UPDATE: *CBOE TO CLOSE EXCHANGES OCT. 29 BECAUSE OF HURRICANE SANDY
Late Updates - after a day of consultation and realization that if the algos were left alone to play then things could go a little pear-shaped - NYSE and NASDAQ will now be totally closed tomorrow:
*U.S. EQUITY MARKETS TO CLOSE ON OCT. 29 FOR STORM, SEC SAYS
As we noted this morning, today seemed more about defense than offense (even though stocks managed to rally off Draghi's Dike twice). Dow 13,000 and S&P 1400 remain safe. Today's theme is 'V-shaped-recoveries' as AMZN managed some magic last night, AAPL managed some super-magic intraday - bouncing off its 200DMA and then fading into VWAP to close on volume, and S&P futures oscillating between post-Tuesday highs and lows all day (with the ubiquitous dump to VWAP into the close after the 3pm ramp on cue)...
Chuck Schumer to Kevin Henry: "Must close green, Mr. Henry"
— zerohedge (@zerohedge) October 26, 2012
S&P futures are being crushed overnight. Currently trading below the levels of September 5th Draghi comments (back under 1400) and -11pts from the close. AUD is weak, Treasuries are modestly bid (as is the USD) and commodities are rolling over. The catalyst? We see four things: 1) Delayed reaction to global supply chain implications of an AAPL outlook cut (and/or overseas holders hedging) as well as some missed earnings in China; 2) Major Aussie quasi-bank Banksia (yes, its really called that!) hitting the skids (a la Northern Rock) bringing fear that Australia is entering 2008-mode USA; 3) a NYT article which could be inferred as a direct attack on the Chinese political faction (exposing Wen Jiabao's hidden billions); and/or 4) a realization that at 14-plus x P/E multiples, the US equity markets are not pricing in anything the kind of possible pain a fiscal cliff scenario (or Romney-ite in the Fed) might bring. Of course, the need for a narrative is irrelevant, the most net long position since 2008 is unwinding (for now) but by the time we wake for New York's morning, things could have reversed once again.
If you often wonder why ‘free market capitalism’ feels like it is failing despite universal assurances from economists and political pundits that it is working as intended, your intuition is correct. Free market capitalism has become a thing of the past. In truth free market capitalism has been replaced by something that is truly anti-free market and anti-capitalistic. The diversion operates in plain sight. Beginning sometime around 1970 the U.S. and most of the ‘free world’ have diverged from traditional “free market capitalism” to something different. Today the U.S. and much of the world’s economies are operating under what I call Monetary Fascism: a system where financial interests control the State for the advancement of the financial class. This is markedly different from traditional Fascism: a system where State and industry work together for the advancement of the State. Monetary Fascism was created and propagated through the Chicago School of Economics. Milton Friedman’s collective works constitute the foundation of Monetary Fascism. Today the financial and banking class enforces this ideology through the media and government with the same ruthlessness of the Church during the Dark Ages: to question is to be a heretic. When asked in an interview what humanities’ future looked like, Eric Blair, better known as George Orwell, said “Imagine a boot smashing a human face forever.”
Equity markets will ebb and flow (mostly flow it seems) at the whim of central planners; and employment statistics will me X-12'd into whatever cognitive bias is required for the status quo to be maintained; but one thing that is hard to hide (harder still with Bloomberg's help) is the reality of job cut announcements. Over the past few years, there is one pronounced reality that has occurred in front of any major fiscal or monetary stimulus-related event - a huge rise in North American job cuts. It would appear, given the data below, that CEOs are wise in the ways of just-in-time only fix it when its totally broken policy-making and have front-run every major event with huge layoffs. To wit, since the start of September, announced layoffs in North American firms have soared to levels not seen since the debt-ceiling-debacle of last year (all the while - claims and the unemployment rate continue to fall). Cautiously optimistic? not!
The last few years have been a wild ride in the world's equity markets. None wilder than the US equity markets. The only fly in the ointment is that we've seen this kind of 'wild ride' before, the kind of unbridled nothing-can-stop-us-now, its-all-priced-in, Central-Bank-sponsored rallies that have been the bread-and-butter of every BTFD'er since March 2009. Presented with little comment - this time it's different, we really hope...
Printing trumped the European recession until the spigots were either turned off or became ineffective. What else is that you can promise the markets after “limitless” and “uncapped” play out? With short rates at just above Zero, with everything promised now except the kitchen sink and with the economies in a major part of Europe falling into the abyss where is it that you think we are going besides down? I would argue that the central banks did what they could, delayed the inevitable but that it was always a question of when and not if before earnings turned grim and the markets reversed.
After absorbing the latest PMI reports from Europe, as well as yet another disappointing German IFO survey which in turn was followed by a sharp rise in volatility, saw equity markets in Europe print lows of the day. However ever since, equities staged an impressive recovery and are now in positive territory, supported by investors looking to capitalise on oversold conditions and in part by short-positions being squeezed. The sharp and unpredictable mood swings resemble one suffering manic depression and it remains to be seen whether stocks will be able to hold onto gains. The move higher in stocks has been led by the tech sector, which has been one of the worst performing sectors over the recent weeks. Looking elsewhere, EUR underperformed its peers, largely driven by a lower EUR/GBP (by-product of deterioration in EU credit markets, as well as good sized buying by a UK bank in GBP/USD).
What is wrong with this market? The S&P 500, instead of grinding higher in the aftermath of QE3 actually hit its peak for the year the day after the policy announcement. Go figure. Maybe economic reality finally caught up with Mr. Market (there is a very fine line between "'resiliency" and "denial" — and keep in mind that the S&P 500 is still up 14% in a year in which profits are now contracting, not just slowing down)... On average, six weeks hence, the S&P 500 was up more than 9% after the policy announcement. It was all so novel! Tech on average was up over 11%, industrials were up 12%... ditto for Consumer Discretionary and Materials. The cyclicals flew off the shelves. But this time around. either Mr. Market is jaded or the laws of diminishing returns are setting in. Six weeks after the unveiling of QE3, the market is down 2%. This hasn't happened before. Every economic-sensitive sector is in the red, and even Financials — the one sector that should benefit from all the "sucking at the Fed teat" — have made no money for anybody!
What happens if all the "ifs" become "whens"?...
No matter what you are told by the mainstream media, peripheral government bonds have seen the worst 2-day sell-off in over a month with Spanish 10Y spreads +27bps this week so far and 2Y breaking back above 3% yield in a hurry. Just as we warned - this rally is not capital flowing back into 'tail-risk- removed govvies, it is simply fast money front-running actions and now momentum gains for the exits. Swiss 2Y rates fell their most in a month to -20bps as safety was sought. Europe's equity markets dropped for the third day in a row (hhmm more profit-taking we are expected to believe?) with the broadest BE500 index down 1.65% today and almost 3% off its recent high (the biggest 3-day drop in three months) and now at critical support once again. Equities are underperforming credit - as credit suffered the epic short-squeeze last week and we suspect remains a little gun-shy. EURUSD cracked back below 1.30 (down over 100pips to 1.2950 as Europe closes) and Europe's VIX jumped notably back above 23% - its highest in 6 weeks. GGBs lost their most in 3 months...
Dow Jones down 250, and a new bearish letter from Bob Janjuah? Lucky coincidence? Or conspiracy? You decide. From Bob: "How to play it? The SPX is the obvious pure risk short because of how rich it is against other equity markets. Outright is fine, so are options. Take a look at January 1350 puts for example currently trading at 20. If doing outright we would recommend a stop just above the recent highs at 1475. We also like the USD and Treasuries because the market has seen time and time again US problems do not lead to selling of (safe) US assets and it can and we think will be the same again."
The Mañana approach endorsed by the Spanish government is finally beginning to have its toll on investor confidence and after being contained by the so-called Draghi put, 2y bond yields are up over 20bps for the second consecutive day. The decoupling that is being observed is being driven by yesterday’s downgrade of several Spanish regions by Moody’s, citing deterioration in their liquidity positions. As a result, Spain runs a risk of being forced to raise the size of its regional bailout fund which stands at EUR 18bln, with EUR 17.2bln already tapped, as the latest downgrade will likely put an upward pressure on borrowing costs. Major equity markets in Europe are down close to 1%, led by basic materials and oil & gas sectors, as WTI continues to consolidate below the key USD 90 level, while spot Gold continues to lose its shine and is looking to make a test USD 1700. The second half of the session sees the release of the latest Richmond Fed report, as well as the weekly API report.
Even though The Powers That Be pushed the market higher at the close, I was pretty pleased with how the day went. My portfolio was profitable for most of the day - - although a lovely five-figure profit dwindled to a two-figure profit (!) by day's end - - but the point is that my portfolio hugely outperformed the market (on an inverse basis since, as you've probably guessed, I was so short I could jump off a nickel). I remain positioned for a fall.
"Preservation of Capital" must be the watchword in this market; in all markets. Any mistake made is now magnified by our very low interest rates so that any error is compounded by the ability to make back the loss. In America we are facing our national elections. In Europe we are facing a hardening of positions where the divisions between the North and the South, with France lining up with the Socialist South, are edging closer to some nation or another refusing to fund. The scheme of diversion can last only so long as real decisions with real consequences are about to be forced upon the Continent as funding must come or not come.