"We have repeatedly noted that it is dangerous to short stocks that have disconnected from traditional valuation methods. After all, twice a silly price is not twice as silly; it’s still just silly. This understanding limited our enthusiasm for shorting the handful of momentum stocks that dominated the headlines last year. Now there is a clear consensus that we are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand, and what might pop it. In our view the current bubble is an echo of the previous tech bubble, but with fewer large capitalization stocks and much less public enthusiasm."
- David Einhorn
Moving onto overnight markets, apart from China we are seeing broad based gains across most Asian equities. Bourses in Japan, Korea and Australia are up +0.2%, +0.2% and +0.5% respectively whereas the Hang Seng and the Shenzhen Composite indices are down -0.2% and -1.1% as we type. The gains in broader Asia Pacific followed what was another constructive session for risk assets yesterday during US trading hours. The S&P 500 (+0.38%) rose for its 5th consecutive day partly driven by better corporate earnings from the likes of GE and Morgan Stanley. Staying on the results season, we’ve had 70 of the S&P 500 companies reporting so far and the usual trend is starting to emerge in which earnings beats are faring better than revenue beats. Indeed the beat:miss ratio for earnings has been strong at 77%:23% whereas revenue beats/misses are more balanced at 50%:50%. Looking ahead, markets should get ready for another big week of US earnings.
Volume is light, as Europe remains on Easter holiday, but the volatility is back. Biotechs opened notably higher, dumped to unch, ripped to new highs, then dumped again... The S&P 500 managed to regain all last week's dump losses - but stalled then as POMO struck (the biggest in April) and AUDJPY took off in its front-running way but left stocks behind. Of course, there's no need to worry though - tomorrow is Tueaday after all.
Keep interest rates at zero, whilst printing trillions of dollars, pounds and yen out of thin air, and you can make investors do some pretty extraordinary things. "Central bankers control the price of money and therefore indirectly influence every market in the world. Given this immense power, the ideal central banker would be humble, cautious and deferential to market signals. Instead, modern central bankers are both bold and arrogant in their efforts to bend markets to their will. Top-down central planning, dictating resource allocation and industrial output based on supposedly superior knowledge of needs and wants, is an impulse that has infected political players throughout history." The result was always a conspicuous and dismal failure. Today’s central planners, especially the Federal Reserve, will encounter the same failure in time. The open issues are, when and at what cost to society?
Outlook for the major currencies in the week ahead.
Central bank's ongoing and so-far-successful efforts to crush short-term volatility and encourage hapless individuals into the world's nominally rising stock markets has had consequences. Inequalities abound (rich vs poor, corporate profits vs capex/jobs, bond yields vs growth hopes) but nowhere else is this more evident - given the ever-increasing crescendo of the drum-beat of war around the world - than in oil price volatility. As the chart below shows... oil price volatility is at its lowest in 21 years. We can't help but be reminded of Taleb's priceless phrase that "there is no freedom without noise - and no stability without volatility."
The majority of global growth in the next decade will instead be generated by "frontier markets". in fact, over the past five years, 43 of the 47 highest-growth economies have come from the frontier.
Bank Of America Reports Q1 Loss On Massive Legal Charge, Ongoing Operations Disappoint As NIM TumblesSubmitted by Tyler Durden on 04/16/2014 07:44 -0400
Moments ago Bank of America reported its Q1 earnings, and as expected, they were quite a mess, with the bank posting an actual loss of $0.05 on expectations of a $0.27 beat, which however - in the spirit of JPM - was the result of a $6 billion pretax charge related to various litigation items, which amounted to $0.40 per share. So Bank of America would like you, dear bank analysts, to do what you do to JPM every quarter with its recurring "non-recurring" litigation item, and please add it back. But what is worse is that Bank of America reported Net Interest Income of $10.1 billion, far below the expected $11 billion, and an amount that had nothing to do with legal fees, "one-time" charges and reserve releases. Why was this number so weak? Because not only does BofA's balance sheet continue to collapse, with its mortgage services portfolio crashing from $1.185 trillion to just $780 billion, but because BofA just reported the lowest NIM, or Net Interest Yield as it likes to call it, in history at 2.29%. So much for that NIM surge that everyone was expecting.
Futures are treading water once more now that Ukraine has stormed to center stage from the backburner after everyone was convinced Putin would let the situation cool off after annexing Crimea. Guess not. Adding the renewed geopolitical jitters to what has already been a beta stock bloodbath into a holiday shortened week assures some high volatility fireworks. Cautious sentiment was observed over in Asia (Nikkei 225 -0.36%) amid renewed fears that geopolitical tensions in Ukraine will flare up again following reports of exchange gunfire with pro-Russian militants. This sentiment carried over into the European session with stocks lower across the board (Eurostoxx50 -0.71%). EUR is lower after ECB’s Draghi said any further strengthening of the EUR would warrant further action by the ECB, including non-standard measures such as quantitative easing - it is amazing how frequently and often the Virtu algos still fall for Draghi's jawboning trick which has now become all too clear will never be implemented and certainly not if he keeps talking about it daily, as he does.
Chief Economist Of Central Banks' Central Bank: "It's Extremely Dangerous... I See Speculative Bubbles Like In 2007"Submitted by Tyler Durden on 04/11/2014 18:05 -0400
Yet again, it seems, once senior political or economic figures leave their 'public service' the story changes from one of "you have to lie, when it's serious" to a more truthful reflection on reality. As Finanz und Wirtschaft reports in this great interview, Bill White - former chief economist of the Bank for International Settlements (who admittedly has been quite vocal in the past) - warns of grave adverse effects of the ultra loose monetary policy everywhere in the world... "It all feels like 2007, with equity markets overvalued and spreads in the bond markets extremely thin... central banks are making it up as they go along." Some very uncomfortable truths in this crucial fact-based interview.
A look back at the headlines and market movements of the last month provides some useful color for why markets are weak and why now... As Scotiabank's Guy Haselmann warned early last month, there is a threshold point during the Fed’s attempt to normalize policy where the tide reverses and investors join in a sell-off in a race to avoid being left behind. This is why it's called the greater fool theory.
The market has had a rough start of the year flipping between positive and negative year-to-date returns. However, despite all of the recent turmoil from an emerging markets scare, concerns over how soon the Fed will start to hike interest rates and signs of deterioration in the underlying technical foundations of the market, investors remain extremely optimistic about their investments. It is, of course, at these times that investors should start to become more cautious about the risk they undertake. Unfortunately, the "greed factor," combined with the ever bullish Wall Street "buy and hold so I can charge you a fee" advice, often deafens the voice of common sense. "Not surprisingly, lessons learned in 2008 were only learned temporarily. These are the inevitable cycles of greed and fear, of peaks and troughs."
- Russia's Gazprom says Ukraine did not pay for gas on time (Reuters)
- Ukraine Moves to Keep Control in East (BBG)
- Banks Set to Report Lower Earnings as Debt Trading Slumps (BBG)
- More DeGeners and Obama selfies needed: Samsung's lower first-quarter estimate highlights smartphone challenges (Reuters)
- Citi Is Bracing to Miss a Profit Target (WSJ)
- Another slam from GM? Safety group calls for U.S. probe of Chevy Impala air bags (Reuters)
- Japan drugmaker Takeda to fight $6 billion damages imposed by U.S. jury (Reuters)
- EU court rules against requirement to keep data of telecom users (Reuters)
- White House may ban selfies with president after Ortiz-Obama photo promotes Samsung (Syracuse)
It took Virtu's idiot algos some time to process that the lack of BOJ stimulus is not bullish for more BOJ stimulus - something that has been priced in since October and which sent the USDJPY up from 97.000 to 105.000 in a few months, but it finally sank in when BOJ head Kuroda explicitly stated overnight that there is "no need to add stimulus now." That, and the disappointing news from China that the middle kingdom too has no plans for a major stimulus, as we reported last night, were the final straws that forced the USDJPY to lose the tractor-beamed 103.000 "fundamental level", tripping the countless sell stops just below it, and slid 50 pips lower as of this moment to overnight lows at the 102.500 level, in turn dragging US but mostly European equity futures with it, and the Dax was last seen tripping stops below 9400.
The last time global equity markets were falling at this pace (on a growth scare) was the fall of 2011. That time, after a big push lower, November saw a mass co-ordinated easing by central banks to save the world... stock jumped, the global economy spurted into action briefly, and all was well. This time, it's different. The Fed is tapering (and the hurdle to change course is high), the ECB balance sheet is shrinking (and there's nothing but promises), the PBOC tonight said "anyone anticipating additional stimulus would be disappointed," and then the BoJ failed to increase their already-ridiculous QE (ETF purchase) programs. The JPY is strengthening, Asian and US stocks are dropping, CNY is weakening, and gold rising.