SPY

Last week we reported that in the aftermath of the so far disastrous French campaign to eradicate "rebels" in the north of Mali, because of their implied threat fo Europe, that "US Drones, Boots Arrive In Mali." Turns out we were wrong, and as the case virtually always is, for some reason there was already a US presence of at least three US commandos in Mali in the summer of 2012. What they were doing there remains a mystery, as it is a mystery if the ever co-present flip flops on the ground were there inciting the perpetual scapegoat Al Qaeda to do this, or that. Or maybe it was not the CIA. Maybe it was the Army's "little-known and secretive" branch known as the Intelligence and Security Command. Regardless, what becomes obvious is that while the US was on the ground and engaged in secret missions, it needed an alibi to avoid "destabilizing" the local situation once its presence became conventional wisdom. It got just that, thank to one Francois Hollande just over a week ago.

Some discoveries are exciting, joyful, and exhilarating, while others can be quite painful.  Stumbling upon the fact that you do not necessarily have a competent grasp of reality, that you have in fact been duped for most of your life, is not a pleasant experience. I came to see a dark side to the Democratic Party that had always been there but which I had refused to acknowledge.  During the rise of any despotic governmental structure, there is always a section of the population that is given special treatment, and made to feel as though they are “on the winning team”.  For now, it would appear that the “Left” side of the political spectrum has been chosen by the establishment as the favored sons and daughters of the restructured centralized U.S.  However, before those of you on the Left get too comfortable in your new position as the hand of globalization, I would like to appeal to you for a moment of unbiased consideration.  I know from personal experience that there are Democrats out there who are actually far more like we constitutionalists and “right wing extremists” than they may realize.  I ask that you take the following points into account, regardless of what the system decides to label us...

Some have argued that the market is dead. They may be right, as the following sequence of S&P 500 closes from the past 5 days: 1472, 1472, 1471, 1472, 1473 ...suggests that V-Fib has set in among the equity indices. Perhaps, as the movie Flatliners noted "Some Lines [like SPX 1470] Shouldn't Be Crossed." Meanwhile the 10Y Treasury yield has slipped from 1.90% to 1.82% over the same period.

The Winners of the Academy Award and Golden Globe Are ... Government Propagandists

Sometimes the writing on the wall seems painfully obvious. But occasionally it's a good idea to step back and look at the big picture:

History Repeats ...

In a world in which the NSA has access to everything, including - soon - one's bank accounts, because "the government is there to protect you", it was only a matter of time before the logical extension of abdicating all privacy was enforced in the city that never sleeps, and which ended up with 24/7 vigilant "alarm clocks" in the form of unmanned aerial vehicles, aka drones, "for the sake of security." From RT: "The head of the New York City Police Department announced this week that the largest local law enforcement agency in the United States might soon rely on spy drones for conducting surveillance. During an open conversation held Thursday between Reuters editor-in-chief Stephen Adler and NYPD Commissioner Ray Kelly, the chief of police confirmed that New York’s boys in blue aren’t entirely opposed to acquiring an unmanned aerial vehicle for the sake of security. “We’re looking into it," Kelly reportedly told an audience at the 92nd Street Y Thursday evening. “Anything that helps us.”

Just because there was not enough encroachment by the government into virtually every corner of private life, here is another "collaboration" that will further enmesh big brother into every aspect of private life, in this case private financial life, because as the WaPo reports, "major U.S. banks have turned to the National Security Agency for help protecting their computer systems after a barrage of assaults that have disrupted their Web sites, according to industry officials... The NSA, the world’s largest electronic spying agency, has been asked to provide technical assistance to help banks further assess their systems and to better understand the attackers’ tactics." And while we salute the great diversionary pretext that "Iranian hackers" pose a greater risk to the stability of the US financial system than, say, the ongoing monetization of US debt at a pace of $85 billion per month, which has made the Fed's DV01 rise to a mindboggling $2.75 billion, or idiot pundits who claim all American problems can be resolved with one coin, we can't help but wonder what happens when the most intrusive of US spy agencies, one which as reported last year is free "to intercept, decipher, analyze, and store" virtually every electronic communication in the entire world, now has full explicit access to all bank data, and, incidentally, every American's financial snapshot at any given moment?

VIX rose majestically (by a mere 0.25 vols and still below 14%) for the first time in seven days (but the term structure steepened a little more) and while stocks did not like that, they still managed to pull off the lows, close green, and remain in a 1% range for the last week. Treasury yields continue to slide lower (even with a weak auction today) as it would appear the end of the bond bull market was called a little premature (and as we noted, merely reflected short-term rate-locks for corporate issuance). While HLF grabbed headlines, it is AAPL that seems to be swept under the rug as it ends the day crashtastically at its lows (where its margins will be after the iPoor is released). The USD leaked ever so gently higher on the day - ending practically unchanged on the week (with JPY 0.5% stronger on the week). Commodities chopped around non-directionally (though Silver is the week's winner so far). Financials, and Energy had a tough day (and homebuilders were sold hard after Europe's close). HYG seemed today's lever of rampaciousness and remains rich to intrinsics (as cash HY bonds just can't catch a bid at record-high prices). Once again the S&P reversed its (up)trend at around the European close but late-day VWAP reversion held us bid on the day.

The biggest highlight of the day is the launch of Q4 earnings season with Alcoa after the close. The question is by how much will the ES/SPY correlation have dragged individual stock prices higher from far lower cash flow implied valuations - we will get a glimpse this week, as well as get a sense of how Q1 is shaping up, this week but mostly next week as earnings reports start coming in earnest. There was the usual non-event newsflow out of Europe, which has no impact on risk levels, now driven solely by every twitch of Mario Draghi's face, and best summarized by this from SocGen: "In the wake of September's 3 point VAT increase in Spain, which saw a significant bringing forward of consumption to beat the tax hike, euro area activity in Q4 has been genuinely awful."

S&P 500 futures (ES) ended practically unchanged (though cash was down ~5pts) on relatively weak volume but decent average trade size - thanks in large part to the entirely ubiquitous rampathon into the close. A less-than-8pt range in ES saw the standard larger block sizes come through into the close as we ramped. Stocks were supported by USD weakness (-0.35%) but commodities ignored it (as did Treasuries). The front-end of the VIX term structure was the ramping-weapon choice today once again collapsing to red as S&P 500 futures were driven up to unchanged (and Friday's VWAP). The VIX term-structure has is its steepest in over three months and has steepened its most in 20 months over the past 5 days. HYG (also levered for a ramp) surged once again (to last week's key VWAP) squeezed this afternoon as its short-interest reaches record high levels (as it seems every HY manager is hedging via the ETF since the underlying has become increasingly illiquid) with some big blocks going through. Rates overall oscillated in a narrow +/-2bps range today (not exactly the big rotation) as we suspect, given the chatter of IG issuance this week, that last week's weakness was more rate-locks and hedging (as we have seen time after time) than asset rotations. Overall, today was an equity catch-down day to risk-assets overall.

Will the taxer-in-chief discuss the debt ceiling or will this 'personal' announcement be all Hagel/Defense and Brennan/CIA? Stay tuned...

S&P 500 futures lurched in a vol-driven mania above their implicit QE3 highs (stop-run) and yay verily there was much rejoicing as cash S&P 500 reached closing levels not seen since December 2007. The only trouble with all this jubilation - Treasuries rallied all day (so no 'Great Rotation'), high-yield credit was having none of it, and AAPL positively hated it (though financials had their best week since the stress tests in March). Average trade size surged as did volume into these highs and as we noted before, the VIX term-structure is now at its steepest in 5 months - as hedgers shift their positions out past the debt-ceiling deadline (and implicitly crush short-term vol spurring the rally further). But, into the close, S&P 500 futures were decidedly skittish as it appeared we ran out of greater fools for a few seconds at the close (via @nanexllc $1.1B worth of $SPY and 25,000 eMinis in last few seconds). Equities pulled away from the rest of risk-assets in the last 30-minute ramp closing the week right at the QE3-day highs, with the USD +1% on the week.

In part one of this two part series – Hey You – we examined how an invisible government of wealthy, power hungry men have utilized the propaganda techniques of Edward Bernays and lured the American people into a narcissistic, techno-gadget, debt based servitude. Over the last one hundred years they have created a totalitarian state built upon egotism, material goods, and fulfilling our desires through Wall Street peddled debt and mass consumerism. It has been an incredibly effective form of control that has convinced the masses to love their servitude. The lyrics to Pink Floyd's 'Mother' had both a literal and figurative meaning for Roger Waters. Having seen his Wall Tour performance this past summer at Citizens Bank Park with a diverse crowd of 40,000, ranging in age from senior citizens to teenagers, it seems this song has gained new meaning. He sang a duet with himself from 1980 projected on the Wall and when he sang the lyric, “Mother, should I trust the government?” the entire stadium responded in unison – NO!!! This revealed a truth that is not permitted to be discussed by the corporate mainstream media acting as a mouthpiece for the ruling class. A growing legion of citizens in this country does not trust the government. This is very perceptive on their part.

We know we're going to get a knee-jerk rally as the shorts run for cover today...