Here's a small sampling of the 120+ posts seen on the Buzz & Banter this week:
Monday, May 19, 2014
Negative ECB Deposit Rates
Nothing shows the de-linking of global central bank orientation than the three-months-late-but-now-possible negative European Central Bank (ECB) deposit rate. The Federal Reserve has been busy firing up the Full Allotment Fixed Rate Reverse Repo Facility (FAFRRRF, or Death Star for short) and signaling raising the term deposit facility rate at the same time.
In Switzerland, where people were rushing to open accounts, the negative rate ploy (the bank charges you to hold your money) was used to alter customer behavior. If unleashed in the Eurozone, other consequences unfold. The first is leaking in now; dollar money rates are under pressure. Twelve-month Libor cracked 0.54 a few days ago, London Interbank Bid Rate (LIBID) is closer to 0.44. 2016 Eurodollar futures are 25 ticks above the employment print.
Also, as Mark Dow of Behavioral Macro has pointed out many times, the currency effect is less important inside the zone. Exports are price inelastic for Italian leathers and custom German ball bearings. The majority of Eurozone trading is internal. That was the point of the currency!
The concept of money as a game of international hot potato is catching on. US banks are already overly flush with cash. An influx of Eurodeposit refugees is unwanted and un-needed. "Other" assets (cough, cough, S&P 500 (INDEXSP:.INX), cough, cough) will rise and take on "cash-like" characteristics as money around the world goes through the looking glass. The Chinese have seen this game since the days of Marco Polo and opt for "things" as stores of value.
Meanwhile, the low cost of capital fuels over capacity, production, and investment. Unlike the 1970s adage of "too much money chasing too few goods" (Peter Schiff's mantra), there are an ever growing amounts of each chasing each other. The Fed built the Death Star because it was worried about holding "the Floor." If the ECB goes negative, the floor's going to get more crowded.
Tuesday, May 20, 2014
Chatter Box: ETF Rotation
Earlier this month [subscription requirements], I pointed out some chatter that Good Harbor Financial, an investment firm that specializes in momentum ETF investing, was rebalancing its portfolio away from small caps and into Treasuries. The firm usually does rebalancing on or around the first month, as evidenced by volume in those products.
I am hearing that it is happening again today by the same firm, or another firm that has piggybacked onto the strategy. Volume is well above normal in the small cap proxies ProShares Ultra Russell 2000 ETF (NYSEARCA:UWM) and iShares Russell 2000 Index ETF (NYSEARCA:IWM) versus buy volume in ProShares Ultra 7-10 Year Treasury ETF (NYSEARCA:UST) and iShares Barclays 7-10 Year Treasury Bond Fund (NYSEARCA:IEF). UWM is the leveraged version of IWM, and UST is a leveraged version of IEF. Beta-adjusted, IWM is underperforming SPDR S&P 500 ETF Trust (NYSEARCA:SPY) by 1.01%. The 5-year thru 10-year Treasury has dropped by 1 basis points to 1.5 basis points in the past 30 minutes.
On a personal level, I find it odd that the cash Treasury market would be affected by trading in ETFs. The volume there is 1,000 times larger than the combined volume in those two Treasury ETFs. But maybe that shows how much activity has fallen off in the bond market?
Wednesday, May 21, 2014
Wednesday Is Recycling Day
I guess I could come up with new ways to say the same things, but I think it's important to restate my current views:
- There is a lack of liquidity, and the bid (or offer) won't be there if you "need" it. Investors are too concerned about "tail" risk, and the real issues are the next 3% to 5% in equities and the 10 to 20 basis points in credit. I am not deterred in that view by some small strength in futures today. Yesterday's price action seemed to fit well. I think 1,840 is a key level for the S&P 500 as it seems that some pretty serious bets on complacency were put in around that level, and those are starting to go wrong.
- Central Banks will disappoint. The Fed, the ECB, the Bank of Japan (BOJ), and People's Bank of China (PBC) will all fail to do what stocks want. Federal Reserve Bank of New York President William Dudley helped on that yesterday (May 20). Mario Draghi, President of the European Central Bank, has said that he will do what the economy needs, not what the markets needs, and he has telegraphed that there will not be a big sovereign quantitative easy, but the markets are ignoring him (for now). The Fed minutes probably give another chance to see that the Fed is not able to forecast growth any better than anyone else (and maybe even worse since it believes in its own policies so much).
- The theme of a lack of liquidity and thin markets has been in a number of our other recent reports.
- On the Treasury market, it looks to me like that market has got itself all twisted and turned around. Everyone was a bear at 2.70 when it was heading wider, and everyone is a bull at 2.50 when it is heading tighter. The long bond in particular has really stalled. I like to think that I was the first to hammer home the idea of what the Fed owned, making a big difference in parts of the curve and "scarcity," and that I was definitely the first to point out the relative (and surprising) importance of the ETF crew. As ProShares UltraShort Lehman 20+Year ETF (NYSEARCA:TBT) attracts new investors, there will be yet another big capitulation, but right now, the likelihood is to move wide as that market is resetting rather than exiting.
- Inflation and inequality are growing in importance, or at least hitting the media's radar screen. Neither are good for Treasuries. Inflation has a direct and obvious effect, and there is growing concern that the Fed is getting behind the curve. Inequality is less obvious, but more and more people are making the connection between the Fed's current "repressive" policies and inequality (rightly or wrongly), which will make it harder for the Fed to act. The political independence, while real, is hardly perfect.
- Russia continues to get what it wants. Sadly, so long as it wants what no one else really cares about (no one has summer homes in Minsk), Russia is likely to continue to take more, and the markets will largely ignore it. The risk to the markets (not to the people) is that President Obama feels the need to do some chest pounding that creates real problems. A politician deciding to flex his muscles in an election year, hmmm. So, that is a wild card that is not priced in, and while it would create some "flight to safety" for treasuries, I think this will be much less than has already occurred.
- GDP will be 1.637% for the year. Okay, I made up that number, but investors are starting to realize that the first quarter is likely to be negative. The second quarter, which if all the weather bouncers were right should be tracking at 6%, seems lucky to be tracking above 3%, and my impression is the bounce is fading quickly, and I would not be surprised to see a second quarter number closer to 2% than 4%. If there isn't a bounce, why should the third quarter and the fourth quarter be good? You shouldn't. If I am right with my central bank superfecta, then they will act bad. And while I don't think the situation is the same as 2008 at all, it is worth remembering that our fearless leaders only determined in December 2008 that a recession had started in December 2007. It really boggles the mind if you think about it for long.
So, from a risk perspective, my preferred positions are as follows:
Short Equities (US and Germany)
Short Credit (CDX and Leveraged Loans)
Short Rates (Treasuries)
Long French versus German
My view is that in a risk-off move, the risk assets sell off far more than the safe assets rally.
On any rebound, the safe assets will sell off far more than the risky assets rally.
Thursday, May 22, 2014
The Federal Reserve Warns of Compression
The Dow Jones Industrial Average (INDEXDJX:.DJI) enjoyed its best day in a month yesterday as investors exhaled following the Federal Open Market Committee meeting.
While the language was largely consistent with expectations -- I've come to expect wavering and other "data-dependent" vernacular -- it wasn't enough to upset the apple cart as investors ready for the long holiday weekend.
One interesting tidbit did emerge from the Federal Reserve meeting: committee members noted that the low system volatility represented increased investor risk appetite. This is a theme that I've discussed on Minyanville for some time, and it makes intuitive sense.
In periods of low volatility, investors ratchet up their leverage in order to magnify paltry returns. This creates "compression" that builds under the seemingly calm financial surface.
On May 5, when I warned of an approaching "volatility storm," I noted that this, in and of itself, isn't a timing mechanism but rather a contextual red flag. Per the chart below, currency volatility, interest rate volatility, and S&P 500 volatility are compressed across the board.
That makes sense in a world where liquidity is artificially infused into the financial fabric -- volatility is the opposite of liquidity -- but not so much as the punch bowl is being taken away., And it is clearly something that is on the radar of Federal Reserve officials, particularly given the interconnectedness of the global financial machination.
Click to enlarge
Friday, May 23, 2014
FactSet on Ukraine/Russia
FactSet just issued a report on S&P 500 companies and the impact of the Ukrainian and Russian crisis.
Here are some of the highlights of the report:
- 100 S&P 500 companies mentioned Russia, Ukraine, or both on recent earnings calls.
- Most companies did not see an impact.
- Only 16 of these companies mentioned a minor negative impact on business in the first quarter or in the future.
- Just six companies expressed concerns about the impact of an escalation of tensions, Caterpillar (NYSE:CAT) being the biggest.
- The real question is how the crisis will impact the economy in Europe, which is much more important to S&P 500 companies than Russia and Ukraine.
- The European economy is still the top region that gets discussed on earnings calls.
Meanwhile, not only has the crisis not impacted US stocks, but the Russian MICEX Index (MCX:MICEXINDEXCF) actually put in a bottom when the crisis began, which represented a peak in fear and negativity.
Click to enlarge
I'm now thinking about a position in Thailand (NYSEARCA:THD), which is down 24% from its May 2013 high, as the military coup could represent a similar near-term fear and negativity bottom.
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