Last month it was a tribute to his cat. This month, the manager of the world's largest bond fund discusses sneezing: "A sneeze is, to be candid, sort of half erotic, a release of pressure that feels oh so good either before or just after the Achoo! The air, along with 100,000 germs, comes shooting out of your nose faster than a race car at the Indy 500. It feels sooooo good that people used to sneeze on purpose." He also discusses the aftermath: "The old saying goes that when the U.S. economy sneezes, the world catches cold. That still seems to be true enough, although Chinese influenza is gaining in importance. If both sneezed at the same time then instead of “God bless you” perhaps someone would cry out “God have mercy.” We’re not there yet, although in this period of high leverage it’s important to realize that the price of money and the servicing cost of that leverage are critical for a healthy economy. " He also talks about some other things, mostly revolving around long-term rates of return assumptions and what those mean for investors.
Housing data weaker than expected? Check. Consumer confidence weaker than expected? Check. New cycle highs in stocks - check, check, and check. Why not - after all, as we noted this morning, what really matters is JPY and the fact that it's Tuesday. The Dow is now practically unchanged year-to-date... but ex-Tuesdays is down over 7%. Despite stocks hitting new highs, treasury yields continue to slide, gold is up, and credit markets are not making new tights. Just remember, when it comes to investing, "it's not the economy, stupid! It's Tuesday.. oh and tomorrow is FOMC."
The last time Goldman Sachs urged clients to "sell", it was gold - and in the next quarter, they were the largest acquirer of the precious metal via ETFs. So when the muppet-murdering bank suggests this morning that, while "we have been caught in choppy action" there is a slow awakening of Treasury bears and recommends shifting from a neutral to short-duration position in bonds... one can't help but wonder just what the bank will do with all the bonds clients sell to them...
The coming week will be busy in terms of data releases in the US; highlights include an improvement in consumer confidence, anemic 1Q GDP growth, and solid non-farm payrolls (consensus expects 215K). Wednesday brings advanced 1Q GDP - consensus expected a pathetic 1.1% qoq, on the back of what Goldman scapegoats as "weather distortions and an inventory investment drag", personal consumption (consensus 1.9%), and FOMC (the meeting is not associated with economic projections or a press conference). Thursday brings PCE Core (consensus 0.20%). Friday brings non-farm payrolls (consensus of 215K) and unemployment (6.6%). Other indicators for the week include pending home sales, S&P/Case Shiller home price index, Chicago PMI, ADP employment, personal income/spending, and hourly earnings.
In the last few months, the yield curve spread between 5Y Treasuries and 30Y has collapsed almost 80bps - this is the fastest relative drop since February 2007. The yield curve is down further today - at its flattest since September 2009. As BofAML's Macneil Curry warns, the flattenin trend is ongoing and sees medium-term targets down to 143bps (over 30bps below current levels) which would raise a number of eyebrows among the excuberant equity crowd (and the Spanish bond-buyers).
This doesn't happen very often. Marketwatch reports that Jim Bianco points out in a recent market comment that the 67 economists taking part in a regular Bloomberg survey have a unanimous forecast regarding treasury bond yields: they will be higher 6 months from now... and a separate poll of economists recently showed that exactly zero expect the economy to contract. This is an astonishing degree of consensus thinking, but it perfectly mirrors the complacency we see in stock market sentiment and positioning data. The probability that such a unanimous view will turn out to be correct is traditionally extremely low. The economy is likely resting on a much weaker foundation than is generally believed. This is not least the result of massive monetary pumping and deficit spending, both of which tend to severely weaken the economy on a structural level, even though they can create a temporary illusion of 'growth'.
As we noted earlier, The Federal Open Market Committee (FOMC) has continuously been overly optimistic regarding its expectations for economic growth in the United States. A major reason for the FOMC’s overly optimistic forecast for economic growth and its incorrect view of the effectiveness of quantitative easing is the reliance on the so-called 'wealth effect'. However, "There may not be a wealth effect at all. If there is a wealth effect, it is very difficult to pin down..." Since the FOMC began quantitative easing in 2009, its balance sheet has increased more than $3 trillion. This increase may have boosted wealth, but the U.S. economy received no meaningful benefit. Furthermore, the FOMC has no idea what the ultimate outcome of such an increase will be or what a return to a ‘normal’ balance sheet might entail. Given all of this, we do not see any evidence for economic growth as robust at the FOMC predicts. Without a wealth effect, the stock market is not the “key player” in the economy, and no “virtuous circle” runs through the stock market.
It seems yesterday's decoupling (stocks up, and everything else risk-off) has unwound today as equity markets were broadly weaker. The Dow and S&P traded in a very narrow range on the day closing slightly negative and breaking the 6-day winning streak. Nasdaq and Russell underperformed notably as "most shorted" stocks appeared to gain some momentum to the downside once again (ahead of tonight's AAPL/FB results) as high-beta caught down to low-beta today. Away from the oddly decoupled equity markets, Gold, silver and copper all closed unch to modestly higher as WTI crude prces dropped further (to $101.50). The USD rallied off European open weakness to end unchanged for the week (with notable AUD weakness overnight). Treasuries rallied with 30Y outperforming once again and the yield curve flattening to fresh 5 year lows. Credit markets continues to push wider and are not sustaining any of the exuberance remaining in the S&P.
VIX-slamming, USDJPY-ramping, BTFDe-escalating muppetry and we end the week near the highs with the S&P and Trannies comfortably green YTD (though notably underperforming gold still). Treasuries were sold hard today (7Y +10bps) as the D word was bandied about by the politicians (while in reality de-escalation was anything but what was happening), but the 5s30s still flattened modestly further. 10Y saw one of its worst days of the year and yields pressed up to their 200DMA. Gold and silver were flat to modestly lower as copper and oil limped higher. FX markets were relatively calm as the USD pushed higher on the week (+0.5%). Stocks closed weak into the close but after 3 days of ramp, it's hardly surprising.
We have bad news for hedge funds who, like Hugh Hendry in December of last year, threw fundamentals and caution to the wind and, with great reservations, jumped into this momo bandwagon in which mere buying beget more buying until nobody knew why anyone bought in the first place... and then everything crashed, leading to the worst day for hedge funds in a decade: according to Goldman's David Kostin, whose job is to be a cheerleader for the intangible "wealth effect" leading to all too tangible Goldman bonuses: "The stock market will likely recover during the next few months... but not momentum stocks."
For a decade or two, it's been dubbed the widowmaker (though truth be told, the losses are more bleed than massive capital loss like those holding US growth stocks currently), but as Barclays notes the Japanese bond market 'conundrum' (that nothing like a recovery is priced into the JGB curve, which is failing to price even a partial, eventual success of the Abe government's reflationary agenda) may finally be ready to be played..."We are always on the lookout for asset prices that seem inconsistent with the more plausible economic and financial scenarios. Sometimes these discrepancies point toward necessary alterations of our fundamental world view. In other cases, they point toward investment opportunity. At the moment, one of the most glaring discrepancies between macro and markets is the long end of the Japanese curve."
JPM Misses Top And Bottom Line, Slammed By Collapse In Mortgage Origination, Slide In Fixed Income TradingSubmitted by Tyler Durden on 04/11/2014 06:45 -0500
Moments ago, JPM reported Q1 earnings which missed across the board, driven by the now traditional double whammy of collapsing mortgage revenues - the lifeblood of any old normal bank - and fixed income trading revenues - the lifeblood of new normal banks. Specifically, JPM reported revenues of $23.9 billion, well below the expected $24.5 billion, matched by a reported earnings miss of $1.28, down from $1.59 a quarter ago (and down $0.02 from Q4, 2014), also missing consensus estimates of $1.38. The breakdown was as follows.
With 30 year bond yields set to close their lowest in 10 months, CNBC's Rick Santelli is concerned at the signals that the Treasury yield curve is sending.If yesterday's minutes from the Fed were supposed to walk back their 'hawkish' tone, then Santelli slams they are "gonna need a really big billboard" because the term structure is still flattening. "When 'flattening' is the theme, that is not painting a rosy outlook for the long-term economy," and as Santelli warns, this is when the Fed is pulling out of its extraordinary policies. Santelli screams, "the entire monetary policy side has to be under review... and the only way you can keep the fallacy alive is "if you sell it as a 'deflationary' issue, where you can keep trying the same thing that isn't working."
Yesterday's 10 Year auction may have been surprisingly weak, perhaps concerned about what the subsequent FOMC minutes would reveal (as it turned out the minutes couldn't have been more dovish - just as everyone knew would be the case - and sent 10Y yields sliding) but today's 30 Year reopening (Cusip: RE0) auction was quite brisk, with the high yield of 2.535% stopping through the When Issued of 2.537% by 0.2 bps. And for those who have been living under a rock and unfamiliar with the epic flattening in the yield curve, today's 30 Year was the tightest pricing since the 3.36% yield last seen in the auction from June 2013.
For the first time since the bailout/restructuring, Greece will issue long-term debt to the public markets. These 5 year-term English Law bonds (which is entirely unsurprising given the total lack of protection local-law bonds suffered during the last restructuring) are expected to yield between 5 and 5.25%. That is modestly higher than Russia, below Mexico, and one-sixth of the yield investors demanded when the crisis was exploding. The secondary market has rallied to this entirely liquidity-fueled level leaving onlookers stunned (and likely Draghi et al. also). Greece must be 'fixed' right? Just don't look at the chart below...