In November 2008, President Barack Obama won the popular election for President by 9.5 million votes. A burgeoning financial crisis and weakening economy helped his candidacy at the time, but four years on the sluggish pace of economic recovery is a headwind to his re-election. Consider, for example, that there are currently 12.8 million people unemployed in the U.S., or that an estimated 8 million adults entered the SNAP (Food Stamp) program since November 2008 (total increase in enrollment: 15.6 million). Presidential elections are won in the Electoral College, of course, so in today’s note ConvergEx's Nick Colas parses out this employment/food security economic stress for the key “Battleground” states.
Seven of the 8 swing states this election year are more economically stressed than the national average in terms of unemployment and/or food stamps, while 2 of the 3 states “leaning” toward Obama are worse off than the national average. Romney, behind in the electoral vote count by most analysts’ figures, theoretically stands to gain from a weak national economy, but he’ll have to earn the vote of an estimated 4 million Americans in 14 key battleground states to have a shot at the White House.
As Bernanke and Draghi carefully try to centrally-plan navigate us mere mortals through this dismal period of market and economic reality, we thought this clip was a perfect analogy for the 'heavy-lifting' job they are doing... and the likely outcome.
It will come as no surprise to many but everyone's favorite enemy #1, the US banker, decided to give himself a well-earned pay-rise in 2011 - according to data from Moody's Analytics (via Crain's). What is perhaps a little more surprising is the sheer gall of it given that the financial industry profits plunged over 70% from $27.6bn in 2010 to a mere $7.7bn in 2011. While the rise in salaries is not large, and the average man on the street actually saw a bigger rise, the critical point is that for two years in a row - from 2009 to 2010, and now from 2010 to 2011 - banking industry profits have dropped like a stone but the average salary of those oh-so-deserving 'Wall-Street'ers has risen.
This evening, as many boomers on the verge of stepping into the golden hue of retirement sit down for dinner and watch the news, they will be perplexed at their next move. The Dow closed at 13000.71 (just in the realm of the Fed's 3rd mandate to enable retirement) but stunningly the S&P 500 closed at 1399.48 (below the dreaded 1400 level that gives everyone a green-light to retire). Volume was average for the recent lows and despite the S&P 500 e-mini's 'tickle-algo' efforts to get back up to the day-session opening levels (cutting half the day's losses), the last few minutes of the day saw a plunged back down to the lows. AAPL fell over 1.5% - its worst day in five weeks - enabling NASDAQ to catch-down to the S&P in performance terms since the 8/21 highs (down ~1.2%) while the Dow Transports is down 3.8% in the same period. Healthcare and Staples outperformed (though all sectors were red today) as Energy and Tech were the biggest losers. A strong 7Y auction sent TSYs bid to the week's low yields this afternoon but the early comments from Europe were the driver of USD strength (EUR weakness) and Treasury strength - which implicitly dragged commodities (though mixed) and stocks lower. VIX traded over 18% just before the European close, fell back and then rose once again into the close up 0.75 vols to its highest in a month. As everyone holds their breath for tomorrow, the after-hours crack lower in S&P futures - to end at the lows of the day - suggests some urgency to cover longs (as opposed to hedge - as VIX did not keep pace).
Year-to-date, before the decimation that the Knight x1000 Algo wreaked upon the market, volumes had trended lower YoY but had not cratered. As the charts below suggest - in somewhat stunning technicolor - that since the Knight-algo was put-to-death, NYSE volumes have coincidentally plunged by 40%! Today's run-rate with an hour to go was the lowest of the year. For those that hang on the consideration that this is due to high-priced stocks and USD-volumes are stable - err, wrong answer - futures volumes cracked in half also (and that is a stable USD volume); The summer doldrums explains it - err, wrong answer - we are 20 percentage points below a normal summer-drop-off. The simple fact of the matter is, with retail suddenly the smart-money and exiting stage left (unable to trade this ridiculous market), it seems that losing one market-maker algo has almost halved trading volumes; what happens if GETCO ever goes down?
"Don't underestimate how close the Court verdict is" is the warning that Morgan Stanley's European Research group sends out in a note today. In their view, there is a non-negligible risk that the German Constitutional Court will voice concerns about the ESM and, potentially, also the fiscal compact on September 12. Given that the EFSF is still in operation, given that the Court views the scope of the German constitution as being exploited already, and given its record of voicing concerns about European integration, MS sees a 40% chance that the Court bans Germany from ratifying the ESM treaty (with major repercussions for financial markets), at least for now, and while their base case is for ratification of both treaties, they believe the market is not priced appropriately for the downside tail-risk of a possible 'no' verdict (and the asymmetric scenarios below).
"Fix it Yourself" or "We've got Your Back"; "Crisis not done in three years" or "Euro is not in crisis";
"Market is pricing in Breakup of Euro" or "Portugal Yields Back at Pre-Bailout Levels" Is it any wonder that EURUSD just blipped up 10 pips, on ECB Executive member Asmussen's confusing diatribe, and fell back now stranded like an upside down beetle. Of course, the key factor in the non-crisis is that
- *ASMUSSEN SAYS SPECULATION OF EURO AREA EXITS HINDERS ECB POLICY
but if there is a crisis - he pushes all-in back to Rajoy:
- *ASMUSSEN SAYS STATES MUST SEEK EFSF HELP BEFORE ECB HELPS
- *ASMUSSEN SAYS THERE HAS TO BE CONDITIONALITY
We guess Europe is indeed back from vacation and the real jaw-boning can begin.
The high-pitched happy Hungarian is back - and this time he is serious. Laszlo Birinyi, the guru of gurus, who (back in January 2011 - as we noted here) forecast the S&P 500 to be at 2854 by September 2013, now sees the S&P 500 at 1500 by year-end (which looks mysteriously like yet another of his famous ruler-applications). What is fascinating about this oh-so-valuable prediction is that it implies Birinyi believes 2013 is the year of all years - a 90% rally in the first 9 months according to the newsletter-peddler - or a 160% annualized return. Trade accordingly.
A few weeks ago, western governments' war on productive people took an interesting twist when US immigration authorities detained two teenage children of an asset manager based here in Switzerland. The kids were traveling through the United States by themselves to visit extended family, and they were interrogated for six hours about their father's business and whereabouts. During the six-hour ordeal, the children were not allowed to contact family members who were waiting for them, nor any sort of attorney or advisor. This 'guilty until proven innocent' approach is the same sort of special treatment reserved for suspected terrorists. The only difference is that you don't end up in Guantanamo. Free societies do not treat people this way. Hell, most criminal networks don't even treat people this way. And while it may raise a few bucks in the short run, in the long run it's counterproductive. People adapt. They create underground, cash-based economies. They leave. Foreign investors stay away.
Even in the unlikely case of a fiscal union, the conflict “Draghi against Weidmann”, between the ECB and the Bundesbank will continue for years. The ECB mandate and many european inflation figures do not allow for excessive ECB rate cuts or for state financing via the printing press, but Draghi wants to help his struggling home country.
The fulcrum security is bleeding; 10Y Spanish government bond spreads jumped 19bps today, the largest gain in almost a month, and are trading back above 525bps over Bunds (the worst in over three weeks). Even the front-end of the Spanish and Italian bond curves lost ground today - as the game of chicken between Rajoy and Draghi continues - with the ridiculous brinksmanship highlighting the entirely dysfunctional dis-union that really exists behind the scenes. European equity markets drifted lower all day, slammed lower after the US opened (with Germany's DAX underperforming - thanks to weak Autos - no surprise there for us), but bounced a little into the European close. EURUSD slumped 70 pips from its post-US-open intraday highs today - ending at 1.2500. Europe's VIX jumped back above 28% (from 21% just 10 days ago) - its highest in a month. Credit widened on the day, financials underperformed, and notably credit did not jump into the close like stocks did.
The Chairman of the fermentation committee, Art Cashin, usually keeps a very apolitical, sober (metaphorically speaking at least) and cool head on, as all veteran traders should. Which is why we were quite stunned to notice that even the NYSE floor veteran may have finally crossed the Rubicon in his political observations. And if Art feels this way, one wonders just how the other Wall Street players, whose voices have far less need to be moderate, really feel...
This is an important update on the U.S. drought of 2012, the combined record-setting July land temperatures, and their impact on food prices, water availability, energy, and even U.S. GDP. Even though the mainstream media seems to have lost some interest in the drought, we should keep it front and center in our minds, as it has already led to sharply higher grain prices, increased gasoline costs (via the pass-through of higher ethanol costs), impeded oil and gas drilling activity in some areas (due to a lack of water), caused the shutdown of a few operating electricity plants, temporarily reduced red meat prices (but will also make them climb sharply later) as cattle are dumped in response to feed- and pasture-management concerns, and blocked and/or reduced shipping on the Mississippi River. All this and there's also a strong chance that today's drought will negatively impact next year's Winter wheat harvest, unless a lot of rain starts falling soon.