We have been keeping a close eye on economic reports in the month of March and as of this morning's just reported Durable Goods number we are now officially at miss 15 of 17. The headline print was +2.2% to a total of $211.8 billion, on expectations of +3.0%, up from a revised -3.6% decline in January. Ex-transportation, the number was +1.6% on expectations of a 1.7% increase, while Non-defense ex aircraft was up 1.2% on Exp. of 1.5%. The primary driver in the core slump was electrical equipment which slide 2.5% in February from $10.5 billion to $10.25 billion - are Americans getting all "gizmoed out?" And finally, for those who are saying the inventory restocking is over, we have two words: Dead Wrong. "Inventories of manufactured durable goods in February, up twenty-six consecutive months, increased $1.6 billion or 0.4 percent to $373.7 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.6 percent January increase. Machinery, up twenty-three consecutive months, had the largest increase, $0.6 billion or 0.9 percent to $62.2 billion. This was also at the highest level since the series was first published on a NAICS basis." That's right - inventories just hit an all time high having increased 26 months in a row. And now you know where US economic "growth" has been hidden all these years. But yes, if you build it, they will come. Eventually. In the meantime, expect sell-side desks to again enact Q1 tracking GDP reductions.
Back in February, shortly before the big sell off in gold we warned that we have some "Horrible News For Goldbugs - Paulson Is Bullish On Gold Again." We may have some bad news again, as the 'bullish' sentiment this time comes from none other than the muppet master, after Goldman released a note overnight saying that "gold is set to glimmer as growth tarnishes." To wit: "We reiterate our constructive outlook for gold prices in 2012 and our 3, 6-and 12-mo forecasts of $1,785/toz, $1,840/toz and $1,940/toz, respectively. We acknowledge, however, that continued strong US economic data poses growing risk to our forecast for rising gold prices. Net, we reiterate our view that at current price levels gold remains a compelling trade but not a long-term investment, and we continue to recommend a long position in Dec-12 COMEX gold futures." Yes, that's great - we have only one word: Stolper That said, the only saving grace to an all out wipeout is that Goldman appears quite set on getting QE at all costs, potentially as soon as April - a move which would send the metal soaring as the Chairman can not have his cake and eat it too, absent a few helping hands from the CME of course.
Going into the US open, European equity markets are trading slightly lower with some cautious trade observed so far. In individual equity news, France’s Total have shown some choppy trade following reports from their Elgin gas field in the North Sea, shares were seen down as much as 3% but the company have played down the gas leak and have regained slightly in recent trade; however they remain down 1.4%. In terms of data releases, the final reading of Q4 GDP from the UK has recorded a downward revision to -0.3%. Following the disappointing release, GBP/USD spiked lower 20pips and remains in negative territory. In the energy complex, WTI is seen on a downward trend following last night’s build in oil reserves shown by the API data. Earlier in the session French press reported that France had made contact with the UK and the US regarding the release of emergency oil stocks, following this, WTI spiked lower around USD 0.30 but quickly regained. Looking ahead in the session, international market focus moves to the US, with durable goods orders and the weekly DOE oil inventory due later today.
- Greece's Fringe Parties Surge Amid Bailout Ire (WSJ)
- ECB fails to stem reduction in lending (FT)
- More Twists for Spanish Banks (WSJ)
- Banks use ECB cash to buy bonds, lend less to firms (IFR)
- UK still long way off pre-crisis growth – King (Reuters)
- Dublin confident of ECB deal to defer payment (FT)
- Goldman's European derivatives revenue soars (Reuters)
- Japan Faces Tax Battle as DPJ Finishes Plan on Sales Levy (Bloomberg)
- Insurance Mandate Splits US Court (FT)
Bad news is once again good news. Asia sells off on Monday's weaker profit news; the Bank of Spain says that the Spanish economy is expected to see a negative print in Q1 which if confirmed will ensure a fresh recession while the budget statistics released by the Spanish government yesterday showed further deterioration in its fiscal situation, per DB. The deficit for the first two months of the year was €20.7bn and this does not include state and regional governments’ budgets; lastly American housing slump accelerates as MBA mortgage applications drop for the 7th consecutive week with applications down 2.7%, on the back of a 4.6% decline in refi applications, the lowest since December 7. And futures are...green. Which is to be expected, since good news is good news, and bad news is, thanks to the Fed, and in this case uber-dove Rosengren, who said more stimulus is on the table, better news. It is now obvious that the Fed will not rest until the market is at fresh all time distorted, manipulated, nominal highs.
It is rather surprising that in a world in which anything and everything is only about money, it is next to impossible to find a consolidated balance sheet of the world's insolvent economies (i.e., the developed countries: US, Japan and the Euro Area). So for all those seeking a visual presentation of all the liabilities that have to be inflated away by the central banks (because that's what this is all about), rejoice: the broke world is presented below in its glory. The irony is that the problem would be quite fixable if it weren't for one minor issue: the bulk of the world's assets also happen to be its liabilities! At the end of the day, this may prove to be the fatal flaw in the chairman's attempt to dilute the global liabilities, he will be doing the same with the assets.
Following the May 2010 flash crash, the investing public hoped that as part of its "exhaustive report", the SEC would find and hold responsible the various components of a broken market structure, be it HFTs, ETFs, stubbing and sub-pennying algorithms, and all the other knowns and unknowns we have covered over the years. Instead, in what would prove to be a move of cataclysmic stupidity (if sadly understandable - the SEC, like everyone else "in charge" is used to dealing with a gullible and simplistic public, which has no access to the real data and analysis, and whose opinion could be easily manipulated, at least until now), the regulator blamed and scapegoated it all on a Waddell and Reed trade (we wonder just what the quid pro quo was to get the asset manager to roll over and take the blame despite protestations to the contrary, at least in the beginning). The result was that the same investing public realized that market structure is so corrupt, and so robotically mutated, there is no place for the small investor in this broken market. Last week's BATS IPO fiasco merely confirmed this. And as usual, BATS (whose chairman Ratterman has just been demoted even as he stays on as CEO) decided to take the "passive voice" approach and blame it all on a faceless, emotionless, motiveless "software glitch". Just like that perfectly innocuous BSOD we have all grown to love and expect any minute. Only it wasn't. To get to the bottom of what really happened, in a world in which the SEC is far more interested in finding the latest discount internet porn stream than actually protecting the small investor, we relied on our friends from Nanex, who have time and again proven to have a far better grasp of what it is that really happens in the market than virtually anyone else. And if Nanex' interpretation of events is correct (spoiler alert - it was not a "software glitch") it takes SkyNet wars from the silver screen and to a trading terminal near you. What happened is that a malicious, 100% intentional Nasdaq algorithm purposefully brought BATS stock to a price of 0.00 within 900 millisecond of the company's break for trading! This is open SkyNet warfare.
A prevalent theme over the past 3 months has been the emergence of the Schrödinger world, where on one hand we have a world as it is, and on the other, as central planners, propaganda media, and a president caught up in a reelection campaign would want it to be. Luckily, that world only had a binary bifurcation associated to it - and a simple observation of the mythical collapsed its wave function in less time than it would take BATS to commit corporate suicide. A much more fun world emerges when one enters the superstring reality of the Federal Reserve, and especially its chairman, where there are not two, not three, but a whopping six dimensions of (mis)perception, all dependent on one's point of view. Courtesy of Silver Circle we present them all.
'The current rally is running long; equities are due for a 3-5% pull-back' is how Deutsche Bank begins to give some context to the scale of the performance of stocks over the last four months. Whether it be liquidity-fueled optimism, optically-pleasing macro data, crisis-fatigue, or just good old-fashioned back-up-the-truck-we're-all-in buying since the last 10% correction in November, the S&P 500 has rallied 22% - essentially unimpeded for 80 days without a drawdown. In between 5% selloffs, the median rise in the S&P 500 is 10% and the duration is 56 days so this current rally is indeed getting long in the tooth (with a 2.5% retracement the best the bears have managed in 2012). To get a better sense of how equities may perform after such a big rally, Deutsche identifies 8 similar cases to the current one when a 10%+ drawdown was followed by a 15%+ recovery: Jul-50, May-70, Dec-74, Aug-98, Sep-01, Oct-02, Feb-03 and Mar-09. At the same point in the rally (i.e. after 3mo), the market continued to grind higher the next 3 months by 4% on average. So a move of this size and velocity (and smoothness) has only occurred 7 times in the history of the S&P 500 and a quick glance at some of those dates marks some notable periods in US economics (and global geopolitics).
Have you wondered what really drives consumer confidence? The answer is simple. Jobs. If consumers are to be confident about their future, they need to feel secure in the present and future employment. The chart shows (gold bar) the confidence gap, which is the difference between the present situation index and the future expectations index. The red and blue lines are the number of individuals surveyed who feel that jobs are currently hard to get or plentiful. When confidence is high, so are the number of people who feel that jobs are plentiful. This is generally because they are currently employed and feel like they could get another job if they wanted one. The opposite is true today. This gap between jobs being hard to get and plentiful has closed slightly in the last couple of years; however, we are a long way from getting back to levels that are more normally associated with recoveries.
A relatively quiet day after the excitement of the last few as T+3 settlement day into Quarter-end bought little action until the last hour or so. Two main themes appeared for the whole day - VIX pushed higher all day - notably more than the equity move would suggest (which is interesting given our comments on the capitulative normalization of the short-end volatility term structure yesterday) though some looked like catch up to yesterday's blow-off, and Treasuries rallied consistently all day long (with the short-end notably outperforming - as 5Y also down through its 200DMA and saw its largest percentage drop in yield in 2 months). Stocks leaked lower from an early morning spike on German Ifo (stuck in a very narrow range for much of the US day session), FX markets were dull with JPY stable at its lows while the USD rallied very modestly (dragging FX carry off a little and not supporting risk), Oil wavered around with the USD once again (ending up a little) as metal traded lower with a bigger gap down into the last hour or so. Stocks remain notably rich to credit which underperformed once again today. The last hour saw financials and Discretionary stocks start to rollover and then Tech (mainly the majors as GOOG showed the biggest drop top-to-bottom but most did not close strong - though AAPL made new highs once again). Certainly did not seem like a confirming move today of the 35pt rally off Friday's lows as perhaps Quarter-End sees some chips coming off the table - though hard to read too much into today's action.
During February and the first week or two of March, Individual Tax Refunds were running notably ahead of 2011 comparable data. More importantly, after a slow start, the rapid increase in refunds could have perhaps helped buffer the initial gas-price-related 'tax-hike' consumers were concerned about and yet not showing up in retail sales. However, as Stone & McCarthy notes today, the IRS reports that the dollar volume of individual income tax refund issuance lost ground once again to last-year's pace - now down 1% YoY (compared to being up 5.2% in mid-February). 4.3% more tax returns have been received and 2.6% more have been processed at this time compared to last year - and yet the average size of tax refunds are down 2.9% YoY even as the number of refunds is higher. It is perhaps a little premature to forecast the entire tax season, but, for now, what looked like a promising fillip for the consumer as tax refunds provided some extra spending power, appears to be slowing rapidly and removing yet another albeit small bowl of stimulus grool from the consumer's bowl.
While much has been made of the public side the ECB's money-printing facade whereby any and every piece of junk collateral can be lodged with the lender-of-first-last-and-only-resort in return for shiny new Euros to spend on government bonds (or save as the case seems to be), there is another facility - the Emergency Liquidity Assistance program (ELA) - that skirts under the radar. As Goldman notes today, the ELA enables the National Central Banks (NCBs) to provide 'liquidity' beyond and above the regular refinancing operations. While the amounts are not quite on the scale of the LTRO, they are large and continue to play a crucial role in stabilizing certain segments of the Euro area banking sector. But, of course, as seems always to be the case, the unintended consequence of this temporary emergency facility is that it appears to have become a permanent facility. This consequence has two rather ugly consequences, it removes still further collateral (assets encumbered) from bank balance sheets and further delays the needed adjustment process (read deleveraging) across the banking sector.