Reality

I firmly believe we will see Europe start to crumble during the May-June window of time. We have a confluence of political (French, Greece, Irish elections), fundamental, seasonal, technical, and monetary factors (Operation Twist 2 ends in June) occurring in that time period make the possibility of a banking Crisis in Europe higher than at any other point in the last three years. 

In a somewhat sad and shocking slap of reality to the face of our 'recovery' and 'freedom-based-debt-holdings', today's press-release-of-the-day (since we still haven't heard from BATS) goes to Sturm, Ruger (the 4th largest gun-maker in the US) who after receiving orders for over one million units in Q1 has temporarily suspended the acceptance of new orders.

In an interview with Louis James, the inimitable Doug Casey throws cold water on those celebrating the economic recovery. "Get out your mower; it's time to cut down some green shoots again, and debunk a bit of the so-called recovery."

From Historically Miserable Level

Dallas Fed Confirms that Big, Insolvent Banks Are Killing Our Economy ... and Democracy

Pulling no punches and as irreverent as we can imagine, Mr. Panos - the Greek 'Borat' - explains (with a somewhat shocking sense of reality) just what the European crisis - most specifically the Greek 'angle' - is all about. From taxes, tourists, shadow economies, war retribution, and german-union realities -  after watching this clip, everything about Greece will be henceforth clear...except perhaps whether Greece has higher exports of Potassium than Kazakhstan. Enjoy.

Following last night's post on the destruction of the positive trend in macro data (as expectations once again extrapolated to infinity have missed miserably), New Home Sales made it 12 of 14 this morning as they missed horribly. Against an expectation of a +1.3% gain, new home sales fell 1.6% MoM but what is even more shocking (and surely in retrospect would have caused the market to subside aggressively) is the massive revision of the previous month. From a -0.9% 'modest' fall, January's data was revised to a massive 5.4% drop MoM - the largest drop in 13 months! This is the largest downward revision since March 2009. Perhaps KB Home is not the outlier and the 80% rally in the Homebuilder ETF was a little overdone, eh Bob?

Oil as a commodity has always been a highly valuable early warning indicator of economic instability.  Every conceivable element of our financial system depends on the price of energy, from fabrication, to production, to shipping, to the consumer’s very ability to travel and make purchases.  High energy prices derail healthy economies and completely decimate systems already on the verge of collapse.  Oil affects everything. This is why oil markets also tend to be the most misrepresented in the mainstream financial media.  With so much at stake over the price of petroleum, and the cost steadily climbing over the past year returning to disastrous levels last seen in 2008, the American public will soon be looking for someone to blame, and you can bet the MSM will do its utmost to ensure that blame is focused in the wrong direction.  While there are, indeed, multiple reasons for the current high costs of oil, the primary culprits are obscured by considerable disinformation…   The most prominent but false conclusions on the expanding value of oil are centered on assertions that supply is decreasing dramatically, while demand is increasing dramatically.  Neither of these claims is true…

Well that didn't take long. New Greek bonds (GGB2) have dropped dramatically in the last 2 days. The 2023 bond has fallen from over EUR29.5 on Wednesday to under EUR25.5 this morning, prices have dropped an incredible 14% and down a painful 17.5% from its opening break highs of just 2 weeks ago. Yields have broken back above 20% for the first time for this new 10Y as it appears reality is sinking in that Greek Bailout III will come sooner rather than later. Eurosis is back.

There are relatively few natural buyers of Spanish long dated bonds here. Fast money is likely caught long, and it will take a potentially reluctant ECB and some already overly exposed Spanish institutions to step up and stop the slide. It may happen, but many of the policies that “bailed out” Greece created very bad precedents for bondholders, and some of those are coming home to roost, as is the understanding that LTRO ensures that banks can access liquidity, but does nothing to fix any problem at the sovereign level.

Dressed in the ominous black of his alter ego (Lewis), Charles reflects on his recent trip to NYC with the same incredulity as we do with our many and varied conversations with equity fund managers - they're long and terrified. The recognition of total dependency on Central Bank manipulation leaves an investing public seemingly believing in miracles. From Europe, where the consensus (media) belief is that 'all-is-now-fixed' or at minimum the can is a long way down the road (though the velocity of deterioration in Spanish spreads this week - largest 2-day widening in over 3 months - has many funds we know greatly concerned) when the reality is a dis-union declining into recession relying on more and greater money printing (while disparaging the Greek bailout and offering some crazy facts on the Greek population); to the US as incomes (and the economy) is growing modestly (very modestly) but the impact of earnings dropping (as margins/profits mean-revert) implied far less buybacks to fund the continued expansion of equities; to Asia where China (and EM implicitly) appears to be slowing. The reality is that in an election year he believes Central Banks will do all they can though warning that at some point in time even Wile.E.Coyote has to fall back to Earth.

While T.Boone talks sense and gets to vent his frustration regularly on air, the sad reality is that although the obstacles for substitution to NatGas are not insurmountable, as Michael Cembalest notes we do not get the sense that an NGV fleet is imminent, even with very high gasoline prices. The best shale gas plays are the ones that involve finding liquids in addtion to (or instead of) dry gas. Given the price for coal, natural gas and crude oil per unit of heat/energy humans would stop using oil and gasoline and use more natural gas instead. But in the real world, in which Michael and you and I live oil and natural gas are not frictionless substitutes. As the EIA shows, oil is primarily used for transportation whereas natural gas is used mostly by industry and to create electricity. As a result, there is no substitution effect pulling up natural gas prices, particularly as more natural gas is being found in shale plays. But for shale investors, there are liquids that can be found in shale plays that are worth a lot more than dry gas: shale oil, and natural gas liquids. Shale oil obviously is valued based on oil prices, and natural gas liquids are valued close to oil prices as well. Whether over time natural gas can displace coal or be exported successfully to 'correct' the demand-supply equation is the question that remains but for now it seems a long way off and along with the normal operating risks, there is of course a broader issues of fracking - and what operation safeguards will need to be put in place to allay concerns in the future. The point is that demand possibilities are there but seem far off and while broadly the energy sector has been on a positive ride the last few years, we remember the lost two decades of underperformance during the 80s and 90s but it would seem should we 'dip' again in the global economy that integrated oils, drilling/services will underperform from their elevated levels.

UPDATE: TVIX has now perfectly recoupled with its underlying index (TVIXIV) after a week of HTB dislocation.

With the double-levered long Vol ETF TVIX down 30% in the face of a falling equity market and rising VIX, reality appears to have been suspended. The crushing divide seems driven by the fact that Credit Suisse halted share creation forcing the ETF to behave more like a closed-end fund and with its massive premium to NAV (thanks to extreme hard-to-borrow-ness), this compression makes some 'technical' sense. While the Vol ETFs are designed to track VIX futures not spot, we remain skeptical of these instruments (or the options on them in their wonderfully compound manner) and although CS has said this cessation of share creation is temporary, it definitely brings up significant operational risks for anyone considering trading these vol plays. The TVIX premium to NAV was huge at over 80% as it became hard-to-borrow and with today's action that premium is cut in half (and we assume NAV will rise given the pop in risk).

All you need to read.

One of the biggest surprise stories of the past several months, in addition to economic activity skewing record warm weather, and the New Normal seasonal adjustments (which as Albert Edwards noted earlier are giving data an upward bias for each of the past three years), is the consistently "better than expected" jobs numbers. There is one problem: as discussed previously, the rising jobs are purely a quantity over quality trade off, as every month more and more temp jobs take the place of permanent ones, especially those of former professionals from the FIRE sector. In fact, in January temp jobs soared by the most on record, and the total number of temp workers was just shy of all time highs. Ironically, as this happened, discretionary online retail companies have seen their stock price soar to record highs. One of the primary drivers for this has been the increased "efficiency" at these companies' hubs - their warehouses. Which just happen to be staffed with temp workers. The following infographic presents the reality behind these American "sweatshops" - because this is the "quality" of job that is rising rapidly in the current economy (at the expense of traditional permanent jobs) to give the impression of an economic recovery. There is no point in making an ethical judgment - work conditions are as they are. Just as workers at FoxConn likely have far better conditions than their peers, at least in their view, so do these temp workers view their life as better than the alternative, which is unemployment. It is, as they say, what it is.