While the naive public has been inundated with stories that the foreclosure pipeline has been finally unclogged following the robo-settlement (see here and here) and as a result the home "price discovery" process is well on its way, reality is just a tad different. Make that totally different. As usual, the only foreclosure report that matters, and that is even remotely close to reality, comes from RealtyTrac, and we are sad to say, it brings no good news. Quite the contrary. According to the real estate specialists, March 2012 foreclosures plunged from 206,900 in February to 198,853 in March, the first time the total number of foreclosures (either Default Notices, Foreclosure Auctions, or REOs) has dropped under 200,000 since July 2007! Which sadly means that the foreclosure dam wall has yet to crack. Of course, when it does, well "The Second Foreclosure Tsunami Is Coming, And Is About To Kill Any Hopes Of A "Housing Bottom."
While every soon-to-be-retired boomer and his or her long-only asset-manager stock-broker commission-leecher lies awake at night in the forlorn hope that Ben "I'm-all-in" Bernanke finds another pile of printing presses to make use of in his game of Global No-Limit Texas Central-Banking; the economy, judging by 'selective' macro data and today's Beige Book, is limping along quite happily with no need for QE3 anytime soon (and that spells trouble for a market that is entirely dependent on the spice flow of liquidity and not just the stock of central bank assets). The sad truth is, as we first pointed out back in early February, that the economy is significantly less upwardly mobile than it 'optically' appears (or the market signals it to be) thanks to the extreme weather that has occurred and so while the spin-masters will attempt to make every headline look like we are in self-sustaining recovery mode, the Fed knows full well the reality is far different (hence Bernanke's recent comments) and yet they have not admitted to this animal-spirits-shattering reality (yet). Perhaps this shockingly simple 'chart-that's-worth-a-thousand-words' will force their hand as the correlation between regions showing extreme positivity within today's Beige book and the regions with the extremest weather disconnects is, well, extreme itself. It seems the Fed is caught between a rock of stagnating inaction and a hard-place of independence-removing LSAP.
In an attempt to not steal too much thunder from Gary Shilling's thought-provoking interview with Bloomberg TV, his view of the S&P 500 hitting 800, as operating earnings compress to $80 per share, is founded in more than just a perma-bear's perspective of the real state of the US economy. As he points out "The analysts have been cranking their numbers down. They started off north of 110 then 105. They are now 102. They are moving in my direction." The combination of a hard landing in China, a recession in Europe, and a stronger USD will weigh on earnings and inevitably the US consumer (who's recent spending spree has considerably outpaced income growth) with the end result a moderate recession in the US. The story is "there is nothing else except consumers that can really hype the U.S. economy" and that is supported by employment but last week's employment report throws cold water in that. "Consumers have a lot of reasons to save as opposed to spend. They need to rebuild their assets, save for retirement. A lot of reasons suggest that they should be saving to work down debt as opposed to going the other way, which they have done in recent months. So if consumers retrench, there is not really anything else in the U.S. economy that can hold things up." While the argument that the US is the best of a bad lot was summarily dismissed as Shilling prefers the 'best horse in the glue factory' analogy and does not believe investors will flock to US equities - instead preferring US Treasuries noting that "everyone has said, rates cannot go lower, they will go up, they will go up. They have been saying that for 30 years."
Last week we had the Fed's hawks line up one after another telling us how no more QE would ever happen. We ignored them because they are simply the bad cops to the Fed's good cop doves. Sure enough, here comes Bernanke's right hand man, or in this case woman, hinting that one can forget everything the hawkish stance, and that ZIRP may last not until 2014 but 2015! Which, by the way, is to be expected: since ZIRP can never expire, it will always be rolled to T+3 years, as the short end will never be allowed to rise, until the Fed has enough FRNs in circulation to absorb the surge in rates without crushing the principal, as explained yesterday.
In its latest note, Goldman is not providing any actionable "advice" which is naturally to be faded and would have been thus quite profitable, but merely updates its outlook for the second quarter, which is not pretty. The firm now expects a slowing down in the overall economy to a 2% GDP rate, and an "additional loss of momentum during the next few months", which is to be expected as every bank wants to keep the perception that NEW QE is just around the corner, as economic stagnation can rapidly become a contraction. Most importantly, the firm expects just 150,000 payrolls to be created every month, which net of the 90,000 monthly labor force increase (yes, forget what the BLS tells you - every month courtesy of demographics the American labor force grows by an average of 90k people) means that only 60k jobs will be added to offset the structural job collapse since December 2007. It also means that the pre-election rhetoric will change significantly as the economic strength from the start of the year disappears, and with it any hope of an economic upswing, providing additional ammo for exciting GOP pre-election theater.
The trend continues: as has pointed out here every month for the past five months, Pimco's Bill Gross continues to layer into the "NEW QE" trade, only this time he is making it more clear than ever that he is certain that the Fed will have no choice but to monetize Mortgage Backed Securities. Indeed, in March the firm added another 100 bps in its MBS exposure, bringing the total to 54% of total, or a record $134 billion of the fund's $253 billion in AUM. And while before Gross would buy MBS and TSYs pari passu, that is no longer the case. In fact in March, Gross dumped the most Treasurys since February 2011, cutting his net exposure from 38% to 32%, and likely is in part or whole responsible for the big bond dump in the middle of March, now long forgotten (that or he merely piggybacked on the negative sentiment: April holdings will be indicative of that). Other notable shifts: Gross continues to sell European sovereign exposure, with Non-US Development holdings down to 6%, the lowest since April 2011, and surprisingly even cutting Investment Grade holdings to just 14%, the lowest since October 2008: is Gross smelling a bond bubble (in both IG and HY) and is getting out while the getting is good? Sure looks like it.
Here’s something you don’t see every day: Banks in Vietnam will actually pay YOU to store your gold in one of their safe deposit boxes. I was pretty surprised to find this out for myself; neither Simon nor I have seen it anywhere else in the world except here. This is actually how banking used to be. The original bankers were goldsmiths– big burly guys who worked with gold on a daily basis. They had the security systems already established, and, for a fee, they were willing to let you park your gold in their safes. Eventually, goldsmiths got into the moneylending business; instead of charging a security fee, they would pay depositors a rate of interest for the right to loan out the gold at a higher rate of interest. Goldsmiths’ reputations lived and died based on the quality of their loan portfolios, and their consistency of paying back depositor savings. Today that’s all but a footnote in history. Except in Vietnam.
We have been pointing to the 'changes' that are evident in the high yield credit market (bonds, credit derivatives, and ETFs) for a few weeks now. The fall in the high-yield bond advance-decline line (and up-in-quality rotation); the decompression of HY credit spreads; and the lack of share creation, discount to NAV, and underperformance of JNK/HYG; but these canaries-in-the-coalmine pale in comparison to the massively over-crowded nature of the high-yield credit protection bullish positioning among arguably levered market participants. As Morgan Stanley notes: "US High Yield Investors Are 'Full Overweight'". Remember large crowds and small doors are no fun.
ES (the S&P 500 e-mini futures contract) tested up to its 50DMA and rejected it early in the day (after some rhetorical enthusiasm from the ECB's new French contingent - surprise!). The 10pt rally in ES overnight into the open was the best levels of the day as we slid lower (within a small range) for the rest of the day making its initial lows around the European close and retesting (lower lows) into the US day session close. NYSE and ES volumes were about average (well below yesterday) as Stocks and HY credit underperformed IG credit (with HYG having a good day - after closing at a discount to NAV last night). The Beige Book took the shine off the day as hopes of QE3 faded (remember its the flow not the stock that counts) and that is when stocks began to leak lower - especially energy, financials, materials, and industrials. FX markets were relatively quiet (aside from Jim O'Neill's comments on the SNB which shook swissy) as the USD closed marginally lower helped by strength in EUR and GBP. AUD lost ground after the European close and JPY strengthened (derisking) which likely dragged on US stocks. The modest move in USD was echoed in commodities (apart from WTI where we broke above $103 and Brent-WTI compressed significantly - not forgetting the $1 handle on Nattie) as Gold and Silver largely went sideways all day with some weakness in Copper. Treasuries leaked higher in yield for much of the morning then stabilized after the European close as the long-end underperformed (steepening). VIX closed back above 20% (though lower from the close) having drifted from below 19% near the open - we haven't closed above 20% two-days-in-a-row since 1/18.
Biggest Weekly Stock Outflow Of 2012 Proves Retail Is No Longer Dumb Money; And Nobody Listens To GoldmanSubmitted by Tyler Durden on 04/11/2012 - 15:17
For the 7th consecutive week retail investors not only refuse to chase the bouncing ball, but to listen to former titans of finance, such as Goldman Sachs who on March 21 told everyone to get out of bonds and into stocks (a trade which has since been unwound for all practical aspects). Since then, as well as before then, we have seen relentless outflows from equities to the tune of $10 billion, while allocating cash precisely to bonds, as taxable bond funds saw $20 billion in inflows over the same time period. What is more notable is that despite the liquidity driven rally, one which everyone now understands is 100% fake and central bank driven, retail never got fooled and refused to be the dumb money for the duration of the "rally" - and now that the rally topped, and stocks are sliding back down, retail investors pulled out the biggest one week amount, or $4.3 billion, in the week ended April 4, from domestic equity funds per ICI. And now with every passing day, Primary Dealers - facing the prospect of no dumb money coming in to buy up the hot grenades in inventory, and with the Fed waiting until later in the year before re-entering the market in an election year, may have no choice but to sell. As usual, the first to sell, wins.
We all know that central banks and governments have been actively intervening in markets since the 2007 subprime mortgage meltdown destabilized the leveraged-debt-dependent global economy. We also know that unprecedented intervention is now the de facto institutionalized policy of central banks and governments. In some cases, the financial authorities have explicitly stated their intention to “stabilize markets” (translation: reinflate credit-driven speculative bubbles) by whatever means are necessary, while in others the interventions are performed by proxies so the policy remains implicit. All through the waning months of 2007 and the first two quarters of 2008, the market gyrated as the Federal Reserve and other central banks issued reassurances that the subprime mortgage meltdown was “contained” and posed no threat to the global economy. The equity market turned to its standard-issue reassurance: “Don’t fight the Fed,” a maxim that elevated the Federal Reserve’s power to goose markets to godlike status. But alas, the global financial meltdown of late 2008 showed that hubris should not be confused with godlike power. Despite the “impossibility” of the market disobeying the Fed’s commands (“Away with thee, oh tides, for we are the Federal Reserve!”) and the “sure-fire” cycle of stocks always rising in an election year, global markets imploded as the usual bag of central bank and Sovereign State tricks failed in spectacular fashion.
The risk of the 30 most systemically important financial institutions (SIFI) in the world has risen over 30% in the last three weeks as the effects of LTRO fade and encumbrance becomes the new reality. This less-manipulated, government-bank-reacharound-driven bond-market sense of reality has retraced almost 40% of its improvement from its peak last November at 311bps to its best level mid-March at 171bps. The current 226bps level is extremely elevated and as one would expect is dominated by European and US banks (with US banks on average trading wider than Europeans - which may surprise many but Europeans dominate the worst names - most specifically the Spanish banks).
When building a house in Spain a substantial part of the cost now involves paying people 'off-grid' or 'under the table'. This seems endemic and we imagine is partially historic but IF it is increasing in extent as a result of the financial crisis it is an important trend. Extrapolating this trend out to the whole population, one suddenly realizes that the private sector could be slowly going 'off-grid', further starving governments of revenue and thus the means of the economy’s and therefore the government’s recovery. The downward spiral will continue until eventually social unrest will rise to the point where there will be a “European spring”. One country will ditch the Euro and/or their cumulative debt holdings and/or move back to their own currency. The pain of action will be less than the pain of in-action. So here we sit watching a couple of PIGS not trying consciously to fly but flapping their baby wings anyway. We watch on, content in the knowledge that PIGS can’t fly… Until, that is, the first one takes flight.
Following the all time record high February budget deficit of $232 billion, the US March budget deficit number is in, and in addition to being bigger than expected, coming at $198.2 billion on expectations of "only" $196 billion, the government outlay in the past month also is the largest March deficit on record. This brings the total deficit in fiscal 2012 to $779 billion, which is to be expected for a country gripped in total political chaos and which is unable to either raise revenues or lower spending. What is more disturbing is that over the same period (Oct 1 2011 - March 31, 2012), the US government issued $792 billion in debt, a trend that will continue. What is most disturbing is that the comparable tax revenues net of refunds, "matching" this increase in deficit and spending, are only $693 billion, in other words the US government is funding well more than half of its cash needs with debt rather than with tax revenue. Just like Japan.