The Fed and the other major central banks have been planting time bombs all over the global financial system for years, but especially since their post-crisis money printing spree incepted in the fall of 2008. Now comes a new leader to the Eccles Building who is not only bubble-blind like her two predecessors, but is also apparently bubble-mute. Janet Yellen is pleased to speak of financial bubbles as a “misalignment of asset prices,” and professes not to espy any on the horizon. Actually, the Fed’s bubble blindness stems from even worse than servility. The problem is an irredeemably flawed monetary doctrine that tracks, targets and aims to goose Keynesian GDP flows using the crude tools of central banking. Not surprisingly, therefore, our monetary central planners are always, well, surprised, when financial fire storms break-out. Even now, after more than a half-dozen collapses since the Greenspan era of Bubble Finance incepted in 1987, they don’t recognize that it is they who are carrying what amounts to monetary gas cans.
- Malaysia Says Stolen Passport User Had No Links to Terror Groups (BBG)
- Malaysia military tracked missing plane to west coast (Reuters)
- Freescale loss in Malaysia tragedy leads to travel policy questions (Reuters)
- Top German body calls for QE blitz to avert deflation trap in Europe (Telegraph)
- Firms Suffer 23% Drop in Asia Fees Amid Search for Cash (BBG)
- Putin Dismisses U.S. Proposal on Ukraine (WSJ)
- Lenovo says China strike an IBM matter, but it won't cut wages (Reuters)
- Congress to Investigate GM Recall (WSJ)
- New hedge funds face life or death battle for funding (FT)
- Muni Bond Costs Hit Investors in Wallet (WSJ)
- BOJ keeps stimulus in place, cuts view on exports in warning sign (Reuters)
- ECB Homes In on Risky Assets as Inspectors Fan Out Across Europe (BBG)
- Snowden: "The Constitution was violated" (Reuters)
Early weakness and volatility was entirely suppressed once European markets closed and stocks traded in a shockingly low range amid dreadfully low volume. All the major indices closed red with the Russell underperforming (and Nasdaq outperforming) as stocks tracked (more loosely than normal) with AUDJPY once again. Treasuries ended the day very modestly lower in yield (30Y unch, rest -1bps). The USD traded modestly higher all day led by weakness in GBP and AUD (as JPY ended unch). Gold closed unchanged as copper (China), oil, and silver slipped. Credit markets remain skeptical and VIX closed higher on the day, despite the late-day ramp efforts to get the S&P 500 green - which failed.
AUDJPY (and therefore US equities) is sliding this morning after the ubiquitous pre-open melt-up providing a green open for retail investors to believe in. Notably, from the close before Putin's press conference, the Nasdaq is underperforming all major indices (and Trannies soaring) but this morning has seen almost one-way traffic since the open. Treasuries are unch today as are precious metals (recovering from early losses) and the USD is modestly higher driven by AUD and GBP weakness.
Dow Transports surge almost 1% as Nasdaq and many of the momo names started to weaken. The S&P closed at new highs once again despite weakness in HY credit market and a rising VIX on the day. Started by Draghi, EUR strength implied USD weakness and the greenback gave back the week's gains and then some (as AUD is up 1.8% on the week). USDJPY topped 103 - supporting the S&P. Treasury yields continue to push higher (with 30Y +10bps on the week). Gold and silver recovered their Putin losses as the formers ends above $1350. Oil prices tanked all day (testing $100) but reversed hard on chatter of escalation in Ukraine. It seems more than a few traders were hedging into tomorrow's payrolls number with VIX rising and stocks tumbling into the last few minutes (not helped by chatter of a Russian invasion overnight).
Volume is around 35% below yesterday's pro-rata but none of that matters. The S&P 500 is at record highs but it is the "most shorted" and most notably the Russell 2000 that is just exploding higher with a massive gap. Up over 3% on the day, smashing to new record highs, this is the best day in over 26 months. This is the biggest rise in stocks since October 2011 (when global central banks came to a co-ordinated rescue). Bear in mind that the Fed already noted small-cap multiples were over-extended (5% below here)... but BTFATH anyway.
With the Ukraine now openly appealing to the world to halt what in its own words is a Russian invasion, it only made sense that after the bigger than expected downward revision to Q4 GDP, and the miss in Pending Home Sales, that the S&P would close at a new all time high
How the volatility of the market can be seen every day! Yesterday, the London financiers were out there celebrating on their 14-year high and backing that the ‘only way was up’. Then today they woke up too late after hitting the bottle too much and now that high has dropped as China’s economy is causing greater concerns for the rest of the financial world.
Having sold his 7-bedroom NY mansion, the CEO of Virtu Financial (the high-frequency-trading firm that accounts for 5% of US equity trading volume) appears to believe investors are ripe for him to IPO his firm. As The FT reports, New York-based Virtu is aiming to raise between $250-$350m from a listing that would make it the first electronic trading business that trades with its own funds to launch an IPO. The question, of course, is, will Virtu be the top-ticking, greater-fool-finding IPO of this bubble that Blackstone was for the last one?
This week saw the continuation of the "bad news is good news" theme as one economic report after another came in far below expectations. The question remains whether it is actually all just a function of the weather? Of course, there is something inherently wrong with driving asset prices higher based on hopes that a weaker economy will keep the Fed's "liquidity fix" flowing to drug addicted Wall Street traders. Under that theory, we should be rooting for an outright "depression" to double our portfolio values. But, when put into that context, it suddenly doesn't make much sense. Yet that is the world in which we live in...for now. Therefore, as we wind down the week on this "options expiry" Friday, here is a list of things to think about over the weekend.
While The Russell 2000 briefly regained positive territory for 2014 (up 1.5% on the week), the Dow, S&P, and Trannies ended the shortened and low volume week practically unchanged (and the Dow -2.6% YTD). Treasury yields oscillated as bad-news-good-news played out but ended the week practcically unchanged (10Y -1bps, 5Y +1bps). The USD drifted lower today to end the week very modestly positive (+0.1%) as EUR strangeth dominated JPY and CAD weakness). VIX went higher all week (admittedly OPEX-impacted) as underlying stocks remained bid. Credit markets ended the week wider than they opened on Tuesday (despite equity strength). Depsite the USD, commodities rose on the week with Silver and WTI crude up almost 2% and gold up 0.5%. For an options-expiration day, today's volume was very weak. And 2014's best performing S&P 500 sectors... Healthcare and Utilities.
All you need to know about the New Normal breed of crony capitalism and unbridled hypocrisy is once again best exemplified by the following quote by Charlie Munger - the lifetime business partner of crony capitalist par excellence Warren Buffett - from May 2013, in which he said that "I think it is very stupid to allow a system to evolve where half of the trading is a bunch of short term people trying to get information one millionth of a nanosecond ahead of somebody else. It's legalized front-running. I think it is basically evil and I don't think it should have ever been allowed to reach the size that it did. Why should all of us pay a little group of people to engage in legalized front-running of our orders?" Noble, noble words Charlie. What Munger, however, did not disclose is that as part of the Berkshire Hathaway-owned Business Wire news service, the company was enabling just this "basically evil" frontrunning, by allowing some, those who could afford the hefty fee of course, to make Munger and Buffett even richer and to subscribe to BW's HFT direct news access which gave them a few millisecond headstart and in the process frontrun everyone else.
Headlines will suggest that today's rally was due to the beat in US PMI (a data item that doesn't even rank on Bloomberg's scale of economic importance) and chose to ignore the misses (macro and micro) in everything else (which must be weather-related), the facts are different - it was simply an AUDJPY-inspired almost perfect correlation levitation from the post-China-PMI miss lows - more China QE to come. Having decoupled from USDJPY overnight, today's melt-up in stocks recoupled the all-important fun-durr-mental pair and lifted the Russell 2000 back to unchanged for 2014. With OPEX tomorrow, VIX was noisy and remains bearishly divergent from stocks (though was offered today). Credit markets lifted with stocks. Treasury yields rose back to modestly higher on the week. Gold and silver rose on the day starting from the China PMI miss (as did the USD with most of the majors losing ground against it). US Macro hits fresh 6-month lows.
The last week or two appeared to be dominated by hope that the transitory weakness in data was weather-related, the recovery was all good, and that the Fed would un-taper to give it a helping hand just in case... Today's FOMC minutes made it clear the latter was not the case and today's macro data made it clear this weakness is not just the weather. With US macro data at six-month lows, the last 2 days saw credit and equity protection markets well bid - even as underlying stocks surged back to unchanged on the year. However, between Fed talking-heads and the FOMC minutes, hope faded... stocks tumbled, credit widened, Treasury yields surged higher, the USD jumped, and precious metals were slammed into the red on the week. Volume - surprise surprise - was the highest in over a week.
Celente again warned of the economic parallels with the 1930’s and said that we are again seeing recession and depressions, currency wars, trade wars and that this would lead to actual wars. His free webinar and Q & A tomorrow will look at ways to protect yourself from these risks in 2014 and beyond.