After the worst week for stocks in years, and following a significantly oversold condition, it will hardly come as a surprise that the mean reversion algos (if only to the upside), as well as the markets themselves (derivative trading on the NYSE Euronext decided to break early this morning just to give some more comfort that excessive selling would not be tolerated) are doing all they can to ramp equities around the globe, and futures in the US as high as possible on as little as possible volume. And sure enough, having traded with a modestly bullish bias overnight and rising back over 2000, the E-Mini has seen the now traditional low volume spike in the last few minutes, pushing it up over 15 points with the expectation being that the generic algo ramp in USDJPY ahead of the US open should allow futures to begin today's regular session solidly in the green, even if it is unclear if the modest rebound in the dollar and crude will sustain, or - like on every day in the past week - roll over quickly after the open. Also, we hope someone at Liberty 33 tells the 10Y that futures are soaring: at 2.13% the 10Y is pricing in nothing but bad economic news as far as the eye can see.
"Over the next five years investors now expect inflation to average just below 1.3%. This level of expected inflation has always previously been associated with a decline in US equity prices. There have been no exceptions until today." Russell Napier
While on the one hand, Iceland's decision to inch towards lifting its capital controls is a positive step, it appears what they give with one hand they are taking with another. Just as we predicted three years ago, the muddle-through has failed and there are only hard choices left and sure enough BCG's envisioned 'wealth tax' appears to be rearing its ugly head once more. As Morgunbladid reports, Iceland plans to impose an exit tax as part of removing capital controls, anticipating all bank assets will be subject to the levy, regardless of whether assets are held in local (ISK) or foreign exchange.
Even the most avid Bulls should grasp that market corrections of 10% to 20% are statistical features of all markets. Cranking markets full of financial cocaine so they never correct simply sets up the crash-and-burn destruction of the addict.
Today's markets exist in an Oz-like, fantasy world. For 5 years now, stock and bond prices have risen like Dorothy's balloon, with hardly a puff of downdraft to spoil the fun. Everybody likes higher prices, so let's have them always go up! Forever! But what if...
Is this stock market decline the "real deal"? (that is, the start of a serious correction of 10% or more) Or is it just another garden-variety dip in the long-running Bull market? Let’s start by looking for extremes that tend to mark the tops in Bull markets.
"In effect, by pursuing indexation we have introduced a socialist way of allocating capital in the heart of the capitalist system... As we all know, socialism is the ultimate form of freeloading. It has never worked, and it never will. This indexation is one of the most obvious forms of parasitism we have ever encountered."
The 2008 Wall Street meltdown is long forgotten, having been washed away by a tsunami of central bank liquidity. Indeed, the S&P closed today up by nearly 200% from its March 2009 low. Yet four cardinal measures of Main Street economic health convey nothing like a 2x pick-up from the post-crisis bottom.
Goldman Goes Schizo On Gold: Boosts Price Target To $1200 Even As It Is "Selling It With Conviction"Submitted by Tyler Durden on 07/23/2014 19:44 -0500
With less than 6 months to go until the end of the year, with various gold ETFs suddenly seeing the biggest buying in years, and with gold continuing to outperform most asset classes YTD, what is Goldman to do? Why follow the trend of course, and just like David Kostin had no choice but to boost his S&P 500 price target using the idiotic Fed model as a basis, so earlier today Goldman just upgraded its gold price target from $1,066 to $1,200. Probably this means that after accumulating it for the first half of the year, Goldman is finally preparing to sell the precious metal. Not so fast: because while Goldman did just raised its price target, it continues to have a Conviction Sell rating on Gold, which is its second most hated commodity after iron ore. Go figure.
The Federal Reserve’s policy of quantitative easing has produced a historically prolonged period of speculative yield-seeking by investors starved for safe return. The problem with simply concluding that quantitative easing can do this forever is that even speculative assets have to compete with zero. When a safe zero return is above the medium or long-term return that one can estimate for a very risky asset, the rationale for continuing to hold the risky asset becomes purely dependent on expectations of immediate short-term price gains. If speculative momentum starts to break, participants often try to get out the door simultaneously – especially if there is some material event that increases general aversion to risk. That’s the dynamic that produces market crashes.
We are witnessing implied volatility on all asset classes simply collapse to the lowest levels witnessed in 20 years, or at least the lowest levels achieved prior to the GFC in early 2007.
Market bears take the position that stocks are expensive, citing a variety of indicators and arguing that profit margins should “mean revert” from record highs. On the other side, market bulls dispute the indicators and propose that fat margins are no big deal – they might just remain at record highs indefinitely.
“High margins reflect a long-term structural change, not a short-term cyclical one,” according to one account of a popular position. Or “It’s a mistake to think that margins will revert to a long-term mean just for the sake of reverting to a mean.”
The message seems to be that mean reversion is for losers. This is a new era, or it’s a new economy, or whatever. We're paraphrasing, but the story sounds a lot like the capital letter New Economy of the late 1990s. There’s even a technology angle once again, along with huge confidence in monetary policy and recession-free growth. Above all, there’s a notion that the world might be different. Needless to say, the new, new economy story comes with plenty of red flags.
Bill Gross lost "Bob" this week. The death of his cat sparked some longer-term reflection on the hubris of risk-takers, the mirage of magnificent performance, and the ongoing debate in bond markets - extend duration (increase interest rate risk) or reduce quality (increase credit risk). As the PIMCO boss explains, a Bull Market almost guarantees good looking Sharpe ratios and makes risk takers compared to their indices (or Treasury Bills) look good as well. The lesson to be learned from this longer-term history is that risk was rewarded even when volatility or sleepless nights were factored into the equation. But that was then, and now is now.
Howard Marks once wrote that being a "contrarian" is a lonely profession. However, as investors, it is the downside that is far more damaging to our financial health than potentially missing out on a short term opportunity. Opportunities come and go, but replacing lost capital is a difficult and time consuming proposition. So, the question that we will "ponder" this weekend is whether the current consolidation is another in a long series of "buy the dip" opportunities, or does "something wicked this way come?" Here are some "words of caution" worth considering in trying to answer that question.