). Call option volumes have also massively increased relative to Put option volumes. However, while this suggests 'new' entrants lining up to buy their Apple lottery ticket, it is the 'pricing' of these options that is most worrisome as while dropping $1 on a lottery ticket will not break the retirement account - the divergence between Apple Options volatility and the broad market's volatility suggests a huge demand and willingness to overpay. Volatility tends to be the cleanest way to judge demand for options and since late January, the premium for Apple options has exploded (even as its share price rose and rose - breaking the empirical link between the two) as the 'optical cheapness' of Apple options compared to Apple's share price drew in the lottery ticket-buyers. Of course this in no way points to an end to the buying of Apple lottery tickets but the recognition of 'overpaying' - even as Apple's share price reaches all-time highs once again and the overpayment reaches 2008 highs - will eventually slow demand for a levered bet on a new life (but as a bookie market-maker you'd be willing to take that trade bet free-money from punters every day) or maybe covered-call writers will just soak it all up again.
NOAA just released confirmation that the first quarter of 2012 was the warmest on record. The fact that we rely on 'seasonal adjustments' in macro data that are so critical in our seeming belief in the recovery of the US economy (and its extrapolation into how many iPads will be bought next month) when the temperature is 20% hotter than average is simply incredible.
As we all know, the "unsinkable" Titanic suffered a glancing collision with an iceberg on the night of April 14, 1912. Ten minutes after the iceberg had opened six of the ship's 16 watertight compartments, it was not at all apparent that the mighty vessel had been fatally wounded, as there was no evidence of damage topside. Indeed, some eyewitnesses reported that passengers playfully scattered the ice left on the foredeck by the encounter. But some rudimentary calculations soon revealed the truth to the officers: the ship was designed to survive four watertight compartments being compromised, and could likely stay afloat if five were opened to the sea, but not if six compartments were flooded. Water would inevitably spill over into adjacent compartments in a domino-like fashion until the ship sank. The financial system of the United States of America is like the Titanic. Hubris led many to declare it financially unsinkable even as its fundamental design was riddled with fatal flaws and the human pilots in charge ran it straight into the ice field at top speed. We have some time left before the ultimate fate is visible to all. Ten minutes after the collision, the Titanic's passengers had 2 hours and 30 minutes before the "unsinkable" ship sank. How much time we have left is unknown, but the bow of the ship will be visibly settling into the icy water within a year or two--and perhaps much sooner.
The shortfall in US labor union pension funds is huge and growing rapidly. The latest data, from 2009, from the PBGC showed that these multi-employer plans were 48% underfunded with $331bn of assets to support $686bn of liabilities - and it has hardly been a good ride for those asset values since then. Critically, as the FT notes today, recent changes by FASB has enabled Credit Suisse to estimate shortfalls more accurately and it paints an ugly picture. The critical difference between reality and what is being reported is the ability for firms to use actuarial 'facts' to discount liabilities or compound assets at a 7.5% annual growth rate - as opposed to the sad reality of a financially repressed investing environment where returns swing from +20% to -20% in a flash forcing all funds into market timers and not long-term buy-and-hold growth players. These multi-employer pension schemes cover over 10 million people concentrated in industries with highly unionized workforces such as construction, transport, retail and hospitality but of the shortfall only $43bn lies with firms of the S&P 500 - leaving the bulk of the burden on small- and medium-sized businesses once again. It seems the number and size of unfunded (implicitly government) liabilities continues to rise or does this force pensions to follow Ben's path and increase exposure to hedge funds (which are underperforming in this serene rally so far this year) in an effort to meet these hurdle rates? Either way it appears this under-appreciated drag on the real-economy as one after another small-, medium-, and large- (Safeway faces shortfalls larger than its market cap) businesses will need to eat into earnings to fund this shortfall.
We have been mis-lead first by the short term effects of the LTRO and then by the political commentary that everything had returned to normal. Hard data will show that things now are about as normal as 9/15/08, the day Lehman filed for bankruptcy... It is just not Greece and Ireland that are experiencing huge drop-offs in the M-1 money supply but Portugal -14.00%, -13.80% in Italy and Spain is quickly approaching double digit numbers. Even in developed countries the signs are worsening as the Henderson Global Investors gauge, the Real Narrow Money Supply, peaked at 5.1% in November, then dropped to 3.6% in January and was 2.1% for February. This is comparable to the declines seen in mid-2008 and so I bring this to your attention. Equally as worrisome is M-2 in the United States which fell below 1.6% last month for the first time since records have been kept in 1959.
There are numerous methods for growing vibrant gardens in less than perfect weather, and growing in colder northern areas with longer winters is absolutely possible, given the gardener has some brains. In the video series below produced by The Survival Podcast, they showcase a very straightforward no nonsense experiment which proves that with a little ingenuity (and rudimentary greenhouse methods) you can indeed grow vegetables regardless of the temperature or the region in which you live.