Amid the best start of the year for the S&P 500 since 1987, Nic Colas of ConvergEx offers some deep thoughts on how behavioral finance concepts can help us understand the dichotomy between last year's derisking and this year's rerisking in terms of market participant psychology. Between delving into whether a short-sharp or long-slow colonoscopy is 'preferable' Nic reflects (antithetically) on 10 bullish perspectives for the current rally and how the human mind (which still makes up maybe 50% of cross-asset class trading if less in stocks) processes discomfort in very different ways. Critically, while it sounds counter-intuitive to him (and us), focusing on the pain of recent volatility is actually more conducive to investors' ability to get back on the horse especially when the acute pain is ended so abruptly (intervention). As studeis have found, "subjects who actually focus on a painful experience while it is happening are more willing to immediately undergo further pain than those who performed some distracting task"
- Here we go again: IMF Said to Seek $1 Trillion Resource-Boost Amid Euro Crisis (Bloomberg)
- China said to Tell banks to Restrict Lending as Local Officials Seek Funds (Bloomberg)
- EU to Take Legal Action Against Hungary (FT)
- Portugal Yields Fall in Auction of Short-Term Debt (Reuters)
- US Natural Gas Prices at 10-Year Low as Warm Weather Weakens Demand (Reuters)
- German Yield Falls in Auction of 2-Year Bonds (Reuters)
- World Bank Slashes Global GDP Forecasts, Outlook Grim (Reuters)
- Why the Super-Marios Need Help (Martin Wolf) (FT)
- Chinese Vice Premier Stresses Government Role in Improving People's Livelihoods (Xinhua)
The German industrial elite talks about exiting the Eurozone.... And to heck with Greece.
Business school curricula today completely lacks the necessary knowledge to survive the deepening and widening global monetary & economic crisis. We offer a video and a few thoughts below regarding the type of knowledge that will help you prepare.
When back in August, Europe declared a short selling ban of any financials (here we are willing to channel Romney, and make a $10,000 bet with anyone that said ban will never be lifted), and which as we predicted has had no favorable impact on bank stocks which have since tumbled, we suggested that the next step will also be the final one: the passage of laws prohibiting sales of any kind. As usual we were partially joking. And as so often happens, we are about to be proven right again. As the FT reports in its headline article today, whose gist is simple enough, that Europe is on the verge, it is the tactically-placed final paragraph that is of particular curiosity. It says the following: "Speaking on the fringes of a start-of-year retreat of her Christian Union lawmakers in the city of Kiel, Ms Merkel said she would consider calls from her party colleagues for legislation to bar institutional investors such as insurance companies from selling bonds when ratings were downgraded, or fell below investment grade." Allow us to recopy and repaste the key part: "legislation to bar institutional investors such as insurance companies from selling bonds."
If JPM, which just launched the financials earnings onslaught by first reporting Q4 results, is any indication, it will not be pretty for the financial sector which has seen dramatic moves higher in the past several weeks, because as Jamie Dimon says, Q4 was "Modestly Disappointing." The reason: a top line miss, and a continuing contraction in capital markets leading to yet another decline in Investment Banking results. Also, what DVA giveth, DVA taketh away, and with CDS tightening in the quarter, DVA resulted in a $567 million loss in the quarter. Yet even with the DVA impact exclusion, revenue, which was reported at $21.47 billion would still have missed estimates of $22.56 billion. Finally, what would a quarter be if a bank did not reduce its loan loss allowance and release even more reserves, no matter how the market is actually doing: JPM did just that in its mortgage banking division, lowering its net loan loss allowance by $230 million following a $1 billion allowance reduction in loan-losses offset by actual impairments of $770 million. Stock is down following the release.
Analyst surveys have now risen to the level of fact, as we all know. Thus Bloomberg and other news outlets feature detailed reports about the opinions of the Sell Side community as though these musings were burned into stone tablets with the fire of the Holy Spirit.
Any North Koreans Found Not To Have Cried Hystrically At Kim Jong-Il's Passing May Spend 6 Months In A Labor CampSubmitted by Tyler Durden on 01/11/2012 10:31 -0500
Well, it is a slow news day, so we focus on the patently absurd, such as this news out of Interfax confirming that TheOnion can now close up shop as reality is far, far better. From Interfax: "North Korean citizens, who did not take part in the mourning ceremonies for the country’s late Leader Kim Jong-il, are facing up to six months in labor camps, Interfax reported January 11. According to the South Korean media sources, “People’s Courts” took place all over the country starting December 29 to condemn those who did not show enough emotion after the death of “the great leader” Kim Jong-il. The People’s Court hearings were reportedly over by January 8. The behavior of those people, who criticized the three-generation principle of ruling the country, was also a matter of discussion during the court meetings. It was reported earlier that 2012 calendars were fully taken out of stores because the date of death of the late Leader Kim Jong-il was not marked in them." That said, we doubt anyone will punish the capital markets for crying hysterically should Bernanke's printer finally kicks the ghost.
One of the recurring analogues we have used in the past to describe the centrally planned farce that capital markets have become and the global economy in general has been one of a increasingly chaotic sine wave with ever greater amplitude and ever higher frequency (shorter wavelength). By definition, the greater the central intervention, the bigger the dampening or promoting effect, as central banks attempt to mute or enhance a given wave leg. As a result, each oscillation becomes ever more acute, ever more chaotic, and increasingly more unpredictable. And with "Austrian" analytics becoming increasingly dominant, i.e., how much money on the margin is entering or leaving the closed monetary system at any given moment, the same analysis can be drawn out to the primary driver of virtually everything: the inflation-vs-deflation debate. This in turn is why we are increasingly convinced that as the system gets caught in an ever more rapid round trip scramble peak deflation to peak inflation (and vice versa) so the ever more desperate central planners will have no choice but to ultimately throw the kitchen sink at the massive deflationary problem - because after all it is their prerogative to spur inflation, and will do as at any cost - a process which will culminate with the only possible outcome: terminal currency debasement as the Chaotic monetary swings finally become uncontrollable. Ironically, the reason why bring this up is an essay by Pimco's Neel Kashkari titled simply enough: "Chaos Theory" which looks at unfolding events precisely in the very same light, and whose observations we agree with entirely. Furthermore, since he lays it out more coherently, we present it in its entirety below. His conclusion, especially as pertains to the ubiquitous inflation-deflation debate however, is worth nothing upfront: "I believe societies will in the end choose inflation because it is the less painful option for the largest number of its citizens. I am hopeful central banks will be effective in preventing runaway inflation. But it is going to be a long, bumpy journey until the destination becomes clear. This equity market is best for long-term investors who can withstand extended volatility. Day traders beware: chaos is here to stay for the foreseeable future." Unfortunately, we are far less optimistic that the very same central bankers who have blundered in virtually everything, will succeed this one time. But, for the sake of the status quo, one can hope...
We did a double take when we read the following lead sentence from a just released Bloomberg report on what is about to take place in China: "China’s stocks regulator will “actively” push pension and housing funds to begin investing in capital markets, and encourage long-term investors such as insurers and corporate pension plans to buy more shares." To paraphrase Lewis Black - we will repeat this, because it bears repeating - "China’s stocks regulator will “actively” push pension and housing funds to begin investing in capital markets, and encourage long-term investors such as insurers and corporate pension plans to buy more shares." And that is the last ditch effort one does when one has no choice but to push "long-term investors" into the last giant ponzi. Of course, this being China, "long-term investors" means anyone at all, and "pushing" ultimately involves either 9MM or a 0.44 caliber. And what was said earlier about mocking mainstream media spin - well, the first opportunity presents itself a few short hours later - when Bloomberg, the same agency that wrote the above report, tells us that "Asian Shares Rise Amid Global Economic Optimism." Odd - no mention of the fact that China is now pushing habitual gamblers, which over there is another name for "investors" into what is openly an invitation (at gunpoint nonetheless) into the latest and greatest bubble. That said, we give this latest artificial attempt to boost stocks a half life of several days max before the SHCOMP plunges to new lows for the year.
Poor, poor Federal Reserve.
Whether it is strong-USD-based forward revenue reductions for US corporations, rear-view mirror-based fuel-cost implicit tax-cuts, or unsustainable savings rate reductions, the recent US data has created a plethora of 'this time is different' decoupling theorists. We discussed David Rosenberg's perspective on this unsustainability last week and now his old employer (Bank of America) is notably out with a rather negative note on the chances of this 'local' European problem becoming a global issue and impacting US growth through both trade and financial linkages. In their view, we will see a steady deceleration in growth this year while the consensus sees a pick up and by the spring these negative revisions (from sell-side economists) will weigh heavily on stock markets and support bonds. They sum it up succinctly: 'Enjoy the recent price action while it lasts.'
Presenting An Iran Attack Probability Timetable And A Complete Geopolitical Outlook For The Middle EastSubmitted by Tyler Durden on 01/07/2012 15:41 -0500
The folks at Religare Capital Markets have put together one of the better cheat sheets on a region that most of the big banks largely ignore: the Middle East, where day after day we get new and more troubling headlines of escalation, usually involving Iran and Israel. And since at the end of the day, in a resource-strapped world, the bottom line is always about energy, and oil, what happens in the MENA region is arguably far more important at the end of the day than who prints how much electronic paper/linen. But most important is probably the following analysis charting the probability of an attack of Iran by either Israel or the US. We were quite surprised to find that in Religare's opinion the probability of an Israeli-sourced attack on Iran hits a high of 50% sometime in early February, with the US contributing about 20% with a peak in May and just before the presidential elections. This is how they explain it: "The probability of an attack on Iran is now higher than ever. The only solution to the current crisis, diplomacy, is off the table due to politics and the focus is now shifting to regime change. We see the probability dropping mid-year, although US elections could increase the probability of a US attack significantly (unless Ron Paul steams ahead), as will Iran’s likely decision to move their centrifuges to reinforced facilities in Qom if not handled correctly (likely mid-year). We reiterate our view that the fallout may not be as bad as expected from an Israeli strike, horrendous from a US one." And if they are right, what happens to oil will likely be the biggest catalyst of events in 2012 - a topic PIMCO has already had some extended observations on.
Despite the barrage of geopolitical headlines involving Iran, and as of today, the US and Israel, especially as pertains to wargame exercises in the Straits of Hormuz, a different, and potentially much more important story is to be found in the country's capital markets, and specifically its currency, which has continued to tumble ever since Obama signed the Iran financial boycott on New Year's Day as reported here. And, as we predicted, it is the aftershocks of the boycott which may have the most adverse impact on geopolitics. Because if the Iran regime finds itself in a lose-lose situation with its economy imploding and its currency crashing, the opportunity cost of doing something very irrational, from a military standpoint or otherwise, gets lower and lower. Then again, something tells us the US administration has been well aware of this sequence of events all along. Here is Art Cashing explaining it all.