Volumes in cash equities (NYSE) and futures (ES) were on the low-side for the year today but what was shocking and perhaps the sign that this rally has run out of real-money to push it higher is that fact that today saw the lowest average trade size in the S&P 500 e-mini futures contract of the year. This follows the peak (in average trade size of the entire rally) on Friday as stocks bump up against the March 2009 low up-trendline. We can't help but feel the professionals (who will tend to trade in larger size) are leaving the building rapidly with only the algos and correlations to hold this up for now (as Treasuries start to lag back down) as we note (h/t John Lohman) that this was the 6th lowest relative range in cash S&P for the year. The sell-off into the close dragged stocks back in line with broad risk (as CONTEXT had underperformed all day) as well as credit and vol markets as 10Y Treasuries rallied the most in two weeks now lower in yield for the week (and flatter). Oil outperformed as the USD meandered higher (and JPY stronger) while commodities were generally quiet. Credit was weak - led by HYG - as IG remains the up-in-quality favorite (though suffered a little from its richness today) as VIX dropped and its term structure flattened modestly led by the longer-end.
Goldman screams it is a generational buy, Larry Fink goes all in stocks, Notorious BIGGS is 90% long, anchors on comedy-financial fusion channels are channeling the producer in their earpiece and screaming at the teleprompter to "sell bonds and buy stocks", even as stocks are at their highest in nearly 5 years and... what happens? In the latest week, ICI just reported that domestic equity retail funds just saw another $2.9 billion outflow, the 4th consecutive in a row, and the 23 of out 27 outflows during the entire parabolic blow off top phase the market has undergone since October, and instead put another $9 billion in fixed income funds "soaring" yields be damned. What does this mean? Probably that the stock ramp is about to get uber-parabolic for the simple reason that this is the only thing left in the status quo's arsenal - to keep doing the same old same old, hoping for a different outcome, because this time it's different. Only this time the dumb money either doesn't have the cash to burn, or just doesn't want to participate in a rigged, corrupt, centrally-planned market. Whatever the case, the Primary Dealers and the Fed will just have to keep hoping more central banks pull a Bank of Israel and sell the hot grenade axes to them, since Joe Sixpack is done being the "dumb money."
It appears we are, as a nation of desperately consuming investors, becoming increasingly cognitively dissonant. Charles Biderman, of TrimTabs, leaves the ominous clouds of the Bay Area for New York City and addresses our seemingly Pavlovian response for the third year in a row to a rising stock market (flooded with portfolio-rebalancing duration-destroying Central Bank money) as evidence that the real economy must be doing great. Of course, relying on tried and true facts such as real job growth and real wage growth and understanding the seasonally-abused-adjusted housing data realities, Biderman notes that the only money driving stocks up is corporate buybacks dominating selling pressure. While modestly bullish on these flows, he is growing more anxious. He sees insider selling surging (from 5:1 January to 14:1 February to 35:1 in March), there has been no new 'cash-takeovers' announced this month compared to $15bn per month last year, and the IPO pipeline is ramping up fast (supply will dominate demand) as the end of Operation Twist approaches removing yet another prop to the perceived reality of stocks.
How did we get here? An argument can be made that miscalculation, accident, inattention and the like are why things go bad. Those elements do have a role, but it is minor. Potential catastrophe across the board can't be the result of happenstance. When things go wrong on a grand scale, it's not just bad luck or inadvertence. It's because of serious character flaws in one or many – or even all – of the players. So is there a root cause of all the problems I've cited? If we can find it, it may tell us how we personally can best respond to the problems. In this article, I'm going to argue that the US government, in particular, is being overrun by the wrong kind of person. It's a trend that's been in motion for many years but has now reached a point of no return. In other words, a type of moral rot has become so prevalent that it's institutional in nature. There is not going to be, therefore, any serious change in the direction in which the US is headed until a genuine crisis topples the existing order. Until then, the trend will accelerate. The reason is that a certain class of people – sociopaths – are now fully in control of major American institutions. Their beliefs and attitudes are insinuated throughout the economic, political, intellectual and psychological/spiritual fabric of the US.
With volatility so low and risk seemingly removed from any- and every-one's vernacular, perhaps it is time to refresh our perspective on downside and tail-risk concerns. While most think only in terms of equity derivatives as serving to create a tail-wagging-the-dog type of reflexive move, there is a growing and increasingly liquid (just like the old days with CDOs, so be warned) market for options on CDS. Concentrated in the major and most liquid indices, swaption volumes have risen notably as have gross and net notional outstandings. Puts and Calls on credit risk - known as Payers and Receivers (Payers being the equivalent of a put option on a bond, or call option on its spread) have been actively quoted since 2006 but the last 2-3 years has seen their popularity increase as a 'cheap' way to protect (or take on) credit risk - most specifically tail risk scenarios. Morgan Stanley recently published another useful primer on these instruments - as the sell-side's new favorite wide-margin offering to wistful buy-siders and wannabe quants - noting the three main uses for swaptions as Hedging, Upside, and Yield Enhancement. These all have their own nuances but as spreads compress and managers look for ever more inventive ways to add yield so the specter of negative gamma appears - chasing markets up into rallies and down into sell-offs - and the inevitable rips and gaps this causes can wreak havoc in markets that have momentum anyway. Given the leverage and average notionals involved, understanding this seemingly niche space may become very important if we see another tail risk flare and as the Fed knows only too well (as it suggested here) like selling Treasury Puts, derivatives on credit are for more effective at establishing directional moves in the the underlying than simple open market operations.
Treja Vu: Albert Edwards Expects New Lows On Bond Yields, Equity Rally Turning To Dust, "Just As It Did In 2011"Submitted by Tyler Durden on 03/21/2012 14:38 -0400
Nothing that we haven't said already many times, but always good to hear someone, in this case SocGen's Albert Edwards, observe what is patently obvious - namely that the start of every year now sends a consistently wrong signal that the economy is improving due to seasonal adjustments that no longer are applicable in the New Normal. This coupled with the liquidity boost that takes places just prior to each and every run up completely explains why 2012 is not only deja vu, as it continues to be a carbon copy replica of 2011 (when the market peaked in late April), but is really a treja vu, mimicking the action of 2010. After all it was none other than Reuters who in its puff spin piece tried to caution readers that we have been here before: "This time last year, the U.S. economy was adding jobs at a similar pace of more than 200,000 a month between February and April...Growth was nipped in the bud by the Arab uprising, which sent oil prices soaring. In 2010, prospects had looked even stronger. Between March and May, companies were adding a net 309,000 new jobs each month, and first-quarter growth came in at a 2.7 percent. The rebound proved temporary." And yet here we are, wondering if this time it's different. It isn't. Albert Edwards explains: 'With bond yields breaking out to the upside and the equity bull run continuing, investors are back to their same old hopeful habits. Many are thinking that if we have seen the all-time lows on bond yields investors will be forced into equities. We already can observe leading indicators rolling downwards in exactly the same way as they did in 2011." And here is why Edwards will once again be unpopular with the permabull, momentum chasing crowd: "Expect new lows on bond yields by Q3 and this equity rally to turn to dust – just as it did in 2011."
Just because bailing out the ECB is not enough for Europe's (and now America's) long-suffering taxpayers, it also makes sense to throw in the occasional McKinsey paperweight in there, in this case the following 72 page behemoth titled "Greece 10 Years Ahead" which was issued in March 2010. Where does it come from - it "was jointly sponsored by McKinsey & Company, the Hellenic Bank Association (HBA) and the Hellenic Federation of Enterprises (SEV)." Translated: thank you taxpayers. Unfortunately, since the study "took place between December 2010 and October 2011" it is hopelessly wrong, inaccurate, and outright misleading. But at least it provides a pretty brochure to throw around around conference tables when eurocrats decide how to best spend even more taxpayer cash.
Everyone who believes the government is "here to help disadvantaged people" needs to wake up and ask what kind of government we have when due process has been replaced with "legal" looting. R.T. reported the income in question on his 2006 Federal and Arizona tax return. Wouldn't common sense, not to mention common law, suggest that the state of California should be required to ask the citizen who now resided in another state if the income in question had been reported in that state? How about notifying the citizen of the state's claim and his/her rights to present facts relating to the state's claim? There was no due process. How can this be legal in a nation that is nominally governed by rule of law? First the state steals the $1,343 and authorizes its parasitic predatory bag-"person" Wells Fargo Bank to steal another $100 for handling the state's theft. A week or two later the citizen is notified of the theft as a fait accompli. Now the onus is on the law-abiding citizen to attempt to reclaim his own money from a distant, all-powerful Kafkaesque state agency. How can this be legal in a nation supposedly operating under rule of law? Let's be very clear about what happens here in America on a daily basis...
Whether it was the truthiness of Willem Buiter's comments this morning, the sad reality of Spanish housing, or more likely the ugly fact that LTRO3 is not coming (as money-good assets evaporate), today was broadly the worst day of the year for European sovereigns. Spanish 10Y spreads jumped their most since the first day of the year, Italian yields broke back above 5% (and spreads broke back over 300bps), and Belgium, France and Austria all leaked notably wider. Since Friday's close, Italian and Spanish bonds have suffered their largest 2-day losses in over 3 months. Notably the CDS markets rolled their contracts into Monday and perhaps this derisking is real money exiting as they unwound their hedges - or more simply profit-taking on front-run LTRO carry trades but notably the LTRO Stigma has exploded in the last few days back to near its highs. European equity markets are now underperforming credit - having ridden the high-beta wave far above credit markets in the last few months (a picture we have seen in the US in Q2 2011 and HY is signaling risk-aversion rising in the US currently in the same way). Just how will the world react to another risk flare in Europe now that supposedly everything is solved?
After deconstructing the labor report for signs of false positives, Michael Cembalest of JPMorgan, sees muddle-through data in the US as sustaining a below trend growth rate - noting his belief that the US economy would not withstand a withdrawal of stimulus (read promise of liqudity to come) right now. While not as ebulient as many on the street, the JPM CIO sees a US job market that is gradually getting better - as is spending. However, what keeps him up at night is the budget deficit (as we noted very specifically last night). Critically, jobless claims have just crossed a threshold that in the past has signaled risk-on is primed to pay-off as the business cycle becomes self-sustaining but at the same time, the budget deficit is at massively 'different-this-time' levels. As he notes: "But as Big Bird used to say, one of these things is not like the other: the US primary budget deficit which supports this recovery is a bigger now", and so the US economy had better improve markedly in order to merely 'pay-the-freight'. "I lose a lot of sleep over this, but I don’t know a lot of other people that do."
Yesterday, Ben Bernanke dedicated his entire first propaganda lecture to college student to the bashing of the gold standard. Of course, he has his prerogatives: he has to validate a crumbling monetary system and the legitimacy of the Fed, first to schoolchildrden and then to soon to be college grads encumbered in massive amounts of non-dischargeable student loans. While it is decidedly arguable that the gold standard may or may not have led to the first Great Depression, there is no debate at all that it was sheer modern monetary insanity and bubble blowing (by the very same professor!) that brought us to the verge of collapse in the Second Great Depression in 2008, which had nothing to do with the gold standard. And as usual there is always an other side to the story. Presenting that here today, is Antal Fekete with "The Gold Problem Revisited."
While Europe is once again back on the radar, having recently disappeared therefrom following the uneventful Greek CDS auction (which in itself was never an issue - the bigger question is any funding shortfall to fund non variation margined payments, as well as the cash to make whole UK and Swiss law bonds) following Buiter's earlier announcement that Spain is now in greater risk of default than ever, coupled with Geithner and Bernanke discussing how Europe is 'fine' in real time, here are three quick charts which will remind everyone that nothing in Europe has been fixed. In fact, it is now worse than ever. As a reminder, when thinking of Europe, the shorthand rule is: assets. And specifically, the lack thereof. Why is the ECB scrambling to collateralize every imaginable piece of trash that European banks can procure at only some valuation it knows about? Simple - quality, encumbrance and scarcity. When one understands that the heart of Europe's problem is the rapid "vaporization" of all money good assets, everything falls into place: from the ECB's response, to Europe's propensity for infinite rehypothecation, to the rapidly deteriorating financial system. It also explains why America will be increasingly on the hook, either via the Fed indirectly (via FX swaps), or indirectly via the IMF (such as two days ago when US taxpayers for the first time funded the first bailout check to the ECB using Greece as an intermediary).
We heard it then and we will hear it again (soon we suspect) that unless some huge liquidating bailout event occurs, the world will no longer exist as we know it, iPads will no longer toast pop-tarts, and American Idol will cease to be. The M.A.D. argument remains the go-to move in the government's playbook and Rick Santelli jousts with Steve Liesman (and new glad-man Scott Wapner) in this heated exchange over the reality of TARP's saving the world (from what) and the precedents this sets going forward.