On January 8, 2013 there were two separate events where an exchange stopped disseminating quotes, which caused the last quote sent from that exchange to lock (bid price equals ask price) or cross (bid price is greater than ask price) the NBBO (National Best Bid/Offer) when market prices moved higher or lower on other exchanges. Crossed quotes cause many problems for wholesalers (who internally match orders), order-routers, traders, financial web-sites, business news channels, and any of the 2.5 million subscribers that use the consolidated quote to analyze stock prices. From IWM to HLF, the crosses (and thus integrity of the consolidated feed) were everywhere.
After record-breaking compression and six consecutive drops in VIX (along with a morning full of further compression) spot VIX is bleeding higher now. Having caught 'down' to stocks' ebullience yesterday, it appears the hedgers are either covered or rolled further out but there is another reason perhaps (aside from the absolute cheapness of protection). Quantitatively, the implied volatility of the S&P 500 is now below its recent realized volatility (this difference is really a better indication of how fearful or fearless investors are) - and on each of the previous three occasions that has occurred in the last year, VIX has risen notably relative to realized in the next few days.
The last time the US held a 10 year auction was earlier than its usual time on December 12, just before the Fed announced QE4EVA. The result from that particular auction were a total jumble, where Primary Dealers took down a tiny 33.1%, and where Directs were stuffed with a near record 42.7%. That and a big, 1.7 bps tail. In this light today's 10 Year was a little more casual, with the Treasury just issuing another $21 billion in 10 year bonds, this time not premonetized unlike tomorrow's 30 year auction, although the internals were just as ugly. The When Issued was 1.855%, with the final High Yield of 1.863% tailing (84% allotted at high). The Bid to Cover was 2.83, the smallest for a reopening auction since December 2009, and well below the average for 2012 of 3.03. Indirects took down just 28.5%, the second lowest in years, and better only compared to December's 24.2%, while Directs ended up holding only 14.8% of the final allocation, a big drop from December's 42.7%, which increasingly appears to have been a year end window dressing by various credit funds to show "safe securities" on their books. Overall, an ugly 10 Year auction following another ugly 10 Year auction, even if the past week has seen the yield on the paper drop substantially from 1.97% a week ago to 1.86% today. Was that it for the great "bonds to stocks" rotation?
CNBC's Rick Santelli nails it once again by cutting through the idiocy and spin that is almost the entire mainstream media's view of the 'fiscal cliff' resolution. His point, among many he makes in this brief but compelling clip, is that the massive amounts of arm-twisting of the House Republicans not to add any Amendments was not about the 'economic turmoil' it might cause (as so many press wanted to report) but that "it would have riled up the stock market." The shouting Chicagoan explicitly states: "the Country, and Congress in particular, ...should never again use the stock market as their main barometer when addressing what's wrong with the country". Santelli drives his point home with examples from previous equity market downturns as he makes the critical point that it took 20 years to catch Madoff's ponzi scheme and he wonders how long we will remain dumbstruck by the Fed's printing presses, FASB, et al. into believing everything is good because stocks are going up. "Take a look at yourself in the mirror," he admonishes, but watch this 3-minute clip first for enlightenment!
Back in December 2011, we previewed the rotation in the FOMC's voting block with "When Doves Laugh: 4 Weeks Until The Quiet Coup In The Fed Gives QE3 A Green Light", a post whose summary was that as a bevy of new voting doves came in, it made QE3, then very much a taboo topic - because, you see, "the economy was improving on its own" - virtually inevitable (despite some angry comments from even our own readers). Naturally, as 2012 played out, we got not only QE3 but QE4EVA. So now what? Well, with the new year comes the now traditional new roster of voting regional Fed president members. And while the supremacy of the Bernanke core supermajority group of 8 permanent voters (especially with the three new hires) will never be in jeopardy, 4 new regional presidents join the core group of Bernanke doves. The new voting FOMC members: Evans, Rosengren, Bullard and George. They replace Pianalto, Lockhart, Williams and consummate critic and sole voice of reason and opposition at the Fed in 2011, Lacker. So how does the layout of the 2013 FOMC nest of hawks and doves look like? SocGen summarizes.
While not to the level of US sophistry, European equities enjoyed the day driven by further compression in Europe's VIX. The big winners were Spanish and Italian stocks (now up 2% on the week) as Europe's VIX drops to one-month lows. However, the correlated risk-on awesomeness did not flop over into anything but the high-beta nominal prices of equities. EURUSD slid all day (with a slight bump into the close); Italian and Spanish sovereigns bled wider all day (with a slight give back in the latter part); and corporate and financial credit stayed wide as stocks soared. With EUR weakness (remember the Fed/ECB framework), we wonder if European equity strength is merely rotation from US to Europe? Or is it merely front-running the sell-the-news event at the ECB tomorrow?
There was a time when the Fed would repurchase freshly issued bonds a month, a week, or even a day after they were auctioned off by the Treasury (to avoid that whole perjury-inducing "no monetization" stigma). That's no longer the case. Moments ago the Fed concluded its most recent POMO as part of the now unsterilized QE4EVA, focusing on 2036-2042 maturities, i.e., the long-end. A quick look at the issues bought shows that the one CUSIP most put back by dealers to the Fed was the 912810QY7 30 Year. Curiously this is precisely the same CUSIP that, despite the debt ceiling being breached and all, will be auctioned off... tomorrow. Granted, it is a reopening (29 year, 10 month issue), but in a world in which nothing financial makes sense, and idiots come up with debt ceiling avoidance "schemes" that could have rolled right off a Lewis Black rant, we prefer to think of its as pre-monetization, much the same as pre-crime. That said, our hopes that Spielberg will consider putting the script of Monetization Report into a movie, with Paul Giamatti reprising the role of the man who prints the world, will likely not come true.
With the decision of the Federal Reserve to continue its policy of asset purchases (QE) as long as US employment remains depressed, we can say that inflation targeting as a tool of monetary policy, introduced in the early 80s under Paul Volcker, has finally been buried. Central banks are now moving towards a policy of targeting asset prices and other economic variables, primarily nominal GDP (or jobs per se). The consequences of this monetarist revolution on asset price formation are difficult to assess. However, we cannot overemphasise the potential disruption to the correlation and volatility regimes to which investors have become accustomed. In such conditions, proven investment strategies may prove obsolete. More than ever, investors will need to be able to challenge and fight against preconceived ideas. Lastly, and fundamentally, it is to be hoped that the policy of quantitative easing (QE) does not last too long, because, ultimately, it could lead to a massive distortion in the allocation of capital. However, as the charts below illustrate, every decade has been characterised by a different economic, monetary/fiscal policy, and investing environment and the limitations of Keynesian policy have been betrayed.
As we warned on December 26, when the stock was trading in the mid 20's the pain for shorts is horrible and getting worse (courtesy of the best and always absolutely certain contrarian signal - the involvement of Whitney Tilson) and is about to send the stock into the stratosphere following a very surprising announcement by none other than Bill Ackman buddy Dan Loeb, who just filed a 13F reporting a 8.24% passive stake in Herbalife sending the stock surging. In other news: this may be Herbadeath for Whitney Tilson, who may well be on track to blow up a second fund in under a year.
As reported previously, when Bloomberg broke the news two days ago, it now appears that the official appointment of Jack Lew as the new SecTres will take place tomorrow. From Bloomberg: "President Obama will announce tomorrow that White House Chief of Staff Jack Lew is his pick for Treasury secretary, person familiar with the matter tells Bloomberg’s Han Nichols." In other words - goodbye Timmah: best of luck writing your new book, which in the tradition of every ex-public servant who departs the government where they kept their mouths firmly shut, we assume will be all about bashing Tim Geithner.
2012 was a historic year for extreme weather that included drought, wildfires, hurricanes and storms. But, as NOAA reported yesterday, 2012 marked the warmest year on record for the contiguous United States. The average temperature for 2012 was 55.3°F, 3.2°F above the 20th century average, and 1.0°F above 1998, the previous warmest year. Rainfall was dismal also at 26.57 inches, 2.57 inches below average, making it the 15th driest year on record for the nation. NOAA also adds that the U.S. Climate Extremes Index indicated that 2012 was the second most extreme year on record for the nation, nearly twice the average value and second only to 1998. 2012 saw 11 disasters that reached the $1 billion threshold in losses. Climate Central also confirms that fully two-thirds of the lower 48 states recorded their first-, second- or third-hottest years, and 43 states had one of their top 10 warmest years ever recorded. Globally, 2012 appears to be the eight warmest on record.
Readers already know that when it comes to Europe, the scariest chart, from a political, economic, financial and social perspective, is that showing youth unemployment - youth, which engaged in idle, non-productive activity is a powder keg for both future economic instability and social upheaval. The monthly update is presented below. This time, we are happy to also present the "scariest heatmap" that goes with it, showing the geographic breakdown of unemployment in the critical 15-24 age groups. Those looking for geopolitical hotspots in the coming months and years, look no further than the dark shaded areas.
- A Bold Dissenter at the Fed, Hoping His Doubts Are Wrong (NYT)
- China and Japan step up drone race as tension builds over disputed islands (Guardian)
- How Mario Draghi is reshaping Europe's central bank (Reuters)
- Merkel Economy Shows Neglect as Sick Man Concern Returns (BBG)
- US oil imports to fall to 25-year low (FT)
- China Loan Share at Record Low Shows Financing Risks (BBG)
- Dimon Says Some JPMorgan Execs ‘Acted Like Children’ on Loss (BBG) - children that reveleased who 'excess reserves' are truly used
- Fed injects new sell-off risk into Treasuries (FT) - really? So the Fed will stop monetizing the US deficit some time soon?
- Obama aide presses Republicans to accept more tax revenues (Reuters)
- Ex-SAC analyst named 20 alleged insider traders (FT)
- BOJ easing bets help dollar regain ground vs yen (Reuters)
- Goldman Sachs Said to Be Part of Fed-Led Foreclosure Settlement (BBG)
- Venezuela postpones inauguration for cancer-stricken Chavez (Reuters)
Think the Fed (with its balance sheet amounting to over 20% of US GDP), or the ECB (at 30% of GDP) is bad? Then take a look at the balance sheet of the Swiss National Bank, whose assets now amount to some 75% of Swiss GDP and which has now "literally bet the bank" in the words of the WSJ not once, not twice, but three times in a bid to keep the Swiss Franc - that default flight to safety haven - low, and engaging in what is semi-stealth currency warfare by buying other sovereigns' currencies for over two years now, although he hardly expect the US Treasury to even consider it for inclusion on its list of currency manipulators - after all, "everyone is doing it".