In part three of our five-part series tying the Olympics to economics (previously here and here), we note that in a rather surprising coincidence, the Olympics' host nation has been a rather simple tool to pick long-term 'winners' in the FX market. As Goldman points out, while we doubt that the Olympics directly affects the FX market, it has provided excellent long-term appreciation potential. We assume this means that the BoE will stop QE or we really don't see cable extending this performance record, though the findings suggest that systematically picking the 'next' host tends to pick winners more than losers.
It’s tough to do just about anything today without experiencing the far-reaching hand of the growing regulatory state. Virtually everything the average shopper see on the store shelf is stamped with government approval. With the increasing use of red light safety cameras and even domestic surveillance drones, the dystopian world which George Orwell painted so brilliantly in 1984 is sounding more prophetic by the day. The result is a new generation that is coming of age amongst a pervasive and all-inclusive nanny state. With a federal register that grows by tens of thousands of pages each year, tyranny is spewing forth across America from Leviathan’s home of Washington D.C. every single day. In a free society, it would be unjust to force some into paying for the constant supervision of those less cautious of life’s risks. Just as a child learns to avoid a hot stove by painfully touching it, we all learn through misfortune. The Jersey Shore drownings, tragic as they are, should serve as a lesson all beach visitors. Common sense isn’t something to be legislated. It can only form when the right incentives are involved for people to make smart decisions without relying on a central source of authority. And just like the free market, common sense is also a product of spontaneous order.
Oh the exuberance. CRAAPL led the NASDAQ down heavily today as its high-beta ebullience reverted back to 'normal' and the S&P 500 and NASDAQ are closing practically unchanged for the month of July. The Dow Industrials are down 0.4% but the Dow Transports are down 2.65% - near their lows of the month. Financials have been monkey-hammered as today's offer-a-thon dragged them dramatically lower (MS/BAC -13% for the month). A late-day OPEX-inspired activity burst dragged volume up from near year lows and likely inspired the surge lower in VIX into the close (even as stocks went sideways to lower) - but still ended up 0.75vols back above 16%. Treasuries end the week down 2-3bps at the long-end and 4-5bps at the short-end with a decent rally today. The USD is up a modest 0.25% on the week - thanks to notable weakness today in EURUSD (which broke its pattern of reverting today) though dispersion was broad with AUD stronger by 1.5% and EUR weaker by 0.75% on the week. Gold and Silver are practically unchanged on the week, Copper down around 1.5% and WTI up over 5% - but only WTI is up for the month. Cross asset class correlation picked up towards the end of the day as ES caught-down to broad risk asset's less sanguine view of the world. ES ended the week up around 7pts, VIX down around 0.5 vols with financials -2.25% and Energy +3%.
Tour operators in China do their best to arrange excursions, but it pales in comparison to what could be done. Someone could create tremendous value by facilitating transactions between these potentially buyers and sellers… essentially helping to create a marketplace. This type of business is scalable; it could be done on a small, local level in individual cities and tourist hotspots, or on a much larger, international level. The demand is there, the door is open. This is just one example… but it goes to show that regardless of how much money they print or how many freedoms they try to take away, there are always great opportunities out there.
Despite all the chatter about negative sentiment, and its all priced in, we couldn't help but notice three little signals of concern with regard the real state of people's perceptions of risk. The implied volatility of the S&P 500 is at or near its lowest in the last two years; the difference between the implied volatility of the S&P 500 (forward-looking) and the realized volatility (backward-looking) is its lowest in almost nine months - and at or near the peak complacency levels of last summer; and lastly the size of debt balances in margin accounts at broker-dealers indicates that leverage is at or near its 2008 and 2011 peak levels. Seems like this will not end well, but then again - Ben's got your back and it's all priced in.
Two days ago we made the "missing link" connection between traders in Libor manipulating banks (all of which curiously had a hub in Singapore: something else for the media that has been about 4 years too late on this topic to focus on) and hedge funds (most of which curiously centering on the otherwise sleepy bastion of banking: Geneva, Switzerland). The immediate aftermath was the loss of trading privileges of one Michael Zrihen. We are fairly certain this is just the beginning of the hedge fund bust: when all is said and done, many more funds will have terminated traders they hired for reasons (and kickbacks) unknown over the past 2 years as Lie-bor manipulators sought to put a clean firewalled break between their old employer and current one. Because apparently sometimes the regulators are that stupid and can be confused by a simple job change. And while many have assumed (and even calculated based on completely groundless assumptions) that only BBA member banks have benefited from Libor manipulation, the reality is that hedge funds were just as complicit and benefited just as much if not more. What is worse, they took advantage of their whale client status with manipulating banks, and courtesy of Total Return Swap and other leveraged gimmicks, made far more money when they co-opted two or more banks to do their bidding. Impossible you say: hedge funds would never be so stupid. Oh very possible: we present exhibit A - Brevan Howard, a "fund, with assets of $20.8 billion as of Dec. 31, has never had a losing year and returned 14.4 percent annualized from its April 2003 inception through the end of 2008" as Bloomberg said in a made to order profile of the funds recently. Perhaps there is a very simple reason for this trading perfection: "Brevan Howard telephoned on 20 Aug 2007 to ask the defendant to change the Libor rate," according to a paper filed with the Singapore High Court cited by Bloomberg."
The decoupling between revenues and earnings (that we discussed here) continues and while we have seen analyst reduce estimates, Nic Colas of ConvergEX notes that the estimates for the upcoming quarters of 2012 and into next year have taken a disturbing turn for the worse. On average, the Street expects the 30 companies of the Dow to post only 1.0-1.5% year-over-year top line growth for Q3 2012, down from the 3.0-3.7% expectations it had baked into its financial models just 60 days ago. Also, these analysts now peg Q4 2012 at 3.9% growth, but those numbers are falling quickly as companies report their earnings this month. Also worrisome: analysts are reducing their revenue expectations across the board – only 3 of the Dow 30 companies saw increased expectations for Q3 2012 revenues in the past 30 days, with a similarly dismal count for Q4 2012 expectations. If this is the best these large, well-capitalized companies can muster in terms of sales growth, can a U.S. recession be far behind? And expectations for further monetary policy easing as the last-and-best explanation for the recent rally in U.S. stocks.
With IBEX down 6%, 10Y yields over 7.30%, 10Y spread over 610bps, and EURJPY at 12 year lows; the hits just keep coming...
- EWP: Egan-jones cuts Spain sovereign rating to CC+ from CCC+
- Spain Won't Grow Until 2014 as Eurozone Agrees Bank Bailout
- *SPAIN BAD BANK MAY INCLUDE NON REAL-ESTATE DETERIORATED ASSETS
- *SPAIN BAD BANK TO APPLY `REAL LONG-TERM' ECONOMIC VALUATIONS
- *SPAIN TO MAKE ROADMAP BY END-NOV FOR LISTING OF RESCUED LENDERS
- *SPAIN'S LOAN-LOSS PROVISIONING FRAMEWORK TO BE REASSESSED (will we see the same in the US?)
The World Gold Council have just published their commentary on gold’s price performance in various currencies, its volatility statistics and correlation to other assets in the quarter - Gold Q2, 2012 - Investment Statistics and Commentary. It provides macroeconomic context to the investment statistics published at the end of each quarter and highlights emerging themes relevant to gold’s future development. One of their key findings is that gold will act as hedge against possible coming dollar weakness and gold will act as a "currency hedge in the international monetary system." The key findings of the World Gold Council’s report are presented inside.
Spain's broad equity index suffered its second largest single-day drop in almost 4 years and Italy also tumbled almost 5% as everything European was sold hard. EuroStoxx (the broad Dow equivalent) is down almost 3% as EURUSD dropped to two year lows, EURJPY to 12 year lows. AAA safe havens were massively bid with Germany, Denmark, and Switzerland all to new low (negative) rate closes. Core equity markets did suffer though with Germany down 2% but it was the periphery that saw the damage in credit-land with Spain 10Y closing at 7.27%, 610bps over Bunds (and 5Y CDS over 605bps). Spanish spreads are +130bps from post-Summit (and pre-Summit) and Italy +78bps, but it is the front-end of the curve that is most worrisome - Spain's 2Y is 132bps wider in the last week. Europe's VIX exploded by over 4 vols to 24% today and once again looks decidedly high relative to US VIX.
UPDATE: It would appear $32.75 is the line in the sand...
After pricing its IPO at $26 and opening at $30.10, the latest poster-child for the awesomeness of the US capital markets has pushed up to over $34.50. While Fender cites market conditions, it seems 'investors' can't get enough of this Silicon Valley 'special offer'. This one should be interesting as we see some stability already and volume...
One of the most widely accepted truisms of our time is that deflation is bad: bad for debtors, bad for the indebted government, and therefore bad for the economy. What all this overlooks is how wonderful mild deflation is for those who owe no debt but who own the debt and the income streams that flow from debt. What the "deflation is bad" argument ignores is who controls the financial and political systems, and what set of conditions benefits them. Everyone assuming the Federal government has the power to create inflation and that inflation is "good" should examine the interests of those who control the government's policies, i.e. those who own the debt. Put another way: here's what will be scarce: reliable income streams and liquidity.