As Elvis (oops) Jerry Lee Lewis might have said if he were a trader "there's a whole lotta shakin' going on" but not much else. Cross asset-class correlations were weakening, ranges were very narrow today in stocks, credit, Treasuries, commodities, and FX, and volumes were well shrug. The three biggest items of note to us were among 'leadership' assets: AAPL dropped rather notably into the close - ending -0.7%; HYG (the high-yield bond ETF that has been so flow-/yield-grab-driven) dropped significantly into the close (saved by a last minute rescue) after heavy volume at the close last night and relatively heavy today as we sold down; and the major leveraged financials GS and MS - soared intraday (GS>MS) far exceeding their peers - but MS gave a significant amount of it back into the close while GS kept pushing up (+3%) with some major volume and VWAP action. Everyone is waiting for the great and good Draghi to anoint this rally tomorrow morning but the last hour pull to VWAP in S&P futures was not followed by VIX, as we note today was the lowest average trade size (amateurs) day of the year in S&P futures.
There are three key factors to modeling trade flows - or relevance - in a post-globalization world. While competitiveness is important, countries gain from being generally 'Technology-rich', 'Labor-rich', and/or 'Resource-rich'. The following chart, from Deutsche Bank, shows where the world's countries fit into the Venn diagram of give-and-take in a post-globalization market. The red oval highlights where Italy, Greece, Portugal, and Spain (and Argentina sadly enough) do not fit into this picture. Two words - Euro-sustainability?
By now it should be no secret that under the New Centrally-Planned Normal, good is great, but worst is far greater. It is therefore no surprise that in the past year, some of the highest returning stocks have been the companies which have seen wave after wave of shorts come in, attempting to ride the underlying equity value to zero, only to see themselves scrambling to cover short squeezes, generated either due to the pull of borrow by an overeager shareholder (think SHLD), or due to bad news not being horrible enough, leading to short covering ramps (think AMZN at each and every worse earnings call, which however is never bad enough to finally trounc the last traces of the "bull story"). Which is why, as we have done on various occasions in the past, we have collated the most hated stocks in the less prominent but far more volatile Russell 2000 Index, where we have limited the universe to the 700 or so stocks with a market cap between $50 million and $1,000 billion, or those which tend to have aggressive moves up or down on modest volume (i.e., not widely owned). We have then sorted these in descending order of Short Interest as a % of Float. The results are presented below.
With the front-end of the Spanish (and Italian) credit spread curves having compressed to what Goldman believes is 'fair-value' given rates and current fundamentals, it seems the consensus expectation ahead of tomorrow's ECB call is that Draghi will promise, deliver, and implement instantaneously. In a recent client survey a stunning 88% of investors expect Spain to officially request activation of EFSF/ESM support - subject to an MoU - by the end of the year (with 70% expecting it by the end of October - the heavy redemption month). A full 50% expect the Italians to follow suit by the end of Q1 2013. The paradox of course is that with the spread cost of funding so 'low', Spain has no need to ask for the help that is implicitly priced into the low yields - and with that huge maturity looming, it seems they have two options: 1) pre-empt the redemption by issuing short-dated debt now to fund it (piggy-backing on the ECB's confidence inspiration) but of course this will signal no need for a short-term MoU and therefore no ECB support and therefore bonds will sell-off; or 2) admit defeat, beg for help, lose face and get the bailout... (as we await tomorrow's 'details' on the seniority issue). The promise (or threat) of support implies it has to get worse before it can get better.
Fresh from his vacation with Mickey and Minnie, CNBC's Rick Santelli is back and mind-blown at the total cognitive dissonance of the fact that we just broke through $16tn debt. The relaxed Chicagoan summarizes, in words and tables that any Disney-princess-loving 6 year old girl could comprehend, why "a trillion is a big number" and while not dissing the first lady's speech, he notes that unlike her "money's not important to Barack" comment, when the number gets this big, it better matter to someone.
Back in early July we wrote that contrary to expectations, veteran Middle Eastern aircraft carrier CVN-74 Stennis would end its shore leave far earlier than expected, and be redeployed back to its usual stomping grounds just off Iran months ahead of schedule. As of days ago, the Stennis has quietly departed Naval Base Kitsap-Bremerton and is off. It will join CVN-65 Enterprise (which is doing its last tour of duty ever before being decommissioned) and CVN-69 Eisenhower in the Arabian Sea, aka off the coast of Iran. This will be one of the only times in history when the US has had three aircraft carriers in close proximity to those evil Iranians who are hell bent on global domination. Expect Stennis to reach Iran (and be available to support an Israeli attack of Iran) in the last third week of September. Then determine when the next full/new moon is following the arrival of Stennis at its destination, and buy Brent calls just ahead. Finally, profit.
That the SEC is the most incompetent, corrupt, irrelevant and captured organization "serving" the US public is known by everyone. And while the details of the SEC's glaring lack of capacity to do anything to restore investor confidence in the capital markets, which has become a casino used exclusively by Wall Street to defraud any retail investor still stupid enough to play (which lately a moot point as there have been no material retail inflows into mutual funds in over three years), are scattered, courtesy of Bloomberg we now have the best summary of just how the utterly clueless SEC is a muppet plaything of Wall Street, and together with it, the "grand regulation" that was supposed to keep Wall Street in check, is nothing but what Wall Street demand it to be, and forced the SEC, way over its head on regulation, to accept every change, that the very banks that are supposed to be regulated, demands as part of Dodd-Frank reforms. In short: everything we know about Wall Street 'regulation' has been a farce, and a lie, exclusively thanks to corruption rampant at the now documentedly incompetent Securities And Exchange Commission.
It is remarkable that we greedy ignorant short-term-focused human beings never seem to learn that driving forward and looking in the rear-view mirror can only end in disaster. Forget 'dancing while the music plays' or other such 'defenses' of herd ignorance, the most recent data regarding Auto Loans is simply mind-blowing:
- Subprime borrowers received 56.46 percent of loans on used cars in the quarter, up from 52.70 percent a year earlier.
- The average loan-to-value on new cars was 109.55%
- The average used car loan-to-value ratio rose to 126.62%
- 77% of Subprime Auto Loans are for a period greater than five years
As Yahoo notes, citing some monkey, "Despite the rise in subprime loans overall, there is still a strong sense of managing risk. Because the overall lending environment has improved, lenders are making loans available to a wider range of customers."
The cheek of it! They raised the price of our favorite ice cream. Actually, they didn't increase the price; they reduced the container size. Raising prices is one thing. We understand raw-ingredient price rises will be passed on. But underhandedly reducing the amount they give you… that's another thing entirely. It just doesn't feel… honest. You've noticed, we're sure, how much gasoline is going up. Food costs too are edging up. Kids' college expenses, up. Car prices, insurance premiums, household items – a list of necessities we can't go without. Regardless of one's income level or how tough life might get at times, one has to keep spending money on the basics. According to the government, we're supposedly in a low-inflation environment. What happens if price inflation really takes off, reaching high levels – or worse, spirals out of control? That's not a rhetorical question. Have you considered how you'll deal with rising costs? Are you sure your future income will even keep up with rising inflation? If your monthly expenses are about $3,000/month, you need 45 ounces of Gold to cover two years of high inflation.
The disregard for the future and the fundamentals of fiscal well-being is about to reap consequences. The Powers That Be counted on "time healing all," as if the mere passage of time would magically heal a broken economy and political machine. Time heals all--unless you have an aggressive cancer. The system has been pushed to extremes: the expectations are impossibly high, the promises are impossibly generous and the sums of money demanded by the vested interests "just to stay afloat" are stratospheric. The "run to fail" levers have all been pushed to the maximum, and it is simply too politically painful to make any real-world adjustments that might save the system from imploding. Nobody wants a crisis, yet a crisis is the only thing that can save the system from implosion.
You've seen Spanish youth unemployment rates soaring; been brow-beaten with data on the dramatic rise and acceleration of Spanish bank non-performing loans; and the rate of Spanish capital outflows chart is now ubiquitous; but where there is pain, there is also pleasure. As we are always looking on the bright-side and trying to find a silver-lining, Michael Cembalest provides just such a chart. To wit, the unprecedented surge in corporate bankruptcies in Spain; without question, a boon for the bankruptcy-lawyer industry and perhaps just the economic boost the country needs. Tongue-out-of-cheek, this is just a disastrous chart of reality on the ground.
Breaking news from now from France 24, which follows the massive7.9 Costa Rica earthquake moments ago.
- BREAKING FRANCE: FIRE BREAKS OUT AT FESSENHEIM NUCLEAR PLAN, INJURIES REPORTED
Fessenheim is France's oldest nuclear power plant located in the Alsace region.
In the words of Sesame Street, one of these spending components of the long-run budget plan is not like the others; one of these entitlements is not the same; can you spot which one? As BofAML notes, "no long-run budget plan would likely be effective if this rapidly growing program is not significantly constrained. This cost reflects growth in the economy, an aging population and an 'excess' growth factor that includes both medical advances and presumably inefficiencies."
Whether it is "buying-the-rumor" to "sell tomorrow's news" or some contagion from domestic bank-to-sovereign credit arbitrage, European credit markets are giddy with the Draghi rumors. European sovereigns are better but are leaking back a little now - with 2Y limping higher in yield. European stocks seem thoroughly unimpressed for now broadly-speaking (despite EUR strength helping drag US equities higher?) The world, it seems, has no idea what is going on once again... and then Merkel adds this:
- *MERKEL TELLS LAWMAKERS SHE OPPOSES UNLIMITED ECB BOND PURCHASES
- *MERKEL CAN ACCEPT TEMPORARY ECB BOND BUYING, BARTHLE SAYS
- *MERKEL CAN ACCEPT ECB BOND BUYING OF SHORT MATURITIES: BARTHLE
Which sends EURUSD into spasm...