recovery

Look at the big picture. 

Low trade volume is sucking the fuel from the global economy

NASDAQ managed its largest gain in four months as Apple came back into vogue and saved the day. The equity indices were alone in their magnificent exuberance after the European close as Gold, Treasuries, and the USD all tracked sideways in a very narrow range. As we have been warning, the mania is back in equity (and credit markets but less so) as April has now seen six of the last nine days swinging between 2 sigma gains and 2 sigma losses (for the NASDAQ). Volume was average today in ES (the S&P 500 e-mini futures) and NYSE (stocks) but high in Apple's equity and options markets as the schizophrenic behavior pushed the stock from under $572 at the open to almost $610 by the close (though notably stuck between Friday's close $605.19 and its closing VWAP at $610.74). The last day to fund your IRA combined with tomorrow's VIX futures/options expiration likely helped some of this momentum (as we note VIX is about 1 vol higher than it was when the S&P closed at these levels on Friday). Just as in Europe, credit markets were simply not as enamored with the Spanish auction or Apple's awesomeness as equities and drifted sideways to weaker all afternoon (with some late-day weakness in HYG as it starts to fall back towards its NAV). Financials and Materials lost some ground into the close and ES gave all its post-Europe-close gains back as volume and trade size picked up significantly at last Thursday's swing highs (near pre-NFP levels again). The Treasury complex saw all its 'losses' in the early going and went sideways in an extremely narrow range for much of the US day session - ending the day slightly higher in yield (0.5-1.5bps) on the week. Commodities surged early on as the USD slipped but drifted back from mid-morning on (except WTI which broke above $105 (ended above $104) for the first time in 2 weeks. Gold and Silver nose-dived right after the US open only to recover it all by the European close. EUR strength (and USD weakness) occurred early this morning on the Spanish auction and aside from a rip in CAD the rest of the day was relatively tight ranges with a very small drift higher in DXY. All-in-all, it seemed like an oversold snap that saw opportunistic sellers coming in at the end as average trade size surged and ES closed back above its 50DMA again - echoing last week's mania and worryingly raising realized vol for all those hopes and dreamers. Equities look over-their-skis again relative to risk assets in general.

With S&P futures, and most notably financials, staging the second overnight opening surge in a row, we thought it perhaps worth reflecting on five quite concerning fundamental reasons why dip-buyers (as anesthetized as they have become thanks to central bank 'protection') could face a tougher time. As Mike Wilson of Morgan Stanley notes, for those looking for a cause or explanation of recent weakness, feel free to blame it on the more hawkish Fed minutes, Draghi’s comments that it was now “up to governments to do the right thing” or the soft US payroll numbers. After such an uninterrupted run, some kind of correction was inevitable and simply a matter of timing. The bigger question to resolve is whether this pull back will look like what we experienced in 2010 and 2011 or end up being more muted. Obviously, the key variables for this analysis remain growth and liquidity expectations. The 'payback' that we have been warned about for such an unseasonably warm winter is upon us (as macro data surprises increasingly to the downside) and that is the first flaw in BTFD logic. Wilson goes on to point out that NFIB small business hiring intentions have dropped precipitously, GDP growth is weak but earnings growth is now catching up (down) to that weakness and for many stocks is rapidly falling towards zero, we remain in a 'liquidity lull' as central banks stand on the sidelines and reflect, and perhaps most worrisome is the rapid deterioration in the Bloomberg financial conditions index. All-in-all, these sum up to suggest a greater-than-5% correction is more than likely.

Today's futures pop on short-term bill auctions in Europe (that remain in a world of their own and should not be considered as anything but emergent in nature rather than indicative of investor demand) and ad hoc data in Germany that disconnects from any sense of reality in true economic environs only confirms Morgan Stanley's Mike Wilson's perspective that there still isn't much fear out there. We remain in the midst of a longer-term deleveraging cycle, of that there can be little argument in reality (unless of course exponential trends are natural) and as Wilson points out we are likely to remain in the wide trading range that we have been in the past two years - however, many investors appear to disagree (not the least of which the effusively exuberant 'Ace' Greenberg this morning). Few expect a correction more than 5-10%, Buy-lists are already in great demand, and put-call ratios remain muted. "Of course, this is what happens when an animal becomes conditioned to buy the dip in a pavlovian manner over years during which they have remain unscathed by some of the biggest financial risks we have ever witnessed. As the saying goes, “the only fools bigger than those that are playing are those that are watching.” Of course, having some Fed official speaking every other day to remind us they are there to save the day in the event of trouble helps perpetuate this unnatural one way market." However, his bottom line is that slowing/disappointing economic data, zero percent earnings growth and a liquidity lull sounds like a recipe for more than a 5% correction.

Today's housing starts number is merely the latest datapoint confirms the housing bottom callers will be once again early. In March, housing starts, expected to print at 705K (which is crawling along the bottom as is, so it is all mostly noise anyway, but the algos care), came at a disappointing 654K, the lowest since October 2011, and a third consecutive decline since January. Want proof that the record warm Q1 pulled demand forward? This is it. As the chart below shows, the all important single-unit housing starts have not budged at all since June 2009. So was there any good news in today's data? Well, housing permits, which means not even $1 dollar has been invested in actually 'building' a home soared to 747K, from 715K in February, and well above expectations of 710K - the highest since September 2008. That a permit is largley meaningless if unaccompanied by a start, not to mention an actual completion goes without saying. However, what is notable is that even the permit dat was skewed: single unit structures came at 462K, lower than February's 479K. Where the ramp was in 5 units or more, aka multi-apartment units, aka straight to rental. It appears that now everyone is piggybacking on the administartion's REO-to-rent plan, and instead of buying "home to buy", all future constrcution will be apartments to rent. Which is great: since rents have been going up, builders are already redirecting their attention to the one segment in the market that is not moribund. As a result, in a few short months expect a glut of rental properties, which will kill even the incipient possibility of a recovery, as the supply drowns any latent demand, as more and more households shifts from owner to renter mentality.

All you need to read and more.

Based on supply, demand and even after taking into account the geopolitical factor, we believe oil could experience a correction later this year and in the next three years or so.

Amid the fourth heaviest volume of the year, Apple shares fell over 4% today - its largest single-day drop in six months (and largest two-day drop in 23 months) and GOOG also fell over 3%. This dragged the NASDAQ down but the S&P 500 (which was implicitly hurt by this major underperformance) managed to survive with relatively minimal damage close-to-close as the EUR repatriation drove TSY yields up and the USD down with correlations doing the rest to support stocks. Heavier volume and trade size came in as ES (the S&P 500 e-mini future) slid notably into the close though - almost 10pts off its afternoon highs and over 1% off its day-session opening levels (which were the highs). USD weakness accelerated rapidly after the European close - quite evenly distributed across all the majors but EUR weighed heavily as it retraced most of Friday's losses. The USD selling stopped around 130pm ET. The USD weakness supported some recovery from early weakness in commodities but the second largest compression in Brent-WTI in 16 months to around $15 - led by Brent more than WTI - on the Seaway reversal date being brought forward, was the biggest news in commodities. Silver ended unch and gold down modestly. Credit outperformed stocks on the day (and from open-to-close) but this seems as much credit-equity index arb as credit remains notably weaker. HYG stayed in sync with SPY today after we first noted the convergence on Friday (following the April asset allocation shift). After rallying early, Treasuries stabilized through the USD selling frenzy immediately post-European close but as the USD stabilized in the late afternoon (and AUD weakened) so Treasuries were oddly sold off (along with stocks) ending the day basically unchanged (after being lower by 4-5bps before the US open). VIX closed unchanged after opening lower and pushing to well over 20% at its worst - as 19% seemed to support it as we rallied in the afternoon. ES tested above its 50DMA once again and closed back below it on a relatively heavy day with very low average trade size.

We all know the Status Quo's response to the global financial meltdown of 2008 has been a travesty of a mockery of a sham--smoke and mirrors, flimsy facades of "recovery," simulacrum "reforms," and serial can-kicking, all based on borrowing and printing trillions of dollars, yen, euros and yuan, quatloos, etc. So when will the travesty of a mockery of a sham finally come to an end? Probably around 2021-22, with a few global crises and "saves" along the way to break up the monotony of devolution.

It seems all that confident over-extrapolating of warm-weather-based foot-traffic into closed sales and a recovery in housing was, as we vociferously warned, simply wrong. There's no schadenfreude here as this was too obvious for anyone except the blinkered hopium peddlers as even the NAHB is forced to admit things aren't so rosy in home-sales-land "interest expressed by buyers in the past few months has yet to translate into expected sales activity". The NAHB Index fell for the first time in 7 months, dropped the most in 10 months and missed those glorious expectations by the most in 22 months - quite an impressive set of statistics.

All you need to read and some more.

Eurozone periphery concerns continue to loom as Italian and Spanish spreads against the German 10yr remain elevated, but have come off their widest levels in recent trade amid some unconfirmed market talk of real money accounts buying Spanish paper.  Despite the concerns in Europe, the major European bourses are trading higher with individual stocks news from over the weekend propping up indices with reports of intra-European M&A and a string of good news for mining stocks pushing up markets today. Some stock stories of note include the agreement of an offer between France’s GDF Suez and UK’s International Power for GBP 4.18 per share, and a speculated merger of BHP Billiton’s and Rio Tinto’s diamond units by private equity firm KKR. The financials sector, however, is showing the strain, as the 3m EUR basis swap moves sharply lower to -53.87 from approximately -50 on Friday, with particular underperformance noted in the French banking sector.  The session so far has been very data-light, with Eurozone trade balance coming in slightly lower than expectations but markets remained unreactive to the release.

The question most asked by clients is why, with all that is going on in Europe, is the currency not much lower as nearly every analysts has a target of between parity and 1.2000? It is a very good question but way back at the start of 2011 I suggested that I felt some accord had been reached by the G20 to hold the EUR stable and this I still believe. The issue is that the EU leadership and indeed all those that trade with the zone, realize that equity markets would be held up by QE and that bond yields could be kept down (wrong) using the same method but the whole house of cards could be brought down if there was a run on the currency and a general loss of confidence in the currency. It would simply be a disaster and to me it is central bank manipulation that is keeping the EUR so ridiculously strong so selling breaks to the downside has seen many karted out on a stretcher and sent to the asylum.

Volatility is back. The S&P moved more than 1% on 4 of the 5 days, had the biggest down day of the year, and even the least volatile day was a 0.7% move.