While everyone awaits Germany's bowing to European pressure to share in their supposed wealth, the sad truth is that the clear line between core and peripheral economies is blurring every day as the lead-boots of Portugal, Spain, and Greece, drag 'until-recently high-fliers' Germany and France down to the bottom. The release this week of European Manufacturing Confidence data shows that all the nations are now contracting as core converges DOWN to periphery in a vicious circle. This is critical as suddenly the clock for a Euro-break-up is speeding up: every day that Germany delays to intervene and acquiesce bailout the PIIGS, the PIIGS implied-leverage declines as Germany is being dragged to their level - and thus 'unable' let alone 'unwilling' to share some burden.
Still scratching your head over what happened this morning (this would be everyone at the SEC but not their porn webstream vendors - even they by now realize just how broken the market is)? Don't be - courtesy of Dennis Dick and Premarket Info, here is a 20 minute video explanation parsing the tape and showing precisely what happened that impacted nearly 150 stocks.
We already know that the National Security Agency will soon capture all communications — phone calls, search histories, web history, e-mails, passwords, etc — in their Utah data centre. In Britain, a dangerous precedent is being set. "A teenager arrested over a malicious tweet sent to Team GB diver Tom Daley has been issued with a warning. Dorset Police said the 17-year-old boy was held at a guest house in the Weymouth area on suspicion of malicious communications and later bailed. After coming fourth in the men’s synchronised 10m platform diving event on Monday, Daley, 18, from Plymouth received a message on Twitter. It told him he had let down his father Rob, who died in 2011 from cancer." Arrested and cautioned for expressing an opinion. Not for threatening violence. Not even for racial or sexual abuse — as happened in March when a student was convicted of incitement to racial hatred after he tweeted a series of racial slurs. Just for expressing an opinion that the authorities found to be distasteful. I admit, it was a distasteful comment. But the idea that the government should arrest the person who made it is far, far, far more distasteful still. Meanwhile, the number of bankers arrested for rigging LIBOR remains at zero.
While hope remains, Citigroup's Steven Englander notes that the much stronger than expected ADP has probably shifted market expectations towards neutral, but like us he believes the market remains more hopeful of an aggressive fed than wary of disappointment. In parentheses below, we indicate what we think will be negative, neutral and positive surprises from an investor viewpoint.
Just when you thought the Li(e)bor scandal had jumped the shark, Germany's Spiegel brings it back front-and-center with a detailed and critical insight into the 'organized fraud' and emergence of the cartel of 'bottom of the food chain' money market traders. "The trick is that you can't do it alone" one of the 'chosen' pointed out, but regulators have noiw spoken "mechanisms are now taking effect that I only knew of from mafia films." RICO anyone? "This is a real zinger," says an insider. In the past, bank manager lapses resulted from their stupidity for having bought securities without understanding them. "Now that was bad enough. But manipulating a market rate is criminal." A portion of the industry, adds the insider, apparently doesn't realize that the writing is on the wall.
Markets are toast as Louis Bacon plans to give back 25% of his fund to investors as "liqudity and opportunities have become more constrained." As Bloomberg notes, Bacon is struggling to make money in his typically macroeconomic trend exploiting fund as "the risk on / risk off environment appears to be an abiding presence that has keep engagement low." Macro funds lost an average of 1.3 percent in the first six months of the year. Bacon, pointed out that "Markets are increasingly distorted by central banks’ attempts to squeeze drops of growth from an over-indebted private sector across much of the developed world." The U.S. markets are hindered by "a caustic political environment and an anti-business administration," he said and pulls no punches as he goes after inept regulators in Europe and the US, and describes the state of affairs as "Disaster Economics, where assets are valued based on their ability to withstand a lurking disaster as opposed to what they may yield or earn, is now the prism through which investors are pricing markets." And perhaps most 'distorted' is the credit market where trading in individual corporate credits has also been 'decimated' he said. "I shudder to think of the stress that is going to occur during the new credit liquidation cycle."
Anyone who has had the displeasure of trading this market since the open will be well aware that the massive selling that started at 3:59:57 PM yesterday just as we showed, appears to have continued into today, after an algo, supposedly one impacting NYSE stocks this time, and proving that the entire market is a broken joke, not just Nasdaq and BATS, and one which is linked to Knight Capital, has continued this morning, sending countless stocks into the proverbial "batshit" formation, with moves of 10% higher and lower for no apparent reason. That's ok: the SEC and various other regulators are all over it, and will guarantee that the markets "are fixed." In other news, today we will report the latest massive outflow from domestic media funds. In the meantime, here are the first two picture of stocks getting pounded in super slo-mo courtesy of Nanex. Behold "perfectly normal" bids, offers and prints.
Expectations that the American manufacturing sector would expand after "briefly" contracting in June were promptly doused after the Manufacturing ISM printed at 49.8, below expectations of an expansionary print of 50.2, and essentially unchanged from last month's 49.7. Where did offsetting growth come from? The most hollow of indicators - Inventory - which keeps on being built up in expectation of a demand spike that never comes. This is also the third miss in a row for the ISM, whose most watched component, the Employment index, slid from 56.6 to 52.0 confirming that the earlier ADP number was a total noisy fluke as usual. The question: is the data as bad as possible for it to be good for stocks remains unanswered, especially with some Knight algo wreaking havoc across all stocks as of this posting.
Those wondering how the preponderance of Wall Street's buyside community feels about the President, will have their questions answered after reading this blurb from Dan Loab's Q2 letter. "The second quarter was marked by choppy markets caused by fears about Europe, a soft patch in the U.S., more signs of a Chinese slowdown, and U.S. consumers and business owners alike frustrated by the Obama Administration, which is openly hostile to most businesses and unable to articulate or implement policies to spark growth and reduce unemployment. Since ”Euro?phobia” has roiled the markets for over twelve months, we attributed the second quarter’s sell?off mostly to the renewed worries over US weakness and pervasive concerns about a Chinese hard landing, which punished any assets linked to global growth."
In a brief 42 seconds, Bloomberg TV perfectly describes the sad reality that we are facing in the US. Conjuring images of gold medal winners and years of effort, this brief clip notes that not only is the current recovery the worst since WWII, it is worse than the poster-boy for dismal 'lost-decade' economy's - Japan. Somewhat ironic in its dysphoria given Larry Meyers' counterfactuals and the massive stimulus so far - but we do still have hope (and change). It seems we should forget 'Citius, Altius, Fortius' since reality is 'weaker, slower, longer'.
We previously observed that the US Treasury, under advisement of TBAC Chairman Matt Zames, who currently runs JPM's CIO group in the aftermath of the London #FailWhale and who will become the next JPM CEO after Jamie Dimon decides he has had enough of competing with the Fed over just who it is that run the US capital markets, would soon commence issuing Floating Rate bonds (here and here) as well as the implication that the launch of said product is a green light to get out of Dodge especially if the 1951 Accord is any indication (which as we explained in detail previously was the critical D-Day in which the Fed formerly independent of Treasury control, effectively became a subservient branch of the government, in the process "becoming Independent" according to then president Harry Truman). Sure enough, minutes ago the TBAC just told Tim Geithner they have given their blessing to the launch of Floating Rate Notes. To Wit: "TBAC was unanimous in its support for the introduction of an FRN program as soon as operationally possible. Members felt confident that there would be strong, broad-based demand for the product." Well of course there will be demand - the question is why should Treasury index future cash coupons to inflation when investors are perfectly happy to preserve their capital even if that means collecting 2.5% in exchange for 30 Year paper. What is the reason for this? Why the Fed of course: "Whereas the Fed had, as a matter of practice, reinvested those proceeds in subsequent Treasury auctions, Treasury must now issue that debt to the public to remain cash neutral. For fiscal years 2012-2016, this sums to $667 billion." Slowly but surely, the Fed's intervention in the capital markets is starting to have a structural impact on the US bond market.
Following David Einhorn's take-down of the great and glorious Oz Larry Meyer eighteen months ago, the latter has been in training - readying his counterfactual counter-punches and controlling his ire. The king of Keynesianism just had his bell rung once again by a market realist and pragmatist as Stephen Roach destroyed the "if-we-don't-have-models-we-are-making-it-all-up" maestro and his constant diatribe of counterfactual crap. "Where's the beef, Larry?" Roach asked on CNBC this morning, which was followed up with a rabbit punch from Kiernan, "and what about Christina Romer's stimulus-employment model?" The visibly shaken (seriously watch the clip) Meyer falls back once again to a defensive pose - and while practically admitting that the Fed is impotent - as he pulls out the ultimate "but without our models we would not be able to tell you how much worse it would be without the Fed interventions". Roach takes this weak cross to the chin and comes over the top with a devastating "mark your models to market in light of what the economy has done over the four and a half years, the traction from monetary policy has been the major disappointment of this so-called post-crisis recovery." TKO.