Equity Markets

The stock market has now been up for ten straight days. Many on Wall Street are singing “Happy Days Are Here Again.” For them, that is probably the case. They finally have something to sell that will bring the rubes back into the markets. We are not in Kansas anymore. Fear is ebbing and greed is coming back. Those on the outside looking in are rounding up cash so that they don’t get left behind. The shills assist them with their pictures of economic recovery, new era crap and whatever other nonsense they can peddle successfully. So the cycle goes, as it has since the New York Stock Exchange came into existence. We are in another game of musical chairs where the music is playing joyfully. As in all such events, there are too few chairs to accommodate the participants when the music stops. And it always does!

It appears paying more for gasoline and higher taxes trumps the exuberance of the equity markets as UMich Consumer Sentiment crashed in February. Printing at 71.8 on expectations of 78.0 this is the biggest miss on record based on Bloomberg data. The 71.8 level is the lowest since December 2011 as it appears that the Fed's only remaining policy tool is just not sparking that animal spirit in the real economy's anchor - the US consumer - as while current conditions did drop, it is future expectations that plunged.

With Greenspan emerging from his crypt to confirm that he is now as clueless about everything as he was 15 years ago (although the absolutely zero reaction out of "stocks" to his statement that stocks are "very undervalued" is perhaps indicative that SkyNet may just be learning), it is appropriate to remind readers that this thing known as the "market" died some four years ago. What we have now is a vehicle with a "role in the policy fight to support spending" while "today’s stock market has arguably lost some of its ability to reflect underlying economic trends." Not our words - those of Bank of America's Ethan Harris, who, four years after the fringe blogs, finally "gets it."

"Equity prices in the US and Europe have been hovering at multi-year highs. To the extent that this reflects powerful policy easing, equity markets may have lost some of its ability to reflect economic trends in exchange for an important role in the policy fight to support spending." This is a statement from a Bank of America report overnight in which the bailed out bank confirms what has been said here since the launch of QE1 - there is no "market", there is no economic growth discounting mechanism, there is merely a monetary policy vehicle. To those, therefore, who can "forecast" what this vehicle does based on the whims of a few good central planners, we congratulate them. Because, explicitly, there is no actual forecasting involved. The only question is how long does the "career trade", in which everyone must be herded into the same trades or else risk loss of a bonus or job, go on for before mean reversion finally strikes. One thing that is clear is that since news is market positive, irrelevant of whether it is good or bad, virtually everything that has happened overnight, or will happen today, does not matter, and all stock watchers have to look forward to is another low volume grind higher, as has been the case for the past two weeks.

This is the third day in a row that an attempt to mount an overnight ramp out of the US has fizzled, with first the Nikkei closing down for the second day in a row and snapping a week-long rally, and then the Shanghai Composite following suit with its 5th consecutive drop in a row as the rumblings out of the PBOC on the inflation front get louder and louder, following PBOC governor Zhou's statement that inflation expectations must be stabilized and that great importance must be attached to inflation. Stirring the pot further was SAFE chief Yi Gang who joined the Chinese chorus warning against a currency war, by saying the G20 should avoid competitive currency devaluations. Obviously China is on the edge, and only the US stock market is completely oblivious that the marginal economy may soon force itself to enter outright contraction to offset the G-7 exported hot money keeping China's real estate beyond bubbly. Finally, SocGen released a note last night title "A strong case for easing Korean monetary policy" which confirms that it is only a brief matter of time before the Asian currency war goes thermonuclear. Moving to Europe, it should surprise nobody that the only key data point, Eurozone Industrial Production for January missed badly, printing at -0.4% on expectations of a -0.1% contraction, down from a 0.9% revised print in December as the European recession shows no signs of abating. So while the rest of the world did bad or worse than expected for the third day in a row, it will be up to the POMO and seasonally adjusted retail sales data in the US to offset the ongoing global contraction, and to send the perfectly manipulated Dow Jones to yet another all time high, in direct refutation of logic and every previous market reality ever.

A 2-minute read on developments in the global capital markets. Equity markets are heavy, bonds little changed as is the dollar. Sterling is the big winner on short covering and bottom picking.

While we are used to seeing insta-crashes in our highly-regulated and trustworthy equity markets, the unregulated digital world of Bitcoins suffered another flash-crash last night. According to Ars Technica, the 23% plungefest in the value of the digital currency (the second in a week) was due not to Waddel & Reed, not HFT algos, but 'forking' Cryptographic algos gone wild agreeing on different (legacy) keys as being correct - akin to finding Tungsten in your Gold bars (and hence the drop in the value). This latest glitch is different from the problem that caused Bitcoin prices to briefly crash to zero in June of 2011. In that case, the sell-off was caused by the compromise of the exchange itself, whereas this time the glitch occurred in the core Bitcoin software. Obviously, the incident will be another important test of the cryptocurrency's decentralized governance structure - to say nothing of its reputation among the less technically-capable owners and miners (even though BTC rapidly recovered almost all its losses).

Despite the hopes and greed of the marginal greater fool algo lifting equity markets to highs, Goldman's business cycle 'swirlogram' has dropped notably into the 'Slowdown' phase after a brief 6-month trip into 'Expansion'. China growth risks remain the largest weight on investors' angst (Chinese IP growth and retail sales for the January/February period were sequentially weaker, and overall disappointing) as Euro and US risks have 'apparently' fallen in the last week or two.

"...we've had volatile times and I think while the world has on balance, poured a lot more into equities; the reality is that the underlying situation in the world has probably not changed as much as the equity markets reflect."

Marius J. Kloppers, CEO BHP Billiton

U.S. equity markets rallied once again after opening weaker Monday repeating previous performances. There wasn’t much news domestically. The Fed continued modest POMO actions which will grow in scope throughout the week. Stocks were quiet most of the day but got a lift on rumors that Apple (AAPL) will declare a dividend of some kind. If they do this, then the SEC should be monitoring who and what groups were front-running this piece of news.

We are wondering if and when these signals will have significance.

Bulls remain in control of the tape even if there are only a few of them. There is better economic data in the U.S. as the Employment Report indicates (236K vs 171K expected & prior 151K) while the headline unemployment rate dropped (7.7% vs &.7.8% expected & prior 7.9%). The latter is the headline number HFT & algo traders jump on and “away we go!” Jackie Gleason would shout. Inside the numbers there is less cheerful data but “da boyz” running the programs never pay attention to these like: “4.8 million unemployed greater than 27 weeks and only 63.5% of the workforce engaged in work”. The latter numbers haven’t changed much.

A 'successful' Spanish auction and Draghi's reassuring anti-currency war chatter had little to no effect on Europe's equity markets but FX and bond markets moved quite significantly. A mix of small gains (CAC, DAX) and small losses (Italy, Switzerland) in stocks but Italian and Spanish bond spreads dropped 10-15bps further (down 30bps on the week) - back well below the pre-Italian election levels and Portugal goes from strength to strength on the small ratings upgrade last night (-50bps on the week). EURUSD was the story (and EURJPY) as a lack of concern over Euro potential strength by Draghi drove it to run stops above recent highs and end the day at 1.3100 (up around 130 pips on the day). EURJPY is now back to pre-Italian election levels.

Despite the improvements in equity markets, Credit Suisse's global risk appetite indices are flashing warning signals. Their equity risk model points to weakness (most notably - Emerging Market underperformance relative to Developed Markets) and their credit risk appetite model maintains its 'sell' signal (which is what we are seeing in the broad credit markets). Finally, their bond risk model suggests a confirming signal getting long US duration.

A small note on the frankly hilarious news that the Dow Jones Industrial Average smashed through to all-time-highs. First of all, while stock prices are soaring household income and household confidence are slumping to all-time lows. Employment remains depressed, energy remains expensive, housing remains depressed, wages and salaries as a percentage of GDP keep falling, and the economy remains in a deleveraging cycle. Essentially, these are not the conditions for strong organic business growth, for a sustainable boom. We’re going through a structural economic adjustment, and suffering the consequences of a huge 40-year debt-fuelled boom. While the fundamentals remain weak, it can only be expected that equity markets should remain weak. But that is patently not what has happened. With every day that the DJIA climbs to new all-time highs, more suckers will be drawn into the market. But it won’t last. Insiders have already gone aggressively bearish. This time isn’t different.