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Latest Observations On Stocks Vs Credit
From Peter Tchir of TF Market Advisors
Stocks vs Credit
As IG16 goes back to unchanged, as XOVER gives up half its early morning gains (it is now 20 tighter), and Greek bonds continue to trade lower, I can only scratch my head and wonder what stocks are looking at?
Nothing in Europe has been fixed. Yes, Germany did agree that it wasn't illegal to proceed with EFSF, but that doesn't really do much. Especially not when more and more comments from European bankers and politicians indicate that Greece none of the current solutions are working for Greece. The EUR which popped briefly on the announcement has given back a lot of the gains.
As bizarre as it is to say, but yesterday felt like a short squeeze in the US. In spite of SPX finishing down 9 points, the price action felt like shorts getting squeezed. How can that make sense? Well, anyone who set a short ahead of Jackson Hole or just after the speech, likely set it in the 1130-1160 range. The memory of stocks rallying up to 1228 is too fresh in everyone's mind, so shorts were nervous, and longs may have been set too, as hope remained that Obama, Bernanke, Trichet, and Merkel would say or do things to support the market. I believe yesterday's bounce from the lows, then late day 10 point down and back up swing cleaned up a lot of shorts, so the market is much more balanced at 1175 than it was at 1175 at Jackson Hole time. This gives us a lot more ability to trade lower. Maybe it is too bizarre to believe that we can have a short squeeze on a massively down day, but it felt like that, and it feels like people are positioned less bearish than they feel. With nothing resolved in Europe, and some signs of continued deterioration, the market is more vulnerable to a sell-off.
My favorite spin yesterday was that the US will muddle along even if Europe is in trouble. Wasn't it just a few months ago that analysts were saying it is okay if the US does poorly, because over half of S&P 500 profits come from overseas? Weren't profits being enhanced because companies were selling things in Europe and translating those profits back into dollars at favorable exchange rates? Is that story gone and now globalization doesn't matter?
I remain convinced that credit in particular will remain weak as banks and to a lesser extent insurance companies and mutual funds perform quarter end window dressing. Unlike the "good" window dressing where they ramp up particular stocks, this will keep credit spreads on sovereigns and European banks relatively weak until at least the end of the month.
I spoke briefly about Eurobonds and remain amazed how many people believe they are a realistic possibility. We are working on a more detailed analysis of the pitfalls, but I still have not seen anyone lay out details on who would pay back Eurobonds, or who would receive the money. I also haven't seen much discussion on the rating, which would be Baa2 (on a WARF basis) if all countries are included in the same proportion as their EFSF commitments. S&P has already proposed using the punitive "weakest link" methodology.
In the meantime, maybe it is simply enough to mention that the EU has a 26,000 word document detailing the sale of cabbages within the EU, but yeah, they are going to create a Eurobond.
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Every now and then it is easy to forget that the one or two "better thanexpected"
data points blasted by flashing headlines do nothing that merelymask what is an
otherwise quite deplorable and deteriorating reality. For
the disconnect between America and the rest of the world look no further
than this chart showing the dramatic divergence between the DJIA, which has
just gone positive for the year, and every other major global stock market.
Yet for those who require a narrative to go with their numbers, here is The
Economic Collapse with the latest of their traditionally comprehensive
bulletins, this time summarizing the "25 signs that the financial world is
about to hit the big red panic button."
From The Economic Collapse:
The following are 25 signs that the financial world is about to hit the big
red panic button....
#1 According to a new study just released by Merrill Lynch, the U.S.
economy has an 80% chance of going into another recession.
#2 Will Bank of America be the next Lehman Brothers? Shares of Bank of
America have fallen more than 40% over the past couple of months. Even
though Warren Buffet recently stepped in with 5 billion dollars, the
reality is that the problems for Bank of America are far from over. In
fact, one analyst is projecting that Bank of America is going to need to
raise 40 or 50 billion dollars in new capital.
#3 European bank stocks have gotten absolutely hammered in recent weeks.
#4 So far, major international banks have announced layoffs of more than
60,000 workers, and more layoff announcements are expected this fall. A
recent article in the New York Times detailed some of the carnage....
A new wave of layoffs is emblematic of this shift as nearly every major
bank undertakes a cost-cutting initiative, some with names like Project
Compass. UBS has announced 3,500 layoffs, 5 percent of its staff, and
Citigroup is quietly cutting dozens of traders. Bank of America could cut
as many as 10,000 jobs, or 3.5 percent of its work force. ABN Amro,
Barclays, Bank of New York Mellon, Credit Suisse, Goldman Sachs, HSBC,
Lloyds, State Street and Wells Fargo have in recent months all announced
plans to cut jobs — tens of thousands all told.
#5 Credit markets are really drying up. Do you remember what happened in
2008 when that happened? Many are now warning that we are getting very
close to a repeat of that.
#6 The Conference Board has announced that the U.S. Consumer Confidence
Index fell from 59.2 in July to 44.5 in August. That is the lowest reading
that we have seen since the last recession ended.
#7 The University of Michigan Consumer Sentiment Index has fallen by almost
20 points over the last three months. This index is now the lowest it has
been in 30 years.
#8 The Philadelphia Fed's latest survey of regional manufacturing activity
was absolutely nightmarish....
The survey’s broadest measure of manufacturing conditions, the diffusion
index of current activity, decreased from a slightly positive reading of
3.2 in July to -30.7 in August. The index is now at its lowest level since
March 2009
#9 According to Bloomberg, since World War II almost every time that the
year over year change in real GDP has fallen below 2% the U.S. economy has
fallen into a recession....
Since 1948, every time the four-quarter change has fallen below 2 percent,
the economy has entered a recession. It’s hard to argue against an
indicator with such a long history of accuracy.
#10 Economic sentiment is falling in Europe as well. The following is from
a recent Reuters article....
A monthly European Commission survey showed economic sentiment in the 17
countries using the euro, a good indication of future economic activity,
fell to 98.3 in August from a revised 103 in July with optimism declining
in all sectors.
#11 The yield on 2 year Greek bonds is now an astronomical 42.47%.
#12 As I wrote about recently, the European Central Bank has stepped into
the marketplace and is buying up huge amounts of sovereign debt from
troubled nations such as Greece, Portugal, Spain and Italy. As a result,
the ECB is also massively overleveraged at this point.
#13 Most of the major banks in Europe are also leveraged to the hilt and
have tremendous exposure to European sovereign debt.
#14 Political wrangling in Europe is threatening to unravel the Greek
bailout package. In a recent article, Satyajit Das described what has been
going on behind the scenes in the EU....
The sticking point is a demand for collateral for the second bailout
package. Finland demanded and got Euro 500 million in cash as security
against their Euro 1,400 million share of the second bailout package.
Hearing of the ill-advised side deal between Greece and Finland, Austria,
the Netherlands and Slovakia also are now demanding collateral, arguing
that their banks were less exposed to Greece than their counterparts in
Germany and France entitling them to special treatment. At least, one
German parliamentarian has also asked the logical question, why Germany is
not receiving similar collateral.
#15 German Chancellor Angela Merkel is trying to hold the Greek bailout
deal together, but a wave of anti-bailout "hysteria" is sweeping Germany,
and now according to Ambrose Evans-Pritchard it looks like Merkel may not
have enough votes to approve the latest bailout package....
German media reported that the latest tally of votes in the Bundestag shows
that 23 members from Mrs Merkel's own coalition plan to vote against the
package, including twelve of the 44 members of Bavaria's Social Christians
(CSU). This may force the Chancellor to rely on opposition votes, risking a
government collapse.
#16 Polish finance minister Jacek Rostowski is warning that the status quo
in Europe will lead to "collapse". According to Rostowski, if the EU does
not choose the path of much deeper economic integration the eurozone simply
is not going to survive much longer....
"The choice is: much deeper macroeconomic integration in the eurozone or
its collapse. There is no third way."
#17 German voters are against the introduction of "Eurobonds" by about a 5
to 1 margin, so deeper economic integration in Europe does not look real
promising at this point.
#18 If something goes wrong with the Greek bailout, Greece is financially
doomed. Just consider the following excerpt from a recent article by Puru
Saxena....
In Greece, government debt now represents almost 160% of GDP and the
average yield on Greek debt is around 15%. Thus, if Greece’s debt is rolled
over without restructuring, its interest costs alone will amount to
approximately 24% of GDP. In other words, if debt pardoning does not occur,
nearly a quarter of Greece’s economic output will be gobbled up by interest
repayments!
#19 The global banking system has a total of 2 trillion dollars of exposure
to Greek, Irish, Portuguese, Spanish and Italian debt. Considering how
much the global banking system is leveraged, this amount of exposure could
end up wiping out a lot of major financial institutions.
#20 The head of the IMF, Christine Largarde, recently warned that European
banks are in need of "urgent recapitalization".
#21 Once the European crisis unravels, things could move very rapidly
downhill. In a recent article, John Mauldin put it this way....
It is only a matter of time until Europe has a true crisis, which will
happen faster – BANG! – than any of us can now imagine. Think Lehman on
steroids. The U.S. gave Europe our subprime woes. Europe gets to repay the
favor with an even more severe banking crisis that, given that the U.S. is
at best at stall speed, will tip us into a long and serious recession. Stay
tuned.
#22 The U.S. housing market is still a complete and total mess. According
to a recently released report, U.S. home prices fell 5.9% in the second
quarter compared to a year earlier. That was the biggest decline that we
have seen since 2009. But even with lower prices very few people are
buying. According to the National Association of Realtors, sales of
previously owned homes dropped 3.5 percent during July. That was the third
decline in the last four months. Sales of previously owned homes are even
lagging behind last year's pathetic pace.
#23 According to John Lohman, the decline in U.S. economic data over the
past three months has been absolutely unprecedented.
#24 Morgan Stanley now says that the U.S. and Europe are "hovering
dangerously close to a recession" and that there is a good chance we could
enter one at some point in the next 6 to 12 months.
#25 Minneapolis Fed President Narayana Kocherlakota says that he is so
alarmed about the state of the economy that he may drop his opposition to
more monetary easing. Could more quantitative easing by the Federal
Reserve soon be on the way?
And the conclusion which is, as usual, spot on:
Things have not looked this bad for global financial markets since 2008.
Unless someone rides in on a white horse with trillions of dollars (or
euros) of easy credit, it looks like we are headed for a massive credit
crunch.
What we witnessed back in 2008 was absolutely horrifying. Very few people
want to see a repeat of that. But as things in the U.S. and Europe
continue to unravel, it appears increasingly likely that the next wave of
the financial crisis could hit us sooner rather than later.
None of the fundamental problems that caused the crisis of 2008 have been
fixed. The world financial system is still one gigantic mountain of debt,
leverage and risk.
Authorities around the globe will certainly do all they can to keep things
stable, but in the end it is inevitable that the house of cards is going to
come crashing down.
Let us hope for the best, but let us also prepare for the worst!!!
Why are you straight cutting & pasting entire ZH articles into ZH comment boxes?
http://www.zerohedge.com/news/it-time-financial-world-panic-25-reasons-why-answer-may-be-yes
If cut from The Economic Collapse itself it would be somewhat more understandable, but there's even the ZH commentary, e.g:
MRSAP--Try to keep up, ace, this was already posted. A little slow, are we?
Big headfake this morning with futures glowing green. Could get very ugly this afternoon.
especially since now everyone "knows" stocks go up when Europe goes home
I am staying short via puts, its cheaper then outright shorting and I couldn't care less about any squeeze! I can roll over into next month expiration, move to a more favorable strike etc! This is just another bounce which will be sold, as it always does! The QQQ is the best example of this pittyful manipulation, 3 stocks in there are "on a tear" and wooshhh it goes up, LMAO, really, REALLY!
I agree...today seems like a smell the pretty flowers day.....all is good...gold and silver down ...on what????? we have 300 billion in more debt coming up....over and above the 2 trilion existing....the EU is failing apart....and it is....2 years to make a Euro bond agremment at the least....and yes ..at what price..it will be over by then...China who knows but it is affecting Brasil quite a bit...I am buying gold and silver on this HFT driven dip....you can have the paper...
greek bond yields are climbing today
I think this statement is a lock. The short squeeze followed by the now traditional gap up/mark up to finish any shorts left...leaving no buyers for marked up positions.
It is equally bizarre and certain that the market will come off by the end of the day...or tomorrow as President Zero makes his empty promises speech.
The integrity of the US market is in its death throes stage. All that is required is her final breath...which I suspect is near.
Bernanke speaks tomorrow so this thing can levitate until he finishes.
Beige book will be a bummer today though.
How bizzarre how bizzarreeeeeee.
Looks more like money from gold is flowing into equities.
why?
Def felt like a squeeze, but w/ gold down $50 this morning I don't think we're going to be plunging soon. AAPL over $380 too
This stockmarket is violently swinning in every direction. It's like a cardiogram showing the last 2 minutes of somebody going into a hart attack.
It is not too far outside the realm of possibility to consider that perhaps mainstream news networks have a team of "scouts" roaming the playgrounds of elementary schools around the world trying to identify children with early symptoms of being pathological liars with sociopathic tendencies in order to get a head start on the competition for the next crop of Network News Anchors.
Had Bernanke's finger prints all over it. Bernanke loves short squeezes. I am sure he intervened in the Market yesterday.
I observed that when Bernanke was in QE2 mode the Market almost always rallyed in the last half hour. With Bernanke out of the Market the Market has a tendency to sell off. They buy in the Morning and Sell in the Afternoon.
The trading action yesterday appeared like Bernanke had a hand in pumping the Market from the lows and then when the Market was going to roll over about 3:30 they gave it TONS of juice.
Plus, with Bernanke and QE2 all of the high beta stocks were pumped, which is the same thing that happened yesterday.
Peter,
Nicely done on Taking Stock yesterday. I was glad to catch a part of it last night on the replay.
Peter, great posts as always. Always look forward to you musings.