Price Action

All hell broke loose on 8/16. The stock droped a mind numbing 75% in a single day - (the widows and orphans got taken to the cleaners)

The main macro event today will be the interest rate announcement by the ECB due out at 7:45 am (with the Bank of England reporting earlier on its rate and QE plan, both of which remained unchanged as expected, which will remain the case until Carney comes on board) which is expected to be a continuation of the policy, with no rate cut despite some clamoring by pundits that Draghi should cut rates even more. Overnight, we got Chinese December trade (better than expected) and loan (slightly worse than expected) data, coming in precisely as a country which has a new communist politburo leadership implied they would. Of particular note was that the US has now replaced the EU as the largest Chinese export market: what happens when the euro weakens even further? But at least the net benefit to European GDP as a result of declining imports will, paradoxically, help. Elsewhere, Spain auctioned off more than than the expected €4-5 billion in its first 2013 auctions of 2015, 2018 and 2026 bonds, sending the 10 year SPGB yield to under 5%, or the lowest since 2010, a process driven by expectations of a Spanish bailout. Thus the incredible odyssey of Schrodinger Spain continues, whose interest rates are improving on hopes it is insolvent. Fundamentally, things got better nowhere, with Greek unemployment rising to 26.8% in October from 26.0% previously, while bad loans in Italy soared by 16.7% Y/Y to €121.8 billion, while loans to businesses dropped at the fastest pace ever. And so the scramble to offset the trade and economic collapse of Europe using central bank tools continues.

There are seven items that will be on the radar screen of global investors in the week ahead. 1. There is confusion over Fed policy. Despite the leadership (Bernanke, Yellen and Dudley) demonstrating their unwavering commitment to use heterodox monetary policy in an attempt to promote a stronger economy in the face of household de-leveraging and fiscal consolidation, many have read the FOMC minutes to imply an early end to the $85 bln a month in long-term asset (MBS and Treasuries). That December meeting was historic not because it marked the beginning of the end of QE, but the exact opposite, the nearly doubling monthly purchases and the adoption of macro-economic guidance (6.5% unemployment and 2.5% inflation) before rates are lifted.

In money management long term success lies not in garnering short term returns but avoiding the pitfalls that lead to large losses of invested capital.  While it is not popular in the media to point out the headwinds that face investors in the months ahead - it is also naive to only focus on the positives.  While it is true that markets rise more often than not, unfortunately, it is when markets don't that investors are critically set back from their long term goals.  It is not just the loss of capital that is devastating to the compounding effect of returns but, more importantly, it is the loss of "time" which is truly limited and never recoverable. Therefore, as we look forward into 2013, we want to review three reasons to be bullish about investing in the months to come but also review three risks that could derail the markets along the way. The reality is that no one knows for sure where the markets will end this year; and while it is true that "bull markets are more fun than bear markets" the damage to investment portfolios by not managing the risks can be catastrophic.

The fiscal cliff deal appears to be a done deal and markets have reacted accordingly (although President Obama is apparently awaiting a photo-op later today to sign it). However, the deal leaves a large number of loose ends that ensure high drama for the next two months on the US fiscal front. The immediate impact of all the loose ends and deadlines may be smaller than the Dec 31 fiscal cliff, but all of these loose ends are important and could lead to short-term price action. Several of them are very important for the long run USD outlook as well.

The crowds are slowly starting to fill up Times Square, and despite the imminent countdown to New Year’s, Washington still has not conjured up a resolution to avoid the fiscal cliff.  Over the prior two months we have leveraged game theory, Venn diagrams, option “greeks,” and basic investor psychology as tools to decipher the ultimate path of the crisis and subsequent market reaction.  Alas, regardless of all the analysis we and countless others have supplied; the short, intermediate, and long term prospects for stocks rest exclusively on headlines.  More poignantly, the fate of the U.S. economy, global equities, and net incomes for hundreds of millions now depend upon the decision making of a group so small, its numbers can be counted with one hand.

You truly have to be mentally challenged if you follow the gold/silver market action and cannot appreciate something is very amiss, as per the confused Mitsui gold people, as brought to your attention the other day.

The holiday week saw the dollar consolidate against most of the major currencies.  The yen was the main exception as its losses were extended under the aggressive signals coming from the new Japanese government.   

At the end of the week, the other key consideration, the US fiscal cliff made its presence felt.  The recent pattern remained intact.  News that gives the participants a sense that the cliff may be averted encourages risk taking, which means in the foreign exchange market, the sale of dollars and yen.  

News that makes participants more fearful that the political dysfunction failed to avert the cliff and send the world's largest economy into recession, generally see the dollar and yen recover.  This is what happened in very thin markets just ahead of the weekend as Obama's ling last ditch negotiating stance seemed to reflect a retreat from his earlier compromises.

We could say that news is actually relevant or matters in this "market" but we would be lying, just as we would be lying if we said that this market has not become so utterly predictable, with yesterday's late day market surge - on yet another ridiculous catalyst - visible from so far away, it was almost painful to watch it take place in real time. Sure enough, futures are now sliding back, and giving back much of yesterday's gains - but don't worry, in a day full of even more meetings and flashing red headlines, at least some combination of carefully phrased MSM words will set off today's algo-driven buying frenzy, guaranteeing yet another "retail investor" decides they have had it with this farcical "free market" casino for ever.

It seems a few humans have read a little this weekend and sold into the algo-induced euphoria from Friday's close. S&P 500 futures are down around 9 points - at the lows from Friday's day-session. EUR is bleeding modestly and JPY is weakening as equities appear to be recoupling with FX as a risk-driver (following EUR's dislocation two weeks ago). Cash Treasuries are yet to open but futures infer 2-3bps compression in yields. Much was made of VIX's 'strength' on Friday as some kind of tell; unfortunately misunderstanding is rife and it is evident that hedges were in fact rolled out into January (rather than lifted in any bullish manner). So far stocks are pushing back down to recouple with VIX's view of the world. Silver is flat at $30, Gold and Oil down a little. 6 more hours til Europe opens.

2 days ago US Treasury 10yr yields were 10bps cheap vs stocks.  Well, not anymore.  US Treasuries now have both technical and cyclical forces on their side for the next 1-2 weeks.  Let us explain how...

The US dollar is sporting a softer profile today.  It had initially extended its gains after recovering in North America yesterday. In Japanese candlestick terms the euro and sterling had recorded "shooting stars", in essence opening on their highs and finishing on their lows.  Additional profit-taking was seen in Asia, earlier today.  The euro was pushed below its 20-day moving average for the first time since Dec 11.  Sterling fared better but still extended yesterday's losses.  However, in the European morning, both currencies have recovered to move back into yesterday's ranges.

The price action can be attributed to thinning market conditions and the recovery of the yen.  Indeed, "sell the rumor buy the fact" gains in the yen, may have pressured the other currencies as cross positions were also unwound.   The dollar has stabilized after slipping through the JPY84.20 area to trade below the previous day's low for the first time since Dec 10. 

Treasuries have sold off aggressively over the past 2 weeks.  Is it time for that trade to reverse to New Years??