On the surface all is well, stocks are soaring, the EURUSD is up solidly, and euphoria is back, or that is at least what is being telegraphed. So why is the single biggest unmanipulated flight to safety flag (defined by us) currently available - the Swiss 2 Year - screaming to run for cover? The bond is currently at an all time nominal low, as none of the peripheral euphoria has had any impact on Europe's true remaining risk free asset, and instead it just hit a new all time record low yield moments ago. Just what does it know that nobody else does, or wishes to acknowledge? Or is today merely the latest iteration of the Copperfield market: keep the algos distracted with flashing red headlines and bright green S&P numbers, which the real money is quietly running away into the safety of Geneva bank vaults...
Jobless and looking? According to the BLS the US has added 1.8 million jobs in the last 12 months: these are the sectors which supposedly have high demand for (part-time) workers - Professional and Business Services accounting for one third of the increase in jobs, Education and Health Services at 23%, and, in equal amount, Leisure and Hospitality and Trade, Transportation and Utilities, which combined have accounted for 31% of the change. Where there were no job additions in the last year? Construction (but yes, there is a housing recovery supposedly). The one sector actively laying off? Government. That's ok though: with 22 million government jobs at the end of April, or 16.5% of the total people employed, government can stand to shed many more jobs.
Baffle With BS Continues: Non-Manufacturing ISM Better Than Expected As Employment Drops To Lowest Since 2011Submitted by Tyler Durden on 08/03/2012 10:14 -0400
The strategy to keep everyone utterly confused and merely chasing momentum and trends continues. After the surge in this morning's NFP report, driven entirely by statistical fudging and part-time jobs, which has sent the market higher by well over 1%, we next get a Services ISM update for July according to which the US non-manufcaturing sector improved modestly, to 52.6, on expectations of an unchanged print at 52.1, making the case for NEW QE even more distant. But wait, just to keep everyone totally baffled with BS, the ISM says that the employment index dipped below 50 for the first time since 2011, printing at 49.3 from 52.3: in other words, the employment in the US services sector is now contracting, something which the NFP number roundly denied. Confusion? Mutual exclusivity? It doesn't matter to algos, who are confident that the Fed will certainly launch more QE with the S&P at 2012 highs no matter what the facts say.
There have been various rumors floating around over the past 2 weeks that Russia would do everything in its power to establish its foothold in Syria once and for all, with the local regime closer to the edge with every passing day. There have also been rumors, however silly, that Russia is willing to give up its naval basis in the Syrian port city of Tartus, since denied. Today, we finally get the full story, courtesy of the BBC, which is that that "three large Russian landing ships carrying hundreds of marines will soon visit the port of Tartus in war-torn Syria, the Russian military says." And who can blame them: this is only logical following the surge buildup of US naval assets in the region as we reported last week and the recently 'leaked' 'secret' data that Obama was actively supporting Syrian rebels. End result: WTI soaring, and well over $90 at last check.
Since closing last night, the stock of Knight Capital has moved by nearly 100%, touching on under $2 in the after hours session, and now trading well over $3. The catalyst: a report by the WSJ that the firm has obtained a line of credit. Is this surprising? Not at all, and in fact is standard operating procedure by any firm which is buying hours of life in exchange for usurious lending costs. The lender is most likely a firm which will be a key participant in the forthcoming 363 asset sale, who has obtained a supersecured lien on all the firm's assets, and is also priming all of the other creditors of Knight. The question is whether the lender will be happy with what they find as a result of this 24 hour life line. If not - they simply pull the line of cash and the firm files. Think of it as an advance glance into Knight's books. And that glance will likely not reveal much. With rumors that even JPM has now ended lines with Knight, the New Jersey market maker is simply a closed box: no trades coming in or out, and only has housekeeping cash outflows on its books to keep its employees employed and systems running. We wish them luck. They will need it. None of this would have happened if, as we hoped 3 years ago, proactive steps had been taken to eliminate the threat of HFT.
Happy by the headline establishment survey print of 133,245 which says that the US "added" 163,000 jobs in July from 133,082 last month? Consider this: the number was based on a non seasonally adjusted July number of 132,868. This was a 1.248 million drop from the June print. So how did the smoothing work out to make a real plunge into an "adjusted" rise? Simple: the BLS "added" 377K jobs for seasonal purposes. This was the largest seasonal addition in the past decade for a July NFP print in the past decade, possibly ever, as the first chart below shows. But wait, there's more: the Birth Death adjustment, which adds to the NSA Print to get to the final number, was +52k. How does this compare to July 2011? It is about 1000% higher: the last B/D adjustment was a tiny +5K! In other words, of the 163,000 jobs "added", 429,000 was based on purely statistical fudging. Doesn't matter - the flashing red headline is good enough for the algos.
Expectations were +100,000, NFP prints at 163,000K. Goodbye QE in 2012.
While Knight's algos will be focusing on the headline number and furiously calculating if [X AS PRINTED] is < or > than [X AS EXPECTED] and simplistically moving the market up or down accordingly, without regard for quality or compoisition (they don't call it the Part-Time Non Farm Payrolls for nothing), another key swing factor in July will be the seasonal adjustment. As a reminder, as the chart below shows, in July we experience a major swing event. While in June, seasonal factors typically subtract about 1 million from the headline non-seasonally adjusted headline number, in June we invert, and instead of subtracting, seasonal factors for the first time since April "add" jobs. 295,000 (past decade average) to be exact. How will this impact the actual number? We will find out shortly. One thing to note: of the 100,000 consensus headline adjusted print, the seasonal adjustment factor itself will be roughly three times the actual print that will move the market. In a year of record temperature abnormalities and the "average seasonal adjustment" being anything but, we leave it up to readers to do with this data as they see fit.
While normally quite absurd, we do have to admit that last month, Deutsche Bank's Joe LaVorgna was among the analysts closest to the final actual number, which came in far below consensus. As such we give him the benefit of the first forecast: Joe LaVorgna is expecting a headline/private payroll increase of 75k/80k respectively. The market is looking for 100k/110k. Unemployment is expected to hold at 8.2%. The irony today is that max pain is a far stronger number, which in light of some very recent economic news, can not be ruled out (see Nick Colas' discussion below): if indeed NFP rises by well over 100,000 the market will have to push back its prayer that the NEW QE will come in September into 2013 as Bernanke will not do another easing round just as the presidential election approaches. What are some others thinking? Here is what Bank of America says.
- U.S. nuclear bomb facility shut after security breach (Reuters)
- EU Commission Welcomes Greek Reform Pledge, Wants Implementation (Reuters) -> less talkee, more tickee
- China Cuts Stock Trading Costs to Lift Confidence (China Daily) as France hikes transactions costs
- Holding Fire—for Now—but Laying Plans (WSJ)
- ECB-Politicians’ Anti-Crisis Bargain Starts to Emerge (Bloomberg)
- Dollar falls back as non-farm payrolls loom (FT)
- Ethics Plan to Raise Consumer Confidence (China Daily)
- Brazil backslides on protecting the Amazon (Reuters) - fair weather progressive idealism?
- Japan Foreign-Bond Debate May Boost BOJ Stimulus Odds (Bloomberg)
- Japan’s Lower House Passes Bill to Let Workers Stay on to 65 (Bloomberg)
The short-end of the Spanish curve is collapsing rapidly, and at last check was tighter by nearly 70 bps even with the 10 Year essentially unchanged, for one simple reason: more hope and prayer. This time we have completely unconfirmed and unverified talk that either the ECB will hold another conference, or that Spain will finally request a full blown bailout. Neither is likely to happen, certainly not on a Friday. In other words, the rapid steepening of the curve on more "talking" will not last. What will however, is increasingly negative sentiment toward the longer end of peripheral country bond curves. To wit, here comes JPM recommending a new short position in Spanish 10 Years. Below is the full text of JPM's Gianluca Sanford saying to short the Spanish 10 Year until it touched 7.75%. Why 7.75%? Because that is the level at which Rajoy will have no choice but to demand a bailout. The irony is that the market, by frontrunning politicians, continues to make the required political decision impossible - welcome to the new normal. Paradoxically, only after the market has fully abandoned hope, can the desired outcome happen. But it will take the broken market a few more weeks to figure this out.
When we started reading the LA Times article reporting that "the federal government has quietly been completing an audit of U.S. gold stored at the New York Fed" we couldn't help but wonder when the gotcha moment would appear. It was about 15 paragraphs in that we stumbled upon what we were waiting for: "The process involved about half a dozen employees of the Mint, the Treasury inspector general's office and the New York Fed. It was monitored by employees of the Government Accountability Office, Congress' investigative arm." In other words the Fed's gold is being audited... by the Treasury. Now our history may be a little rusty, but as far as we can remember, the last time the Fed was actually independent of the Treasury then-president Harry Truman fired not one but two Fed Chairmen including both Thomas McCabe as well as the man after whom the Fed's current residence is named: Marriner Eccles, culminating with the Fed-Treasury "Accord" of March 3, 1951 which effectively fused the two entities into one - a quasi independent branch of the US government, which would do the bidding of its "political", who in turn has always been merely a proxy for wherever the money came from (historically, and primarily, from Wall Street), which can pretend it is a "private bank" yet which is entirely subjugated to the crony interests funding US politicians (more on that below). But in a nutshell, the irony of the Treasury auditing the fed is like asking Libor Trade A to confirm that Libor Trader B was not only "fixing" the Libor rate correctly and accurately, but that there is no champagne involved for anyone who could misrepresent it the best within the cabal of manipulation in which the Nash Equilibrium was for everyone to commit fraud.