22% of the Q1 earnings season (by market cap) is over, and anyone listening merely to soundbites and reading media headlines would likely think that stocks have soared as a result of a relentless parade of beats. One would be mistaken. In fact, as the chart below shows, there is something very wrong with this earnings season...
The Fed is clearly worried about the economy. Ben Bernanke's latest speeches aren't exactly inspiring. It is as if he thinks the rosy(ier) numbers are some prank being played upon him by the gods; that soon this will all be taken away. He is right. He admits he doesn't understand why the economy is the way it is. Reality doesn't fit his theory. ("It's supposed to work, dammit!") So, what do you do when you are the head of the world's biggest printing press, and don't know what else to do? Why QE3 of course.
Deals from last week tell me that we are are again in a credit bubble.
Every time we see oil prices go up we hear that it will cause inflation and/or the economy will go into the tank. The premise is wrong because that has never happened.
S&P futures have moved more than 20 points since 3:30. The first big move was on the back of a story that Greece really will commit to the whatever the EU demands. The second move was after China re-pledged to invest in Europe. IG17 is about 1.5 bps tighter than the wides of the day and is unchanged this morning. In Europe, Main is unchanged while stocks are up about 1% across the board. Even the 10 year bond which saw yields drop from 1.98% to a low of 1.92% are only back to 1.94%. Why? Sentiment seems overly bullish, overly complacent, and the credit markets are sending a warning sign to stocks about irrational exuberance.
In this very informative interview between The Browser and Peter Boettke, the professor of economics discusses the contributions made by the Austrian School, and explains the various nuances of the economic school by way of recent books by "Austrians." He also explains what we can learn from Mises and Hayek, and argues that economics is the sexiest subject.
This article was written by DoctoRx for the Daily Capitalist. He is a successful investor with 30 years of markets experience. The Doc gives us a look at where silver is going, plus a look at PSLV.
Most of human history conforms to established patterns, forming the basis of modern statistical analysis. Random walk extrapolation from any data series seems to hold up in the face of reality because the data series is extracted from the pattern itself, a sort of logical fallacy. Models constructed in this way “behave” rather well until the pattern and paradigm shifts. At that point, models should be recalibrated to the new pattern in order to maintain any kind of usefulness (or simply scrapped). This is especially true if the model failed to see the paradigm shift coming, a predictive capacity that is almost built-in since inflection points are not really points at all; they are an eventual slide into the new pattern. During the inflection “period”, models conditioned by the old pattern will increasingly look out of sync and render confusing results to their practitioners. But, due to human nature intruding into this “scientific” process, all too often these human practitioners look to rationalize and fit the wider world into their models, rather than see the paradigm shift for what it is. Combining this willful blindness with the simplifications that models have to incorporate just to function, the fact that they rarely see inflections is not at all surprising.
Our framework centers on the idea that humanity is facing a set of predicaments quite unlike anything else in the history books. Because this time there are no borders to cross in search of safety; the entire world is involved. On a global basis, we've never experienced collective debt loads of this magnitude. Never before has an entire set of intertwined currency systems -- all debt-based money -- collectively been backed by nothing more than the hope of a larger future, and never before have this many people had to figure out how to move from more-concentrated to less-concentrated energy sources (from fossil fuels to sun- and wind-based alternatives). The convergence of exponential trends in population, energy depletion, debt accumulation, and an economic model that is hooked on growth will combine to produce quite an interesting, if not challenging and disruptive, future. The funny thing about complex systems is that they are unpredictable, and therefore preparing for what may come is a non-trivial (yet absolutely essential) task. The immediate question for most people is What should I do? We break down the intelligent responses into three big buckets: financial, physical, and emotional. In this report, I detail the financial steps that everyone should undertake right now to manage future risks using the framework that I use to assess and understand the financial world and markets. My approach is founded as faithfully as possible on facts and data. But my views on how the markets operate are formed from personal experience, observation, and connecting a few dots that rely on opinions and sometimes beliefs. Therefore, this financial and investing framework is something that you should only accept if it works for you -- and reject if it does not.
If a ballistics expert were so poor at his job that his artillery routinely fired missiles into the sea or, worse still, at his own men, he would soon be removed from office. He might perhaps be purged more dramatically, pour encourager les autres. No such logic would seem to apply, however, in either politics or economics in the west, where discredited practitioners of failed theories are allowed to pontificate and spend into absurdity. We cannot say with certainty what was spooking European investors prior to last week’s make-or-break summit (the 14th such “crisis summit” in 21 months), but it seems plausible to argue that they were concerned about an unsustainable build-up of credit, credit risk and leverage. Happily, those concerns have now been put to rest, because the Euro Zone’s leaders have pledged more credit, more credit risk, and more leverage. To put it another way, President Sarkozy and Chancellor Merkel have bought more time, albeit time paid for with yet more borrowed money. A three ring circus of blind, incontinent clowns would have more class.
Volatility and wild gyrations in all financial markets continues due to a confluence of negative data, news and fundamentals. French banks have been downgraded and Chinese Premier Wen’s call that Europe get its own house in order quashed the unsubstantiated and unsourced rumors regarding massive Chinese intervention to solve the Eurozone debt crisis. European banks are hemorrhaging deposits as savers and money funds pile into other perceived havens such sterling, dollar and Swiss franc deposit accounts. Retail and institutional deposits at Greek banks fell 19 percent in the past year and almost 40 percent at Irish lenders in 18 months. A tiny fraction of these European deposits has gone into gold with the majority going into other fiat currency deposits. It is not just the saver of periphery nations who are opening non euro deposit accounts - many German savers are opening up deposit accounts in Switzerland. Greece’s inevitable default is being prepared for despite the usual denials. A conference call among Greek Prime Minister George Papandreou, French President Nicolas Sarkozy and German Chancellor Angela Merkel is set for 16:00 GMT.
The ES to Contextual Risk spread presented on Friday, at which point the ES was 15 rich to "underlying" fair value (first red circle from the left on the chart) continues to make new wides. After collapsing to 30% of the original spread level shortly after presenting, (first green circle) the spread returned to almost inception levels, and has since continued to blow out wider. At last check, ES appears to be nearly 25 points rich to fair value. Whether this means that correlation traders have taken an extended vacation, or that once again the purchasing capacity of those who "wag the dog" of actual underlying risk expression is impaired due to lack of actual capital, is unclear. It is also unclear how much wider the last 24 hours of irrational exuberance can send this spread before it reverts to fair levels. If the recent move in ES is predicated by self-fulfilling expectations of the Fed announcing QE3 on September 21, it is quite likely this may blow out to historic wides as the Bernanke Put, as presented here and which impacts primarily stocks in the early part of the easing regime, continues to be priced in over the next 3 weeks.
Time to reestablish some compression trades. As the latest update from Capital Context indicates, ES, relative to its risk benchmark consisting of all other risk assets, is once again along in its optimism, trading about 15 points above its implied fair value. Paradoxically, the driver of today's bout of irrational exuberance is not the latest monetary stimulus announcement by the Fed, which obviously did not come, (and it may be time for the daily dose of sobriety: without fiscal and monetary stimulus Q3 and Q4 GDP will tumble; good luck buying stocks on contrarian bent when even the NBER admits we have entered a double dip), but merely "buying the news" - supposedly everyone was convinced there would be announcement by the Fed, which in itself was a catalyst to buy?! Regardless, the buying is only happening in stock as can be seen by the ES. As such it is time to put the trusty old compression trade back on: short ES, long the Contextual Risk leg.
The Squid: A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can't Trade In Volatile MarketsSubmitted by Reggie Middleton on 08/22/2011 10:51 -0500
Some investment and trading tidbits about the Squid that somehow have miracurously escaped both the pop media and sell side Wall Street... Hmmm....