How do we get a fundamental change away from this extend-and-pretend which prevails not only in Europe but also the world? History tells us that we only get real changes as a result of war, famine, social riots or collapsing stock markets. None of these is an issue for most of the world - at least not yet - but on the other hand we have never had less growth, worse demographics, or higher unemployment since WWII. This is a true paradox that somehow needs to be resolved, and quickly if we are to avoid wasting an entire generation of youth. Policymakers try to pretend we have achieved significant progress and stability as the result of their actions, but from a fundamental point of view that’s a mere illusion..
These men are masters of the capital markets. They are voting with their feet and pulling their capital out of them.
Aside from being core long gold and oil on the basis of an ongoing global reflation effort by the myopic central bankers of the world; Eclectica's Hugh Hendry is long consumer Staples (as he explains - for a conservative investor, there is little choice but safest, least volatile, most liquid consumer non-discretionary blue chips), long USD (cleanest dirty shirt), long Japanese equities (extreme reflation efforts), and is long the short end of the curve in various sovereign bonds around the world (once again on the basis that weaker data combined with central bank intervention means this duration will benefit). Critically, the outspoken Scot notes that Japan's monetary pivot towards QE will not create economic growth out of nothing. Instead it seeks to redistribute global GDP in a manner that favors Japan versus the rest of the world. This is the last thing the global economy needs right now. His base view remains that there will be more central bank intervention, more debasement, that a sound money core is key, and taking advantage of liquidity flows in the meantime can be profitable.
In a testament to just how euphoric stock markets are right now, James K. Glassman the co-author of the fabled Dow 36,000 — a book published in 1999 that claimed that stock prices could hit 36,000 by as soon as 2002 (and which quite understandably is now available for just 1 cent per copy) — has written a new column for Bloomberg View claiming that he might have been right all along... The uber-optimistic atmosphere permeating much of the financial press is frightening to me. The resurrection of the Dow 36,000 zombie is a symbolically significant event that likely signals much the same thing as it did first time around: a correction.
The crowds are slowly starting to fill up Times Square, and despite the imminent countdown to New Year’s, Washington still has not conjured up a resolution to avoid the fiscal cliff. Over the prior two months we have leveraged game theory, Venn diagrams, option “greeks,” and basic investor psychology as tools to decipher the ultimate path of the crisis and subsequent market reaction. Alas, regardless of all the analysis we and countless others have supplied; the short, intermediate, and long term prospects for stocks rest exclusively on headlines. More poignantly, the fate of the U.S. economy, global equities, and net incomes for hundreds of millions now depend upon the decision making of a group so small, its numbers can be counted with one hand.
During the its first term, the Obama Administration thus far has proven itself in favor of increased Government control and Central Planning. That is, the general trend throughout the last four years has been towards greater nationalization of industries (first finance, then automakers and now healthcare and insurance), as well as greater reliance on our Central Bank to maintain our finances.
The S&P 500 achieved its anticipated 4-5% bounce off the recent 7-10% pullback, most of it accomplished in a very light holiday trading week. Much of the gains were attributed to overly effusive optimism over the prospects of resolving the fiscal cliff. Ironically, with Washington abandoned the past ten days for Thanksgiving, we have not heard anything substantive on the negotiations since Senator Reid and Speaker Boehner spoke jointly on the White House Lawn on November 16. The returns in equities that resulted from this perceived positive outlook has likely run its course as the blue chip index has regained the levels from the morning after the Election. Certainly, the mundane increases in open interest for the futures and the outperformance by the blue chips versus smaller capitalization names on a beta adjusted basis hint at such vacuous motivation for the upward move.
On this day (+1) in 1987 (that's 25 years ago, if you are burdened with a graduate degree), the NYSE had one of its most dramatic trading days in its 220 year history. It suffered its largest single day percentage loss (22%) and its largest one day point loss up until that day (508 points). No one who was on the floor that day will ever forget it. While it was an unforgettable single day, there were months of events that went intoits making. The first two-thirds of 1987 were nothing other than spectacular on Wall Street. From New Year to shortly before Labor Day, the Dow rallied a rather stunning 43%. Fear seemed to disappear. Junior traders laughed at their cautious elders and told each other to "buy strength" rather than sell it, as each rally leg was soon followed by another. One thing that also helped banish fear was a new process called "portfolio insurance". It involved use of the newly expanded S&P futures. Somewhat counterintuitively, it involved selling when prices turned down.
In a market in which horrible data leads to upward stock spikes, what can one expect but a directionless market for now: after all today's biggest pending disappointment, the durable goods orders due out in an hour, has not hit the tape yet sending stocks soaring. Newsflow out of Europe is more of the same, summarized by the following BBG headline: 'MERKEL SAYS EURO BONDS ARE THE ‘WRONG WAY." We for one can't wait for the algos to read into this as more bullish than Eurobonds only over her dead body. Perhaps that explains why despite the constant barrage of abysmal economic data, capped by today's epic collapse in MBS mortgage applications plunging 7.1% or the most since March despite record low mortgage yields, futures are once again green. In summary: the usual Bizarro market which has by now driven out virtually everyone.
Last week, Europe was the source of transitory euphoria on some inexplicable assumption that just because the continent has run out of assets, and the ECB has no choice but to expand "eligible" collateral to include, well, everything, things are fixed and it is safe to buy. Today, it is the opposite. Go figure. Call it pre-eurosummit burnout, call it profit taking on hope and prayer, call it Brian Sack packing up his trading desk (just 5 more days to go), and handing over proper capital markets functioning to a B-grade economist, or best just call it deja vu all over again.
If yesterday's global intervention rumor was a feeler of market response to the next latest and greatest intervention then we may have big problems: the EURUSD is now unchanged, Spanish bond yields are now unchanged, stocks are doing their quad witching thing which means all stops will be taken out before the day is done, but most importantly the euphoria such an announcement would have created before is now completely gone (as per The Diminishing Returns Of Central Planning). What is actually worse, and how the G-20 rumor may have backfired, is that as we pointed out, suddenly there has been a significant shift in expectations: if Syriza does not have an outright win on Sunday then there will be no immediate central bank response, which was predicted to be "if needed". Remember: for this market, when all that matters is the next 10 minutes of trading, this is the only relevant metric. Which means that suddenly from a Risk On event, Syriza's loss has become Risk Off! Of course, the reality is that Sunday will almost certainly be a replay of the last election, where the parliament continues to be empty, and Greece continues to be "Belgium" - recall from May 3, "Previewing The First Of Many Greek Elections." In either case, as others have suggested holding on to positions over the weekend may not be the most prudent thing.
After hitting overnight highs of 1.2670, the EURUSD has wiped out nearly all of its gains following the Spanish "bailout", and was last trading just +40 pips higher compared to the Friday close. Same thing with Spanish bonds: these reacted favorably initially, but slowly the bondholder realization that they just got primed has settled in, and with sovereign CDS still a questionable hedge courtesy of ISDA, the only real hedge is selling, and have now drifted wider on the day, as have Italian bonds following a Bloomberg piece which notes the patently obvious: Italy Moves Into Debt-Crisis Crosshairs After Spain. Expect US stocks, always last to get the memo, to realize that Europe has not only faded the entire move, but is now appreciating it for what it is: a confirmation of failure.
That economic data out of Europe was disappointing overnight should come as no surprise to anyone. That Spain is broke, and there is no money to bail it out under the existing framework (and that Germany is unwilling to come up with a new bailout scheme), should also be no surprise. And yet they somehow manage to stun the market... each and every day. Which is why overnight action has now boiled down to a simple algorithmic exercise: is there a short covering squeeze: if yes, then rip, aka Risk On. If not, then Risk Off. So far, the squeeze has not been initiated which is also to be expected, following the biggest short covering squeeze in up to two years. This too may change if repo desks decide to pull borrow as they tend to do during regular hours, to give the impression that the latest and greatest bailout plan is "working." And in other news, which is completely irrelevant, here is the actual news.
10 Minutes to go until the ECB.... very likely disappoints again. As it usually does. There is simply too much pent up hope in what Mario Draghi will say or do, as always happens at critical junctions for the insolvent continent. Recall the same happened in November, only for the world to have to bail out Europe following a non-announcement by the ECB as Europe was imploding. Finally, why should the ECB do anything, when the public debate has already started about the US bailing out Europe: why should Draghi further infurtiate Germany's taxpayers when it has a free put option on Bernanke doing what he does best in two weeks. But for now: RISK ON. For at least a few more minutes.
One word explains the overnight action: confusion. After opening down 10 points just shy of unchanged for the year following fearful Asian trade, futures have rebounded and are now almost unchanged courtesy of a UK-market which is offline for the next two days, letting Europe take advantage of another day of impotent rumor-mongering and wolf-crying, this time focusing on a 7pm press conference in which Merkel will say more of the same vis-a-vis Europe's non-existence Banking Union, but at least Europe will have closed at the highs. Not much on today's docket so expect more kneejerk reactions to rumors, which have a positive half-life measured in the minutes.