recovery

NYSE volume was the 3rd lowest of the year so far (while ES was just below average) as stocks leaked lower all day to small net losses by the close. Financials led the drop in stocks as they start to catch up the credit market weakness we have been pointing to for over a week but while HY (the high yield credit spread index) continues to underperform (and stocks following at a lower beta), IG (investment grade credit spread index) modestly outperforms (the up-in-quality rotation) but HYG (the high-yield bond ETF) surged today into a world of its own once again. We suspect this is driven by 'arbitrage' flows between HY's recent richness and HYG's cheapness (as well as potential HY new issue impacts). Gold (and to a lesser extent Silver) was the story of the day as it exploded (perhaps on the Greek gold-collateral news) over $1780 intraday (now up over $55 in the last 3 days) although the USD did nothing (FX was quiet with JPY inching lower and EUR small higher as DXY leaked higher on the day to -0.25% on the week). The rest of the commodity complex jumped also (with WTI losing ground into the close even as Brent kept going - suggesting the spread decompression was in play). Treasuries rallied from early in the European day with yields dropping 6-8bps from the peaks and shifting the entire curve into the green for the week now (10y and 30Y around 1bps lower in yield). ES couldn't get significantly above VWAP today and CSFB's fear index (which tracks equity option skews) is at record highs which both suggest a preference to sell/cover is appearing (even as VIX diverged modestly from stocks today with implied correlation rising).

'All is not resolved' is how Morgan Stanley's Arnaud Mares begins his latest diatribe on the debacle that is occurring in Europe. While a disorderly default seems to have been avoided (for now), the Greek problem (as we have discussed extensively) remains unsolved as debt sustainability seems questionable at best, economic recovery a remote hope, and the growing political tensions across Europe (and its people) grow wider. Critically, Mares addresses the seeming complacency towards a Greek exit from the euro area noting that it is no small matter and has dramatic consequences (specifically a la Lehman, the unintended consequences could be catastrophic). Greece (or another nation) leaving the Euro invites concerns over the fungibility of bank deposits across weak and strong nations and with doubt over the Euro, the EU could collapse as free-trade broke down. The key is that, just as in the US downgrade case last year, a Euro-exit implies the impossible is possible and the impact of such an event is much, much higher than most seem to realize. While the likelihood of a Greek euro-exit may remain low (for now), the scale of the impact makes this highly material and suggests the EU will do whatever it takes (print?) within their mandates to hold the status quo. For all practical purposes, it would be the end of the euro as a genuine single currency and to preserve the euro if Greece left would require total federalism in the rest of the area.

And here is yet another reason why we will permanently ignore the pathologically lying real estate syndicate known as the NAR (link): December data was just revised from +5% to -0.5% (from 4.61 million to 4.38 million). Since December market expectations were for a +5.2% print, imagine the sheer horror the algos would have been faced with had the real number been reported on time. Needless to say, if this number had been unrevised, the January +4.3% increase would have been a decline. This way the aglos focused only on the immediate moment get two months of beats in a row. Huzzah. Anyone who trades anything based on this borderline criminal self-reporting enterprise needs to have their head checked. In other news, when will the LIBOR investigation finally target the NAR?

While today the association of real estate advertising agents known as the NAR will tell us that the home market is improving - an economic observation which we will completely ignore as any data out of the NAR is now proven to be manipulated and fraudulent, a far better indication of the ongoing implosion in the housing market, and more importantly - the sheer powerlessness of the Fed to do anything about it - came out of the latest weekly Mortgage Brokers Association, which showed that refi applications were down 4.8% W/W, while purchases slid 2.9%, after collapsing 8.4% in the past week. This has taken the Purchase Application index back to the September lows, which just happens to be the lowest print in 16 years. And while this in itself would be ok if not exactly good, it took place at a time when the 30 year mortgage rate was down to all time record lows! In other words, Bernanke's sole prescription to fix the broken housing market diagnosis - low mortgage rates, has now been proven to be a complete disaster, even as Obama does everything in his power to get debt repudiation for deadbeats (at the expense of everyone else of course) and fails. So: what's the next plan?

Crude oil spiked to nine-month high primarily on investors fear of potential conflict over the escalating tensions between the US, Europe, Israel, and Iran.  Right now, it seems Iran could be the one blinks first (war or peace).

Just when we thought that when it comes to nonsensical announcements Europe is second to none, here comes the White House and takes the cake:

• WHITE HOUSE SAYS RISE IN GASOLINE PRICES CAUSED BY VARIETY OF GLOBAL FACTORS, INCLUDING UNREST IN SOME PARTS OF WORLD, FAST GROWTH IN OTHERS - RTRS

Uhm, would the "unrestful" parts of the world be those that have an above average US drone presence. At least we know that said price surges have nothing to do with the following chart:

The ECB needs to convert its bonds so that they can be addressed separately.  So far, there is no indication on Bloomberg, which gets its bond information from trustees, that this has been done.  The outstanding amounts of existing GGB and Greece (Greek and English law bonds) hasn’t changed. Greece has to implement a retroactive collective action law.  With some luck, they will implement that, before the ECB actually converts their bonds. As we’ve written before, both of those actions are likely to be challenged. There are many concerns: that the PSI is such a mess, or that Greece continues to erode, or some governments fail to support the deal, and it gets cancelled and Greece actually doesn’t pay any of its bonds. Somehow no one in equity land or fx land seems to believe a failure to pay can occur, but I think bond values here, show that the credit markets are far less convinced that the can has been kicked.

Opting to trade commodities over Cede & Co.-owned stock certificates? Hopeful there would at least be a physical recovery if the counterparties collapse in a bilateral netting fireball of linked counterparty exposure (as long as MF Global is not involved... or its exchange... or regulator)? Then here is a simple way to gauge relative commodity strengths and weakness courtesy of Morgan Stanley's "Commodity Thermometer" which shows what products MS is bullish and bearish on, and why.

Heading into the North American open, equities are trading lower with the benchmark EU volatility index up 1.6%, with financials underperforming on concerns that the latest Greek bailout deal will need to be revised yet again. Officials said that the deal will require Greece’s private creditors to take a deeper write-down on the face value of their EUR 200bln in holdings than first agreed. The haircut on the face value of privately held Greek debt will now be over 53%. As a result of the measures adopted, the creditors now assume that Greece’s gross debt will fall to just over 120% of GDP by 2020, from around 164% currently, according to the officials. However as noted by analysts at the Troika in their latest debt sustainability report - “…there are notable risks. Given the high prospective level and share of senior debt, the prospects for Greece to be able to return to the market in the years following the end of the new program are uncertain and require more analysis”. Still, Bunds are down and a touch steeper in 2/10s under moderately light volume, while bond yield spreads around Europe are tighter.

Mainstream media is desperately scrambling to fill copy with stories of collaboration, rescue, heroism, sacrifice, and altruism among the European leaders. The dismal reality facing real people and real participants is quite different and as Peter Tchir points out "How many 'untruths' have become so accepted that they are now treated as facts or axioms". In an effort to get to the facts and reality, we disentangle Bloomberg's 'Greek Rescue' story and note the increasingly Orwellian nature of the events unfolding across the pond. But anyways, the machine is grinding along towards headlines of "rescue" where Greece will have been "saved" and "default will have been avoided" and it will be "great that banks and politicians worked to save Greece" in spite of the "lingering doubts that Greece will fulfill its obligations".

• Germany FinMin: More Talks Needed On 2nd Greece Bailout Plan (MarketNews)
• You stand up to the bankers, you win - Icelandic Anger Bringing Record Debt Relief in Best Crisis Recovery Story (Bloomberg)
• Iranian ships reach Syria, China warns of civil war (Reuters)
• Men's suit bubble pops? Zegna CEO Says China Sales Slowing (WSJ)
• German presidency row shakes Merkel's coalition (Reuters)
• Greece must default if it wants democracy (FT)
• Decision day for second Greek bailout despite financing gaps (Reuters)
• So true fair value is a 30% discount to "market" price? Board of Wynn Resorts Forcibly Buys Out Founder (WSJ)
• Spain Sinks Deeper Into Periphery on Debt Rise (Bloomberg)
• Walmart raises stake in China e-commerce group (FT)
• Iron Lady Merkel Bucks German Street on Greek Aid (Bloomberg)

Now that the bipolar market has once again resynced general risk appetite with the EURUSD (high Euro -> high ES and vice versa), everything in the macro front aside from European developments, is noise (and the occasional reminder by data adjusting authorities in the US that the country can in fact decouple with the entity responsible for half the world's trade. This will hardly come as a surprise to anyone. In fact, the conventional wisdom as shown by Goldman's latest client poll has European sovereign crisis worries far in the lead of all macro risks. Behind it are Iran and nuclear tensions, China hard-landing, the US recovery/presidential election and the Japanese trade deficit/record debt/JGB issues. Which for all intents and purposes means that the next big "surprise" to the market will be none of the above. What are some of the factor not listed as big macro risks? According to David Kostin 'Risks that clients did not mention include late March US Supreme Court review of health care reform (implications for 12% of S&P 500); mid-year deadline to implement Dodd-Frank financial reform (14% of market); and the French Presidential election on April 22nd where polls show incumbent Nicolas Sarkozy trails opposition candidate Francois Hollande." Oddly enough, one very crucial item missing is once again surging inflation courtesy of trillions in stealthy central banks reliquification, sending crude to the highest since May 2011, and the most expensive gas price in January on record.

It was one short week ago that both Australia surprised with hotter than expected inflation (and no rate cut), and a Chinese CPI print that was far above expectations. Yet in confirmation of Dylan Grice's point that when it comes to "inflation targeting" central planners are merely the biggest "fools", this morning we woke to find that the PBOC has cut the Required Reserve Ratio (RRR) by another largely theatrical 50 bps. As a reminder, RRR cuts have very little if any impact, compared to the brute force adjustment that is the interest rate itself. As to what may have precipitated this, the answer is obvious - a collapsing housing market (which fell for the fourth month in a row) as the below chart from Michael McDonough shows, and a Shanghai Composite that just refuses to do anything (see China M1 Hits Bottom, Digs). What will this action do? Hardly much if anything, as this is purely a demonstrative attempt to rekindle animal spirits. However as was noted previously, "The last time they stimulated their CPI was close to 2%. It's 4.5% now, and blipping up." As such, expect the latent pockets of inflation where the fast money still has not even withdrawn from to bubble up promptly. That these "pockets" happen to be food and gold is not unexpected. And speaking of the latter, it is about time China got back into the gold trade prim and proper. At least China has stopped beating around the bush and has now joined the rest of the world in creating the world's biggest shadow liquidity tsunami.

Today, Rand’s fictional world has seemingly become a reality – endless bailouts and economic stimulus for the unproductive at the expense of the most productive, and calls for additional taxation on capital investment. The shrug of Rand’s heroic entrepreneurs is to be found today within the tangled ciphers of corporate and government balance sheets. The US Federal Reserve has added more than $2 trillion to the base money supply since 2008 – an incredible and unprecedented number that is basically a gift to banks intended to cover their deep losses and spur lending and investment. Instead, as banks continue their enormous deleveraging, almost all of their new money remains at the Fed in the form of excess reserves. Corporations, moreover, are holding the largest amounts of cash, relative to assets and net worth, ever recorded. And yet, despite what pundits claim about strong balance sheets, firms’ debt levels, relative to assets and net worth, also remain near record-high levels. Hoarded cash is king. The velocity of money (the frequency at which money is spent, or GDP relative to base money) continues to plunge to historic lows. No wonder monetary policy has had so little impact. Capital, the engine of economic growth, sits idle – shrugging everywhere.

Financial credits remain the big underperformer hinting at much less risk appetite than USD-based stocks would indicate for now but broad risk assets staged an impressive bounce recovery on better than average volumes today as early weakness in Europe was shrugged off with better-than-expected macro data in the US (claims and Philly Fed headlines) and then later in the morning the story in the ECB Greek debt swap deal. We discussed both the macro data and the debt swap deal realities but the coincident timing of the ECB story right into the European close (when we have tended to see trends reverse in EUR and risk anyway) helped lift all risky asset boats as USD lost ground. The long-weekend and OPEX tomorrow likely helped exaggerate the trend back today but we note HYG underperformed out of the gate and while credit and stocks did rally together, the afternoon in the US saw stocks limp higher on lagging volumes (and lower trade size) as credit leaked lower. Treasuries sold off reasonably well as risk buyers came back (around 8bps off their low yields of the day pre-ECO) but rallied midly into the close (as credit derisked). Commodities all surged nicely from the macro break point this morning with Copper best on the day but WTI still best on the week. Silver is synced with USD strength still (-0.25% on the week) as Gold is modestly in the money at 1728 (+0.4% on the week) against +0.47% gains for the USD still. FX markets abruptly reversed yesterday's USD gains with most majors getting back to yesterday's highs. GBP outperformed today (at highs of the week) and JPY underperformed (lows of the week). VIX shifts into OPEX are always squirly and today was no different but we did see VIX futures rise into the close. We wonder if the last couple of days of Dow swings and vol spikes and recoveries will remind anyone of the mid-summer day swings last year?