SPY

Something different today. A dip was bought and kept a little momentum - aided and abetted by some late-afternoon desperation EUR buying correlation-help which dragged the Dow back over the magical 12,500 level. Stocks and high-yield credit bounced nicely today - with the latter dragging the former higher from what we could tell (on the back of reversion to fair-value in the ETF and credit market) - as the rest of risk-assets were generally stable. AAPL rotation (making yet another one of its 9-plus % drops-and-pops) helped drag NASDAQ up while FB dragged the entire social media segment down. Financials, while up as a sector, were ugly in the majors with JPM joining Citi and MS in the red YTD now and BAC back to 4 month lows. Gold was unch and silver down as Oil and Copper jumped (with the former testing $93 at the close). Treasuries were practically unchanged from Friday's close but the long-end rallied the most from its opening levels last night and the 2s10s30s curve was a significant risk-on driver. Stocks were on their own though when we look at Treasuries, the USD, and gold as it appears the credit compression arbs were enough to pull stocks up and AUD and EUR strength into the close was interestingly aggressive - short-squeeze or does someone know something? Heavy and large size volume into the close suggests it was another ramp to provide exits - and credit indices needed to shed some 'cheapness' - though we remember that Europe is due to open in 10 hours. VIX tumbled over 3 vols but remains above 22% with the term-structure fo vol still steep.

Three important things occurred today: 1) US equities converged down to high-yield credit's less sanguine view of the world; 2) US equities converged to US Treasuries hope-less view of the world; and 3) Gold was the leading indicator for where risk assets should be today - as its stability was the only rock upon which to anchor expectations of intervention once again. The equity market fulfilled every technical analyst's wet dream today with a low volume gap-fill - which notably left today's VWAP at almost exactly the closing price from Friday (i.e. gave bigger players a chance to get out without losing their short - which was exemplified by the sell-off into the close on much bigger than average trade size). Never have we heard just whimsical exuberance at the market closing practically unchanged (ES +2pts) but critically risk markets in general did nothing but revert ahead of tomorrow's real action as the UK (and that means the European credit market) comes back from a long-weekend. Broadly speaking - US equities outperformed risk-assets modestly until the late-day give back dragged them back to reality but overall - IG credit underperformed, HYG outperformed (inflows dominant), and HY and S&P 500 e-mini futures (ES) stayed in sync.

What are the classic signs of an asset bubble? People piling into an asset class to such an extent that it becomes unprofitable to do so. Treasury bonds are so overbought that they are now producing negative real yields (yield minus inflation). And so America’s creditors are now getting slapped quite heavily in the mouth by the Fed’s easy money inflationist policies. John Aziz proposes (much to the consternation of the monetarist-Keynesian “print money and watch your problems evaporate” establishment) that this is a very, very, very dangerous position. And that those economists who are calling for even greater inflation are playing with dynamite. See, while the establishment seems to largely believe that the negative return on treasuries will juice up the American economy — in other words that “hoarders” will stop hoarding and start spending — we believe that negative side-effects from these policies may cause severe harm. Do we really want to risk the inflationary impact of continuing to print money to monetise debt (and hiding the money in excess reserves, thereby temporarily hiding the inflation). As John wrote recently - "So, does the accumulation of excess reserves lead to inflation? Only so much as the frequentation of brothels leads to chlamydia and syphilis." We’d call that playing dice with the devil.

One of the best definitions of fascism – the one used by Mussolini himself – is the “merger of state and corporate power“. We’re pretty much there …

For the third day in a row, the USD was bid from the Europe open to its close and drifted lower in the US afternoon. Today's limp lower in the USD this afternoon (with AUD and CAD strength while JPY was flat) provided, along with some leaking higher in Treasury yields, support for a modest risk-on levitation in stocks as the S&P 500 tried and failed to get back to unch after falling below yesterday's lows (well below the pre-ISM levels) early in the day. Credit, equity, and Treasury markets were remarkably in sync today - which is unusual given recent dislocations and correlation across asset classes in general picked up. Gold (and the rest of the commodity complex) traded pretty much in sync with the USD all day, leaving Silver down 2% on the week and WTI back under $106 but still +0.4% on the week - but Gold -0.5% (in sync with USD's 0.5% gain this week) was the best performer of a bad bunch today. VIX generally traded in sync with stocks aside from an odd gap lower right at the close. Treasuries ended the day 2-3bps lower in yield (a few bps off their best levels though) leaving the entire complex modestly lower in yield for week (aside from 2Y which is +0.4bps). Broad risk assets ebbed a little into the close even as stocks bounced off VWAP for one last push but volume leaked away as we rallied (as normal).

The 20-day realized volatility of the S&P 500 ETF (SPY) has more than doubled in the last two months from a low near 7% to the current level over 15%. At the same time, implied vol (akin to VIX) has dropped 2-3vols during that period and almost 5 vols in the last two weeks - nearing its multi-year lows once again. For the first time this year though, 3-month-implied volatility is trading below realized 20-day volatility and while they are apples-to-oranges to some extent (forward-looking vs historical), the 'cheapness' of volatility may well be enough to encourage hedgers back in - especially on a day when stocks pop unexpectedly. What is more worrisome though is almost exact replica that implied- and realized-vol are following when compared to last year in the run-up to the big mid-summer swoon as complacency is back it seems.

History shows that freedom is almost always the price that societies pay to maintain the status quo and keep their rulers in power. When the system finally collapses under its own weight, though, things can go from bad to worse as the people cry out for CHANGE. The French, for example, traded an absolute monarch in Louis XVI for an absolute dictator in Robespierre. Similarly, the Russians traded the empire of ‘Bloody’ Tsar Nicholas II for the Red Terror of Soviet Russia. As the Russian Marxist revolutionary Leon Trotsky said in 1937, “The old principle of ‘who does not work shall not eat’ has been replaced by a new one– who does not obey shall not eat.”

Two words: Screw that.

The gravitas of gravity...

9 Torture Myths DeBUNKED

As if anyone needed another example of who is really running the show, the S&P 500 cash index (an index that tracks the weighted performance of 500 underlying and supposedly fundamentally idiosyncratic companies) closed at 1399.99 after breaching the almighty 1400 earlier in the afternoon. The Dow Industrials failed to close in the green for the month and Dow Transports notably diverged bearishly today as the afternoon's ramp-fest in equities - and notably nothing else - gave hope to hope-less. Between a weak/strong (you decide) jobless claims data, a dismal Kansas Fed (and Chicago NAI negative print) juxtaposed with what was 'supposedly' strong pending home sales (contracts not signings note), it seemed some early QE-hope spillover from Bernanke yesterday got us going (with gold outperforming) early on but as the US day-session began, stocks took off from their lows, stabilized into the European close, then re-accelerated - running stops to the early April non-farm-payroll print levels. Stocks reconnected with Gold's early run but this did not have the feel of a QE trade at all - the USD was flat all afternoon, volume was dismal, gold actually fell as stocks took off this afternoon, and Treasury yields rose and fell in a narrow range. In other words, there was not a concerted cross-asset class QE hope here -  this was all stocks on their own - as they disconnected from our cross-capital structure and broad risk asset models as the afternoon wore on. Notably SPY implied vol is very close to crossing below its 20-day realized vol for the first time in almost five-months as VIX tested under 16% but couldn't maintain it into the close. The USD was lower close-to-close with AUD strength and JPY weakness most obvious as the US day session began with EUR relatively stable. Treasuries broadly remain lower in yield on the week with 7Y outperforming and 30Y basically unch. Copper was the best performing commodity today followed by Silver (though Ag remains down on the week) but Gold and Oil also benefited from USD's leaking. Discretionary, Energy, and Financials sectors outperformed on the day in stocks (with Materials weak - another non-QE sign) but it was the equity market's standalone bullishness that suggests this was more technical than a hope- or fundamental-based regime shift.

A 2.7% gain in the NASDAQ, obviously dramatically aided and abetted by the squeeze-fest in AAPL +9% from last night's close, was the best gain in over four months for the tech-heavy index but still leaves it lagging the Dow (by over 2%) and S&P 500 (by over 1.5%) from the 4/9 highs in Apple. At the other end of the spectrum in the real economy, CAT's less than rosy outlook, saw it suffer its largest drop in 7 months dragging an impressive 37pts out of the Dow's lagging but positive performance on the day (now positive from the 4/9 Apple Top day). Of course the Apple-exuberance which seemed enough for the entire world's risk-asset markets to decide that everything is fixed started the day off gap higher in the US and late-to-the-game retail pushed equities higher out of the date this morning as the rest of risk-assets were generally steady. Europe's close seemed to have only minimal impact as everyone was focused on the FOMC statement and Bernanke's presser. Between the FOMC and the Bernanke conference, Gold, stocks, and the USD knee-jerked and retraced but Treasuries remained worse (higher in yield by 3bps or so). Once Bernanke began his quaking tenor, Gold pushed higher, Treasuries lower, stocks higher and the USD lower as hints of QE back on the table were dribbled in between defensive tacks on biflationary concerns. This QE-specific action was accompanied by low volumes though (as usual) but volatility did compress (a la typical QE trades) with VIX closing below 17% - its lowest in over a month and near its largest divergence from European volatility (V2X). Commodities in general lagged early then recovered as USD sold off on QE chatter from Ben - Silver underperformed on the day but outperformed notably off its lows after testing below $30 for the first time in 3 months. Treasuries pulled back positively off their high yields of the day in the late afternoon ending the week with the short-end (out to 5Y) flat and 10s/30s 2.5bps higher in yield. HYG was a dramatic high-beta outperformer today - now green for the month - even as HY and IG credit lagged the ebullience in stocks (though did improve to two-week highs). ES (the S&P 500 e-mini future) closed above its 50DMA on average volume today with some heavy and larger average trade size into the close ending just above Friday's highs - even after the dismal US data (Durable Goods) and Europe's issues this morning.

Follow the indicators or BTFD?

With the plethora of mounting event risks, from the end of Operation Twist to numerous elections, the possibility of QE3, the US fiscal situation, the ECB/Bundesbank battle, and China's on-again-off-again economy, it seems finding a low cost long volatility 'bet' is the best way to gather some macro protection (aside from total liquidation that is). Earlier, we noted how expensive S&P 500 implied volatility had become relative to its realized vol - suggesting that being long S&P vol is not a low-cost option. However, as Barclays points out, GLD (and slightly less so SLV) is among the cheapest (defined based on percentiles of implied vol over realized vol) volatilities available. SPY vol is trading at a 60% premium to its realized vol while GLD is trading at a 20% discount. While the main risk to being long GLD volatility is a continued drift lower in realized vol, the current realized volatility is near the lower-end of its empirical range and there appear to be a number of catalysts, as we noted above, for gold (or hard assets in general) to break from its range-bound YTD performance in price and volatility (either up - more likely in our view - or down).

An ugly European market initially dragged stocks notably weaker overnight, with plenty of headline-makers from Apple's moves to WMT's 'Sinko-de-Abril' accounting for 20% of the Dow's loss, and Europe's macro data but after the first 30 minutes or so, S&P futures bounced off 4/10 day-session lows and leaked higher all day from there to end around last Monday's closing print. Volumes lagged as we rallied - as did average trade size - but in the last few minutes heavy volume and large average trade size stepped back in more biased to the downside. Stocks and volatility continue to follow very similar paths during this reflation phase as they did in 2010 and 2011 and while much was made of VIX's more-positive-than-expected performance today, we remind readers that we are at 8-month wides relative to realized vol - suggesting markets are anticipating a lot more anxiety ahead. FX markets leaked higher in the USD until shortly after the US day-session open and then drifted USD weaker from there as Treasury weakness coincided with EUR buying - smelling a lot like more repatriation flows. The drift higher in equities is therefore supported from a correlation-perspective as carry and rates (and oil) pushed up from soon after the US open. The USD ended up around 0.25% from Friday's close (with JPY the best performer and stable from the Tokyo close) which matches gold's 0.25% loss (though still best of the group) as Commodities all lost ground today with Silver underperforming. WTI managed to get back over $103 by the close. Credit markets underperformed close-to-close but from the lows intraday, they managed to out-gain stocks with a late-day pop in HYG bringing it in line with its intrinsic value and SPY for the first time since 3/29.

Just a month ago we raised more than a proverbial eyebrow when we noted the creation of the NSA's Utah Data Center (codename Stellar Wind) and William Binney's formidable statement that "we are this far from a turnkey totalitarian state". Democracy Now has the former National Security Agency technical director whistleblower's first TV interview in which he discusses the NSA's massive power to spy on Americans and why the FBI raided his home. Since retiring from the NSA in 2001, he has warned that the NSA’s data-mining program has become so vast that it could "create an Orwellian state." Today marks the first time Binney has spoken on national TV about NSA surveillance. Starting with his pre-9-11 identification of the world-wide-web as a voluminous problem since the NSA was 'falling behind the rate-of-change', his success in creating a system (codenamed Thin-Thread) for 'grabbing' all the data and the critical 'lawful' anonymization of that data (according to mandate at the time) which as soon as 9-11 occurred went out of the window as all domestic and foreign communications was now stored (starting with AT&T's forking over their data). This direct violation of the constitutional rights of everybody in the country was why Binney decided he could not stay (leaving one month after 9-11) along with the violation of almost every privacy and intelligence act as near-bottomless databases store all forms of communication collected by the agency, including private emails, cell phone calls, Google searches and other personal data.

There was a time when Americans still cared about matters such as personal privacy. Luckily, they now have iGadgets to keep them distracted as they hand over their last pieces of individuality to the Tzar of conformity as simply put "The NSA Is Lying - The government has copies of most of your emails".