As if further evidence of the algo-driven maniacal market were needed, for the fourth time since this liquidity infused post-March 2009 ramp began, the S&P 500 has managed to correct after a similar length and magnitude move based on global central bank exuberance. What happens when SkyNet becomes self-aware of this pattern? Each time the ES has managed to pull back to at least its 50DMA.
While we have noted the comparative weakness in European credit and sovereign markets, stocks had so far remained hopeful until today. Bloomberg's broad BE500 index of European stocks fell 2.8% today, its worse performance since mid-November when the recent rally began. This one-day drop has wiped out the gains of the last five weeks in stocks and credit is even worse as it continues to lead risk lower. European financial stocks are catching up to European credit's weakness (and we note US financial credit is really coming off today). Whether or not to BTFD is the question. We note that this sell-off is much more broad-based with stocks and credit dropping together (instead of just credit last time) and across asset classes the weakness is in CONTEXT with broad derisking. Furthermore, Sovereign credit stress re-emerged with Spain and Italy up 26bps and 18bps on the week as the former is now at almost 4 week wides. At some point, we wonder when MtM losses will hit all those aggressive Italian and Spanish banks who loaded up on chaotically procyclical carry trades?
The always-enticing Abby Joseph Cohen serves as the eye candy to this key crack in the Dow's uptrend.
Welcome to the Crazy House, a rotting McMansion ruled by power-drunk megalomaniacs suffering from delusions of invulnerability and god-like powers. Why are we here, you ask? Because the drunks who run the household make it so darned easy: just keep quiet, listen politely to their ravings, and you get subsidized meals, free rent, a houseful of techno-gadgetry and nonstop entertainment--and that's not even counting the amusement value of their delusional, sloppy-drunk ramblings out by the rust-stained pool.
China had a massive surge in its demand for commodities over the past decade, fueled by its housing boom and infrastructure investment boom. From 2000 to 2010, China’s imports (in value terms) of iron ore surged by 42.5 times, thermal coal 248 times and copper 16.2 times. During the same period, its production (in quantity terms) for aluminum jumped by 441.8%, cement 219.5% and steel 396.0%. It is the biggest consumer in virtually all commodity categories in the world. In Credit Suisse's view, China was the key factor behind the global commodity supercycle. After a period of economic slowdown, all eyes are on China, hoping that the middle kingdom can return to its might in commodity demand. CS cuts through all the cyclical factors and asks whether China's mighty demand for commodities will return in the medium term - their answer is 'No'. As the economy shifts its growth engines away from infrastructure, construction and exports toward consumption, especially service consumption, the propensity of demand for commodities is bound to decline. Getting a massage simply does not use as much steel as building an airport.
In this day and age of pervasive momentum trading, herd-following and unfathomable and sheer "investing" stupidity, it is refreshing to now and then run across forward looking pieces of research that were not only spot on, but ran completely counter to conventional wisdom and groupthink. Such as the following analysis from Kyle Bass' Heyman Capital, which was also the pitchbook for the fund's Subprime fund, which showed, in plain language why Subrpime was not only the class to short, but the implications for the broader market. As a reminder, the fact that Bass made a killing by being one of the first to short subprime, is because the vast majority of the market was dumb enough not to see what he saw. Because it was inconceivable that the Fed could be wrong. After all, throughout 2006 it was none other than the Fed that told everyone who was stupid enough to listen that housing issues were "contained." Ironically, all those same people who lost an arm and a leg believing the Fed are back again, telling everyone to never get in the way of the Fed.
Not many websites, analysts or authors have both the balls/temerity & the analytical honesty to take Goldman on. Well, I say.... Let's dance! This isn't a collection of soundbites from the MSM. This is truly meaty, hard hitting analysis for the big boys and girls. If you're easily offended or need the 6 second preview I suggest you move on.
As Apple goes sour (-5% from yesterday's highs) and financials flounder (MS -7% this week), the Dow is suffering its largest single-day loss in 3 months (which is relatively stunning given that it is -150pts or only just over 1% on the day). Under the surface though weakness is considerable across asset classes and sectors (as Materials, Financials, and Energy are the laggards).
Wonder why risk is sliding, and taking crude with it? Here's why:
- DEFENSE SECRETARY PANETTA SAYS THE US WILL TAKE MILITARY ACTION TO PREVENT IRAN FROM ACQUIRING NUCLEAR WEAPON IF ALL ELSE FAILS - RTRS
Guess what - all else will fail, as there is no "all else" - this whole charade has been set up precisely to leave Iran with no options. Then again, even the Pentagon knows that starting with a lower baseline in Crude, supposedly in the double digits, is preferable to a $110 jumping board when Operating Enduring Iran Oil Liberation is a go.
Silver is now down around 6% on the week as it reverts back in line with Gold's recent weakness. Whether this is broad asset/collateral liquidation from AAPL holders or a reaction to the liquidity spigot being turned off is unclear but while we need 'weakness' in equities before the next printfest begins, its inevitability suggests buy-the-dip in PMs may be the play once again. Meanwhile, WTI just lost $105 as the Brent-WTI spread holds around $17 (upper end of recent range) as the USD pushes higher.
A few days ago when discussing the "stability" of Europe's biggest and most undercapitalized hedge fund, we said that "The adjusted balance sheet is pro forma for today's LTRO 2, which we noted earlier will add at least €311 billion in net assets to the ECB's balance sheet, and potentially much more. Assuming the minimum, it means the ECB's balance sheet will now hit €3 trillion." Sure enough - as of minutes ago, the total ECB balance sheet just passed €3 trillion, or €3.023 trillion to be precise (which is just why of $4 trillion based on today's exchange rate), as our estimate of net LTRO contribution was on the low side, with total assets increasing by €331 billion in the past week. Needless to say, capital and reserves has been unchanged, which means that our analysis from a week ago factoring in the ECB balance sheet expansion of the "well-capitalized" ECB was correct. Incidentally, the spike in the chart below was factored in long ago (about 20% lower in the market ago). And as we have been saying all along, the next bank on the docket to ease is the Fed, as everyone else has already done so. However before that happens stocks and more importantly crude, have to plunge by at least 15-20%, much to Dick Fisher's shock. It seems that the market is finally getting the hint today.
The latest in a series of reports evaluating the future of the energy markets, especially in the context of the increasingly inevitable Iranian conflict, may just be the best and most comprehensive one (not just because it looks at the commodity from an "Austrian" angle). In 82 pages, Austrian Erste Group has extracted the key aspects and variables for the world oil market and come up with a simple conclusion: "nothing to spare." To wit: "We see the risks for the oil price heavily skewed to the upside. At the moment, the market is well supplied, but the smouldering crisis in the Persian Gulf could easily push oil prices to new all-time-highs should it escalate. We believe that new all-time-highs can be reached in H1, at which point we could see demand destruction setting in. We forecast an average oil price (Brent) of USD 123 per barrel between now and March 2013...The latently smouldering Iran crisis seems to be close to escalation. The most recent manoeuvres, ostentatious threats, sanctions, embargoes and the shadow war currently ongoing, have heated up the situation further. It seems we may soon see the last straw that breaks the camel's back. Even though Iran could probably only maintain a blockade of the Straits of Hormuz only for a very limited period of time, the consequences would still be dramatic. The oil price would definitely set new all-time-highs and could reach levels of up to USD 200." Enjoy those price dips while you can.
European financials are under significant pressure today and that is dragging down the rest of the broad markets. The selling appears to be driven by three main factors: 1) the LTRO Stigma has surged back to record wides (after a brief lull into LTRO2); 2) rather amazingly investors are starting to get concerned that the Greek PSI deal may not happen; and 3) weak macro data. Obviously both are no surprise to readers and the canaries have been fluttering for a few weeks on this. Equity markets continue to hold onto hope as they remain broad outperformers but in a different tone than the last credit-led sell-off, European equities are dropping much more in sync today. Sovereign spreads and yields are leaking higher with Spain and Italy underperforming (followed closely by France) as perhaps all the self-serving Italian and Spanish carry-trade-funding banks have run out of ammo (or will to extend) as the Greek basis package inches ever closer to Par (implying absolute inevitability of an imminent credit event). Notably Sov CDS are underperforming (as we pointed out last week they are potentially a less manipulated and cleaner indication of risk appetite than bonds for now). It would appear that all the belief that insolvency tail risk and contagion had been deferred or ring-fenced by yet another liquidity flush may have simply forced European banks into an Oliver-Twist-style environment - "May we have some more?" as we now start top hear the mutually assured destruction chatter surrounding the implications of a failed PSI deal - where have these people been for the last 3 months?