Price Action

Two days ago we highlighted the growing divergence between Italian sovereign credit spreads (tightening) improving while EURUSD was deteriorating rapidly - suggesting (for those with deep pockets) an interesting convergence trade. It seems that whatever message the FX traders are hearing is being ignored by equities too now as today US equities diverged even more dramatically joining the rest of risk assets in their divergence from strong USD, weak EUR flows. It seems risk assets broadly are pricing in 'an event' and then thinking ahead to the subsequent 'intervention' that will inevitably float all boats. However, what is clear, in our view from the EURUSD price action, is that unlike many who expect the Fed to save the day, EUR weakness implies some form of monetization by the ECB (or reduces the market's implied expectation for Fed QE3/4). Given tonight's weak equity futures performance (ES -7pts from late highs), we suspect the FX market has it right and momos are over-thinking the reaction impulse function as a given - or more clearly - if Greece exits and no other risk-assets drop (having already anticipated the central bank reaction), will the central bank reaction come?

Update:  well, our feeling was correct:

MASSACHUSETTS SUBPOENAS MORGAN STANLEY OVER FACEBOOK
MASSACHUSETTS SEEKS MS COMMENTS TO INSTUTIONAL INVESTORS ON FB
MASSACHUSETTS SUBPOENAS MORGAN STANLEY OVER FACEBOOK COMMENTS

It is by now well-known that certain large banks were heavy defenders (by mandate and then by sheer panic) of the Facebook share price post-IPO. Margin Stanley appears to have been the name of choice for this defender and today's price action suggests that whether it was them or not - whoever it was just gave up their undying defense. The following volume profile (how many shares were traded at each price point since the share's release) illustrates dramatically the massive bid-side presence (remember there are no short-sellers per se) as they defended first $42 (78mm shares bid), $41 (11.6mm shares bid), $40 (18.4mm shares), $39 (3.9mm shares), $38.50 (6.5mm shares), and finally $38 (22.7mm shares bid) before the first day or two were over. This is at least 140mm shares that were bid for above the volume-weighted average price of $37.98 across all 844mm trades that have occurred since Facebook began trading on NASDAQ. $32.1bn of trading volume across the three days. It appears that today's action - which seemed to be left undefended as algos were in charge was the breaking point for MS.

Adam Fleming, Chairman of Wits Gold and Fleming Family & Partners (yes, related to Ian Fleming of James Bond game), discusses the gold bull market with GoldMoney's Chairman James Turk. Topics include metal price action, the eurozone's debt crisis, and mining in South Africa. Both men think that we are the "in the foothills" of a long precious metals bull market, and that the gold price is in some ways cheaper than it was back when they spoke at GATA's Dawson City conference in 2005, owing to all the quantitative easing – or more bluntly, money printing – that central banks have engaged in since the financial crisis of 2008.

At the beginning of the week, European equities are seen modestly higher in the major indices with underperformance noted in the peripheral markets. Markets have sought some solace in the G8 summit over the weekend, with leaders agreeing that the optimal scenario would be Greece remaining within the European Monetary Union, and have furtively agreed that further measures may be necessary to return Europe to growth. The disagreements, however, continue to rollover as leaders fail to commit to a specific growth strategy. The tentative risk sentiment is reflected in the fixed income markets, with the German Bund remaining in negative territory for much of the session and 10yr government bond yield spread between the periphery and the German benchmark tighter on the session. Touted bids by domestic accounts helped support BTPs (Italian paper), especially in the short end of the curve, where the spread between the German equivalent is trading tighter by around 3bps. From Tokyo, comments from Fed’s Lockhart have drawn attention, who commented that with the downside risks emerging from the Eurozone, it would be unwise to take QE3 off the table.

Asia is deteriorating rapidly this evening - extending losses from the US day session. S&P 500 futures just touched 1300 once again and credit markets are bleeding wider. Only the DAX remains positive for the year so far in Europe; today's price action pushed the Dow Transports into the red year-to-date and the rest of the US indices are rolling over rapidly; and in Asia-Pac - Japan and Australia are now in the red year-to-date (in USD terms) with the HangSeng getting close.

Jeff Gundlach discussed mortgages, models, math, and moronic delusion with Tom Keene on Bloomberg TV this morning. Starting with why Europe matters to US Treasury and mortgage markets, the DoubleLine boss goes on to address whether banks/hedge-funds have become too math-centric. "I don't believe in models" is how Gundlach begins his diatribe on the over-confidence in math and empirical relationships. Jeff believes there is no reason to hold any investment grade bonds that are inside of 3 years (and perhaps even 5 years) because they "just basically have no yield" and further, it is non-sensical to think that short-term interest rates are going up in the US. As Socrates said, Gundlach echoes the fact that 'one should not try to know everything; but respect the things that one cannot know' - don't delude yourself - which seems like good advice for all those with such high convictions of sustained reality. Towards the end he discusses his already-infamous short-AAPL, Long-Nattie trade - adding that the trade has 'monster legs' and the biggest mistake investors make is exiting winners too early.

Overnight: just more of the same, as markets collapsed, first in Asia, then in Europe, on ever more concerns what a Greek exit would do to Europe. The most important story of the night was a report in Dutch Dagblad claiming that ECB has turned off the tap for Greek bank liquidity: "At the end of January, Greek banks had received EUR73 billion in liquidity support from the ECB, but this amount has dropped by more than 50% now, according to the newspaper. The ECB is cutting back support because Greece has been holding off on recapitalizing its banking system, despite receiving EUR25 billion in funds for that purpose, the paper says." Whether this move is to force Greece to blink (even more) by making the previously reported bank run even more acute, or just general European stupidity, is unclear but it is certain to make the funding stresses across all of Europe far more acute. The news sent all peripheral bond yields soaring, and the EURUSD tumbling to under 1.27 briefly. 

Someone has to take the other side of the JPM debate. I'll try.

Curious how the world's most important trading desk saw the action today? Here it is.

For the third year in a row, crude oil prices have stumbled in April (-26% in 2010, -17% in 2011, and -10% in 2012 so far). Much has been made of the help this will offer the economy and consumer spending but this is ceteris-paribus linear thinking. There are a few other critical aspects to consider that make many, including Barclays, believe "there is little to the latest price action than the increasingly self-fulfilling prophecy of ‘sell it in May and go away’, exaggerated by market positioning, with broader macroeconomic concerns used as a lightening rod." With crude inventories on the high side and gasoline (and other oil product) inventories relatively low and falling - we would hold our breaths on the recent crude price drop funneling along to the retail pump price anytime soon as there is one critical aspect of the supply-demand equation that many have missed - a period of heavier-than-usual refinery maintenance which while temporary have reduced demand but tell us nothing about the state of final demand. In other words, even if a balance of sorts was achieved in terms of crude flows in March and April due to maintenance, that balance is likely to be disturbed from June onwards. The mainstream media is full of talking-heads on the chronic weakness in US oil demand, but it does not appear to be a real phenomenon according to the steadily improving flow of data and while Greece, Hollande, and US macro data has dragged out macro shorts, it would appear the fundamentals support oil prices higher from here. With the upward-sloping curve in crude to year-end and the relatively small drop this week (-1.2% only in WTI) despite all the derisking, perhaps the market is already starting to realize.

From the moment we all got to peek behind the over-leveraged financial system reality thank to Lehman's collapse, the-powers-that-be have made every attempt to stop this whole thing unraveling. Eric Sprott humbly suggests, when the CNBC anchor in the following clip questions recent gold price action as evidence of something wrong in his thesis, that just as Jim Grant opines, "All markets are manipulated" and that Central Banks (who are desperately trying to revive the dying system in every extreme monetary scheme possible) simply do not want to see the price of gold rising. He then notes that Silver is likely to be the investment of the next decade (although offers no strong thesis other than levered gold). Shrugging off the obfuscation from Omaha, "People who sell paper gold and paper silver can rule the markets in the short-term but physical participants will win the day in the long-run". Detailing some fundamental drivers for gold's advance, as the investment of the last decade and so for those three gentlemen (Buffett, Gates, & Munger) who missed it, I don't know that I should respect their opinion at this point in time.

If you're not familiar with the concept of "Cost Shifting", the deadly (to your competition) effect of negative margins or believe that Google is search engine or ad co., then this article/video is a must read/see.

Dollar vs. Stocks 

Equity indices managed to close green on a generally lower-than-average volume day but while the morning was dominated by a 20pt rip post-ISM's 4.5-sigma surprise, the post-Europe-close afternoon session saw us give back over 60% of those gains on rising volume and average trade-size. As the day-session closed, ES (the S&P 500 e-mini futures) was right around yesterday's highs and today's VWAP in a relatively balanced manner but after-hours was leaking lower still. AAPL also had a big rotation day as it opened red, surged into the middle of the day then gave it all back to close within a few pennies of its 50DMA (and in fact is trading below it in after-hours trading). Stocks pushed well ahead of credit markets as they rallied and HYG was far less impressed. Sure enough by the close, equities had limped back in line with credit's reality but in the meantime, HYG was back down at last Wednesday's levels. The ISM caused the USD to pop, stocks to pop more, oil to pop about the same and gold/silver/Treasuries to drop. The post Europe-close action saw stocks give back most of those gains, the USD leak back lower (as CAD strengthened), Oil maintained it bid over $106 (month highs) and Gold/Silver pulled back up nicely. Treasuries remained under pressure though with only a very late-day dip lower in yields to show for the dips in stocks. As expected, Energy and Financials outperformed close-to-close on a rally-day but also retraced the most in the afternoon as Discretionary and Materials also joined the high-beta fray. The strength in oil and weakness in TSYs was enough to juice risk-assets in general and provided some support for the rally but stocks remain rich relative to risk in general and we wonder how the bulls have it both ways - rally on unsustainable good news (but no QE3) and on bad news (Ben's got yr back) as the first day of May (absent any European hedging) seemed a chaotic rush to buy this morning that may have been a short-term climax.

Google vs .GOV vs Apple vs Telcos: .GOV keeps old way of doing business alive for current broadband cos. Roads are expensive too, but we have found ways to build them without requiring tolls at the end of our driveways.