The real estate industry announces the housing recovery is finally underway every year. 2012 is no different from previous years: various positive data points are duly cherry-picked (multiple offers are back in West Hollywood, sales are up year-over-year in Las Vegas, inventory is down, etc.) to back up the claim the "bottom is in" and the recovery in sales and prices is rock-solid. We understand the industry's extreme self-interest in attempting to re-inflate housing, but let's begin with the obvious question: what's the housing recovery based on? The standard answer is of course "super-low mortgage rates, courtesy of the Federal Reserve." But people need a sufficient income to qualify to own a house, regardless of rates, so let's look at income by age, and focus on the key homebuying ages of 25 to 44. The only age group whose incomes continued rising during the past five years is the over 65 cohort--the very group who is "downsizing" or selling their homes to live in assisted living. The key homebuying cohorts have seen their incomes plummet since the housing bubble popped.
Things are bad and getting worse. We have a plan but can't tell you all about it. We have guns (and ammo) - do you feel lucky? All paraphrasing today's press conference by Ben Bernanke but perhaps most notable when one analyses his comments was the overwhelming use of the word 'think'. It seems, as ever, that us mere paeons in the global game of survival chess must once again bow to the great central planners' deep thought (and actions).
Today's FOMC circus concludes with Ben Bernanke saying a few generic words from prepared remarks, then answering Steve Liesman's and a few other journalists' questions, which all will boil down to the following: if the stock market drops by anything more than 1%, the stock market should rise immediately because will be there to prop it up, unemployment, inflation and the general economy be damned.
In April, the Fed saw 2012 GDP between 2.4-2.9% and unemployment of 7.8%-8/0%. The just released updated forecasts table has these two critical for the election campaign data points at 1.9%-2.4%, or a major drop since April, for GDP and unemployment declining to 8.0%-8.2%. One thing is certain: whatever GDP and unemployment are at the end of 2012, they will not be whatever the perpetially inaccurate Fed forecasts.
Goldman, which as recently as Monday night was pushing what clients it has left into believing the Fed may launch something as gargantuan as a $50-75 billion Flow-based QE program, has already come out with its take of today's action. For informative purposes, here it is.
Whipsaws everywhere. Gold and Silver soared back up to unchanged on the day and S&P 500 e-mini futures roared over 15pts higher off spike lows to take out the stops at the high of the day-session. EURUSD also dipped and ripped swiping aside everyone's stops (long and short). 60 minutes after the announcement of disappointment but hope to come, it appears the over-reaction to the knee-jerk reaction is being faded now as Stocks, Gold, Treasury Yields, and EURUSD are all falling now. The realization that Merkel's comments were simply fact and nothing new and the stop-hunt is complete provides some food for thought for all those buying this dip ahead of Bernanke's press conference. Beware now. Gold remains notably above its pre-FOMC levels as stocks have retraced to unch as have Treasuries and the USD.
This is just getting ridiculous:
- MERKEL SAYS BOND PURCHASING BY BAILOUT FUND A POSSIBILITY
Uhm... that whole point of the bailout fund (ESM/EFSF) is to BUY BONDS. Basically Merkel just confirmed that the whole point of the ESM, which by the way still does not exist, and whose sole purpose is to buy bonds... is to buy bonds. You can't make this up. Yes they will subordinate existing bondholders in the case of ESM, and in the case of EFSF Finland and soon Germany will demand collateral via negative pledges (as in the case of Spain - or did the market forget all about that already), but apparently that is now merely an irrelevant detail. And the EURUSD ramps on this, once again proving that nobody has any idea what is going on in the market but flashing red healines = usually good.
UPDATE: ES at day's highs - alone in its exuberance relative to risk assets.
We watched, we dipped, and then we ripped. Disappointment at no new QE drove Silver down first, then Oil and then the rest of the risk basket tumbled notably. EURUSD dumped 60pips, ES dropped 7-8pts to Monday's close, Treasury Yields dropped 6-7bps, Commodities (Gold, Silver, Oil, Copper) all fell 1-2% (with Silver worst). But then we ripped as Van Rompuy and Merkel started chatting about some progress in Europe. This pulled EURUSD up to unch, Gold and Silver retraced half of their spike down, stocks recovered all of their drop and reached up to VWAP (rather conveniently) where selling volume re-appeared. Notably, only Treasuries remained near their spike levels. As we post, the recovery spike back up in risk assets is now fading. Now get your popcorn ready for Bernanke's presser. Finally, the issue with the European stick save, where Gollum mentioned Eurobond lite again, is that it is merely a regurgitation of news from Sunday, which Germany has already said Nein to: In The Case Of The World Vs Merkel, The Broke Prosecution Proposes Eurobonds Lite.
As always, Goldman Corzined anyone who listened to its call that an epic QE is coming. Fed did the worst possible outcome for risk- merely extended Twist, just as the credit market predicted it would 3 weeks ago:
- FED SAYS IT IS PREPARED TO TAKE FURTHER ACTION `AS APPROPRIATE
- FED TWIST EXTENSION TO SWAP $267 BLN OF TREASURIES BY END 2012
- FED TO SELL OR REDEEM `EQUAL AMOUNT' DEBT DUE 3 YEARS OR LESS
- FED TO BUY TREASURIES DUE IN 6 TO 30 YEARS AT `CURRENT PACE'
- FED SAYS EMPLOYMENT GROWTH `HAS SLOWED'
- FED SAYS INFLATION HAS DECLINED, REFLECTING OIL
- FED REITERATES ECONOMY `EXPANDING MODERATELY'
- LACKER DISSENTS FROM FOMC DECISION
This means that soon Primary Dealers' entire balance sheets will be filled with the entire inventory of Fed 1-3 year bonds. Market not happy. Full June statement here.
After QE-based disconnects last week (Gold rallying with stocks and USD weakness as Treasury yields drop), the last day or so has seen these relationships fading fast. Gold and Treasuries have resynced at a much less sanguine on QE level and the USD is gaining modestly leaving stocks by far the most 'hope-full' asset class for now. WTI crude is back below $82 also - hardly a NEW QE indication of conviction. The major financials continue to push higher though the sector overall just limped back to unch on the day. With ES dropping back to overnight lows, we suspect the realization is gradually reaching the smart, sexy stock traders that their exuberance has removed the punchbowl once again.
Commenting on the incredible circle-jerk that Europe (sovereign-to-banking-system) has become, the outspoken UKIP MEP Nigel Farage exclaimed to FOX Business in this best-ever-rant clip that "The whole thing is a giant Ponzi scheme, isn't it?" Goaded somewhat by the interviewer's questions citing Barroso's intimation that the US is to blame for Europe's problems, Farage opines that "Barroso is a deluded idiot" and a communist who supported Chairman Mao. The contagion effect from the US financial crisis did have impacts on Europe, there is no doubt, but as the frustrated Farage notes: the reason the Euro is in the state it is in is that they put together a completely artificial currency with countries that never fitted together on top of which was added a regulatory cost burden through excess regulation on the environment and employment legislation that is driving parts of Europe towards being a third world country; "America, you are not to blame". The clip goes on to discuss the circular bailout fantasy, the taxpayer burden leading to a democratic revolution, and at the end of the day "this whole thing is going bust" as the likable libertarian notes that European leaders believe that "well-educated bureaucrats know better than we the poor peasants how best our lives should be led" which is the same path that led to the economic and social crash-and-burn in the Soviet Union.
The focus of the markets these days is driven by the headlines that are pumped out by the European Union. Hope is promised, the next big summit to fix all issues is touted, Germany is going to come around any day is offered up as Ms. Merkel denies any such thing and “muddling through” holds up prices as the by-word of belief as the blinders of the great propaganda machine direct everyone’s attention away from what is most important. As one example of this is some firewall, no matter what size, that does not do one thing to address the core issues of Italy and Spain which both have too much debt and too many other liabilities in a time of recession where contingent liabilities become outright liabilities and hidden in a vast variety of ways. These firewalls accomplish nothing except to dissuade investors from being involved and their capitalization weakens the finances of the countries providing the capital, whether counted or not, and ends up weakening the balance sheets of the core countries of Europe as we roll from promises and guarantees to moments when real money must be put up. If you stand far enough back you can visualize what is going on; “look at our firewall and do not pay attention to the countries which are having severe economic declines” and so the head fake continues until it cannot any longer as the bills overcome the ability of a nation to pay them.
Believing 'people familiar with the matter', extending rumors of large trades, and extrapolating DTCC (the CDS data repository) data has apparently caused a number of mainstream media reporters to believe that the JPMorgan 'Whale Trade' has been 60-75% unwound. The assertion appears to be based on two things: 1) a rumor from a Credit Suisse desk of heavy volumes in the last few days; and 2) DTCC data showing open trades falling. While we restate that no-one knows what the trade was, we offer three retorts to these assertions: 1) there is nothing in DTCC data that suggests any recent change in trend (or dramatic shift in net or gross notionals); 2) the aggregate nature of DTCC data offers little insight into the actual changes (whether they be unwinds or opposing positions); and 3) today is single-name CDS and index credit option expiration which means the few days leading up to this will ALWAYS have heavy volume - especially at the end of a very dramatic quarter such as the one we have just witnessed. The bottom-line is that the 'price' changes in IG9, HY9, and IG18 do not suggest any 'recent' change in the unwind scale and while we would expect that JPM has been unwinding (at least the hedge of the hedge), no-one knows how much and given the market's awareness of the position, IG9 would dramatically underperform its whale-driven rally move (which it has not yet). Anything else is speculation - though it is clear that IG9 tranche notionals suggest the original tail-risk position remains on the books.