Kashkari Punks CNBC And Joseph Cohen: Compares Business TV And Sellsiders To "Jersey Shore" And "Desperate Housewives"Submitted by Tyler Durden on 11/08/2011 12:58 -0400
We usually mock Neel "get me a napkin" Kashkari. This is not going to be one of those times, because in one of the better essay written on the topic, the Pimco equity strategist and former Hank Paulson right hand (fall)guy makes a mockery out of anyone and everyone who tries to predict the future, wth an emphasis on CNBC (not surprisingly considering the relentless barrage that the Comcast fin-comedy channel has unleashed toward Bill Gross in the past year) and that seer of seers, prognosticator of prognosticators: A. Joseph Cohen. Kashkari's take home: "In December 2007 sell-side equity strategist Abby Joseph Cohen predicted the S&P 500 would climb from 1,463 to reach 1,675 by the end of 2008. Given the brewing financial crisis, this was a bold call. In fact, the crisis dramatically worsened and the S&P 500 ended 2008 at 903. As the U.S. crisis recedes into memory, people have moved on.... If we’re right – and neither PIMCO, nor anyone else, can accurately predict the level of the stock market at a certain date in one week, one month or one year – why do so many sell-side analysts (and a few investment managers) make such predictions? And why do we pay any attention? I will answer my question with a question: Why do millions of people watch professional wrestling, “The Real Housewives” or “Jersey Shore?” It makes for entertaining television." And the stab right at CNBC's conflicted little heart: "My hope from this piece is not that you stop watching business television. I certainly watch regularly and I also participate, sharing PIMCO’s views. I think it is a unique medium in which to follow markets and quickly hear a variety of perspectives on important topics. My hope is that it becomes a little easier to distinguish thoughtful commentators discussing knowable economic topics from entertainers throwing darts." Congratulations sell-side Wall Street, and their number one media venue to present senseless permbullish biased forecasts - you have just been Punk'd.
In true save-the-market style, as 3pm ET comes around we have another rumor from Europe. This time it purports to be the creation of an investment fund, as a subsidiary of the EFSF, which will 'attract' external capital sources, via tranching of returns, to enable the purchase of sovereign debt in primary and secondary markets. Headlines, via Bloomberg, for now suggest this is yet another strawman and given the concessions on this morning's EFSF issue, just who exactly is going to be investing in this levered product and why? Equity markets remain 'exuberant' relative to credit though HY is slowly catching up to the intrday heights of the S&P 500 futures. It really doesn't sound like anything but the beginnings of the structure of the SIV for the EFSF that we have been discussing for a couple of weeks now.
We are all quite aware of the fact that heightened volatility has become a short term norm in the financial markets as of late. Not surprisingly, we’re seeing the same thing in a number of recent economic surveys. The most current poster child example being the Philly Fed survey that has shown us historic month over month whipsaw movement over the last few months. Movement measured in standard deviation parameters has been breathtaking. All part of a “new normal” in volatility? For now, yes. But over the very short term economic surveys and stats have been taking a back seat in driving investor behavior and decision making in deference to the “promise” of ever more money printing. Of course this time the central bank wizardry will happen across the pond, although the US Fed is also now back to carrying out it’s own modest permanent open market operations (money printing) relatively quietly, but consistently, as of late. Although over the short term “money makes the world go ‘round”, we need to remember that historic money printing in the US in recent years only acted to offset asset value contraction in the financial sector and did not lead to macro credit cycle acceleration engendering meaningful aggregate demand and GDP expansion. And we should expect a Euro money printing experience to be different? Seriously?
Three of the smartest strategists at Goldman, Huw Pill, Francesco Garzarelli, and Peter Oppenheimer, have released what one could tentatively call a white paper on the "next steps" for Europe. Far from being the traditional permabullish sellside drivel, this is a must read note, as it cleanly lays out the risks for the Eurozone from this point. The note focuses on three key aces: 1) fiscal consolidation and the ongoing role of the ECB in the future of a Eurozone which still has no fiscal cohesion (which makes sense: just like in the US, the Fed is aggressively putting the ball in Congress' court, as neither the monetary nor fiscal apparatus has any interest in being blamed for ongoing economic deterioration, so in Europe the ECB wants a federal union, complete with Eurobond issuance powers, so it is not in the cross hairs: alas, European politicians realize this is career suicide and the question remains: when push comes to shove, and saving the Euro requires career harakiri from politicians, will they step up to the plate?); 2) Italy, of course, as the country under the spotlight now and going forward; and 3) what the above two mean for BTPs and thus the European (and Global) equity markets. The sense we get from the Goldman trio is that while the company which has just spawned Europe's latest central banking head, while cautiously neutral is pushing for a downside case: after all what better way to unlock the Heidelberger Druckmaschinen true potential, than with a full blown crisis...
Credit markets were far less sanguine into the close than equity markets as ES managed to get back to day session highs (and beyond). IG and HY credit markets closed much nearer their lows of the day and while broad-based risk assets rallied off the morning lows, the late day surge in stocks was entirely idiosyncratic! HYG outperformed HY while HY secondary bonds were much more balanced (net buying to selling) today than in recent days. It certainly appeared credit market participants were much less comfortable holding into the Greek vote and uncertainty of the weekend than equity players. The USD was noisy all day but rallied into the close (as the EUR drifted back under 1.38) and Gold trod water as oil managed a modest rally while silver and copper lost more ground on the week. TSYs rallied only modestly today with the belly outperforming as we saw major duration reduction in corporate bond trading on the day as the long-end was net sold. VIX rose modestly into the close, disconnecting from stocks - like every other asset class.
Amid average volume, ES managed to rally an impressive 45pts off overnight lows to close just shy of the 200DMA on what was mixed (at best) macro data in the US and seemingly more chaos in Europe (does anyone know for sure whether there will be a confidence vote?). High beta and most-shorted stocks dramatically outperformed the broad equity markets as 4% swing days have become so de-rigeur nowadays! Financials went from major loser soon after the open to middle of the pack by the close with only a very late day disconnect between HY credit and stocks (HY outperformed after the bell) of any note as we leaked higher all day long. Heavy new issuance in IG credit saw secondary bond trading pretty balanced from a net-buying/selling perspective - even as TSY yields rose significantly. TSYs saw 2s10s30s rise notably but combined with FX carry crosses, oil, gold, and the dollar - risk asset drivers in general were far less excited than stocks by the close. Commodities lifted further after Europe's close as the USD weakened more leaving gold and oil up around 1.5% on the day.
Bloomberg's consumer comfort index once again confirms what so many know, despite the day to day 3-4% swings in equity markets, that broad-based sentiment is desperately weak. Retail metrics also confirmed retail sales starting to disappoint - as perhaps burning through savings is starting to reach its tipping point - and so perhaps all those charts we have been so vociferous about pointing to the disconnect between spending/growth and sentiment will converge sooner than many suspect. Specifically the State of the Economy index is only fractionally above its record lows from Feb09 - about as bad as it can get!!
I said it in the past and was proven correct twice. It happened again, big time - and is now incontrovertible. Contrary to popular belief, Squids can't trade!
With the S&P closing -2.5% led by another financials sell-off (-4.3%), the long-hoped for late-day-rumor failed to appear and save the knife-catchers. The major credit indices modestly outperformed equities today although the after-hours (Greek govt is not collapsing) rally-monkey dragged ES (up to VWAP) closer to credit's performance as stocks closed back to 10/21 levels while credit held more in the 10/24 region. Another huge day in the TSY complex saw the 30Y rally around 15bps (back under 3%), 10Y drop back under 2% and major flattening continue as 2s10s30s collapses further. FX markets were dominated by EUR's referendum-on / referendum-off volatility as the dollar maintained its strength which was ignored by Gold which managed to rally while commodities and silver generally lost ground today. Implied Vol and correlation spiked as macro protection was bid in equity markets but notably, secondary bonds and CDS saw major regions of net-selling as opposed to blanket protection demand - suggesting IG credit has reached its limit on second-guessing and is derisking at the individual level (as opposed to macro hedging) especially higher beta names.
10Y US Treasuries have now successfully eradicated all the post-summit losses and are well on their way to last week's low yields as the reality (that we unendingly slammed into people's heads) appears to be hitting managers minds. 2s10s30s has also retraced the entire post-summit shift and the EUR is also getting very close to unch (from pre-summit). This leaves only ES (and credit to a lesser degree) as the odd man out having retraced only 50% of the post-summit euphoria.
As the EUR trades at its lows of the day (having retraced over 60% of the Euro-Summit rally, we wonder how long before the broad European equity markets will take to fill the gap from that wondrous liquidating day. Equities are underperforming credit so far this morning but it is very clear that hedgers/shorts are back in lower cost credit positions as European sovereigns leak wider in yield (cash and CDS). We also note that EFSF is underperforming Bunds (by around 7bps so far this morning) making us wait for the Barroso-Van-Rompuy 'We're gonna need a bigger boat' speech.
Once again, Bill Gross proves he can think outside of the box better than most, with the following paragraph from his latest letter to clients: "the investment question du jour should be “can you solve a debt crisis with more debt?” Penny or no penny. Policymakers have been striving to answer it in the affirmative ever since Lehman 2008 with an assorted array of bazookas and popguns: 0% interest rates, sequential QEs with a twist, and of course now the EU grand plan with its various initiatives involving debt write-offs for Greece, bank recapitalizations for Euroland depositories and the leveraging of their rather unique “EFSF” which requires 17 separate votes each and every time an amendment is required. What a way to run a railroad. Still, investors hold to the premise that once a grand plan is in place in Euroland and for as long as the U.S., U.K. and Japan can play scrabble with the 10-point “Q” letter, then the markets are their oyster. Not being one to cast pearls before swine or little Euroland PIGS for that matter, I would tentatively agree with one huge qualifier: As long as these policies generate growth."..."My original question – “Can you solve a debt crisis by creating more debt?” – must continue to be answered in the negative, because that debt – low yielding as it is – is not creating growth. Instead, we are seeing: minimal job creation, historically low investment, consumption turning into savings and GDP growth at less than New Normal levels. The Rogoff/Reinhart biblical parallel of seven years of fat followed by seven years of lean is not likely to be disproven in this cycle. The only missing input to the equation would seem to be how many years of fat did we actually experience? More than seven, I would suggest." And that, dear readers, is the bottom line: put otherwise, we have experienced 30 years of deviation from the mean courtesy of the biggest, and most artificial in history, cheap debt-inspired period of global "growth." And we are due for the mother of all mean reversions when the central planners finally realize their methods to defeat this simplest of methemaical concepts, have failed.
In addition to the unknown factors impacting the European “solution”, next week the Federal Reserve will have their regular FOMC meeting and statement.
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