Equity Markets

Well, they sold in May but did they go away? If today is any guide, they did as the swings across asset classes intraday were very reminiscent of 'death rattles' with trading scenarios becoming more and more binary and more and more extreme. Into the US macro data this morning risk assets in general were behaving in a synchronized manner. As the dismal data hit, it got wild with gold and stocks gapping down and Treasury yields crashing lower (10Y 1.53 handle!) only to be saved around the European close by chatter of IMF aid for Spain (funded by the selling of unicorn tears) at which stocks erupted (and while bonds, the USD, and Gold also reacted - they were far more muted). The afternoon was quiet until stocks had a mind of their own and went on a stop-hunt up to yesterday's late day highs (and that magical 1315 level) - pulling well away from any other asset-class reality - only to fail dismally, ending with an abrupt tumble back to sanity (just slightly in the red for the day) grabbing VWAP into the close. The signals were everywhere that risk was not 'on' no matter how hard stocks tried with high-yield credit (most notably the ETFs) surging and purging ending with a terrible dive (after popping up to VWAP after our earlier note) on heavy volume.

If we had a penny for every equity rally away from credit reality that converged back to credit's less-hopiness, we would now have made 5 pennies in the last 6 trading days. We pointed out last night that equities surged into the close on small average trade size as credit remained far less sanguine and the now-ubiquitous open in Europe started the reversion as stocks fell rapidly, below Friday's close - tracking back with high-yield credit's deterioration. HYG gave up yesterday's gains and pops back under fair-value but rather notably, investment grade credit (IG) underperformed significantly today - which is unusual in a sell-off day and signals either more fallout from JPM reaching for hedges (IG9 10Y 166bps offered +5bps) or investors grabbing the cheapest macro overlay from a carry perspective. Gold and Silver outperformed admirably on the day, however the upward move appears to be more of a reaction back to equity, treasury, and USD reality as the afternoon saw the 4 markets recouple and trade together (after disconnecting notable yesterday). Treasury yields dropped the most in 7 months to new record lows in 10Y and close for 30Y. Both implied correlation (systemic risk) and VIX (normal vol) jumped higher today as the latter moved almost 3 vols to close above 24% (its biggest pop in almost 3 months). A heavier volume open at highs, close at lows day for stocks with little to signal capitulation in terms of trade size - and across broader risk-assets, stocks appear to have room to fall - even after ES suffered its worst loss of the year today.

The avuncular Art Cashin opines on the roller-coaster of unreality that has been the equity markets for the last few days as outcomes become increasingly binary and investors increasingly herded from one direction to another. His sage advice - as if spoken by the most-interesting-person-in-the-world - "Stay nimble", my friends.

UPDATE: EURUSD at 1.2478 as we post.

While European, US, and commodity markets (ex-Spain) were enjoying the hope/hype of ECB rumors and QE chatter, Egan Jones just burst the bubble. back to reality. Within minutes of their downgrade of Spain, EURUSD was plunging faster than Facebook and along with that cornerstone of correlated risk markets, gold, silver, oil, copper, and US equities had smashed lower.

Futures are well bid overnight even though following a modest short covering squeeze of the new record number of EUR shorts, the primary driver of risk, the EURUSD is now back to mere pips above its 2010 lows. It is somewhat confusing why equities are so jubilant about what can only be more imminent bailouts, following statements by the ECB's Nowotny who made it clear that the ECB is not discussing the renewal of bond purchases and that the central bank provides "liquidity not solvency." Adding to the confusion was a release in Chinese daily Xinhua which said that China has no intention of introducing large scale stimulus. All this simply means that the only possible source of liquidity remains the Fed, whose June FOMC decision could make or break the global stock markets, pardon economy, and why this Friday's NFP print is so critical. Absent a huge miss, it will be difficult to see the Chairman pushing through with another $750 bn-$1 trillion in LSAP. Which Europe desperately needs: first we got Italy pricing €8.5 billion in 6 month bills at much worse conditions than April 26, with the yield rising over 2%, or 2.104% to be precise, compared to 1.772% previously, and a BTC of 1.61, declining from 1.71. More importantly, the Spanish economic deterioration gets even worse after Spain just recorded a record (pardon the pun) plunge in retail sales. From AP: 'A record drop in retail sales added to Spain's woes Tuesday as the country struggles to contain the crisis crippling its banking industry and investors remained wary of the country's ability to manage its debt. Retail sales dropped 9.8 percent in April in year-on-year on a seasonally-adjusted basis as the country battles against its second recession in three years and a 24.4 percent jobless rate that is expected to rise. The fall in sales was the 22nd straight monthly decline, and was more than double the 3.8 percent fall posted in March, the National Statistics Institute said Tuesday." So all those focusing on the Greek economic freefall may want to shift their attention west.

Aside from Spain (-0.3%) and Greece (-11.8%), European equity markets are ending the week green - albeit marginally - as we can only assume the hopes and prayers of every banker are being discounted into the price of corporate liabilities (an 'event' will happen but don't worry as the ECB/Germany will cave). Corporate and financial credit markets also ended the week tighter - with financials the high beta players on the week, hugely outperforming on Tuesday but fading into today's close. Today was not a pretty end to the week in credit though as both sovereigns, corporates, financials, all peaked early in the day and pushed to near their lows by the close. Senior financial bond spreads actually closed wider on the day - at their wides - and Spanish sovereign bond spreads exploded over 35bps wider from earlier tights to end at theu widest since April 1995. Italian bond spreads also jumped 32bps wider from their morning tights but end the week -9bps and France gave back almost half its sovereign bond gains of the week today. EURUSD remains the story, breaking below 1.2500 for the first time since early July 2010 as it seems the FX markets remain much less sanguine of the endgame here than do equity markets (with sovereign credit getting closer to FX's world view and corporate credit closer to equities but fading today). Europe's VIX remains above 30% (though our VIX-V2X compression trade is performing well as US VIX elevates).

There's been a lot of hand-wringing about busted Initial Public Offerings of late, but the process itself is hardly rocket science.  Like Tolstoy's comment about families, every "Happy" IPO is essentially the same, while every miserable one is different in its own way.  There are rules to the successful IPO, and today we offer up ConvergEx's Nic Colas' manual, a step-by-step checklist for investors to assess if an offering is on track.  From maintaining the illusion of scarcity to managing company and investor expectations, the road from salesforce "teach-in" to final pricing is narrow but well-marked.

Not like this will come as a surprise to anyone in the aftermath of last week's abysmal FaceBook IPO which pretty much killed all retail interest in equity markets, but in the last week, the "dumb" money pulled another $3.5 billion out of domestic stocks per ICI, bringing the total tally to 13 consecutive weeks of outflows, and 52 weeks of outflows in the past 56 weeks, with redemptions amounting to $46 billion in 2012, compared to just $6.5 billion for the same period in 2011. Algo-matic, the 20 remaining Primary Dealers and whatever hedge funds are left can pass hot grenades amongst each other: the retail money (RIP) has found other ways to amuse itself.

Here in the U.S., I think that The Bernank’s plan was to pretend they didn’t need to print more money, get commodity prices down and then hope that the economy would respond favorably to that development.  This wouldn’t have negated the need for more printing; however, it would have bought time and allowed for a potentially lesser degree of action.  Instead, what has happened is that the global ponzi is completely and totally incapable of holding itself together without consistent and increasingly large infusions of Central Bank money.  The debt burden is too large, the mal-investments too pervasive, the corruption too systemic.  The whole house of cards that is the global economy will vanish into dust rather quickly without more and more printing.  So what do you think they are going to do? If I am correct, and the U.S. economy itself is now in the early stages of what will probably turn into a serious economic slowdown, then it will not be easily stopped with incremental Central Bank policies.  The fact that they have waited this long and the fact that the global economy is in the midst of a serious slowdown tells me one thing.  They are way behind the curve and by the time they realize this it will be too late to stem the momentum.  That said, I do expect them to respond and the fact that things will have gotten much worse than they expected will mean a major response.  I’m not talking operation twist part deux.  I mean a serious print.  Potentially the BIG ONE.

Having hit its highs in the pre-open, equity markets drip-drip-dripped lower all day, retracing their late-day exuberance relative to credit markets and broad risk-assets by the middle of the afternoon. Even financials had given back almost all of their post 230ET ramp yesterday but then - IT happened again. Italy's Monti made the same technocrat-fed comments as yesterday and financials take off again leading stocks higher (only to come back 10 minutes later and back-pedal on his hard facts). This time though - was different. Yesterday's rumor-ramp added 2.5% to XLF (the financials ETF) but this time it only managed to spur a 0.5% gain before the effects faded. Coincidentally - the ramp pushed ES (the S&P 500 e-mini futures) up to VWAP where sure enough we saw heavy volume with large average trade size step in to briefly stall the rally - which then managed to push on to near the day-session's highs (but notably all on its own again). ES very much repeated the same pattern as yesterday but with lower average trade size still - ending the day exuberant but on its own. The USD kept pushing higher though - with the divergence with stocks now very large - (as EUR leaked lower - even as AUD rallied on the rumor-ramp) but this USD strength did not weigh as angrily overall on commodities today. Late Europe rumors of another LTRO pushed stocks up and dragged gold and silver up rapidly but they all gave it back by the close. With the USD up 1.5% on the week, Oil, Copper, Gold, and Silver are in the same currency-driven range between down 1.25 and 2% on the week - perhaps suggesting yesterday's plunge in PMs has seen a short-term end to the liquidation factors (though for how long). Into a long weekend, it seemed volume remained decent enough but once again average trade size was very low (suggesting little conviction here and/or algos giving pro-size exits). Treasury yields rose all day (ending higher by 3bps or so) pulling back to near Tuesday's closing levels. VIX tracked down to 21.5% (losing less than 1 vol on the day) and is once again cheap relative to credit/equity's view.

While we were told during the PSI process that all was fixed and that Greece now had breathing room to cut spending and meet its TROIKA-mandated targets on the road to glory, it appears - just as we said it would - that things have got worse (much worse). In the 44 trading days since the PSI deal was struck, Greek government bonds are down over 44% in price - trading below 12% of par today for the first time ever. So much for Greylock's "no-brainer", "trade of the year" eh? Did equity markets signal an expectation of hope and change even as the government's largesse was priced into its debt? Not so much - the Athens Stock Exchange index is down an incredible 35% since 3/22 - back at 22 year lows! Where is the Greek Whitney Tilson when we need him most?

Peripheral stock indices underperformed in early trade, with banks under considerable selling pressure amid renewed tensions in credit markets. Wave after wave of poor data from the European PMIs and the German IFOs placed shares under further pressure and talk of macro names selling EUR/USD weighed on the pair. As a result, in the fixed income space, the German 2/5 spread traded at levels not seen since December 2008. However as the session progressed, stocks staged a decent recovery, which coincided with unconfirmed market talk of an asset reallocation trade, together with talk of Asian real money accounts buying French OATs, which in turn prompted sharp tightening in FR/GE 10y bond yield spread. This also supported EUR/USD, which after coming close to making a test on the 1.2500 barrier is now trading little changed. In other news, the ONS reported that the UK economy shrank by 0.3% in the first three months of the year, more than previously thought. The downward revision was due to a bigger contraction in construction output than previously estimated. Despite this, FTSE in the cash has persisted, and is the strongest performing index in Europe today.

If there was one catalyst for the market to be "convinced" of an imminent coordinated liquidity injection, as Zero Hedge first hinted yesterday, or simply a 25-50 bps rate cut from the ECB as some other banks are suggesting and Spain's ever more desperate Rajoy is now demanding, it was the overnight battery of European Flash PMI, all of which came abysmal, throughout Europe, the consolidated Eurozone PMI posting the worst monthly downturn since mid-2009, the PMI Composite Output and Manufacturing Index printing at a 35 month low of 45.9 and 44.7 respectively. PMIs by core country were atrocious: France Mfg PMI at 44.4 on Exp of 47.0 and down from 46.9, a 36 month low; German Mfg PMI at 45.0 on Exp. of 47.0 and down from 46.2. The implication, as the charts below show, is that GDP in Europe is now negative virtually across the board. Adding insult to injury was the UK whose GDP fell 0.3%, more than the 0.2% drop initially expected. The cherry on top was German IFO business climate, which tumbled from 109.9 to 106.9 on Expectations of 109.4 print, as the European crisis is finally starting to drag the German economy down, or as Goldman classifies it, "a clear loss in momentum." What does it all add up to? Why nothing but a massive surge in risk, as the market's entire future is now once again in the hands of the #POMOList, pardon, the central banks: unless the ECB steps up, Europe will implode due to not only political but economic tensions at this point. Sadly, as in the US, by frontrunning this event, the markets make it more improbable, thus setting itself up for an even bigger drop the next time there is no validation of an intervention rumor: after all recall what sent stocks up 1.5% yesterday - a completely false rumor of a deposit insurance proposal to come out of the European Summit. It didn't, but that didn't prevent markets to not only keep their massive end of day gains, but to add to them. it is officially: we have entered the summer doldrums, when bad is good, and horrible is miraculous.

Equities and broad risk-assets were generally in sync today until around 1430ET when between rumors of a Euro-wide deposit-guarantee 'scheme' - which we had already dismissed as impossible short-term, very unlikely medium-term, and not a long-term solution to redenomination/insolvency risk - and Kocherlakota's hints as NEW QE if the fiscal cliff arrives - US equity markets took off (as did Gold). S&P 500 e-mini futures (ES) pushed to more than 12pts rich to CONTEXT (our proxy for risk-assets based on TSYs, FX carry, credit, and commodities) on all that hope - stalling at yesterday's late-day heavy volume swing highs. Of course the high-beta momo monkeys were pounced on and AAPL as well as the major financials all popped notably - breaking above yesterday's closing VWAP. Today was a low average trade size day - the lowest in a week (but a relatively high volume day) - after a large average trade size day yesterday which smells like algos pushing to enable larger selling (especially as we expect a denial any moment from Europe). VIX plunged off its highs but closed only marginally down with ES closing very marginally higher on the day - so some context is required to avoid anchoring bias intraday and while TSY yields did pop and EUR rallied after equities got going, they remain notably divergent from that sur-reality. Gold and Silver surged on the QE/EU hopes as well but remain down 2% and 3% on the week.

We are always on the look-out for low-cost long-vol trades with lots of convexity (large upside, low downside). We think we've found the 'ultimate' black-swan trade. Warren Buffett's Berkshire Hathaway bought Burlington Northern and implicitly assumed its debt which caused the company's CDS to collapse (risk to plunge dramatically as one would expect) to extremely low levels of insurance cost of only 15bps (or only $15,000 per year to protect $10,000,000 of debt - while gaining or losing ~$5,000 per bps shift in BNI's risk). However, as risk has picked up in the last week or so, BNI's CDS has risen by 7bps (just under 50%) to 22bps and looks set to go even wider if Buffett's Big Bullish 'Bernanke' Bet doesn't pay off. Buying BNI protection at 22bps seems like the ultimate cheap expression of the "All aboard the 'I wrote billions of naked puts just before 2008 market crash' train" trade.