Take your pick of how to describe this week's action. The Dow was green, S&P 500 unch (ES closed right at its 50DMA), and NASDAQ down for its biggest 2-week loss since the rally began. Heavy volume and incessant selling pressure pushed AAPL to its biggest 10-day loss in over 8 months as it closed at 5-week lows just shy of filling the gap from 3/13 and very close to testing its 50DMA for the first time in 4 months. Credit and equity markets generally did a round-trip today closing near their lows after opening the day-session near their highs off the ubiquitous overnight ramp. HY is practically unchanged on the week as IG saw up-in-quality rotation and outperformed while the S&P ended in between the two as they all traded in a broad range for the second week in a row - even though volatility remains intraday. Treasuries slid to their lowest yields of the day into the close today (though off the week's best and unch today) once again somewhat range-bound but with a notable falling-yield momentum down a few bps on the week with the long-end outperforming and 10Y closing under 1.96%. Copper and Oil rallied solidly today but aside from a little volatility Gold and Silver trod water ending the week with Gold -1% and Silver +0.55% as WTI ended back over $104. The EUR kept rallying all week (more repatriation flows?) dragging the USD lower as JPY underperformed on the week (flat today as the rest of the majors tracked USD weakness) and GBP outperformed. Broadly, the Treasury strength balanced the Oil and FX market risk-on-sentiment but risk-assets proxied higher into the US day-session open only to give it all back and drag stocks back down. It feels like there is still hope for some re-liquification but the weakness in AAPL and the financials suggest at best rotation and at worst steady risk-off while earnings beats (of drastically lowered expectations) keep the dream alive.
UPDATE: Added COMEX Silver Inventory Watch shenanigans from Jesse's Cafe Americain
We have long-discussed the currency debasement, fiat-fiasco thesis for owning hard assets and only last night noted the discussion between Biderman and Sprott on the practicalities of this plan. What we found interesting was this week we have seen a number of quite bearish articles on the precious metals - most notably Bloomberg's chart-of-the-day has had two notes citing inventory build for Silver's imminent demise and lagging futures open interest as a sign of investor's losing conviction in gold. Given that we are fair-and-balanced we thought it worth sharing these technical insights and perhaps reflecting on what Eric Sprott noted as the only thing that could break his 'hard asset' thesis - that the political and banker elite "come to their financial senses" and Dylan Grice poignantly described "eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability."
The Congressional Budget Office has just released three very telling infographics which, unintentionally, spell out a pretty dreary picture of US government finances. At the very bottom corner is a most disingenuous statement that says ”Net Interest not included.” In other words, they didn’t bother to include the $454,393,280,417.03 (nearly half a trillion dollars) that the US government spent on interest last year. To put this number in perspective, the US paid more in interest last year than the entire GDP of Saudi Arabia, or the combined GDPs of the smallest 82 economies in the world. Not exactly a trivial number… unless you’re Tim Geithner. A few days ago, Geithner quipped on NBC’s Meet the Press that there is ”no risk” of the US turning into Greece over the next few years due to such extraordinary fiscal imbalances. This is the same guy who said there was no risk of the US losing its AAA credit rating, and that inflation on a global level is “not high on the list of concerns…” Whether it’s lies, ignorance, or arrogance is irrelevant at this point. The situation is what it is. It’s not going to go away just because the political leadership denies it. Each one of us has a choice. We can either bury our heads in the sand, just like they’re doing… or embrace reality and take control of our own financial futures.
On April 16, Argentine president Cristina Fernandez de Kirchner announced that her Argentine government would expropriate and re-nationalize YPF, an energy company operating mostly in Argentina founded by its government in the 1920s and de-nationalized in the 1990s. Repsol, a Spanish company that owns (owned) 57% of YPF called the act “illegal and unjustified” and vowed to sue. As Paul Brodsky and Lee Quaintance of QBAMCO note, in times past such expropriation would surely be an act of war. FdeK’s timing was brilliant, to re-nationalize the Spanish-controlled energy company when Spain’s economy and funding are teetering means the Spanish government and businesses domiciled there lack the clout to make demands of Euro confederates. The political calculus among leaders of sovereign governments reduces to short-term domestic political benefits vs. threats of economic or military retaliation but with regard to natural resources, the QBAMCO pair critically note, the bigger implication that it is sovereign vs sovereign as the paper bets representing global production and resources that we call “capital markets” is in jeopardy of becoming a sideshow. Baseless paper money, fractional banking, revenue shuffling, financial returns, ever-increasing debts, unwarranted confidence building, nominal output growth and politicians posing as policy makers cannot sustain the most basic needs of societies.
All morning we have been blasted with 2011 deja vu stories how the IMF panhandling effort has finally succeeded, and how Lagarde's Louis Vuitton bag is now full to the brim with $400 billion in fresh crisp US Dollars bills courtesy of BRIC nations, and other countries such as South Korea, Australia, Singapore, Japan (adding $60 billion to its total debt of Y1 quadrillion - at that point who counts) and, uhh, Poland. From Reuters: "The Group of 20 nations on Friday were poised to commit at least $400 billion to bulk up the International Monetary Fund's war chest to fight any widening of Europe's debt crisis." We say deja vu because it is a carbon copy of headlines from EcoFin meetings from the fall of 2011 in which we were "assured", "guaranteed" and presented other lies that the EFSF would surpass $1 trillion, even $1.5 trillion on occasion, any minute now. Alas, that never happened, and while we are eagerly waiting to find out just what the contribution of Argentina will be to bail out Spanish banks (just so it can expropriate even more assets from the country that rhymes with Pain), we have one simple question: does the I in the IMF stand for Idiots? Why? Because this is merely yet another example of forced capital misallocation, only this time at a global scale.
The U.S. stock market is getting a wedgie, and so is the U.S. dollar. That matters, as wedges tend to break up or down in a big way. Stocks are a "risk-on" trade, the dollar is a "risk-off" trade, so they are riding a see-saw with wedgies. Yes, I realize this is an unpleasant image, so let's turn to the charts.
The USDA’s Food and Nutrition Service released a new report on Supplemental Nutrition Assistance Program (SNAP, commonly known as Food Stamps) earlier this week with some fresh data on the program. Given our earlier note on Mr.EBT, we thought the following brief clip from Bloomberg TV on the $82bn-per-year program would provide some rather shockingly sad insights and then Nic Colas' recent focus on the SNAP report provides some much more in depth color. First and foremost, there are 46.5 million Americans in the program as of the most recent information available (January 2012), comprising 22.2 million households. That’s 15% of the entire population, and just over 20% of all households. Moreover, despite the end of the official “Great Recession” in June 2009, over 10 million more Americans have been accepted into the program since that month, and the year-over-year growth rate for the program is still +5%. The USDA’s report is, not surprisingly, very upbeat on the utility of the program. Fair enough. But what does it mean when 20% of all households cannot afford to buy the food they need for their families? To our thinking, it highlights an underappreciated new facet of American economic life – one that will be felt everywhere from the ballot box to the upcoming Federal Deficit debates.
The political left misunderstands the causes of income inequality —confused by the belief that government can somehow challenge the corporate and financial power it created in the first place — and thus proposes politically unrealistic (non-) solutions, particularly campaign finance reform, and raising taxes on the rich and corporations. Yes, the left are well-intentioned. Yes, they identify many of the right problems. But how can government effectively regulate or challenge the power of the financial sector, megabanks and large corporations, when government is almost invariably composed of the favourite sons of those organisations? How can anyone seriously expect a beneficiary of the oligopolies — whether it’s Obama, McCain, Romney, Bush, Gore, Kerry, or any of the establishment Washingtonian crowd — to not favour their donors, and their personal and familial interests? How can we not expect them to favour the system that they emerged through, and which favoured them? In reality, the system of corporatism that created the income inequality will inevitably degenerate of its own accord. The only question is when…
A sea of red is flowing from European equity markets and it seems they are unable to stem the flow as IBEX (the Italian Spanish equity index) nears March 2009 lows (down 18% YTD) but dispersion across European indices is very high from the DAX +14% YTD to Italy, Greece, and Spain very much in the red YTD. However, for the second week in a row, European equity markets (as tracked by the narrow Dow-equivalent Euro Stoxx 50) close with a negative return year-to-date -0.3%. The broader BE500 index is still up around 5% (compared to over 10% YTD gains in the S&P 500). European high yield credit is back at 3-month lows and investment grade credit at 2-month lows. This week, however, followed the exact same path as last week with equity and credit trading in a wide range but notably this week credit markets dramatically underperformed the ever-hopeful equity market with financials underperforming the heaviest. European sovereigns are generally wider close-to-close on the week but just like corporate credit and equity, they generally followed a similar path to last week with a broad range trade - though a clear trend generally wider overall. Italy underperformed Spain on the week and Portugal, as we noted earlier was the big winner on what looked like basis trade-driven flows as opposed to whole new world of relief. Ahead of the G-20 meetings, it did not seem like there was much hope in sovereign credit - even as financials and corporates did lift a little off their multi-month lows and having seen the headlines of the G-20 draft, it appears there is no magic bullet there anyway - no matter how big they think their bazooka is.
Tired of being stopped out by the latest HFT FX algo du jour? Disappointed by having only 500x margin purchasing power? Disenchanted by not having an infinite balance sheet, the inability to manipulate markets (in currencies and commodities) at a whim, and worst of all, having to account for risk in addition to return and always fearing taxpayers may not bail you out after that 1000 pip move against you? Most of all: wishing you were Mikael Charoze and finally being able to trade every asset class with the impunity of a central banker on full tilt? Then this is the opportunity for you: for any wannabe real masters of the universe (sorry Goldman, you are just so... 2009), now that only FX trading matters in the great race to the devaluation bottom, please send your resume, together with your cover letter why you should be picked over all the other sociopaths, and why you deserve to make the decision what is in the best interest of billions of people, to Sonya Zilka, head of talent management at the Bank of International Settlement, aka the Central Banks' Central Bank. And best of luck.
From mid-March, the difference in credit risk between banks that took LTRO loans and banks that decided not to become stigmatized and subordinate their existing senior unsecured bond holders has now more than doubled. Another day of decompression today has pushed the so-called LTRO-Stigma to 142bps - its widest in 5 months and worse than at any time since LTRO1 was undertaken. Since we first noted the disingenuous commentary by Draghi on 'there is no stigma' and suggested this trade on the back of the early recognition of the implicit subordination and unintended consequence of self-loading and self-referencing banks buying their own sovereign debt locking them into a vicious circle with one another, the spread has more than doubled (meaning anyone who TRS'd this deal likely would have seen this spread doubling result in a doubling of P&L) and reflects very closely the market's movements during the crisis period heading into the announcement of the new fiscal compact and the LTRO scheme. This time around, there is less collateral and a banking sector that knows what it means to shake hands with the devil.
While one can talk until one is blue in the face about the pros and cons of the current central bank's (mis)deeds over the past 7 years, the reality is that most people are backward-looking (i.e., economists), not forward (which of course explains the prevalence of speculation as to whether the Fed's exponentially rising balance sheet will result in hyperdeflation or hyperinflation). As such, one can, for now at least, judge the Fed merely in the context of what it has achieved to date, not by the seeds of destruction it has planted. So how has Ben Bernanke performed so far when compared to his previous 4 predecessors, at least based on those two now completely irrelevant, but still oddly believed mandates: inflation and unemployment (because by now we all know that even the Chairman himself admitted the only thing that matters to the Fed is the Russell 2000 closing value). Below we present the Fed's accomplishments in the arena of inflation and jobs in the context of the past 60 years split by Chairmen starting with Martin (remember the 1951 Accord?), then going to Burns/Miller, Volcker, Greenspan and finally Bernanke. So who has been the fabbest among the Fed-est? You decide.
While virtually everyone has opined on the topic of the massive fiscal "cliff" set to take place on January 1, 2013, which could crush US GDP unless American politicians manage to find a way to end their acrimonious ways, most forget that a far more tangible cliff is set to take place much sooner, specifically over the next several months, as those currently collecting handouts from the government in the form of extended unemployment benefits (i.e., those who have been out of a job for a year) are about to get as angry as Germants pre-funding TARGET3, once the free money stops. Goldman explains why: "First, more than 150,000 workers per month exhaust their allowed benefits. Second, recently legislated thresholds will reduce benefit eligibility in many states with below-average unemployment rates beginning in June. Third, apart from legislative changes, labor market improvement in some states has taken the state-level unemployment rate below eligibility thresholds, with many states looking at likely expiration of one or more tiers of benefits around mid-year." In other words, unlike the bulk of other transfer payment programs (read government subsides) which could be extended with the flick of a switch at the end of the year following the now traditional 1+ month congressional theatrical impasse, extended claims can not. The net result: by June some 700,000 people who are currently collecting benefits will lose everything. It seems that the old faithful EBT card is about to be denied- and while one can assume that extended benefits are not a core source of marginal aspirational product (read AAPL) sales, we all know the truth. Is the time finally coming to short the one company that is and has always been the primary beneficiary of government transfer payment largesse? Because if AAPL's recent shakiness has been, by some, attributed to the expiration of EBTs, what will happen when Americans are again forced to pay their mortgages?
Wholesale gasoline futures are down around 8% from their late March peak. This follows the late February peak in WTI crude prices. Joseph Brusuelas of Bloomberg's Economics Brief today asks whether this signals a peak in retail gas prices - which are up around 20% this year. In a very similar seasonal and monetary cycle manner to last year, energy prices are rolling over but will retail follow again this time as it did before. For sure this would provide direct releif to households, as Brusuelas notes, that have seen average hourly earnings decline for 13 consecutive months. The typical lag is 2-4 weeks before wholesale improvements start showing up in retail prices and while we wait with baited breath for that spending relief, we note that at the same time, the average price of gasoline in Europe just broke back above $10 per gallon (equivalent) to its highest in almost a year showing no signs of retracing at all.