So the military-industrial complex — the lobbyists, the weapons makers, the media — may accept it if Obama kills 14 women and 21 children to get one suspected terrorist. More terrorism means more weapons spending. For the lucky few it’s a self-perpetuating stairway to riches. Yet for wider society it means spending time, money and effort on war, instead of on domestic prosperity. It means the constant threat of terrorism. And it means the loss of our liberty, as the security state adopts increasingly paranoid anti-terrorism measures. We should do to others as we would have done to ourselves. That means — unless we are comfortable with the idea of ourselves living under military occupation and drone strikes — getting out of the middle east, and letting that region solve its own problems — forget another costly and destructive occupation in Syria. Slash the war and occupation spending, and redirect the money to making America independent of middle eastern energy and resources.
Same time, same place, One day later. After yesterday the Treasury engaged in nearly contemporaneous monetization in the 10 Year bond courtesy of the Fed, first buying then selling the paper, at a record low yield of course, so minutes ago the Treasury just sold $13 billion in 30 year paper at another fresh record low yield of 2.72%, down from 3.06% in April. Ignore that the Bid To Cover plunged from 2.73 to 2.40, the lowest since November 2011, and that Indirects were barely interested, taking down just 32.5%, it was all about the Directs, whose 24% take down soared, and as in yesterday's case, was one of the Top 5 highest ever. China? or Pimco? We will find out soon. Dealers were left with the balance, or 43.5% the lowest since October 2011. Something tells us that once the Fed extends Twist, or engages in more outright LSAPs, we will be seeing much more of this same day turnaround service as little by little all interest-rate sensitive instruments slowly grind down to zero.
It's not all Aston Martins and Brioni suits for hedge fund managers this year. As Bloomberg reports, "It’s a confluence of tricky markets, super-cautious investors and a tough fundraising environment that’s making it a difficult time for hedge-fund managers." The latest addition to the 775 funds that were shuttered last year (the most since 2009) sees California-dreamer Paul Sinclair liquidating his $458mm health-care equity fund as "political decisions made on the other side of the globe have undermined his stock picks and spurred losses for a second year." Physically and mentally exhausted from his travails (planning to spend the summer sleeping and relaxing), Sinclair joins the wannabe likes of Zoe Cruz and three ex-Moore Capital managers, as he honestly notes "I don’t have an edge on Greek elections, the Spanish banking system, what the European Central Bank, the International Monetary Fund, the Chinese government, Angela Merkel, or the U.S. Federal Reserve will do." It seems an increasing number of masters-of-the-universe are awakening to what retail seemed to figure out over the past few years - that everyone's a hero in a central-bank-liquidity-driven rally - and as one other hedge fund manager noted in his investor letter "Markets seem to be driven more by the latest news out of Europe than by a company’s earnings prospects, we have not weathered the ensuing volatility well." Once again correlations are rising - 30-day correlation coefficient between the MSCI World Index and its members is 0.92, compared with the average since 1995 of 0.73 - as all that over-priced alpha is shown up as 'central-bank' beta.
As we witness the riotous dissolution of corrupted capitalism, we need not wait for the history books to identify the mile markers of self-destruction. If we are to rebuild capitalism, even as it is tearing itself down, then we will need to become street-smart detectives in analyzing the current economic murder-suicide in progress. Every fall has its tell-tale confirmations and corrupt capitalism is no exception. There arrive key points where a system’s own contradictions become so evident and self-damaging, where motive, means, and opportunity become so clear, that one can mount an informed, effective counter-offensive.
Italy, Spain, and Greece saw their stock markets rally today (with Greece dramatically so - though what exactly is 10% of nothing?). The rest of European stocks are underperforming as equities broadly deteriorate towards credit markets' already less sanguine shifts. In the last hour or so equities and credit did rally modestly into the EU close but investment grade credit remains near one-week wides as stocks remain range-bound. Spanish bonds (cracking over 7% yields) diverged significantly today as Italy managed to rally modestly close to close. Spain's 10Y spread to bunds has risen 90bps from its opening rally on Monday morning and over 55bps from Friday's close (and Italy +22bps on the week).; but Italian stocks are down 3% on the week and Spain up 1.85% on the week. It all makes sense if you blur your eyes and put your fingers in your ears. EURUSD managed to get back over 1.26 (as gold and silver dumped this morning) as we suspect we are seeing more repatriation flows (and TSYs tumbled this morning) but with Swiss 5Y rates almost 5bps negative, Europe remains teetering.
Yesterday we noted the supreme absurdity of having the Fed buy 10 year Bonds two hours before the Treasury sold 10 year bonds (which obviously priced at terrific terms as there was a $4 billion hole created courtesy of the Fed if only for 2 hours). Today, the lunacy continues. The Fed has just bought $2 billion in 30 year bonds just two hours before the Treasury sells $13 billion in 30 year paper. The ponzi has become so glaring they don't even care to hide it any longer.
Has the Spanish bank bailout set a precedent for all other insolvent EMU member countries to follow? Of course. The only question is when is the stigmata of demanding a bailout (which Europe now has no choice but to grant courtesy of set precedent, be it via ESM or otherwise) less relevant than national pride, than preserving one's banking sector, and preferably preempting the kinds of bank runs that pushed Spain to demand a bailout in the first place. For one small Eurozone member country the answer may be if not now, then very soon. Slovenia's Dnevnik asks a simple question: "How serious is the situation of Slovenian Finance - are we on the way of Spain?" The answer, in not so many words: very likely yes.
The implicit risk transfer from periphery to core - and loss of sovereignty this assumes - that is inherent in any banking union (or Euro-FDIC) is not just a stumbling block for the Germans, Finns, and Brits; without fiscal integration it is a non-starter (which no matter how much chatter or 'coming soon'-phrases we see, is not occurring within weeks/months given the Treaty changes and ratification required). Stratfor's Adriano Bosoni does an excellent job of summarizing the short- and long-term hurdles and implications of what so many of the 'poor' nations are calling for (and yet seem not to comprehend). The proposals all involve a transfer of funds from the center to the periphery and all involve a loss of national control of different aspects of their economy. The ceding of authority to unelected officials in Brussels that will be required may seem like a compromise the desperate Spanish leaders (for example) are willing to take in the short-term. In the long-term, the loss of control over the budget and banking sector would leave the nations under the authority of an external force - a concept that threatens the very existence of the nation state as we know it today. This key contradiction between EU integration and national sovereignty undermines the European project from its foundations.
"The most important election this weekend may have nothing to do with the Eurozone - at least directly. The election in Egypt may change the face of the Middle East. The implications to Israel, Iran and Saudi Arabia are enormous. Will the most populous Arab nation become a theocracy? This will be some weekend."
Last night we noted that OandA will shut-down trading on Sunday ahead of the market-moving events surrounding the Greek election (as it seems they are unwilling to take the agency risk and potentially counterparty risk on a large gap). Nowhere is this more clearly priced into the market than the short-dated FX option market. EURUSD 1 week implied vol is at its greatest premium to realized vol ahead of this weekend than at any time in the last three-and-a-half years. The last time the level of short-dated vol was near this high (in absolute and relative terms) was December 9th 2011 and EURUSD fell 400 pips in the next few days.
My stop loss over the next 4-6 weeks while I expect this risk-on phase to play out is simple: a weekly S&P close below 1267 would for me be very bearish and likely change things. But as mentioned, instead I expect to see markets struggle with headlines and volatility, but ultimately climb the wall of worry up towards 1400, perhaps 1450 S&P....
And then?... My forecast for this extremely bearish risk-off phase over late Q3 and Q4 is that the S&P500 trades below the low of last year, perhaps as low as 1000 +/- 20. The iTraxx Crossover index should over that period widen from around 550/600bp (my end July/early August risk-on target) out all the way to certainly 800bp, and more likely closer to 1000bp. And we should see core bond yields rally hard – I expect 10yr UST yields to rally from my 2.35%/2.45% end July or early August target, all the way down to 1.5%, maybe even lower.
The topic of deteriorating volumes in equity trading has not been far from our thoughts for a few years now but BTIG's Dan Greenhaus has one of the more explicitly clear and sobering charts of this trend today. Whether you see this as a signal of a lack of trust in our capital markets, an investor-class burned by multiple sigma events occurring weekly, an increasingly binary set of scenarios that leave investors clueless, retiring boomers demographically unwinding the 30 year rip, savings draw-downs as income stagnates, or more simply just a generational shift in attitudes towards risk appetite/tolerance; the absolute value of stocks traded is for the first time in a generation diverging rapidly lower as stocks levitate on central bank largesse. It leaves the question: who is the incremental buyer and how sustainable is their presence?
Mark Grant has been on Wall Street for thirty-eight years now. You may claim brains and brilliance and the best investment committee this side of Alpha Centauri but he can smell the napalm in the morning and his nostrils are jumping as if infused by pepper gas. It was in the spring of 2010 that he concluded that Spain was going to get put in “time out” and put it in black and white. Yesterday as Moodys downgraded Spain by three notches to just above junk and likely today the Spanish banks will feel the pain and as the yield on the Spanish ten year is just under 7.00% the heat is on and the stove has been turned up to high. The Italian 10 year yield is 6.25% now and financial markets operate as a matter of faith and it is obvious that the parishioners are leaving the church. There should be no surprise that Greece and Spain and Portugal and Ireland keep asking for money and it should not shock anyone that many clever schemes have been postulated to try to get Germany’s money and it should also not surprise anyone that Germany mouths all kinds of nice and polite phrases to object but in the end Germany will keep rejecting any plot that will lessen their lifestyle.
Initial Claims Miss Big, People Falling Off Extended Claims Soar To 135K, CPI Plunges Most Since December 2008Submitted by Tyler Durden on 06/14/2012 - 08:46
Another economic data point, another preview of the coming NEW QE (and if Goldman is right, the perpetual NEW "Flowing" QE). Initial claims print at 386K, a number which will be revised to 390K next week, a swing and a miss to expectations of 375K, and not even the mainstream media will be able to come up with tits token idiotic headline that claims decline because they did not, even relative to last week's revised 380K from 377K. This is the 22nd expectations miss in the last 25 reports. Continuing claims also miss expectations of 3270K, printing at 3278K. But the biggest surprise to some (not ZH readers who were warned that 700,000 Are About To Lose Their Extended Jobless Claims Benefits), a massive 135K people fell off the Extended and EUC claims as the 99 week cliff hits more and more. Recall that last week 105K dropped of extended claims. This means that in the past two weeks alone 240,000 people no longer collect the last possible form government unemployment benefits, the most in a two week period since December 2010!. We can only hope they are fat enough to collect the new normal stimulus check: disability.