Investor Sentiment

Last time we looked at Denmark it it was in the context of Luxor Capital which had some very ugly things to say about the Scandinavian country in "Rotten Contagion To Make Landfall In Denmark: CDS Set To Soar As Hedge Funds Target Country." Now, 6 months later, Moody's has finally gotten the memo: "Moody's Investors Service has today downgraded the ratings for nine Danish financial institutions and for one foreign subsidiary of a Danish group by one to three notches. The short-term ratings declined by one notch for six of these institutions. The rating outlooks for five banks affected by today's rating actions are stable, whereas the rating outlooks for two banks and for all three specialised lenders affected by today's rating actions are negative  The magnitude of some of today's downgrades reflects a range of concerns, including the risk that some institutions' concentrated loan books deteriorate amidst difficult domestic and European conditions, with adverse consequences on their ability to refinance maturing debt. The latter concern is exacerbated by structural changes in the terms of Danish covered bonds and the mix of underlying assets that lead to increased refinancing risk. While Moody's central scenario remains that financial institutions show some resilience to what will likely be a prolonged difficult environment - and the revised rating levels for most Danish financial institutions continue to reflect low risks to creditors - today's rating actions reflect the view that these risks have increased."

With so many talking heads claiming the 8% drop in stocks and VIX's jump back above 20% as a sure-fire indication that the market is in chaos and needs Fed help stat, we remind readers that VIX reflects a contemporaneous premium for up/down movements in the future offering little insight into downside risk per se and more reflective of a regime shift in market volatility - i.e. a rising VIX merely means market participants expect the markets to move around more (up and/or down). There is a cleaner way of judging the level of concern in trader's heads. The implied correlation, a topic we have discussed in the past at length, quantifies the difference between the index's volatility and the summation of the underlying volatility of the names in an index. In a nutshell, the implied correlation measures the relative demand for instant liquid index macro protection relative to its underlying names. The higher the correlation, the greater the risk of a very significant downside move (since correlations tend to approach 1 when systemically bad events occur). Currently, implied correlation is rising rapidly - a worrying trend - and has broken back above 70% (a critical threshold from last September when capital market risk became epic). We will be watching implied correlation closely - especially relative to VIX - to get a handle on the market's relative demand for downside protection and thus a real 'fear' index (as opposed to a 'movement' index).

In continuing with the 2011 deja vu theme which has become the norm at this point, nearly half way into 2012, the key overnight events driving sentiment and futures higher (if not the EURUSD which despite a record number of shorts appears to have once again decoupled with the US stock market), were a statement following the latest G-8 summit (penned in the brief time when the world leaders were not watching soccer) that Greece should stay in the Eurozone (as opposed to?), and yet another promise from China's Wen Jiabao that the world's fastest growing economy would focus on growth (what a truly radical shift in policy for the country which needs GDP growth over 8% just to avoid riots and civil unrest). And in continuing with the "summit" theme so well exhausted back in 2011, and mocked by David Einhorn (see below), let's recall that there is yet another summit on May 22, this time where the European heads of state will sit down and also decide that, shockingly, they want Greece in Europe, in response to which stocks will surge, then be very confused just why they surged, and promptly tumble. Sadly, by now we have seen it all since 2012 continues to be a carbon copy replica of last year. We can only hope the powers that be infuse at least some originality before we are forced to start recycling headlines from the summer of 2011. In the meantime, futures are green, especially since Dennis Lockhart unleashed the QE bomb hours ago in Tokyo, saying that more easing should not be ruled out amid European risks. Wink wink.

A rare moment of optimism from David Rosenberg: "I've said it once and I'll say it again. And believe me, this is no intent to wrap myself up in stars and stripes. But there is a strong possibility that I see a flicker of light come November. The U.S. has great demographics with over 80 million millennials that will power the next bull market in housing, likely three years from now. After an unprecedented two straight years of a decline in the stock of vehicles on the road, we do have pent-up demand for autos. I coined the term "manufacturing renaissance" back when I toiled for Mother Merrill and this is happening on the back of sharply improved cost competitiveness. Oil production and mining services are booming. Cheap natural gas is a boon to many industries. A boom in Chinese travel to the U.S. has triggered a secular growth phase in the tourism and leisure industry. The trend towards frugality has opened up doors for do-it-yourselfers, private labels and discounting stores.... Few folks saw it at the time. But it's worth remembering, especially now as we face this latest round of economic weakness and market turbulence. It is exactly in periods of distress that the best buying opportunities are borne...and believe it or not, when new disruptive technologies are formed to power the next sustainable bull market and economic expansion. Something tells me that we are just one recession and one last leg down in the market away from crossing over the other side of the mountain. And believe me, nobody is in a bigger hurry to get there, than yours truly. At the risk of perhaps getting too far ahead of myself, but you may end up calling me a perma-bull (at that stage, I must warn you, folks like Jim Paulsen will have thrown in the towel)."

Like my whiny children, who after 30 minutes into a 6 hour car drive, investors are asking themselves, "Are we there yet?"

Bob Farrell's rule #9 is: "When all experts and forecasts agree — something else is going to happen." This statement encapsulates the basic tenant of being a contrarian investor. As Sam Stovall, the S&P investment strategist, puts it: "If everybody's optimistic, who is left to buy? If everybody's pessimistic, who's left to sell?" Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is the darkest. However, being a seller in exuberant markets or a buyer in major rout is very tough, if not impossible, for almost every investor as the emotions of "greed" and "fear" overtake logical buy and sell decision making.

If you "buy the f---ing dip" make sure you "sell the f---ing rip".

But I would contend that you need to be careful for what you wish for as something has happened to the relationship between bonds and stocks over the past 2 years.

The market appears to be topping out after we were all told that this is one of those can't miss you better jump on board now the train is leaving the station moments that you will certainly regret.

It's all good, and no doubt this can only mean one thing. It's clear sailing ahead. But not so fast.

The top can best be described as a period of discussion. Is the economy sputtering? Will the European contagion effect the US economy? Will the fiscal cliff be realized? And of course, the #1 topic of discussion and the only one that matters: will there be QE3?

European markets are seen trading higher as North America comes to market, with some momentum seen following the release of the forecast-beating German ZEW Survey. An economist from the institution commented that downside risks have decreased significantly over the past month, prompting some risk-appetite in Europe during the morning. Participants were also looking towards the Spanish T-Bill auction with particular focus, but it did not confirm the nation’s worst fears as the auction passed with strong bid/covers, selling to the top of the indicative range. Yields, however, did increase over both lines. As such, the Spanish 10-yr yield has fallen below the key 6% mark and remained below that level for most of the session. Peripheral 10-yr spreads against the German Bund are seen tighter throughout the day, amid some market talk early in the session of domestic accounts buying the paper, however this remains unconfirmed.

Will central bankers be able to save the day again?

If you have been a buyer over the past 8 weeks, you most likely will find your investment underwater.

Oh where to begin. The weakness in the markets started late last night when Australia posted a surprising second consecutive deficit of $480MM on expectations of a $1.1 billion surplus (with the previous deficit revised even higher). This is obviously quite troubling because as we pointed out 3 weeks ago when recounting the biggest Chinese trade deficit since 1989 we asked readers to "observe the following sequence of very recent headlines: "Japan trade deficit hits record", "Australia Records First Trade Deficit in 11 Months on 8% Plunge in Exports", "Brazil Posts First Monthly Trade Deficit in 12 Months " then of course this: "[US] Trade deficit hits 3-year record imbalance", and finally, as of late last night, we get the following stunning headline: "China Has Biggest Trade Shortfall Since 1989 on Europe Turmoil." So who is exporting? Nobody knows, but everyone knows why the Aussie dollar plunged on the headline. The shock sent reverberations across Asian markets, which then spilled over into Europe. Things in Europe went from bad to worse, after Germany reported its February factory orders rose a modest 0.3% on expectations of a solid 1.5% rebound from the -1.8% drop in January. But the straw on the camel's back was Spain trying to raise €3.5 billion in bonds outside of the LTRO's maturity, where the results confirmed that it will be a long, hard summer for the Iberian country, which not only raised far less, or €2.6 billion, but the internals were quite atrocious, blowing up the entire Spanish bond curve, and sending Spanish CDS to the widest in over half a year.