Copper

From a valuation perspective, Chinese equities do not, at first glance, look to be a likely candidate for trouble. The PE ratios are either 12 or 15 times on MSCI China, depending on whether you include financials or not, and do not scream 'bubble'. And yet, China has been a source of worry for GMO over the past three years and continues to be one. China scares them because it looks like a bubble economy. Understanding these kinds of bubbles is important because they represent a situation in which standard valuation methodologies may fail. Just as financial stocks gave a false signal of cheapness before the GFC because the credit bubble pushed their earnings well above sustainable levels and masked the risks they were taking, so some valuation models may fail in the face of the credit, real estate, and general fixed asset investment boom in China, since it has gone on long enough to warp the models' estimation of what "normal" is. Of course, every credit bubble involves a widening divergence between perception and reality. China's case is not fundamentally different. In GMO's extensive discussion below, they have documented rapid credit growth against the background of a nationwide property bubble, the worst of Asian crony lending practices, and the appearance of a voracious and unstable shadow banking system. "Bad" credit booms generally end in banking crises and are followed by periods of lackluster economic growth. China appears to be heading in this direction.

Today, Jeff Currie, Goldman Sachs chief commodity strategist said he wouldn’t be surprised if we woke up in summer with $150 oil. Well, I would, and here is why.

From the start of 2012, AAPL was the beta-transforming game in town. Fund after fund claimed their stock-picking excellence when really, they were just running a higher beta fund being overweight AAPL. Today saw that come to an end (for now). AAPL and Nasdaq have recoupled (both +19.5% from 12/30/11) as the former fell to 11-month lows. One thing is clear, given strength in the indices today, everyone and their mom appeared to be in the long AAPL, short index trade isolating their performance. S&P 500 futures pushed inexorably higher all afternoon (even as bonds rallied, and the USD went bid on Juncker's verbal intervention) - testing unchanged on the week. From soon after this morning's POMO, US equities disconnected almost entirely from the rest of risk assets. Gold and Silver rose, Oil and copper slid, HY Credit snapped lower and recovered in the afternoon as the VIX term structure yawns ever wider across the debt-ceiling deadline, CHF was offered all day, and the short-term T-Bill curve is now inverted (stressed) across the debt-ceiling deadline.

• Guess who doesn't believe in the "great rotation out of bonds and into stocks": Abe Aids Bernanke as Japan Seen Buying Foreign Debt (BBG)
• AIG Sues Federal Reserve Vehicle in Dispute Over Lawsuit Rights (WSJ)
• JPMorgan Said to Weigh Disclosing Whale Report Faulting Dimon (BBG)
• Ugly Choices Loom Over Debt Clash (WSJ)
• Credit Suisse to cut bonus pool by 20 percent (Reuters)
• Brazilian Bikini Waxes Make Crab Lice Endangered Species (BBG)
• EU redrafts plan for bank rescue funding (FT)
• JCPenney stock plunges after bad holiday (NY Post)
• Regulator Comments Buoy Shanghai Stocks (WSJ)
• Japan voters back PM Abe's efforts to spur growth, beat deflation (Reuters)
• Cameron averts row over Europe speech (FT)
• Swatch Buys Harry Winston Jewelry Brand for $1 Billion (BBG)

America Sets Its Sights On Controlling African Resources … And Reducing Chinese Influence

In the last two weeks we have pointed out that not only are equity futures traders the most net long in six years but NYSE Margin Debt is also near four year highs. Add to this the fact that VIX futures are the most net short they have ever been - crushed by an all too visible hand - and it appears that equity market participants were critically unafraid of the fiscal cliff uncertainty. What is even more concerning, at least for those who care to be modestly contrarian that is, is that the market appears to be running out of greater fools in every asset class as JPMorgan's speculative position indicator - which combines net positioning across 8 'risky' and 7'safe' assets - is at its most risk-on since just before the crash began in Q3 2007. So, for all those taking heads who expect a flood of new money, who still believe there is money on the sidelines that wants to be put to work, the fact is in the last decade we have been more speculatively positioned long only once - and that marked the top in stocks (and risk-assets everywhere).

• Just like last year: A Postholiday Letdown for Retailers (WSJ)
• Obama Fights Republicans on Debt as Investors Seek Growth (BBG)
• Housing a Sweet Spot for U.S. Economy as Recovery Expands (BBG)
• House chooses Boehner as speaker again despite dissent (Reuters)
• Backlash pushes Republicans to seek cuts (FT)
• Jobs Lost Hit 5 Million With Rigged Currencies (BBG)
• Chavez still has "severe" respiratory problem (Reuters)
• Paris promises flurry of economic reforms  (FT)
• Investors Sour on Pro Stock Pickers (WSJ)
• Abe moves to ease South Korea tensions (FT)
• Wildfires Hit Australia Amid Worst Heatwave in Decade (BBG)
• Monti attacks ‘extremist’ rivals (FT)

You truly have to be mentally challenged if you follow the gold/silver market action and cannot appreciate something is very amiss, as per the confused Mitsui gold people, as brought to your attention the other day.

Despite the fact that Europe was closed today, the algos were not to be put off as the day broke beautifully into two pieces with a linear sell-off across assets into 1130ET and then a de-correlated nothing-burger all afternoon amid volumes lower than a CNBC anchor's IQ. Makes perfect sense right? The market dribbled higher off the lows into the close and then we got a little discombobulated in the last few minutes as Boehner rumors hit and ETFs (notably bonds - TLT) went a little jiggy. VIX remains bid (as we have been so clear to explain why) and while stocks weakened today, risk-assets in general were just not moving much - thanks generally to Oil's 2.75% gain offsetting Treasuries modest risk-off view. HYG (the high-yield bond ETF) went vertical into the close (following TLT's lead) but between negligible volumes and desparate attempts to pull any and every lever (EUR early and HYG late) to get things going, VIX's message is stay hedged into the new year (at 5-month highs with biggest 5-day jump in 7 months). S&P 500 futures closed the day-session at the low-end of the channel post last week's flash crash.

Copper is often referred to as the PhD of commodities for, as JPMorgan's Ken Landon notes, "When companies ramp up production of various products, whether during or in anticipation of economic recovery, they demand more cooper." Gold, however, he adds, "is not sensitive at all to business-cycle demand. Its price is driven by the monetary environment." While Bloomberg's chart of the day prefers to take the short-term (last few weeks) view of the world to justify a bullish equity market call, we prefer to look at longer-term cycles and the message is extremely clear - manufacturers are anything but confident, are doing anything but buying copper in anticipation of demand, and despite gold's recent fluctuations it is anything but implying that the world's grand monetary policy experiment is slowing down. What we see from this chart is yet another clear fundamental divergence between Dr. Copper's take on the global economy and the US equity market's nominal recovery.

Following Part 1 (History), and Part 2 (Interventionism), Part 3 provides a more technical look at the key features of the unadulterated gold standard.  It could be briefly stated as a free market in money, credit, interest, discount, and banking.  Another way of saying it is that there would be no confusion of money (i.e. gold) and credit (i.e. paper).  Both play their role, and neither is banished from the monetary system. There would be no central bank with its “experts” to dictate the rate of interest and no “lender of last resort”.  There would be no Securities Act, no deposit insurance, no armies of banking regulators, and definitely no bailouts or “too big to fail banks”.  The government would have little role in the monetary system, save to catch criminals and enforce contracts.

Despite EURUSD trading in a 10pip range all afternoon (flat), a significant divergence in VIX (bearish), and a roundtrip to unchanged in Treasuries (flat), equity markets did what they do best - levitate. Volume slipped but was not terrible (as did average trade size) suggesting this strength is hardly the stuff of professional rotation (no matter what we are told to believe). For most of the day session stocks trod water in a small range but into the close (ahead of the vote tonight), S&P 500 futures went vertical amid absolutely and utterly no news whatsoever, blowing through yesterday's closing VWAP and beyond led by financials (now +4.375% on the week). Futures kept going after the close completely wiping out yesterday's losses. Silver came off the lows of the week marginally in the afternoon but ends today down 7.2% for the week as Copper and Gold follow it lower (and WTI +3% on the week). We suspect the liftathon is a remnant of the lack of size sellers (knowing there is no liquidity to move into) who are aggressively protecting via options. Most-Shorted names are the best performers once again.