SPX priced in spot gold…on long term support
SPX priced in Spot Gold
Above is a chart of SPX in gold. In late 2008, (the period at the beginning of this chart), the nominal level of SPX was around 1375. It is now near 1325 (15-April 2011). So, one might conclude that the damage has been repaired. However, when priced in gold, SPX is still about 33% lower than it was in late 2008. However, we do appear to be on long term support in the above chart, which suggests selling gold vs buying SPX. (This is NOT a recommendation).
April 15. “A mile wide and an inch deep”?
April 15. Jeff Gundlach was on CNBC yesterday and mentioned that when the first QE ended bond yields fell by 160 bps. He added (I paraphrase) “to be fair, at least part of that move was related to the European banking problems.” Interestingly as we contemplate the end to QE2, Greece and Portugal made new high yields yesterday and Moody’s just downgraded Ireland. I recall analysts blithely dismissing the early subprime problems as a “mile wide and an inch deep”, but of course they turned out to be truly global, and fingers of instability continue to reach out and touch every market. Even yesterday Larry Summers had this to say (HuffPost) “I am in less of a hurry to condemn the [financial] innovation as the cause of the crisis than many,” Summers said, because “most financial crises [in the past] do not seem to have their roots in new-fangled financial institutions.” Instead, he said, it’s probably better to blame the housing bubble. Really? Financial innovation is what allowed the housing bubble to blow up!
–Heavy seller of EDU1 9962^ yesterday, over 20k from 16.5 to 15.5, appears new, at least on put side.
–News today includes: CPI expected +0.5 with Core +0.2. TIC data. Industrial Production +0.6 with Capacity 77.3.
–In comparison with US inflation, India’s wholesale price inflation quickened to 8.98% and China’s CPI was 5.4% (widely thought to be understated). Fed’s balance sheet grew to a whopping $2.65T. Our chief export is (no, not chrome) but rather, inflation!
April 14. New highs Greece and Portugal yields
Interest rate futures continued to rally yesterday as Obama gave a speech about cutting $4T from deficit. Never mind the details, he is moving more towards center and the conversation is about cutting. Just another example of removal of institutional economic support, be it through central bank tightening (China, ECB) or less gov’t spending. Upcoming fights about increasing the debt limit in the US are likely to underscore the theme of less gov’t, and less support for the economy.
–Large option trades in eurodollars were mostly new bearish positions: EDZ1 9900/9925ps bought in size of 75k for 4.5 (open int +75k in 92p). Also a buyer of 30k EOK 9862/9887ps vs 9912c for 2.5. Calls are being heavily offered as the market edges higher in front contracts…appears to be liquidation.
–News today includes PPI expected +1.0% headline with Core of +0.2%. Jobless Claims expected 380k. Kocherlakota and Plosser speaking. I saw an item yesterday about Argentina’s gov’t fining economic forecasters who indicate higher inflation levels than ‘official’ forecasts. “…officials have said they hope the fines will deter economists from “deceiving” the public into making poor financial decisions by publishing inflation estimates that differ considerably from Indec’s CPI data.” Of course, we all know that inflation in the US is low…
–JPM earnings yesterday were ok…but top line revenue growth lower and real estate woes continue …warning flag?
–From MarketWatch: “There have been only four other occasions over the last century when equity valuations were as high as they are now, according to a variant of the price-earnings ratio that has a wide following in academic circles. Stocks on each of those four occasions would soon suffer big declines.” This is the CAPE developed by Robt Shiller… interesting story because most mainstream news services say stocks are cheap or appropriately valued.
http://www.marketwatch.com/story/history-bodes-ill-for-stock-market-2011-04-12?dist=beforebell
April 13. QE…it’s not about bonds, it’s about stocks
April 13. Crude oil slid another $4 bbl yesterday on long liquidation and other ‘risk assets’ also weakened. Five year note fell 9 bps to 2.22. Tens are back to 3.50%, down 7 bps.
–Bernanke is quick to point to higher stock prices as evidence of QE success. On the other hand, he disowns the negative impact of higher commodity prices. In any case, the correlation in prices hasn’t been lost on the market, and as GS has advised lightening up on oil, etc and MS has cut Q1 growth estimates, it appears that the big guys equate the end of QE not with higher RATES, but with lower commodity and stock prices. In turn, bond prices may rally…it’s been an ironic fact that the price of the asset the Fed has ‘targeted’ has gone the opposite direction from stated intentions. It is the impact on tangential assets that matters.
–The IMF says the US lacks credibility on debt on the eve of Obama’s speech (today) to reveal deficit reduction plans. Detroit is facing cuts or collapse, and may have to be taken over by Michigan, (which in turn will be bailed out by the US). KC Fed’s Hoenig stated the obvious: big banks are gov’t sponsored enterprises, and (gasp) actually wants to restrict their activities. http://ca.news.yahoo.com/big-banks-government-backed-feds-hoenig-20110412-112137-434.html
–Today’s news includes Retail Sales expected +0.5%, 10 yr note auction, and Beige Book.
–From a zerohedge article:
Gallup’s conclusion is absolutely spot on: ‘Global events, continued political battles about the budget in the nation’s capital, and a weak, if modestly improving job market add to consumer uncertainties. As a result, it is not surprising that consumer confidence plummets even as Wall Street continues to do well. However, if consumers continue to lack confidence and spending doesn’t increase, it is hard to see how the U.S. economy can continue its modest improvement. In turn, it would seem Wall Street and Main Street will have to align at some point going forward. Either Wall Street will prove right and economic conditions on Main Street will improve or the reverse will prove to be the case.”
April 12. ‘Risk off’ trades follow averted gov’t shutdown
April 12. Huge reversals in many commodities. Crude oil plunged almost $3, having made a higher high for the move. Goldman apparently made a call to exit long commodities, and there was reportedly a large buyer (100k) SLV July 25p just over 10 cents. (Small delta option, just interesting that some of the ETFs are regularly seeing large macro option trades). Silver had a swing of over $2 from morning high to afternoon low.
–Interest rate trading was very quiet in spite of moves in other markets. Both Dudley and Yellen made dovish comments. Inflation data is out on Thursday and Friday (PPI and CPI). Stocks were higher early, but then faded into the close. Alcoa missed earnings and Japan raised the seriousness of its nuclear disaster to Chernobyl level, so SPs are lower again this morning. The perception that general liquidity might not be as plentiful at the margin may also have a bit to do with the “risk off” trade. A french agency is warning that pregnant women and children should not drink rainwater or eat leafy greens due to radiation threat.
–Iceland again rejected an Icesave package that was less onerous than the first one, leaving the matter to the courts. Ireland is following the same route. It’s difficult to see how austerity measures are going to be accepted across many countries when the populace perceives benefits accruing to the banking class only.
April 11. The Art of Contrary Thinking
Attached are 2 pages from The Art of Contrary Thinking, a book published in 1954. I happened to see a reference to it, and bought a used copy on Amazon (power of technology). As I started I found it quite dated, but the two pages (which I copied in attachment and quote below) are quite interesting, which cite economic malaise in France in 1789:
“Early in the year 1789,” writes Andrew D. White in his classic monograph, “the French nation found itself in deep financial embarrassment: there was a heavy debt and a serious deficit.”
In France the hard way had no appeal. There was a general search for some short road to prosperity, White tells us, and “ere long the idea was set afloat that the great want of the country was for more of the circulating medium [today throughout the world, it is for more dollars] and this was followed by calls for an issue of paper.” [expand the Central Bank balance sheet]
The great Mirabeau, you remember, tried by the strength of his oratory to stop the fiendish schemes of Marat, who wished to issue paper money backed by the lands of the Church. Mirabeau lifted his voice in the National Assembly against the wicked idea of issuing four hundred million assignats unsupported by specie—but to no avail. [the original QE1]
The immediate result of the paper money stimulant was, of course, successful. For a brief time, business picked up and people were happy. France rejoiced at the brilliant plan.
Bootstrap economics never works for long, however. Within a short five months the money was gone and “the gov’t was in distress again.” You know the sequel. After lengthy debates wise counsel went for naught. On the 29th of Sept, 1790, the Assembly voted by a large majority to issue more assignats—this time doubling the amount to eight hundred million. [QE2, 221 years later]
The false illusion that inflation is prosperity swept through France.
There was no stopping the orgy. Issue followed issue as the paper money quickly lost its value. Soon, drastic laws were instituted to save the day. Landed estates were confiscated. Price control was tried—the “Law of the Maximum.”
“New issues only increased the evil,” White explains…”but no relief resulted save a monetary stimulus, which aggravated the disease.
“At last came the collapse and a return, by a fearful shock, to a state of things which presented something like certainty of remuneration to capital and labor. Then, and not till then, came a new era of prosperity.”
This sounds awfully similar, in my opinion, to the current example of QE1 and QE2, and the resultant expansion of the Fed’s balance sheet…221 years later.
April 8. US Gov’t shutdown looms
April 8. This morning silver has risen above $40 and WTI Crude (June) is up 1.10, now over $112 bbl as a US government shutdown looms. ECB raised rates as advertised, 1/4 pt. Japan suffered another smaller (7.1) earthquake; BoJ says economy under “strong downward pressure.” The US curve steepened, with red/gold pack up over 5.5 bps. US considers ground troops in Libya.
–US short rates have plunged, with 3 month bills around 3 bps. The FDIC insurance fee on overnight borrowing is mostly to blame, and I’ve seen several articles explaining that policy actions to drain reserves may send mixed messages. The bigger issue, in my opinion, is that changes in very short rates at these levels really only matter for financial institutions and traders, and perhaps money mkt funds. There is little or no transmission mechanism into the economy, except perhaps to spur paper assets. Restrictions on new mortgages don’t loosen, credit card fees don’t fall, corporate cash balances are such that no marginal borrowing occurs. The older population that has saved sees lower interest income while taxes, fees and uncertainty rise. However, in europe, now that Portugal threw in the towel, focus will shift to Spain where 80% of mortgages float and there’s 20% unemployment. In this case even a small rate hike may have an asymmetric (negative) effect.
April 7. Fraying at the edges
Portugal finally admitted it needed a bailout just as the ECB is about to raise rates. In the US, the USDA is expanding access to the food stamp program, already at record use, as a gov’t shutdown looms.
From Gonzolo Lira’s blog: “It’s not merely that the disparity between the wealthy and the rest of the population is obscene—the disparity skews the results. Remove the top 15% of the population, and the avg income in the United States drops below Slovenia’s—and no, I’m not kidding.” [Of course, if one removed even the top 1% of Slovenia’s population, I’m sure the results would change dramatically]. Fraying at the edges continues, and that’s why Bernanke is so concerned about weakness in employment growth.
–Ten year note surpassed 3.50% ending at 3.54 yesterday. The curve is steepening due to inflationary impulses from commodities. New highs in one year eurodollar calendar spreads, with EDH12/H13 edging out to 146. (the widest one year spread).
–Japan’s nuclear woes continue, news item in HuffPost says the focus has now shifted to “preventing explosions”. Though there’s money being pumped in for rebuilding efforts, the loss of output and confidence throughout the region is likely to continue…yen made new recent lows yesterday.
April 6. Fed’s in a bind
New high in silver, gold, corn. CRB index is near high set in early March. SPM had an outside day and closed lower, but volume was light. Google notably down 3%.
–FOMC minutes released yesterday afternoon showed some divisions, but QE2 expected to run its course through June. Inflation still expected to be transitory.
–Interest rate futures gave back Monday’s gains, with ten year again retesting 3.5% yield. New highs in near euro$ calendar spreads, with EDU1/U2 up 5 bps to 122.5. The widest one year spread is EDH12/H13 at 144.5 bps. ED$ straddles up 1-2 bps.
–The Fed is in a bind. Bernanke likes the rise in stock prices engineered (in part) through QE, but doesn’t like oil and food price increases, which he blames on demand from other economies. What if he said, “the rise in stock prices will prove transitory”? As QE2 ends, we’ll see whether stocks and commodities are linked by easy money or not, or whether, as Michael Steinhardt said on a CNBC interview, better economic numbers are “superficial”. After all, commodities are now considered an alternative asset class, non-correlated to stocks (except they ARE correlated now). The asset class showing NON-correlation is real estate.
–From ZH: “The current jobless rate runs at +20 percent in Spain, which is more than twice the European avg (9.9%). Unemployment is especially raging among the younger population of Spain.
–The ECB will likely hike tomorrow, not bound by the Fed’s dual mandate of employment and price stability.
April 1. April fool’s day joke for bondholders…NFP > 300k
–Yesterday afternoon MN Fed’s Kocherlakota suggested the Fed may need to tighten by 50-75 bps in 2011, sending interest rate contracts immediately lower. We’re going into today’s Employment and ISM reports pretty much at the lows of the last couple of weeks, so it shouldn’t take much of a push to really cause a capitulation of longs. The backdrop doesn’t help: Oil jumped another $2.30 and is near new highs as the MidEast situation offers no quick resolution. Grains are likewise pressing to new highs, with Corn up about 70 cents (over 10%) in the last two sessions! Walmart’s head of US operations says all suppliers are raising prices, and retailers can no longer hold the line; inflation will be much worse in coming months. The rise in rates is going to pressure housing, but the gov’t guarantees 95% of new mortgages at this point anyway, so just add it to the tab. Stocks are oblivious, like the college coed crossing the street while texting and listening to her i-pod.
–Nonfarm payrolls expected 200k. ISM expected 61.2.
–Last week there was a large buyer of TYK 117p at 12 vs 119-20,21. Yesterday those puts were sold down to 7 vs 119-12 (open interest fell nearly 40k). Another big bearish bet from a week or so ago is the buyer of Green April 9700/9725p spreads for 4. We’re now only about 15 bps from the upper strike…EDM3 now around 9840.
