The first month of a quarter may set the market’s tone in subsequent months. In the context of today’s markets, they tie into a few questions you may be asking about early 2014 volatility: Is January’s market drop merely noise on the way to another string of all-time highs, or is there more to it than that? For instance, doesn’t it seem a little ominous that we stumbled out of the gates this year despite sentiment being rampantly bullish? Does this tell us to be cautious going forward? If you happen to read the Stock Trader’s Almanac, you’ll connect our questions to the “January barometer” (not to be confused with the “effect” discussed above). The Almanac’s founder, Yale Hirsch, coined the term in 1972 when he presented research showing that January’s return is a decent predictor of full-year returns. He concluded: “As January goes, so goes the year.”
So far in 2013, Bank of America lost money on 9 trading days out of a total 188. Statistically, this result is absolutely ridiculous when one considers that the bulk of bank trading revenues are still in the form of prop positions disguised as "flow" trading to evade Volcker which means the only way a bank could make money with near uniform perfection is if it either i) consistently has inside information that it trades on or ii) it consistently front-runs its clients (the latter incidentally was a topic we covered back in 2009 relating to Goldman Sachs, and which the bank sternly rejected). We now know that when it comes to Bank of America at least one of the two happened.
In the last year Bitcoin has gone 'viral'. As ConvergEx's Nick Colas notes, a lot has happened in 2013: Price appreciation, yes, from $20 to +$800 – the result of this online “Currency” going from science project to mainstream topic. Volatility too – disruptive technologies seldom travel a level path. The story, Colas notes, is about to change, and there are three critical gates which bitcoin must navigate in the New Year. First is regulation, and we will get a good dose of that next Tuesday and Wednesday when the New York State Department of Financial Services holds hearings on bitcoin and potentially issuing a ‘Bitlicense’ to help regulate business which transact in the currency. Second is adoption – how will existing businesses incorporate bitcoin into their sales, marketing and payment channels. Lastly will be volatility, which will have to come down in 2014 to encourage broader use.
It's Risk Off time.
Things got really out of control, and the USDJPY plunged by some 150 pips in the matter of hours, plunging as low as 102, when EM revulsion once again hit participants, in particular TRY and ARS which also supported bid tone in USTs. This also saw spot TRY rate print fresh record high, while 5y Turkish CDS rate advanced to its highest level since June 2012, while at the same time Argentina announced it would life currency controls and dollar purchases in the aftermath of the ARS devaluation by 13%. And since everything tracks the JPY carry pair as we have been showing for the past year, futures once again plunged overnight, for now held by 1810 support, Treasurys are bid throughout, with the same treasury yields that have "no where to go but up" sliding to 2.71% from 2.87% at the beginning of the week, while gold is finally spiking as the realization that absolutely nothing has been fixed, that apparently nobody got the taper is priced in memo, and that soon the Fed will have to untaper, begins to spread. Are the central planners finally starting to lose control?
"What will drive this "strength"? More of the same I suspect – any weakness in earnings will be ignored (virtually all of last year's equity market gains were NOT earnings or revenue growth driven, but were rather virtually all multiple expansion driven), any bad economic data will be ignored – the weather provides a great cover, and instead markets will I think see (one last?) reason to cheer the Fed and/or the BOJ and/or the ECB and/or the PBoC.... The only real "success" of these current policies is to create significant investment distortions and misallocations of capital, at the expense of the broad real economy, leading to excessive speculation and financial engineering. If I am right about the final outcome over 2014 and into 2015, the non-systemic three-year bear market of early 2000 to early 2003 may well be a better "template". Of course the S&P lost virtually the same amount peak-to-trough in both bear markets, and in real (as opposed to nominal) terms actually lost more in the 2000/03 sell-off than in the 2007/09 crash." -Bob Janjuah
What are you afraid of, exactly? ConvergEx's Nick Colas notes we all have our phobias and fears, some logical and anchored in reality and others irrational but still powerful; but for the capital markets currently it seems there is no fear. The CBOE VIX Index started the year at 14.2 and has fallen to a close of 12.9 today. That move, Colas adds, has dragged the IVs of everything from U.S. large cap energy stocks to gold to corporate bonds lower in its wake. Even expectations for Emerging Markets equity volatility are in retreat as we start 2014. But, when near term historical or implied volatility becomes this complacent, it seems appropriate to spend a little more time pondering what might go wrong. Markets, after all, have the entire “What should go right” side of the trade well understood and reflected in current prices. In that spirit, here is the "Top 10" list of what might take us off the rails of complacency in 2014.
Two Las Vegas casinos will become the first known US gambling premises to accept the increasely popular cryptocurrency. The co-owned Golden Gate (Las Vegas' oldest casino) and The D Las Vegas Casino Hotel will begin accepting bitcoins on Wednesday as payment for hotel rooms and related purchases, but, as Bloomberg Businessweek reports, state regulators are unlikely to allow casinos to exchange chips for bitcoins any time soon, according to A.G. Burnett, chairman of the Nevada Gaming Control Board.
"Treasuries have turned medium term bullish," writes Macneil Curry in his latest reports, advising traders to "get ready to buy a dip," in bonds. At a minimum, he notes, BofAML expects yields to test the 2.691% area, but the most likely outcome is for a push to the multi-month range lows between 2.544% and 2.459%. Curry adds that he expected 5s30s to flatten to around 201bps and while they remain equity bulls he warns, "watchout" as seasonals turn much less constructive once February rolls around and the ratio of 3m-to-1m implied volatility is fast approaching the 1.20 level that traditionally coincides with complacency and market corrections.
Fortune Magazine front page today: Middleton sounds a bit like an 18th-century pirate striking back against the Empire when he declares that "what I'm doing right now is a direct threat to fiat merchant banking."
The Forex market is dead and dying, in parallel with the US economy; which is fitting, considering the US is still the world reserve currency.
Significant harbingers that have changed the Forex market forever:
Most people on Wall Street know all about it: the junior banker hazing ritual. Fresh out of college, pulling all nighters after long hours of starting at an excel screen playing solitaire in the background, writing and re-writing pitch books for the sake of generating work which nobody will read, waiting for senior bankers to get back with their revisions, eating (expensed) meals after midnight, and so on. The justification is well-known: greater money and benefits than anyone can make in any other job. But is the trade off worth it? Increasingly more banks and their executives are asking that question, leading to various banks telling their young bankers to take one, even (gasp) two weekends off per month. So how are the young bankers themselves seeing these developments? “A cocktail of zero social life, coffee, propranolol (helps with stress and panic attacks) and modafinil (keeps you up all night),” wrote one UK-based banking employee. Another noted that the “emotional stress” had been reduced since “splitting from my partner”.
"I happen to think that 2014 is a VERY different year than 2013 from a variety of viewpoints. First, there appears to be a dispersion of opinion about markets, valuations, policy frameworks and more. This is a healthy departure from YEARS of artificiality. Artificiality in valuations, artificiality in market and policy mechanics and essentially artificiality in EVERY financial, and real, relationship on the planet based on central bank(s) balance sheet expansion and other measures intended to be a stop-gap resolution to tightening financial conditions, adverse expectations of economic activity, and the great rollover" - Russ Certo, Brean Capital
On the heels of his less-than-optimistic presentation, DoubleLine's Jeff Gundlach tells Europe's Finanz und Wirtschaft "he's concerned about the growing amount of speculation" and draws a parallel between today’s markets and the dot-com boom of the late Nineties. This excellent interview takes the themes of his recent conference call and extends them as he warns "In the over thirty years I’ve been in the financial investment industry, I don’t recall a single year where I saw the year begin with the consensus being so solidified in its thinking across virtually every asset class." His biggest worry (for investors, as opposed to his funds), "the most unthinkable things happen this year and that is a basic pain trade that forces people into treasury bonds."
"US profits are growing, companies have underinvested and have no choice but to spend more on CapEx, and corporations have much less debt than they did during the crisis thanks to a massive cash build up."
These are the generic go to explanations by soundbity talking heads for why the US recovery is gaining traction with US corporations, if not so much Joe Sixpack, and why companies are still cheap. There is one problem: they are all wrong. As SocGen's Andrew Lapthorne shows conclusively, "US profits are not growing, companies are over not underinvesting (they may in fact have overinvested), and corporates are carrying more (not less) net debt than they were in 2009. It would appear that many believe the opposite to be true, yet corporate report and accounts data seems to say otherwise.""
As we begin 2014, it is important to recognize the levels of INSANITY currently existent in the world enabling us to understand the apocryphal nature of the times we live in and prepare ourselves to meet the challenges it represents. The world is leveraged to an extent that has never before seen in history! Debt now masquerades as NOMINAL growth and REAL growth has ceased. Headline economic reports are now nothing more than POLITICALLY CORRECT HOAXES to FOOL the public at large and mask the betrayal of the public by the leaders who hold the reins of power. ECONOMIC Stagnation emerged after the 2008 Global financial crisis and in real terms has NEVER ENDED!