Posts Tagged ‘Divergence’

Don Vialoux: Increase in Volatility Between Now and October Seasonally Common

Friday, August 10th, 2012

Upcoming US Events for Today:

Import/Export Prices for July will be released at 8:30am.
The Treasury Budget for July will be released at 2:00pm. The market expects -$71.0B versus -$129.4B previous.

Upcoming International Events for Today:

German CPI for July will be released at 2:00am EST. The market expects a year-over-year increase of 1.7%, consistent with the previous report.
Canadian Net Change in Employment for July will be released at 8:30am EST. The market expects an increase of 8,000 versus an increase of 7,300 previous. The unemployment rate is expected to remain unchanged at 7.2%.

Recap of Yesterday’s Economic Events:

The Markets
Equity markets ended flat on Thursday despite better than expected reports in the US pertaining to employment and international trade. Volume was once again deadly, amounting to the lowest four-day volume in 5 years. In an article posted by Zerohedge.com, the website notes that “the last 4 days have been the lowest volume for a non-Xmas holiday week since 2007 in futures and NYSE volumes are just remarkably bad compared to even normal cyclical seasonal dips.” Looking at the 4-day simple moving average of the S&P 500 ETF (SPY) volume, the last time the average was this low outside of a Christmas holiday week was October 2007, the last market high prior to the significant decline in the months and years to follow in 2008/2009. Volume confirms conviction, of which very little exists. Conviction to equities remains low as debate grows over the sustainability of the present rally that appears based solely on hope of further monetary stimulus from one of the major central banks around the world.

The divergence between price and volume can also be picked up on the NYSE Cumulative Advance-Decline Volume line, which is derived from the volume of advancing stocks less the volume of declining stocks. The NYSE recently managed to break firmly above the high of early July, yet the NYSE Cumulative Advance-Decline Volume Line has yet to accomplish the same. The pattern of this breadth indicator and price typically match each other, showing similar highs and lows, therefore this divergence just adds to the concern that conviction to equities is lacking, often a precursor to market declines should buyers fail to accumulate.

Sentiment on Thursday, according to the put-call ratio, ended bullish at 0.86. The apparent declining wedge pattern that can be derived from the ratio over the past three months is reaching a peak, which could imply a significant jump higher should the tendencies of this pattern be fulfilled. A significant move higher in the put-call ratio would likely be accompanied by an increase in volatility, a pattern that is seasonally common between now and October.

S&P 500 Index

Chart Courtesy of StockCharts.com

TSE Composite

Chart Courtesy of StockCharts.com

Horizons Seasonal Rotation ETF (TSX:HAC)

Closing Market Value: $12.37 (down 0.24%)
Closing NAV/Unit: $12.39 (up 0.18%)

Performance*

	2012 Year-to-Date	Since Inception (Nov 19, 2009)
HAC.TO	1.72%	23.9%

* performance calculated on Closing NAV/Unit as provided by custodian

Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.

Tags: Canadian, Canadian Market, Central Banks, Christmas Holiday, Conviction, CPI, Dips, Divergence, Don Vialoux, Economic Events, ETF, ETFs, Export Prices, Import Export, International Trade, Moving Average, Nyse, Stimulus, Trade Volume, Treasury Budget, Unemployment Rate, Volatility, Xmas Holiday
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LIBOR Liar, Pants on Fire. A Look at Barc, BAC, JPM, and Citi

Thursday, July 19th, 2012

by Peter Tchir, TF Market Advisors

July 2007 to January 2008

Stocks

These are the stock prices, “normalized” to 100 in July 2007. In the August swoon, JPM and C did the worst. Barclay’s eventually caught up in later August, while BAC did well. We briefly rallied on a Fed Rate cut in October, but then the swoon returned with C underperforming by far. It was down over 40% in that period. Barclay’s was in the middle, and JPM was actually the best performer, down only 11% by year end.

CDS

These are “normalized” CDS spreads. You can see that at first they moved in line, then Barclay’s underperformed, but returned to the fold by the time of the Fed rate cut, and then ultimately we saw a separation as JPM did the best (just like in stocks) and Citi did the worst (just like in stocks). But this overstates the divergence a bit. Looking at the outright spreads shows that Barclay’s actually started the period trading tight, and JPM was the widest, but by the end CDS markets viewed JPM, Barclays, and BAC as similar, but Citi was noticeably wider.

LIBOR Submissions

These are “normalized” LIBOR. All banks were submitting very similar rates. Then the stock market decline started and bank LIBOR increased. This was a function of credit spreads. Then as Fed programs kicked in (discount window) and then rate cuts were implemented, LIBOR moved down.

The outlier to me, is Citibank. Citi was the worst on CDS, the worst on stock, but actually did the best on LIBOR? Really? Was Citi really able to borrow from other banks at rates equal to or lower than BAC and JPM? Shouldn’t it have been closer to Barclays? There is the fact that Barclay’s was reliant on BoE rather than the Fed. That is one reason for Citi to more closely track JPM and BAC, but that close? CDS was relatively tame, so maybe the differential in 5 year CDS overstates the issue, but just doesn’t seem right.

August 2008 to January 2009

Stocks

All the banks moved more or less in line at first. Then Citi, Barclays, and BAC underperformed. For one brief moment, Citi actually bounced and got back to JPM levels, then a long slow decline started. Barclays was for awhile the worst performer, but Citi took over, being down 80% at one stage and finishing down 65%. Those are big numbers. Citi, BAC, and Barclays all saw their stock price decline by 55% to 65%. JP was “only” down 23%.

CDS

On a “normalized” basis, it’s surprising to see Barclay’s CDS do better than anyone else’s at any time during the period. What is clear, is that on a “normalized” basis, Citi consistently was the worst name. One spike up with JPM, one with Barclay’s, and one big spike all by itself. But maybe like in 2007, the levels were low enough that the differences might be immaterial?

No, these moves in LIBOR are real. Citi started the crisis as the highest spread name, and maintained that “distinction” throughout the entire period. Barclay’s never traded as wide in CDS as Citi. JPM was probably the best, but BAC wasn’t too far behind (though it widened as noise about hidden ML losses came out). Barclay’s was surprisingly not as bad as I would have guessed. Citi though is just clearly the worst.

LIBOR Submissions

This is “normalized” and Barclay’s is a clear underperformer. You can tell when they were allegedly “told to catch up”, but throughout, they remained the high submitter. They underperformed through the entire crisis. Not quite consistent with stocks or CDS and may explain why they complained that others weren’t submitting “true” rates. Citi was somehow consistently able to submit LIBOR that was lower than BAC but was even lower than JPM on some days. By the end of the year, once Barclay’s was presumably fully in liar mode, they were similar to BAC and C. Maybe it’s the normalization process screwing up the data?

I’ve added the 3 month yield so you can get a sense of the Ted Spread, but it is clear that Citi felt they funded in line with BAC and at times with JPM. It is only at the end when we see Citi, BAC, and Barclay’s submit similar rates.

If Barclay’s said others were lying, who could it be? There were days the separation between the U.S. banks and Barclay’s was as high as 100 bps. 50 bps difference wasn’t uncommon. I can justify JPM trading that much better. The stock market performance and CDS of JPM would all be good explanations of why JPM was better than Barclay’s at funding. That much lower, is a guess, but it actually doesn’t seem unreasonable.

Citi in particular looks bad. Especially since BAC’s spikes in LIBOR coincide at least somewhat to times when their stock and CDS underperformed.

Conclusions

This is only one point in one curve. I have focused so far on 3 month USD Libor. That is the most important one in my opinion in terms of number of contracts that reference it. The 1 month has such short duration that I didn’t focus on it yet. The 6 month is interesting because it would have more credit risk and should reflect more differentiation. The same analysis would have to be done for every bank, every currency, and every spot on the curve to get a true estimation of how much LIBOR LYING was done. Determining, or guessing how much each bank lied would be critical to any lawsuit. Lawsuits will ultimately have to be tied to how much a bank lied, and how much of that lie impacted the LIBOR setting. The complex mechanism by which LIBOR is calculated means that not all (or possibly any) of a lie would impact LIBOR’s setting. In spite of Barclay’s rush to catch up, they were still being excluded from the LIBOR calculation on most days for being too high.

From this data, there is no way to prove anyone lied, or to prove by how much if they did.

Gut Feel

I have spent more time focused on Barclay’s and their US issues. So far, it looks to me like they were submitting LIBOR more accurately than other and their claims that others were too low seem right. I have more work to do, but am getting to the point where the damage to Barclay’s stock price is worse than the risk.

Concerns over JPM’s exposure seem overdone as well. Yes, they were at the low end of submissions, but I think it would be hard to prove that is a lie without some real evidence. They had low submissions, but their CDS and stock performed the best. I do not think that they can be sued just because they have a large book of business if they didn’t have material amounts of “lying”. Again, I’m not concluding anything yet, but fears related to them seem overdone from all the work I’ve done.

For some reason I want to say something bad about BAC, and my gut tells me I’m right, but as of now, they seem reasonable. Their LIBOR moved with their stock and CDS. Maybe they were slow occasionally, but if anything they come out better so far than I would have guessed.

Citi. It is impossible to say they did anything wrong from the data I’ve looked at, but their submissions don’t pass an initial smell test. If Barclay’s is saying banks were submitting LIBOR that was too low, they strike me as a candidate for much deeper scrutiny. Their stock and CDS did the worst, yet consistently during those peak times, they submitted LIBOR closer to the better performers. Again, it could be a function that it is so short dated, and a function that Barclay’s was so high they were being excluded, but I would want to take a closer look at Citi’s submissions and would be nervous that their stock does not fully reflect the risk.

We are not lawyers, and have no access to actual interbank trades from the time, and this is not a recommendation to buy or to sell, but if the market is going to throw around lawsuit numbers in the $20 billion to $50 billion range and move prices based on that, figuring out how real those numbers are and who would bear the brunt of the burden is key. From all of our work so far, any “manipulation” prior to August 2007 would have had minimal impact as all the submitters were so close together and there really wasn’t a “credit” problem so the fluctuations of LIBOR seem reasonable, at least within a bp or two.

More banks to look at, more points on the curve, and more historical bond prices to dig up.

Tags: Barclay, Barclays, Boe, Citibank, Differential, Divergence, Fed Programs, Fed Rate, Jpm, Liar, Libor, Nbsp, Outlier, Pants On Fire, Stock Market Decline, Stock Prices, Stocks, Swoon, Tf, Year End
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Barclay’s: The Keystone Cops of LIBOR Manipulation

Wednesday, July 11th, 2012

Was Barclay’s Incompetent When Dealing with FSA?

Here is the FSA’s report from June 27^th.

I will admit when I first looked at it, it seemed pretty damning. The dialogue was awful and the charts looked bad. But as I look through the details I have to say, Barclay’s seems incompetent in its own defense. I owe some of this report to Simone Foxman who looked at one of the trades in some detail, but here is a closer look at some of the accusations in the report and what impact it had.

My assessment so far is that Barclay’s was incompetent at moving LIBOR and was incompetent at defending itself against the FSA. I expect that the financial crisis period will be a lot more interesting as there is some real divergence and the potential influence on LIBOR is big and real.

Lost Reputation with Little Accomplished is what analysis of FSA examples demonstrates

Barclays’ Derivative Traders would request high or low submissions regularly in emails, for example on 7 February 2006, Trader C (a US dollar Derivatives Trader) requested a “High 1m and high 3m if poss please. Have v. large 3m coming up for the next 10 days or so”. Trader C also expressed his preference that Barclays would be “kicked out” of the average calculation. Trader C’s aim was therefore that Barclays’ submissions would be high enough to be excluded from the final average calculation, which could have affected the final benchmark rate.

So this looks bad. On Feb 6^th, 2006 a trader asks for a high 3 mth Libor setting over the next 10 days. Here are the submissions by each bank. Barclay’s is in a nice Barclay’s blue.

So you can see that they went from being at the “tight” end on February 6^th, to the high end. Since the memo wasn’t clear on 10 business days or calendar days, or exact start, so I have gone out to the 21^st which would be 10 business days starting on the 8^th.

It is clear that at some times Barclay’s was not actually the highest and was even at the low end a couple of times. Assuming they were trying to get LIBOR higher, what was their impact?

Let’s assume Barclay’s was going to be the lowest setting otherwise. That is the worst case, that they “lied” and had they not “lied” they would have tied for lowest. That is the most possible damage they could have caused LIBOR.

On 9 of the 12 days I looked at, that would have caused NO change in the LIBOR for the day. On one day it would have created a 0.0006% shift in LIBOR as it would only have been 4.7400% rather than 4.7406%. Even with the law of large numbers, that is small, and had Barclay’s just submitted at the average than tightest, no impact.

The second last day had an even smaller move, a maximum potential LIBOR manipulation of 0.0003%. On the final day, which I’m not even sure was in the 10 day window, they could have manipulated it by as much as 0.0013%. One basis point is 0.01% so it is an 1/8^th of a bp. I’m not condoning their behavior, but I am surprised they capitulated on such small moves – and had they just submitted the average rather than what they submitted, only the last day would have been impacted, and that by 1/16^th of a bp.

59. On Friday, 10 March 2006, two US dollar Derivatives Traders made email requests for a low three month US dollar LIBOR submission for the coming Monday:

i. Trader C stated “We have an unbelievably large set on Monday (the IMM). We need a really low 3m fix, it could potentially cost a fortune. Would really appreciate any help“;

ii. Trader B explained “I really need a very very low 3m fixing on Monday – preferably we get kicked out. We have about 80 yards [billion] fixing for the desk and each 0.1 [one basis point] lower in the fix is a huge help for us. So 4.90 or lower would be fantastic“. Trader B also indicated his preference that Barclays would be kicked out of the average calculation; and

iii. On Monday, 13 March 2006, the following email exchange took place:

Okay, this looks promising, and is actually the one Business Insider took a look at.

The person did as they were asked. They put in 4.90 as the rate and it is pretty clear 4.91 was the “right” rate. But LIBOR was set at 4.91 so the “manipulation” accomplished nothing. LIBOR was not affected by the action – just Barclay’s reputation. On the 14^th they remained low, and had they actually submitted at the high end, they could have influenced LIBOR by as much as 0.0006%.

In response to a request from Trader C for a high one month and low three month US dollar LIBOR submission on 16 March 2006, a Submitter responded: “For you…anything. I am going to go 78 and 92.5. It is difficult to go lower than that in threes, looking at where cash is trading. In fact, if you did not want a low one I would have gone 93 at least“.

So here again, the fix came in and we see Barclay’s at 4.925. Yes, 4.93 was the “right” level, but the submission didn’t affect the outcome. Had Barclay’s submitted at 4.95 (which incidentally seems high and makes you wonder what BofA was trying to accomplish) the LIBOR setting would still have been 4.93% so once again only the reputation was affected and NOT LIBOR.

Trader C requested low one month and three month US dollar LIBOR submissions at 10:52 am on 7 April 2006 (shortly before the submissions were due to be made); “If it’s not too late low 1m and 3m would be nice, but please feel free to say “no”… Coffees will be coming your way either way, just to say thank you for your help in the past few weeks“. A Submitter responded “Done…for you big boy“.

How could anything that ends with “big boy” end well.

This one appears to have done marginally better, though it is hard to tell. The day before and after the “request” Barclay’s was already at the low end of the range. Maybe they were axed (or had their own agenda) or just thought LIBOR was there. In any case, had they submitted 5.04% (the high end of the range) they would have accomplished making LIBOR 0.0006% on that day. That would be a “stunning” success by their standards of manipulation but the fact that they seemed to be low anyways leaves some doubt as to whether they were low for other reasons, and that is a maximum they could have shifted LIBOR.

On 6 August 2007, a Submitter even offered to submit a US dollar rate higher than that requested:

So the 5.37 was “unnecessary” it was just overkill, but 5.36 doesn’t seem unreasonable. Had Barclay’s submitted 5.35 or less, LIBOR would have shifted by 0.0013% as the full basis point would have counted. That is potentially meaningful, but again, 5.36 certainly doesn’t seem out of line (unless a consortium was set up to do 5.36). I’m almost more curious why UBS was in at 5.325, which seems like more of an outlier than 5.36. Given the trader’s willingness to put in 5.37 I suspect that 5.36 is where he (or she) thought the rate should be – consistent with many other dealers.

For example, on 15 February 2006, Trader C made a request in relation to Barclays’ three month US dollar LIBOR submission: “Please go for [unchanged], or lower if poss“. A Submitter sent a positive response to this request. The following graph illustrates the changes in Barclays’ submissions as compared to the final three month benchmark rate:

In this one, the FSA pulls up some fancy charts how on the 13^th Barclay’s was at high end, on 15 the low end, and back to high end.

But the keystone cops of LIBOR manipulation are back at it. Yes, they were the highest quote on Feb 13^th and the lowest by Feb 15^th, but they didn’t impact LIBOR. Had they submitted 4.76 on the 15^th rather than 4.74, LIBOR would still have come out at 4.75. What a waste. On any of the days in question, had Barclay’s matched the highest rate the LIBOR setting wouldn’t have been affected.

I’m not sure whether shareholders should be angrier about the manipulation or about how bad they were at manipulating it. I think the focus needs to shift to the “crisis” period where

Tags: 1m, 3m, Accusations, Barclay, Barclays, Benchmark Rate, Business Days, Calendar Days, Closer Look, Crisis Period, Divergence, Dollar Derivatives, Financial Crisis, Foxman, Fsa, June 27, Keystone Cops, Libor, Mth, Tight End
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ECB, NFP, Don’t Hold Your Breath Waiting for Rotation into Equities (Tchir)

Thursday, May 3rd, 2012

by Peter Tchir, TF Market Advisors

Jobless claims better than expected and back to levels where we had been earlier this year (after they were revised upwards). This data has been so consistently revised higher, that the market is taking it with a grain of salt.

Spanish and Italian bonds are holding onto to most of their earlier gains on the back of more auctions and the ECB meeting. So far Draghi has had a very measured tone. If the meeting ends without a change in his tone, I would expect weakness to resume. The market has come to expect, and in fact depend on, central bank intervention. I don’t see a natural buyer of the longer dated Spanish and Italian debt without real hope of an aggressive ECB.

We get ISM later this morning, but the market is really going to focus on NFP tomorrow. That is the key. Most data points to the likelihood of a significant miss, though the employment portion of Manufacturing ISM and today’s jobless claims give hope to the bulls. I expect a miss as so much of the earlier gains were just pulling seasonal jobs forward. Construction projects planned for April, were able to start in February.

MAIN, IG, and HY CDS indices all tried to stage minor rallies this morning and have since drifted back to unchanged. Given the strength we have seen, particularly in IG, that is not surprising, but may be a sign that once again the market has reverted from being too bearish to overly optimistic.

The belief that “everything” is priced in is overwhelming. The only thing I hear more than that, is the view that decoupling is occurring, and not just with the U.S. decoupling from Europe, but with different countries within the EU decoupling. That theory may or may not be correct (I don’t think it is), but it certainly seems fully priced in. The divergence of markets in Spain and Italy compared to Germany and the U.S. is huge. Option premiums also reflect that. I continue to look at buying the underachievers against shorting the “decoupled” markets.

Finally, on Bloomberg TV yesterday we did a segment looking at “fixed income” ETF flows. Within the ETF space, it was clear that high yield has been attracting money, over $6 billion year to date, and treasuries have had basically $0 flows. The theory that investors who have piled into bonds will revert back to equities seems wrong. They aren’t moving into the “safety” of 2% 10 year treasuries, they are moving into junk bonds. That makes sense as mediocre domestic growth is enough for most of those companies to avoid serious problems, and earning 6.5% to 8% of income while being senior in the capital structure offers a lot of appeal, and I believe that appeal is longer lasting than those waiting for the rotation back into equities realize. It may be a subtle difference, but deciding to invest your “bond” money in high yield is very different than investing in treasuries. I believe active management is valuable here and that flows into traditional mutual funds and separate accounts are also strong, but focused on the ETF’s, at least in part because the flow data is so much easier to get and to aggregate.

Tags: Belief That, Bonds, Bulls, Central Bank Intervention, Construction Projects, Decoupling, Divergence, ECB, Grain Of Salt, Hy, Ig, Ism, Jobless Claims, Likelihood, Nbsp, Nfp, Premiums, Rallies, Seasonal Jobs, Tf
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Energy’s Pain is Consumer Discretionary’s Gain

Monday, April 30th, 2012

Each week in our Sector Snapshots report, one of the topics we cover is the performance of individual sectors relative to the S&P 500. Looking at relative strength helps to show which sectors are outperforming and leading the market, which sectors are underperforming and lagging the market, as well as other relationships between sectors. One notable trend in this week’s relative strength charts was the divergence between the Consumer Discretionary and Energy sectors. As shown in the chart below, just as the relative strength of Energy began to fall off a cliff, Consumer Discretionary stocks took off.

Looking at the above chart, it seems completely reasonable to think that what would be bad for the Energy sector (lower energy prices) would be good for the consumer. Looking at a longer term chart, however, shows that this has not always been the case. Taking a longer term look at the relative strength charts of both sectors shows that from April 2010 through the end of 2010, both sectors were outperforming the S&P 500. In early 2011, however, the Energy sector’s performance relative to the S&P 500 peaked while the Consumer Discretionary sector kept outperforming.

Tags: Amp, Bad Sector, Consumer Discretionary Sector, Consumer Discretionary Stocks, Consumer Energy, Divergence, Energy Prices, energy sector, Energy Sectors, Relationships, Relative Strength, Snapshots
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Consumer Confidence Weaker Than Expected (Bespoke)

Wednesday, April 25th, 2012

Today’s report of Consumer Confidence for the month of April came in at 69.2, which was slightly weaker than expected (69.6) and down modestly from last month’s downward revised reading of 69.5.

One interesting aspect of the Consumer Confidence report is the spread between those Americans making more than $50K per year and those making between $35K and $50K per year. It is no surprise that Americans with higher incomes are typically more confident than Americans with lower incomes. What is noteworthy, however, is the growing divergence in confidence between the two groups. Although the current six month average reading is down sharply from last May’s record high reading, since the early 1990s there has been a clear trend higher in this spread.

The two charts below show the historical levels of the percentage of Americans expecting higher and lower stock prices and interest rates. Currently, 35.7% of those asked expect stock prices to rise, while 29.1% see stock prices falling. For those looking for comparisons to last year, this marks the second straight month where more people expect stock prices to rise than decline. The last time this occurred was back in April 2011. The lower chart shows the percentage of consumers expecting higher and lower interest rates. Just as more Americans expect higher stock prices than lower prices, more Americans also see interest rates rising versus falling. It has now been 36 straight months that at least 40% of consumers have been expecting higher interest rates. The last time this number was less than 40% was back in April 2009 when the 10-Year US Treasury was yielding about 3.2%. Today the 10-year is yielding under 2%.

Tags: 35k, Consumer Confidence Report, Consumer Report, Consumers, Decline, Divergence, Early 1990s, Incomes, interest rates, Last Time, Month Of April, Stock Prices, Surprise, Treasury
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Volatile or Not? (Tchir)

Sunday, April 22nd, 2012

From Peter Tchir of TF Market Advisors

Volatile or Not?

It is strange to start a weekly update and not be sure whether the week was volatile or not. North American stock indices ranged from -0.4% for Nasdaq to 0.6% for the S&P. Not much to look at there.

U.S. fixed income finished with small weekly gains. The 10 year treasury was 2 bps better. Fixed income ETF’s like TIP, TLT, LQD, HYG, JNK, and MUB all had small gains. Even the CDS indices, IG18, and the underperforming HY18 saw some small spread tightening over the course of the week.

Looking at Europe and we start to see some more volatility and divergence. The DAX was up 2.5% will the IBEX was down 2.9%. Spanish bond yields were mixed to better on the week, but Italian yields were worse. In a week of obvious attempts by governments and central banks and the IMF to calm markets, they had limited success with the smaller and more easily manipulated Spanish bond market, and failed in Italy. One scary undertone developing in the market is the concern about France and the potential impact of the French election. French 10 year yields moved 14 bps, and it wasn’t because the situation was improving, because German 10 year yields moved 3 tighter on the week. Germany continues to have a flight to quality bid, but France, not so much.

Maybe it is the activity in Europe that made the markets feel more volatile than the weekly changes show. Or maybe it was that the futures traded in an almost 3% range – from 1,359 to 1,390 with several 0.5% swings during the course of most days. Market darling Apple isn’t helping calm the market either. That can reverse on a moment’s notice, or a great earnings release, but the momentum that was dragging more and more hedge funds into the trade, is now working in reverse as stop losses are being triggered.

So often lately, the bulls are able to point to a decent tape in face of weak data and no stimulus, and this week ended with the opposite. Bulls will be nervous that decent earnings and a mega-plan from the IMF failed to provide strength to the market.

So, it was a strange week that was more volatile than the weekly changes show, and where some real cracks are being exposed.

Politicians and the Markets

In a week where the Birkin wielding head of the IMF went from G-20 delegation to delegation asking for them to commit their taxpayer’s money to another illusory firewall, it is important to focus on what was accomplished and what wasn’t.

By all accounts, the IMF has received commitments to increase the “firewall” by some amount, possibly as much as $500 billion. The politicians expect the markets to be excited about this “heroic” effort and the guarantee that no debt problem is too big that it can’t be solved with more debt. In spite of the headlines, I’m being asked

How will the countries honor their commitments?
Where will the money come from? Especially the European portion?
How would the money be used? For countries? For banks?
If commitments made in 2010 haven’t been approved, what good are these commitments?
What does this do to help the countries that are in trouble? Why does the IMF think it is safe to lend when real investors won’t lend?
The list is long, but is also accurate.

The entire IMF Firewall is being run as though it was an election. The leaders use the same slogans over and over. They say the money is needed to avoid calamity. They say the money will help. No evidence of either is provided, but who needs evidence when you are just running a campaign. So they campaigned, and in their view, they “won” the election, by getting these commitments.

That is the big disconnect. Politicians are sitting around Washington convinced that they have won. They fought a hard campaign to convince people that the Firewall was needed and would be good, and they got the job done. What they haven’t done, is seen how the market will react.

Unlike a real election, the market doesn’t give the winner a free pass for a certain amount of time. You haven’t won until the next election, you have merely won until the market tests your resolve.

That test will come quickly, quite likely this week. Markets will likely put pressure on Spanish and Italian yields, and possibly French yields depending on the election results. Nothing about the firewall changes a thing about the current situation these countries find themselves in. That is the key. If the firewall actually did something for these countries, we might be able to stage a strong rally, but the firewall doesn’t have an immediate impact. The firewall just ensures that these countries can borrow more money. That when the markets shut down on their ability to borrow, the IMF will lend to them. Your best hope as a current lender, is to hope you own short enough dated bonds that the IMF is still being generous and lending to the country to pay you back, rather than having gone into PSI mode.

Spain and Italy need to reduce the current interest burden, the total debt, make long term adjustments that while technically austerity, can have minimal near term impact, and they need to embark on some growth policies. A debt restructuring can accomplish the first two items. Policy and some IMF money can help on the all important growth issue. Without some form of PSI, the firewall at best will shift who countries owe money to, and at worst will discourage banks from lending to anyone other than sovereigns.

The markets will test the resolve of the EU, ECB, and IMF this week. They will see how readily “commitments” turn into “actions”. Once again, the smug victory speeches being made by the politicians are likely to look very wrong, and possibly before they have even finished their victory tour.

Last chance to QE?

I think we have one group within the Fed that is desperate to do QE and wants to do it now. There is another group that believes the economy should be left alone, unless the data deteriorates significantly. As we head towards the election in November, the hurdle of what constitutes “weak” economic data will increase. Right now, Benyellen might be able to argue “only” 120,000 NFP jobs is enough to launch QE. I don’t think they would have a chance of launching in August with NFP numbers like that.

So, Benyellen will push hard at this meeting. I think they will still face too much resistance. It is only one bad NFP number and 2 bad “initial claims” numbers. Not enough for the last defenders of anything resembling a free market at the Fed. Housing has been weak too, but again, permits were up, and although not bouncing, there does seem to be some stability returning to the housing market.

I don’t expect QE this week. I think the statement will be slightly more dovish than the last one, but that is priced in as the market does often seem to take the “bad news” as good news path. Realistically, the next meeting is the most likely one to see QE announced since it would only take a few more data items confirming recent ones to let Benyellen railroad the rest into one more round.

Earnings, just how good?

I was frustrated and disappointed with BAC and MS. They aren’t the only ones (GS and C did accounted for things similarly), but for whatever reason, they caught my eye, and convince me that this is what is wrong with the market.

Last year, when DVA and FVO were big positives, those numbers were not only included in the headline, but in the case of Gorman at MS, were trumpeted as he pounded his chest that MS beat GS in Q3 2011. The quality and wisdom of DVA accounting has been questionable at best and the FVO adjustments are staggering in the ratio of the magnitude of the amounts versus the amount of disclosure.

I would much rather have seen headline numbers consistent with 2011. Then we could focus on how they did that quarter. What the business outlook is. Instead, it looks like they are trying to trick the media and investors and make the story better than it is. Investors aren’t stupid. They will do the work. They will figure out the differences in how Q3 2011 and Q1 2012 were reported. Then, not only will they be disappointed with what the firms tried to trick them on, they will question what else is being done. If you are willing to “massage” (sounds better than manipulate) the way you report each quarter’s earnings to make it seem the best, what else are you willing to “massage”? Banks are opaque. On 100’s of billions of assets, what’s a bp or two here or there?

All companies should lay it on the line. Report what happened in the way they always do, then rely on themselves and their conference calls and good analysts to figure out the longer term picture. Companies have to trust in the intelligence of investors and investors will have trust in the companies.

Tags: 10 Year Treasury, American Stock, Bond Market, Bond Yields, Bps, Central Banks, Divergence, Earnings Release, Fixed Income, French Election, Hedge Funds, Hyg, Jnk, Lqd, Mub, Stimulus, Stock Indices, Tlt, Undertone, Volatility
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Potential Bear Flag Forming

Tuesday, April 17th, 2012

This morning futures are up for (insert reason here). The story of the day is a German investor confidence report but if that’s the main cause, it was a market that wanted to find an excuse to go up. Futures took a U-turn overnight from down about 5 to up about 5 and have added to that gain as the morning progressed. That’s a fortunate development for the bulls as the situation looked quite dire with the break of 1370 in the overnight session. Recall late last week I said the area between 1370ish to 1390ish is a “white noise” area and not much stock can be taken of what happens in that area.

Pulling back a bit, yesterday’s action was among the most tricky of the year. The market gapped up – and then immediately gave back all those gains within the opening half an hour. That usually leads to a very bad day. Instead the market moped around, and only the NASDAQ was hit. While the DJIA actually was up quite strongly. And S&P 500 flattish. A strange divergence indeed. The NASDAQ has been the leader of the pack in 2012 and hence it sure needed to ‘catch up’ (in this case down) to the rest of the major indexes – yesterday was one step towards that goal.

The market “generals” began getting hit in earnest last Friday and that continued yesterday – headlined by Apple’s 4% drop. The “teflon” stock is now down 5 sessions in a row, and might actually be short term oversold if you can believe it. But let me call your attention to the bottom of the graph – see that heavy volume? That is quite ominous to me. It speaks of distribution.

Priceline looks very similar in that the drops are on substantial volume versus the pops up of late. This smells of the big boys selling.

Notwithstanding the morning’s gap up, we might be building what is called a “bear flag” on the indexes.

Technically speaking, a bear flag is a sharp, strong volume decline, several days of sideways to higher price action on weaker volume followed by a second, sharp decline to new lows on strong volume.

We saw that initial drop, on volume, over the past 2 weeks. We now could be in the “several days of sideways to higher price action on weaker volume” stage. Note again the volume bars at the bottom of the chart. On those 2 up days last week volume lagged versus the down days. If the bear flag is to play out it could pose an interesting situation towards the end of this week to early next.

The larger issue from this viewpoint is a lot of “go to” stocks are breaking down. Yesterday’s gains were in consumer staples (hide out stocks) and a lot of areas that have shown weakness the past few weeks. A lot of broken charts were the ones that led the charge yesterday. So the benign index action hid a lot of weakening charts. Hence, for those looking to enter or add to new positions the choices are thinning or differing. And the high growth names are the ones withering away. In the end we can stare at the indexes all we want but the market is made up of individual stocks, and many of those charts that were holding up even as the market went sideways in latter March are now signaling sell or at best caution.

Of course we should always look at the opposite view and a bullish take on this would be “we are getting a long needed rotation into new groups”. My issue with that is those groups are mostly defensive.

The next few days will be tricky because some of the high octane stocks are now short term oversold after being taken to the shed the past week and are due for at least a short term bounce – and we have some key earning reports. Tomorrow we have IBM’s earnings report which is to the DJIA what Apple is to NASDAQ, since the DJIA is price weighted and IBM is a $200 stock. So the DJIA is going to effectively be “IBM” on Wednesday.

Anyhow if we are in a bear flag this week is going to be the most dangerous stage of the larger correction since this is where people will let the guard down and say “well I guess that was it”. If however that *WAS* it, and a new leg up is starting (i.e. correction over) then ignore this post.

Tags: Bad Day, Bear Flag, Big Boys, Confidence Report, Divergence, DJIA, Futures, Gap, Generals, Half An Hour, Investor Confidence, Last Friday, Leader Of The Pack, Nasdaq, Overnight Session, Priceline, Substantial Volume, Teflon, U Turn, White Noise
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Figuring Out ECRI’s Recession Call

Friday, March 23rd, 2012

I am writing this post in response to the article “Why Our Recession Call Stands” of March 15, 2012 by Lakshman Achuthan and Anirvan Banerji of the Economic Cycle Research Institute (ECRI).

ECRI said: “How about forward-looking indicators? We find that year-over-year growth in ECRI’s Weekly Leading Index (WLI) remains in a cyclical downturn (top line in chart) and, as of early March, is near its worst reading since July 2009. Close observers of this index might be understandably surprised by this persistent weakness, since the WLI’s smoothed annualized growth rate, which is much better known, has turned decidedly less negative in recent months. The unusual divergence between these two measures of growth underscores a widespread seasonal adjustment problem that economists have known about for some time.”

The last sentence of the above paragraph must be treated with some circumspection. What they call “the unusual divergence” is in my opinion nothing but a mathematical divergence. Let me take you through their calculation of the smoothed annualized growth rate as I figured it out. ECRI calculates a linear smoothed time-weighted index for every week based on weekly WLI values over the past 52 weeks, where each following week carries proportionately more weight than the previous week. The weekly percentage change of the time-weighted index is then calculated and annualized. My calculation of the WLI smoothed annualized growth rate is virtually a perfect fit of that of ECRI with an r-squared of 0.99.

Sources: ECRI; Plexus Asset Management.

It is therefore plain logic that the WLI smoothed annualized growth rate will lead the WLI year-over-year growth rate.

Sources: ECRI; Plexus Asset Management.

It follows that even if the smoothed annualized growth rate starts to fall in coming weeks the year-over-year growth rate will start to turn less negative.

ECRI also commented that “In spite of the efforts of monetary policy makers, actual U.S. economic growth has slowed, while WLI growth has barely budged from a two-and-a-half-year low.”

In previous calls ECRI emphasized the smoothed annualized growth rate of the WLI but its focus has clearly changed to the year-on-year growth rate. Will the improved year-on-year growth rate of the WLI in coming weeks change their mind and cause a big hooray about ECRI‘s change in stance or are they hoping or wishing for a major fall in the markets? It would seem the “unusual divergence” ECRI refers to and its change in focus to year-on-year growth from smoothed annualized growth are used to substantiate their call on the economy, whether it may turn out to be right or wrong.

ECRI also said “It is notable that the WLI, which is sensitive to the prices of risk assets that have been supported by massive worldwide liquidity injections, has hardly been swayed from its recessionary trajectory.”

In analyzing the WLI I concentrated on three major assets, namely the S&P 500, US 10-year Government Bond Yield and the Economist Metals Index. My analysis indicates that ECRI again focused on year-on-year growth rather than on smoothed annualized growth rates when they made the statement.

The U.S. stock indices may have a major impact on the calculation of the WLI. This is evident when the year-on-year growth of the S&P 500 Index is compared to that of the WLI. The growth rate of the S&P 500 Index bottomed at zero percent and is on the rise. This should impact positively on the WLI.