Busy day with the usual Thursday fare of Initial claims, as well as Empire Manufcaturing survey, PPI, and the Philly Fed, which will reflect just two things - the reflation in global capital markets courtesy of non-Fed balance sheet expansion, and soaring gas prices courtesy of the same. Average regular is now $3.821, an all time high for this day in history.
- Obama, Cameron discussed tapping oil reserves (Reuters)
- Greek Bonds Signal $2.6 Billion Payout on Credit-Default Swaps (Bloomberg)
- China leader's ouster roils succession plans (Reuters)
- China’s Foreign Direct Investment Falls for Fourth Month (Bloomberg)
- Greek Restructuring Delay Helps Banks as Risks Shift (Bloomberg)
- Concerns Rise Over Eurozone Fiscal Treaty (FT)
- Home default notices rise in February: RealtyTrac (Reuters)
- China PBOC Drains Net CNY57 Bln (WSJ)
Relatively quiet overnight session in the markets, where Europe has seen several bond auctions, most notably in France and Spain, whose good results has in turn sent the German 30 Year Bund yield to the highest since December 12, all courtesy of the recently printed (and collateralized with second and third-hand Trojans) $1.3 trillion. Per BBG, Spain sold 976 million euros of 3.25 percent notes due April 2016 at an average yield of 3.37 percent. The bid-to-cover ratio was 4.13, compared with 2.21 when the notes were sold in January, the Bank of Spain said in Madrid today. It also auctioned 2015 and 2018 securities. France sold 3.26 billion euros of benchmark five-year debt at an average yield of 1.78 percent. The borrowing cost for the 1.75 percent note due in February 2017 was less than the yield of 1.93 percent at the previous sale of the securities on Feb. 16. Elsewhere, we got confirmation of the collapse in Greece, where Q4 unemployment rose to 20.7%, up from 17.7% in the prior quarter. China weighed on Asian market action again following ongoing concerns about domestic property curbs, and a slide in the Chinese Foreign Direct Investment of -0.9% on Exp of +14.6%. ECB deposit facility usage, primarily by German banks, was flattish at €686.4 billion, while in Keynesian news, Italian debt rose to a new record in January of €1.936 trillion. Watch this space, once inflection point occurs and vigilantes realize that not only has nothing been fixed in Italy, but the current account situation in Italy, and Spain, is getting progressively worse as shown yesterday, all at the expense of Germany.
Earlier we described why it is clear that the Fed will need to print exponentially to fill the void of the crunch in consolidated credit money but why does Bernanke remain so hedged and guarded in his optimism when the market is tearing bears' arms-and-legs off and every talking head from here to Tokyo is claiming we have reached the nirvana of self-sustaining recovery (with, we note one such reconstituted deal-maker claiming "we don't need the Fed's help anyway" after the FOMC meeting). It's the data stupid. Simply put, as the chart below shows, the strength of trend of key US data over the past three months has been disappointing in aggregate (of course one can cherry pick BLS prints or sub-indices of ISM) and the worrying similarities between 2011 (when the same overshoot of optimism occurred) is only too real a problem for Ben and his buddies if they take away the Kool-Aid too early once again and let us drink our own stale sugar-free water. So the next time you hear some long-only asset manager or octogenarian wealth adviser say the 'data has been very strong' so buy-and-hold big-tech or dividend-payers, do them a favor and remind them of this chart and what happened last year.
Nic Colas, of ConvergEx, waxes nostalgic at the dreadful deja-vu he sees in his monthly review of the Street’s revenue expectations for the companies of the Dow Jones Industrial Average. Finding that while markets may be in rally mode, analysts are still fretful about near term sales momentum at these large multinationals. Currently, they expect the average Dow company to post only a 3.6% sales “Comp” in Q1 2012 versus last year, or 5.0% for the non-financial companies in the index. That is the lowest expected growth rate for the current quarter since we started keeping tabs on what the analysts had in their models a year ago. They don’t have to bump numbers to pound the table on their favorite names. The current rally has been more about valuation than revenue and earnings momentum – our revenue expectation data is all the proof you need on that score. So why raise numbers if your “Buy” rated names are rallying without the need to put yourself on that limb? All of this sets up market psychology on a razor’s edge for Q1 earnings reports. And what about ‘Sell in May and go away?' Only 31 trading days left until May 1st.
The encroachment of yet another troubled nation into global geopolitical (read US implicitly) strife, this time Syria, appears to be intensifying further. As Sabah notes today, the CIA Director David Petraeus paid a surprise visit to Turkish Prime Minister Tayyip Erdogan yesterday. The topics of discussion were 'regional issues' but it was evident from concerns voiced about the instability in Syria and Iraq giving the PKK (Kurdistan Workers' Party) terrorist organization a stronger foothold (a group which has been a source of tension between USA, Syria, Iraq, and obviously Turkey before - whose 'undeclared war' with Syria was a direct response to the countries assistance to the PKK). Seemingly stuck in the middle, Erdogan warned of "the potential crisis that could develop in the region due to the sectarian strife in Iraq" and underlined his concerns of events in Syria. One can only wonder at the strategic positioning that the CIA Director's surprise visit achieved, since the published agenda seemed so calmly diplomatic, and for what reason the ninety minute visit was so spontaneous.
As we have repeatedly said in the past, the quarterly Flow of Funds (or Z.1) statement is most interesting not for the already public household net worth and leverage data which serves to make pretty charts and largely irrelevant articles, but due to its insight into the stock and flow of both the traditional financial system but far more importantly - into shadow banking. And this is where things get hairy. Because while equities may have returned to 2008 valuations, the credit shortfall across combined US liabilities - traditional and shadow - still has a $3.6 trillion hole to plug to get to the level from March 2008 (see first chart). It is this hole that is giving equities, which have already surpassed 2008 levels, nightmares. Because while the Fed is pumping traditional commercial banks balance sheets via reserve expansion (read: fungible money that manifests itself most directly in $5 gas at the pump) resulting in a $2.3 trillion rise in traditional liabilities from Q3 2008 through Q4 2011, what it is not accounting for is the now 15 consecutive quarters of shadow banking system contraction, which peaked at $21 trillion in Q1 2008, and in Q4 2011 declined to $15.1 trillion... and dropping. It is this differential that will be the source of the needed "Outside" money, discussed yesterday, and that is only to get equity valuations to a fair level! But considering the Fed's propensity to print at any downtick, this is very much a given, much to the horror of Dick Fisher. Any additional increase in stock prices will require not only the already priced in $3.6 trillion, but far more direct Outside money injections.
It was literally a matter of hours following the release of the now historic Greg Smith "Muppets" Op-Ed, before the true criminals enabling the slow motion trainwreck of the Keynesian klepto-fascist experiment became heard. Sure enough, here is Elijah Cumming indicating he has the most to gain by scapegoating a firm that between Vampire Squids and Muppets is slowly being mocked into the same relevancy as an HR Giger petting zoo.
If the Fed thought it could boldly go where hundreds of millions have gone before (in a vain attempt to be cool, hip and relevant - Twitter of course - with the @FederalReserve handle naturally), all in a quest for faux transparency and openness, which nobody who is even remotely familiar with the Fed's actions is buying, without getting a few heckles in the process, it was wrong. Unfortunately, as the currency debasement race has simply taken a short breather ahead of a presidential election and a possible regional war with wide-ranging commodity price implications, before it resumes into the frantic final lap, the below sample is merely a modest appetizer of what is yet to come.
Dear muppets: Goldman wants you to short TYM2 (reminder: a key axis? check; elephant hunting? check; three letter acronym? check). Translation: every bond you sell, Goldman buys.
UPDATE: The UK outlook change has had little reaction so far: TSY yield down 1-2bps, gold/silver bounced up a little, and a small drop in GBP.
While most of the talk will be about the drop in precious metals today, the sell-off in Treasuries is of a much larger relative magnitude and yet equities broadly ignored this re-risking 'signal'. At almost 2.5 standard deviations, today's 10Y rate jump (closing it above the 200DMA for the first time in eight months) trumps the 1.3 standard deviation drop in Gold prices - taking prices back to mid-January levels. According to our data (h/t JL) for only the 14th time in the last five years (and not seen for 16 months) Treasury yields rose significantly and stocks fell as the broad gains in yesterday's financials (on the JPM rip) were held on to at the ETF level but not for Morgan Stanley, Goldman Sachs, or Citigroup (who gave all the knee-jerk reaction back). Tech led the way as AAPL surged once again (though faltered a few times intraday) having now completed back-to-back unfilled gap-up-openings. Credit and equity were generally in sync until mid afternoon when the up-in-quality rotation took over and stocks and high-yield sold off (notably HYG - the high-yield bond ETF underperformed all day long) while investment grade credit rallied to multi-month tights. VIX bounced higher (notably more than the S&P would have implied) recovering to Monday's closing levels and back above 15%. The Treasury sell-off was 'balanced' in terms of risk-on/-off by the strength in the USD (and modest weakness in FX carry pairs as JPY's weakness was largely in sync with the rest of the majors - hinting its was a USD story). Oil and Copper both lost ground (as did Silver - the most on the day) though they tracked more in line with USD strength than the PMs.
In keeping with the tradition of waking up to reality with a several month delay on downgrades (if being the first to upgrade insolvent Eurozone members), here comes Fitch, to boldly go where Moody's went long ago.
- UNITED KINGDOM L-T IDR OUTLOOK TO NEGATIVE FROM STABLE BY FITCH
- FITCH AFFS UNITED KINGDOM AT 'AAA'; REVISES OUTLOOK TO NEGATIVE
As a reminder, UK consolidated debt/GDP is... oh... ~1000%
While WTI hovers around $105.5 (slightly underperforming USD strength), Brent has notably outperformed with the Brent-WTI spread now edging towards $20 (from under $15 two weeks ago). Given the increasing tension, we thought it useful to get a grasp of just what an oil-supply shock means. BNP points out that in all but one of the historical oil price shocks of the last 40 years, equities have notably underperformed oil (understandably) but the higher the oil price rise, the higher the chance of negative absolute returns for stocks. We also note that oil prices tend to rise in anticipation of the crisis and then explode (so arguing that we are discounting an event is proved moot) and the impact (in lost supply) from closing the Straits of Hormuz is an order of magnitude larger than the next five largest events. Regionally, positioning favors the middle-eastern oil producers obviously with Asian EM nations set to suffer dramatically worse than DMs.