Credit markets have been performing well all year. The returns, while not outstanding have been incredibly consistent. There has been an eerie calm to the market. Most people are bullish on corporate credit - even those who don't like the overall yields argue that the spreads are attractive. That may be true, but two leading indicators of potential trouble in the credit market have popped onto my radar screen
Just in case the broad speculator public did not get the message earlier this week after the CME lowered ES margins, just in time for the market to sell off and send realized vol surging (while of course ignoring plunging vol in gold, silver and all other commodities), the CME has completed the "paint by Rahmian numbers" puzzle, and has made clear which other asset class has the investment "go ahead" by the administration. As of a few minutes ago, the initial and outright margins for 10Y and 30 Y Treasury Bond Futures, 10 Year On The Runs, 7 Year Interest Rate Swaps and LT US Treasury Bond Futures were all lowered by up to 19%. Good thing the move comes 4 weeks before the end of QE 2. Were it to just precede, or, gasp, coincide with June 30, one may get ideas that this is not quote unquote risk management, such as that expressly not exhibited by the CME's refusal to hike ES margins following their cut, but is nothing but another glaringly obvious means of directing speculative capital into preferred asset classes.
Probably the most imprtant secular trend in recent employment data, one that has a far greater impact on the macroeconomic themes than Birth/Death and seasonal adjustment manipulated month to month shifts in the employment pool per either the household or establishment surveys, is the labor share of national income. In a 2004 paper from the St. Louis Fed, the authors make the following statement: "The allocation of national income between workers and the owners of capital is considered one of the more remarkably stable relationships in the U.S. economy. As a general rule of thumb, economists often cite labor’s share of income to be about two-thirds of national income—although the exact figure is sensitive to the specific data used to calculate the ratio. Over time, this ratio has shown no clear tendency to rise or fall." It would be wonderful if this was true, and thus if the US population really had a stable distribution of income between laborers and capital owners. Alas it is dead wrong. In fact, as the latest note from David Rosenberg points out, the "labor share of national income has fallen to its lower level in modern history - down to 57.5% in the first quarter from 57.6% in the fourth quarter of last year, 57.8% a year ago, and 59.8% when the recovery began." And here is where the Marxist-Leninist party of the US should pay particular attention: "some recovery it has been - a recovery in which labor's share of the spoils has declined to unprecedented levels."
"I have said it's worse than Chernobyl and I’ll stand by that. There was an enormous amount of radiation given out in the first two to three weeks of the event. And add the wind and blowing in-land. It could very well have brought the nation of Japan to its knees. I mean, there is so much contamination that luckily wound up in the Pacific Ocean as compared to across the nation of Japan - it could have cut Japan in half. But now the winds have turned, so they are heading to the south toward Tokyo and now my concern and my advice to friends that if there is a severe aftershock and the Unit 4 building collapses, leave. We are well beyond where any science has ever gone at that point and nuclear fuel lying on the ground and getting hot is not a condition that anyone has ever analyzed." So cautions Arnie Gundersen, widely-regarded to be the best nuclear analyst covering Japan's Fukushima disaster. The situation on the ground at the crippled reactors remains precarious and at a minimum it will be years before it can be hoped to be truly contained. In the near term, the reactors remain particularly vulnerable to sizable aftershocks, which still have decent probability of occuring. On top of this is a growing threat of 'hot particle' contamination risk to more populated areas as weather patterns shift with the typhoon season and groundwater seepage.
As we predicted last week, the tide has turned in the futures market, where after 4 weeks of steep declines, the net EUR non-commercial specs have finally posted a pick up. And considering they are delayed by about 700 pips, after the pair has surged since May 23, expect what will likely be the biggest surge in net long EUR exposure next week. In the week ended May 31, there were 21,970 net longs, compared to 19.129 in the week prior, and 99,516 on May 3, when the EURUSD was flirting with the 1.50 mark. We expect a pick up of at least 30-40k contracts in the next week as all latecomer shorts promptly cover. Elsewhere, the short covering spree in the USD continues but not for long: look for the most recent net long exposure of 4,787 to promptly flip and go negative once again as more and more begin anticipating another Monetary Easing episode. And out east, the net JPY exposure went bearish fror the first time sine May 3, with net exposure dropping from 8,006 contracts to -1,648. The technicals at this point indicate a break of recent EURUSD resistance in the 1.50 area is very much possible.
Someone keep an eye on Waddell and Reed at all times. Repeat: all times. Because once they, and the market, and the Troica realize that the passage of Bailout 2 will lead to a revolution, it will get very, very interesting. "Protesters belonging to the left-wing The All-Workers Militant Front (PAME) union unfolded a giant banner from the roof of the finance ministry building on the central Syntagma square, calling for a nationwide strike against the new austerity measures that the government agreed to take in return for the new bailout package. "From dawn today forces of PAME have symbolically occupied the finance ministry, calling on workers to rise, organize their struggle and prevent the government's barbarous and anti-popular measures from passing," the front said, AFP reported."
It has been a few weeks since Goldman's FX strategist Tom Stolper made a public appearance. Which is reasonable: after all the EURUSD dipped as low as 1.39 about ten days ago, a level which threatened to stop out Stolper's 1.55 EURUSD target at a loss. Luckily for the GS FX strategist, this is about the time when the G7 decided it was its imperative to once again impair Europe in exchange for sending US stocks higher (i.e., DXY down, RUT up), alas the decision came at a very bad time for the US economy, which was just entering the worst 10 day period of declining growth since last summer. Either way, now that the EURUSD has retraced a massive 630 pips move in the past 10 days, Stolper has once again shown his head, issuing yet another hit piece on the USD. And what a hit piece it is: "...he upcoming balance of payment data will likely show a notable
deterioration in the BBoP. Finally, US policymakers seem to be making
little or no progress on fiscal consolidation with Moody’s now also
warning about the consequences of hitting the debt ceiling in early
August. We remain short the USD against the EUR, CNY, MYR, PHP, and now also the NOK." Ok, we get how you feel... But what is the prop desk doing?
Anything negative can be called “transitory.” Commodity prices are rising, I am nervous. Don’t worry, it’s transitory. Wait a minute, now the economic statistics are rolling over? Transitory! But Bernank, I don’t have a job and just joined the ranks of record food stamp participation (it is now 44 million people). Quiet sheep, let the adults deal with it. Besides, it’s…well you get it. So the brilliance of it all is that no matter how bad things get, some talking head can come out there and tell you it’s temporary. The term “soft patch” is just a another way of saying it. Not only is it a way to give a downtrodden people hope while they are being robbed, but it also allows for additional time for the Central Bankers to put the final nail in your coffin. All Americans have to do to look at our future is pay attention to what is being done to Greece and Ireland. Greece of course is furthest along the path to becoming a slave colony of the European banks and their puppets at the ECB. They are being told to sell off assets in order to protect the bond values of insolvent banks. This is simply a leveraged buyout of Greece by those that control the distribution channel of money. When EVERYONE is broke, the player that comes out on top is the one that can create the money versus the one that cannot.
Watch the teleprompter advise the president on the correct choice of words at his address to workers at a Fiat, pardon Chrysler Group, Toledo supplier park, during which he will have to explain why both fiscal and monetary policy (read Keynesianism) is now a confirmed failure. But far from Austrian economics finally get the respect it so much deserves, this will merely retrench the current idiotic policies - just read any column by Krugman demand doubling down on stimulus post haste: that's what happens with junkies - it never ends, and in fact the "last" does must always be more and more and more...
Constitutional values cannot defend themselves. They require the people to stand firm, and to never yield. Americans today have yielded far too much already, and at some point very soon, we’re going to have to make the hard choice on what is more important; our general safety and personal comfort, or our freedoms and the freedoms of future generations. Like the American Colonials, we have a system that does not serve our best interests, but the interests of an elite few. We are quickly losing our ability to dictate the terms of our own society, and our own destinies. Sadly, we are not yet presenting the determination that the colonials held in the face of this danger. Today, we are a nation mourning its own demise before it has even occurred. We have turned to reluctant compliance and submission. We are, frankly, whiny and pathetic. This does not have to be.
Thanks to Nanex we once again get a reminder that not only is the economy broken, something which becomes painfully clear each and every time the monetary and fiscal stimulus are about to get yanked, like right now, but that our stock markets continue to be the butt of all algorithmic jokes. Today's punchline: Bitauto Holdings, which traded from $6.90 to $0.09 in two seconds. And lest one thinks this was a fat finger, the total number of trades canceled subsequently by the NYSE and Nasdaq was 22,900 shares. SkyNet strikes again.
Troica Demands Deep Public Sector Cuts, Higher Taxes As Part Of Greek Bailout #2, Or My Big Fat Greek AnschlussSubmitted by Tyler Durden on 06/03/2011 - 11:37
So here it is:
- EU, IMF: GREECE NEEDS TO REINVIGORATE STRUCTURAL REFORMS (so, fire more people and generate more GDP with whoever is left?)
- EU, IMF: GREECE WILL REDUCE PUBLIC SECTOR EMPLOYMENT (so, fire even more peple)
- EU, IMF: GREECE TO REDUCE TAX EXEMPTIONS, RAISE PROPERTY TAXES (So, generate more GDP by taxing people more?)
- EU, IMF: `AMBITIOUS' MID-TERM PLAN, WILL MEET 2011-2015 TARGETS (If the targets are all Greek bankruptcy, yes)
- EU, IMF: OVERALL ASSESSMENT GREEK PROGRAM `SIGNIFICANT PROGRESS (uh, where?)
- EU, IMF: GREEK ECONOMY TO STABILISE AT TURN OF YEAR (Idiots)
And now, the people get angry. Expect live webcast from Syntagma square shortly.
Well it looks like the rich have taken the tax cuts and used the money to buy 'necessities' at Tiffany's rather than hiring people. Weren't the tax cut extensions necessary for hiring? It really looks like that money went straight to little blue boxes. Does Kraft Mac'n Cheeses still come in dark blue boxes? Maybe we aren't separated into rich and poor, just which shade of blue box you can afford?
It is hard to find anything encouraging about the numbers out today. For the past 4 months now, the NFP has added 752k jobs. 610k of those have been birth/death jobs. If you do year to date, it's not as bad since January saw a large negative birth/death adjustment. I am concerned about the validity of the birth/death model. We have gone through such unprecedented changes in the economy I find it hard to believe that the model is calibrated well.
I still like being short IYR, SPG, VNO on the back of the move in CMBX. I am digging deeper into corporate credit, but 2 worrying signals are there. Recent new issues seem to be struggling. Even GOOG is wider. The indices are also starting to trade fairly cheap to fair value. This combination is rarely good so selling LQD (on spread basis) and HYG while collecting more details for this analysis.
Whenever I unleash a tirade at home about how Federal spending has leaped 40% in three years and how the government is now borrowing 42% of its spending, my wife points out that nobody cares because the deficit doesn't impact them at all. This always stops the tirade in its tracks, because it's so obviously true. As long as the Federal checks keep being issued and everyone gets their 17 "low-cost" meds paid by Medicare, the National Defense State gets unlimited billions to spy on the citizenry and indeed, the entire world, gasoline at $1,000 a gallon flows freely in Afghanistan and other distant corners of the Empire, and Wall Street writes itself billions in bonuses, then nobody cares about the deficit. The only way anyone will feel the deficit is if their share of the Federal swag is trimmed to pay the interest on the ballooning debt. But the Federal Reserve has a solution to that eventuality: keep interest rates (and thus yields on new Federal debt) super-low. At zero interest, $50 trillion in debt costs nothing. Heck, you and I could handle the interest payments on $50 trillion at zero interest. At 1%, the interest is "only" $500 billion a year--no big deal, as we can easily borrow another $500 billion a year, no problem. After all, the bond market hasn't barfed yet and we're already borrowing $1.65 trillion a year, plus hundreds of billions "off-balance sheet" in "supplemental appropriations."
John Paulson's worst nightmare is on the verge of coming true. As reported yesterday, JP is a holder of 34.7 million shares of Sino-Forest, which was halted yesterday after Muddy Waters came out with a report exposing the company as a fraud, and by implication, all the sellside analysts covering the company with a buy rating, not to mention all the funds who had bought into it, as diligenceless monkeys who refuse to actually do their homework and merely follow the leader in the worst example of Wall Street groupthink. Well, yesterday groupthink became gangbang, after names as varied as JP, CapRe, Bessemer, Blackrock, John Hancock, Hartford, and many more learned they all may have been fooled by the biggest ponzi fraud since Madoff. And while the funds may pretend things are good courtesy of the continued freeze of TRE.TO on the Toronto Stock exchange, where it still has to issue an announcement despite promises it would do so before market open, its sister stock, SNOFF.PK continues to trade domestically. And it's a bloodbath. After opening at $18 yesterday, the stock just touched $2.45, generating a loss of over $500 million for John Paulson, who in addition is rumored to be very heavily long the company's bonds. It will be ironic if one Chinese fraud (despite our repeated warnings) ends up being the black swan that confirms that there is no such thing as a consistently good hedge fund, and it is all merely a function of one right trade, at the right time, executed with infinite amounts of leverage (thank you CDS). In the meantime, we hope Muddy Waters is working a report exposing that biggest ponzi scheme of all: the US stock market.