A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.
Correlations are breaking down, and each asset class seems to be trading more and more in its own little world. Sometimes retaining old correlations and other times moving counter-intuitively. Each of those markets now seem to be driven primarily by fear. The markets have been split into two camps, those that are afraid of rallies and those that are afraid of sell-offs. The breakdown of many correlations is making it harder to hedge or to balance portfolios. It is adding the broken feeling in the market.
Today, the CBO whipped out its trusty old magic 8 ball, and released its revised forecast of the future. Since there is a substantial difference from the March forecast for the cumulative 10 year deficit over the 2012-2021 period, to the tune of $3.250 trillion, or just about 50% of the last deficit forecast of $6,737 billion, which is now a ridiculous $3.5 trillion, it is about that time for us to, in turn, whip out trusty old history and demonstrate just how worthless and criminally incompetent the CBO's estimates of the future are. Here is what we posted two short weeks ago: "While we reserve judgment for S&P's effectiveness at being accurate in anything they do (they are, after all a rating agency and as such they goal seek results to comply with what their paying groupthink seeking customers demand), we would like to redirect to the modest topic of CBO predictive efficiency (the organization that is at the basis of the current credibility spat between Treasury and S&P, and which, incidentally has created the baseline forecast against which the debt ceiling compromise plan is supposed to cut $2.1 trillion over the next decade), by pointing out according to the same CBO back in 2001, net US indebtedness in 2011 would be negative $2.436 trillion, the ratio of debt held by the public to GDP would be 4.8%, total budget surplus would be $889 billion, and GDP would be $16.9 trillion. We won't comment on the error interval in CBO forecasts when compared to actual 2011 results, and we most certainly won't comment on the idiocy of the Treasury chastising someone, anyone, for erring, or disputing, forecasts." We will comment now: the CBO was off by tens of trillions. And it will be again. Expect massive future revisions to the August CBO baseline, which just cut the future decade cumulative deficit by 50%, however with one caveat: even the CBO admits it will most likely be horribly wrong.
And so the uber-idiotic rumor which spread like wildfire among desperate traders yesterday, namely that JPMorgan would acquire Bank of America, is next in the docket to be denied (after taking cheap shots at Henry Blodget):
- BANK OF AMERICA SAYS JPMORGAN MERGER SPECULATION IS `BASELESS'
- BANK OF AMERICA DISCUSSES MERGER SPECULATION IN INTERNAL MEMO
- BOFA REPEATS IT HAS NO NEED TO ISSUE ADDITIONAL COMMON STOCK
Now... If only Bank of America can focus its attention for 5 minutes and answer our questions and all shall be well.
Gold this morning is plunging by the most since December 2008. For those seeking the reason for the sell off, it once again appears that the market is about 24 hours late in processing news that has been out for over a day. One of the main catalysts for today's gold price is the realization that the Shanghai Gold Exchange hiked gold margins by 26%. Of course that this happened not one but two days ago (as we reported) is irrelevant. There are other factors to be sure: on Tuesday holdings of the SPDR Gold Trust , the world's largest gold-backed exchange-traded fund, fell by nearly 25 tonnes, their biggest one-day outflow since Jan. 25. Furthermore, there is another rumor that hedge funds that have been crushed by the market volatility over the past month are shoring cash ahead of Jackson Hole by selling their winners. Either way, at last check gold was down to $1770. This is the price it was on August 16: about a week ago. As for where gold will go next: we suggest investors consider what the options for the world central banking cartel are, and how many of them do not include diluting paper. We are eager to hear the alternatives.
Today CNBC had to dig very, very deep to find a C-grade sellside analyst willing to stick his neck out and defend Bank of America. They ended up picking Raymond James' Anthony Polini. Why would Polini go out on a limb saying that Bank of America can exist for 2 years without incremental funding, and that all fears that the bank is undercapitalized are overblown? Well, as the chart below shows, he has been consistently wrong on the bank for the past 3 years, and his average error to the true stock price is about... 50%. On the chart below, the white line is his Price Target recommendation. As for the green square, it is self-explanatory. Anyone who listened to Polini over the past two years, has lost about 80%. But this time it is different. We promise. So, to answer our rhetorical question: one can not lose any credibility, if one never had any to begin with.
Who says hedge funds are ambivalent about the current market? As of last week, they have not been more bearish on the S&P since before Lehman. From SocGen: "Hedge funds have opened the biggest net short positions since early 2008, concentrated on the most liquid segment of the market, i.e. the S&P 500. Meanwhile, positioning on small caps hardly moved (slight increase in net shorts on the Russell 2000). Surprisingly, they actually stuck to their net long positions on Technology (Nasdaq)." As usual, the amusingly named "hedge" funds defy their purported nature (as in, to hedge), and merely pursue momentum, and should be more appropriately called "career risk" funds as the only variable is doing precisely what everyone else is doing: remember - to get a bonus at the end of the year, you don't have to outrun the market, you just have to outrun the biggest institutional fool out there. "Hedge funds have closed their net short positions on 10-year Treasuries and strongly diminished their net shorts on the long end (30Y), as recession fears have crunched expectations for higher bond yields, and endorsed by the Fed’s announcement that it will keep rates low until at least 2013." Hedge fund infatuation with metals continues: "Hedge funds’ enthusiasm for gold and platinum remains strong, as indicated by the high net long positions on these metals. Meanwhile, net long positions on base metals (copper) have been strongly reduced. Net long positions on crude oil remain relatively stable, less impressed by the perceived recession threats." Expect to see numerous short covering sprees until the end of the year, even as the market continues it secular decline back to fair value somewhere around 400.
One of the key catalysts (aside from the retarded rumor that JPM would buy Bank of America) that prevented BAC's stock from dropping to a 5 handle yesterday, was JPM's credit upgrade of Bank of America (report here). Sure enough, the reacharound from BAC is as usual missing, with the response from the bank's banking analyst Guy Moszkowski, being to... downgrade JPM. And he did not stop there: he also cut, GS, MS, and C: in other words the entire TBTF brigade. Someone should probably explain to Guy that any sell off in BAC's peers will be doubly acute in the stock of BAC itself, which has now become the whipping boy for the shorts, and the proxy of all that is wrong in the US and European banking system. Then again, with the palpable sheer panic in the corridors of 1 Bryant Park, we doubt anyone at that bank has any idea what they are doing at all.
I could largely take yesterday's piece and insert it here. Credit weaker across the board. Stocks doing okay. Yesterday's almost 40 point rise in the SPX was only able to get IG16 to tighten by just over 1 basis point. It is wider, but tentative today as so many got hurt yesterday when stocks kept going higher. The major change since yesterday is that European Sovereign debt has joined the sell-off party in credit. Nothing major as of yet, but they are finally pushing higher in yield terms as even the ECB might be running out of powder? Gold moved down yesterday, which was a bit inexplicable as the hope of Jackson Hole and more printing was part of the reason for the stock market to rally.
Strong Durable Goods Headline Number, Very Weak Between The Lines: "Weak Start To 3Q" Bloomberg's YamaroneSubmitted by Tyler Durden on 08/24/2011 - 08:41
Once again we get a strong durable goods numbers report at the headline level, but far weaker when one actually reads it instead of just scanning it: with the July Durable goods printing well above expectations, at 4.0%, double expectations of 2.0%, and up from an upwardly revised -1.3%. Ex-transportation, the number was up 0.7%, beating the estimate of -0.5%, virtually unchanged with the previous upwardly revised 0.6%. What is, however, not good is that cap goods non-defense ex aircraft dropped by -1.5%, in line expectations, and a plunge from an upward revised 0.6%: this shows that actual CapEx is plunging. The bulk of the beat comes due to stronger than expected automotive-related production. Futures surge on the news because a continent wide liquidity squeeze is less important than the future channel stuffing of more unsellable cars.
Germany May Want PIIGS Gold as Security for ‘Bailouts’ – Merkel’s Officials in Damage Limitation ModeSubmitted by Tyler Durden on 08/24/2011 - 08:21
Germany is likely to push for European gold reserves to be used as collateral. The Deputy Chairwoman of the Christian Democrats is an astute woman and politician and knew exactly what she was saying. Indeed, she echoed other senior lawmakers who in May called for Portugal to consider selling their gold. Two leading governing party members - Norbert Barthle, Germany’s governing coalition budget speaker and his counterpart Carsten Schneider from the Social Democrats, the biggest opposition party, urged Portugal to consider selling some of its gold reserves to ease its debt problems. They called for a review of Portugal’s request for financial aid to include gold and other potential asset sales. The German people and lawmakers realize that the euro is being debased and lawmakers realize that gold may offer protection from the debasement of the euro but also from sovereign default and systemic contagion. Some of the PIIGS (to use the unfortunate and unfair acronym) have very sizeable gold reserves – especially Italy which alone has some 2,452 tonnes of gold. Portugal has 421.6 tonnes, Spain 281.6 tonnes, Greece 111.7 tonnes and Ireland has just 6 tonnes. The ‘German PIIGS gold collateral’ story is a very important one that is unlikely to go away. Indeed, it may be the story that helps educate those not familiar with economic and monetary history and with monetary economics and who do not understand gold and why gold remains valuable and remains a safe haven asset and currency today.
- Moody's downgraded Japan's long-term sovereign rating by one notch to Aa3, with a stable outlook
- Financials came under pressure during the early European session after figures from the ECB revealed a sharp jump in lending to banks, re-igniting funding concerns
- The Greek/German spread widened partly on news that Troika has warned Greece on public payroll and public mergers
- The German IFO report was not as bad as some analysts expected, which provided appetite for risk
Durable goods orders for July and FHFA house prices. Also another $35 billion in 5 Year bonds to be auctioned off.
Counterparty Risk Soars To Highest In Over A Year, European CDS Sliding, LIBOR-OIS Spikes, High Yield Spreads Blowing Out, Overnight ECB Lending SoarsSubmitted by Tyler Durden on 08/24/2011 - 07:50
We wish we had some good news to report this morning.... But we don't.
Euro Bank CDS Surge To All Time Record After Collapse In German IFO Business Survey, Discord Over Eurobonds, Greek 2 Years Over 40%Submitted by Tyler Durden on 08/24/2011 - 07:29
Following yesterday's plunge in the German ZEW investor confidence reading, today we got yet another confirmation that Germany's economic in freefall, after the IFO Business Climate survey printed at 108.7, the lowest in more than a year, down from 112.9, and a big miss to consensus of 111.0. The 4.2 drop was the highest since November 2008, when it plunged by 4.2. In summary, today’s disappointing Ifo data, if repeated in coming months, points “at least to sharp deterioration of growth, perhaps even recession,” Ralph Solveen, head of economic research at Commerzbank says." And unlike America, where hope is the only thing pushing investors forward, in Germany it is the inverse with the expectations component dropping belopw the 10 year average of 100.5, for the first time since July 2009, while the current assessment component is still above the 102.7 long-term average. Should this collapse in hopium consumption jump across the Atlantic, watch out America. Furthermore, while as was noted before, Merkel's continuing refusal to adopt Eurobonds is nothing new, today we got a new kink after German president Wulff questioned the legality of ECB bond purchases during a conference at Lindau, claiming that bond buying damages the ECB's independence. Wulff cited an article in the European Union's fundamental treaty, which prohibits the ECB from buying bonds directly from governments. "This ban only makes sense if those responsible don't circumvent it with comprehensive purchases on the secondary market," he added. "What independence?" might add anyone who has seen the global printing cartel in action over the past 3 years. Yet the recent expansion in the SMP, which has bought about €40 billion in Spanish and Italian bonds, is the only thing keeping Europe afloat now: if this were taken away, it is the beginning of the end. Another complication to any sustained EUR rally, is that the Finnish government announced overnight it is sticking to its collateral side deal with Greece, a move that apparetly has Germany fuming. Expect headlines as Finland’s govt will meet this afternoon to discuss Germany’s rejection of collateral agreement the cabinet struck with Greece on Aug. 16, newspaper Helsingin Sanomat reported on its website without saying where it got the information. This may well be worth 200 pips in the EURUSD... to the downside. And lastly, the cherry on top is that Greek 2 Year bonds, just soared above 40% for the first time ever! So much for bailout #2. Time to star pricing in the 4th iteration as the 3rd one is now a certainty. All this means that iTraxx Fins Senior is now at an all time high of 255, +4 bps, while the Sub Index is also at a record of 453, +9bps. Look for a resumption in the serial close of trade of all Italian banks before Europe shuts down at 4:30 pm local.