Curious how Bill Gross feels in his new digs at Janus Capital (aka old digs in Newport Beach)? Curious how much money he is managing now or how he will manage it? Curious why he has a band aid under his right eye? All should be revealed in the Janus Capital live webcast going on now.
- Five U.S. airports to screen for fever (Reuters)
- Danger, central banks trading with each other: Bipolar U.S. Stocks See Biggest Mood Swing in Three Years (BBG)
- Draghi Policies Blunted in Berlin as German Protests Grow (BBG)
- White policeman kills black teen in St Louis, triggering fresh protests (Reuters)
- Au Revoir to France’s Welfare Model as Socialists Cut Spending (BBG)
- Here comes Roberto Cavalski (Reuters)
- There are 49 U.S. venture-capital-backed companies with a valuation of $1 billion or more—the highest number on record (WSJ)
- Pressure mounts on Hong Kong leader over payout amid crisis (Reuters)
The most surprising data point in today's 10 Year auction was the plunge in Directs, which tumbled from 13.5% to only 6.6%, which was the lowest since August of 2012 when they ended up with 5.2%. Just how much of this lack of Direct interest is due to Bill Gross no longer being on the bid? And what happens to future auctions in a world without the Old "New Normal" Pimco?
The integrity of markets is clearly at risk. And we have long sought alternatives that offer much lower credit and counterparty risk. The time-honored alternative has been gold. As the chart below shows, gold has tracked the expansion in US debt pretty handily (the correlation between the two is a strong +0.86) and if one expects that relationship to resume (we do), then gold looks anomalously cheap relative to the rising level of US debt.
The central bankers have truly been the markets best friends and Draghi and Kuroda-san have been taking over where Ms Yellen has all but left off, but even they can do little in the face of protest and dissent by various members of the global populace and the continuing stupidity and arrogance of our “democratically” elected representatives.
It appears wherever one looks in the markets there are the skidmarks of PIMCO adjusting to life after Bill Gross. First it was MBS (and related derivatives), then CDS indices adjusted as redemption expectations raised risk premia, and now it is the short-end of the Treasury curve. As The FT notes, 3-month Eurodollar futures (instruments enabling traders to bet on the front-end of the yield curve and thus more accurately pinpoint their bets on Fed actions) saw asset managers (cough PIMCO cough) liquidate a record 868,853 contracts in the week to September 30 – the largest one-week change on record (each contract has a notional value of $1m). This dramatic shift suggests both a disagreement with Gross' "new normal" view of rates lower for longer (since liquidation is concentrated around the 2-year maturities) and a need to meet liquidity requirements from redemption requests.
While the biggest micro news of the weekend is certainly the report that Hewlett-Packard has finally thrown in the towel on organic growth (all those thousands laid off over the past ten years can finally breathe easily - they were not fired in vain), and has proceeded to do what so many said was its only real option: splitting into two separate companies, a personal-computer and printer business, and corporate hardware and services operations (which will certainly lead to even more stock buybacks only not at one but two companies) which in turn has sent its stock and futures higher, perhaps the most notable development in the macro world is Japan's realization finally that the weaker Yen is crushing domestic businesses, which has resulted in the USDJPY sliding to lows last seen at Friday's jobs report print, and also generally leading to across the board wekness for the dollar, whose relentless surge in the past 3 months is strongly reminiscent of the euphoria following the Plaza Accord, only in the other direction (and making some wonder if the Plaza Hotel caterer are about to see a rerun of September 22, 1985 in the coming weeks).
In the mid 1970's ,“experts” warned that gold would fall as interest rates rose. The opposite happened and as interest rates rose, gold rose more than 8 times in 3 years and 4 months - from $100/oz in 1976 to $850/oz in January 1980 (see chart). History does not repeat, but it frequently rhymes ...
I think this is a time where people will look back on us and see it as a period of practically central bank worship. The central bankers – Draghi, Yellen, Bernanke – have become almost celebrities in America. People have invested unreasonable hopes in what these central banks can know, and what they can do. I think that, sooner or later, the investing public will become disillusioned of these ideas.... I dare say that stock prices will not continue to rise uninterrupted at the same pace. That’s not a very interesting prediction, but the stock market is certainly a cyclical thing. I think it’s fair to observe that today’s ultra-low interest rates flatter stock market valuations. Stock prices are partly valued based on a discounted flow of dividend income. To the extent that the discount rate you use to value that stream of dividend income, which depends on interest rates, is artificially low, stock prices are artificially high. I think that the burden of proof is on anyone who would assert that we are in a new age of persistently and steadily rising stock prices.
Market weakness, as BofAML reports, has taken a toll on mutual fund and ETF flows, with stocks (-$9.56bn), HY bonds (-$1.56bn) and levered loans (-$1.17bn) all reporting significant outflows last week (ending on October 1st). There is a clear "up in quality" and "up in capital structure" rotation among investors as investment grade bonds saw huge inflows. Notably, most PIMCO funds, including the Total Return Funds, do not report flows weekly, and hence the bulk of this outflow was not reflected in the last week’s data. In a statement PIMCO said that outflows from the Total Return Fund totaled $23.5bn in September, so we will have to see just where that outflow hit.
It has been a week since Bill Gross dropped a tape-bomb on the fixed-income market and walked away from the firm he founded decades ago. Since then the world and their pet rabbit have commented (most notably David Tepper's "who cares?"); but one man has been markedly silent... until now. In an interview on Bloomberg TV, former PIMCO Co-CEO Mohamed Al-Erian told Betty Liu that Bill Gross' "departure - the fact that it happened and how it happened - was a surprise."
- How you know it is all a lie: Pelosi Presses Obama to Talk Up Stronger U.S. Economy (BBG)
- Secret Goldman Sachs Tapes Put Pressure on New York Fed (NYT), Uh, no they don't
- Clashes Break Out at Hong Kong Protest Site (WSJ)
- N.Y. Fed Lawyer Says AIG Got Billions Without Paperwork (BBG)
- Ebola’s Disease Detectives Race to Track Others Exposed (BBG)
- UPS, FedEx Want Retailers to Get Real on Holiday Shipping (WSJ)
- No more mailman at the door under U.S. Postal Service plan (Reuters)
What one can not exclude is that Blackrock, having worked with the ECB for an indefinite period of time, is intimately familiar with the long-term strategy of the biggest jawboning back in the world: Mario Draghi's ECB. Because while Draghi will say anything, as he started two years ago with his infamous "Whatever it takes" speech, his actual policy options are painfully limited. It is in this context that all those betting that public, US-style, QE will inevitably follow the private QE which is set to last at least two years, may want to sit down and read the following note from Reuters, which warns "investors loading up on some of the euro zone's riskiest government bonds on expectations that the European Central Bank will buy them are making a mistake" according to none other than BlackRock's head of European and global bonds said on Wednesday.
- As we warned in May 2013... Gross Exposes $42 Trillion Bond Market’s Key Flaw in Exit (BBG).... hint: no liquidity
- WTI Crude Slips Below $90 for First Time in 17 Months (BBG)
- Traders Thank Fed for Once-in-Decade Surge in Profit (BBG)
- Islamic State committing 'staggering' crimes in Iraq: U.N. report (Reuters)
- Philippine Islamist militants threaten to behead German on October 17 (Reuters)
- Draghi’s Buying Spree for the ECB Might Start Modestly (BBG)
- Russian Officials Say No Plans for Capital Controls (WSJ)
- Indians Join the Wave of Investors in Condos and Homes in the U.S. (NYT)
- Leader of Mexican drugs cartel captured (FT)
- Dallas Ebola patient vomited outside apartment on way to hospital (Reuters)
While we already documented the crash in Japanese stocks earlier, the biggest market development overnight is the plunge in crude, with both Brent and WTI plunging, the latter sliding under $90 for the first time in 17 months, extending yesterday's selloff after Saudi Aramco cut Arab Light OSP in Asia to 2008 levels. Brent drops to lowest since June 2012. This also confirms that the global slowdown whose can is kicked every so often in a new bout of money printing, is arriving fast. That, and the imminent crackdown on today's Hong Kong protest will likely be the biggest stories of the day, even as the spread of Ebola to the US is sure to keep everhone on edge.