Austerity, Spending & the Black Market in the Room (Tchir)

Tuesday, May 1st, 2012

by Peter Tchir, TF Market Advisors

A dull morning with the Euro markets shut down. Stock futures have meandered throughout the overnight session, trading up and down, but in a narrow range. We get the ISM data and vehicles sales today. It would be surprising if ISM didn’t disappoint, which means the market has already priced in a print lower than the expectations of 53 calculated by Bloomberg. Vehicle sales will be more interesting. They have been helpful for the markets, but weather, and some evidence of channel stuffing, could make for a disappointing report this time around. Any upside surprise in this number will be a welcome relief for the bulls.

In spite of the holiday in Europe, it is still one of the biggest issues in the market. I am not sure how the debate has turned into austerity versus growth? Growth, or at least sustainable debt levels is the goal. Austerity and Spending are ways of achieving that sustainable debt level.

Growth is one way of achieving a sustainable debt level. A bigger economy would more easily support the existing debt. The key here is not creating more debt than the growth can cover. That has been one of the big problems in recent years the spending hasn’t resulted in enough economic growth to cover the cost of that growth. If finding an investment that could easily pay for itself was that easy, the earnings of the S&P 500 would be much higher. Projects that can create more than enough growth to cover their cost should be pursued. It has to be a mix of near term projects and longer term projects. Longer term projects may offer the best possible return, but they have more risk, and the market may be too impatient if the spending outpaces the growth potential for too long before the project comes on line. So yes, spending to create growth has to be an option on the table, but assuming it is easy, is wrong. The tendency to fund fancy projects, like Green Energy, rather than dull things like highway expansion, is bad, because the dull project may add a lot more value.

Reducing debt and reducing expenses is another way of achieving a sustainable debt level. It is depressing and a bit scary that governments have promised far more than they can deliver. We all know that the social security and medical care that has been promised will be very difficult, if not impossible to deliver. Demographics, life expectancy, low interest rates, advancement in medicine, etc., all have played a role in making these promises so difficult to fulfill. Cutting these now is realistic and actually lets people prepare and adapt. Cutting these programs has limited impact today, but is key to creating a sustainable future, and as bad as it is to take away promised benefits, it is better for people to have a realistic expectation of the future and be able to prepare for it. This may be very difficult to achieve from a political perspective, but has the least impact on the current situation while creating a future bond investors can trust in.

Then there is all the existing spending that has limited value. Just like new spending should be examined in terms of what can generate growth, existing plans need to be reviewed. Obama never got around to the line item review of all expenses (at least not that I know of), but that might be required. While embarking on new spending programs, let’s figure out what programs should be cut. Clearly they aren’t achieving the goal of a sustainable debt goal. Some things may have to be cut back. This also won’t be easy, but can probably create some immediate benefits without disrupting the economy much. Yet, for politicians, this is also hard. Spending new money is easy, taking money away from someone is hard, yet that is what needs to be done.

So new spending that creates more growth than it costs should be pursued. It won’t be easy to find that many obvious projects, but at least politicians have an easy time spending more money. Cuts, both in the near term and to future promises are also required to create sustainable debt levels. These are easier to find, but more difficult for politicians to implement.

Then there is the pink elephant in the room, or in this case, the black market. Spain has an official unemployment rate of 24%. They project it to be 22% in 2015. This is structural. I cannot imagine the U.S. surviving with that level of unemployment. The unemployed would have taken to the streets long before it hit that level to demand change. In fact, I find it difficult to imagine any country surviving on that level of unemployment, unless it is structurally encouraged. Are the benefits too good? Is it too easy to avoid working? The longer that unemployment insurance lasts, the more likely people are to use it. The closer the unemployment benefits come to covering your working wage, the more likely you are to stay on it. Then if you can supplement your unemployment benefits with a thriving black market and some under the table jobs, why not? The U.S. may have too small of a safety net and that creates its own tensions, but it seems likely that other countries have too comfy of a safety net, especially when combined with an underground economy. If a country like Spain is paying huge amounts of money to the unemployed, and that is causing a spike in debt to unsustainable levels, then something needs to be done. Maybe the benefits can be tied to work or doing some of the projects deemed necessary for growth? This is a touchy subject for everyone, and I certainly don’t have the answer, but it is time to stop ignoring the pink elephant in the room as these economies and countries try to revive themselves.

Anyways, back to a dull and quiet morning in the markets.

Copyright © TF Market Advisors

Tags: Amp, Austerity, Bulls, Debt Level, Debt Levels, Earnings, Economic Growth, Euro Markets, Green Energy, Ism, Overnight Session, Spite, Stock Futures, Sustainable Debt, Tendency, Term Projects, Tf, Upside Surprise, Weather, Welcome Relief
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Reading the Tea Leaves When There is No Tea (Tchir)

Tuesday, April 17th, 2012

by Peter Tchir, TF Market Advisors

Everyone is trying to figure out what is going to happen next. Investors are looking clues and signals as to the next big move. The problem is that liquidity is so poor, moves that might normally signal a shift in sentiment or risk, are now just noise.

We can look at 10 year Spanish yields. Definitely a useful signal, but back to exaggerated moves on little volume. Liquidity is abysmal.

Things like the EUR/USD basis swap was once an indicator, but how useful is something when the Fed has provided unlimited swap lines and banks are encouraged to use them. Hardly an indicator of anything, though I would argue any weakness in the face of all that central bank effort is more meaningful than signs of strength.

It was easy when the EUR/USD rate itself was a key indicator. Sometimes it still is, sometimes it isn’t. It is flow driven, but the flows are confusing as some money is just being shifted from one Eurozone country’s bonds to another’s, and there is growing confusion over what it means that each country’s debt is being held in an ever greater proportion by its own banks.

For myself, I’m looking more at yield curves than any particular bond. The curve flattening is still a bearish indicator, though Spain is a weird one today, where currently the 2 year yield is higher, the 5 year yield is better, but the 10 year is higher, though all have rebounded significantly.

CDS seems to remain a better indicator of the true state of the credit market, though the technicals from any potential “whale” trade unwind are hard to account for. I am seeing bid/offer spreads normalize in the U.S. which is a good sign, but they are still wider than normal in Europe. IG18 is basically unchanged on the day, in spite of the moves in stocks, another sign that the rally isn’t very deep yet.

The size of the moves in all markets is getting scary. We have now seen stock futures move more than 1% today from their overnight lows. Were the retail sales data really that good? Some of it looked strong, but the “core” numbers were less compelling. Empire manufacturing was bad. We are quickly heading back to a period where you need to have small positions, because news that would have caused a 0. 5% move in the market a couple of weeks ago, is now moving it 1%. Maybe today is somehow a turning point, but I don’t think it is, so we will see selling pressure into every rally as total return players have to “rightsize” their positions for the increased volatility. This is the real intraday volatility that investors experience as they do their intraday P&L estimates, not VIX or any other form of implied vol.

With no liquidity be careful reading too much into any move (positive or negative) but expect some weakness as these moves will force investors (hedge funds in particular) to make smaller bets.

Twitter: @TFMkts

Tags: Basis Swap, Bonds, Confusion, Curve, Eurozone, liquidity, Nbsp, Proportion, Rally, Sentiment, Signals, Spite, Stock Futures, Tea Leaves, Technicals, Tf, True State, Weird One, Whale Trade, Yield Curves
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“Tightening the Screws”

Tuesday, April 10th, 2012

Excerpts from Stock World Weekly:

The major indexes closed lower this [last] week. We had been anticipating a rest in the “fake” rally, and wrote in last week’s newsletter, Under Pressure, “We’re feeling cashy and cautious again. Looking over the last two and a half weeks, the Dow has done nothing, the Russell has done nothing, the S&P has only gone up a little. The Nasdaq is up a lot – but we know that is largely due to one company, Apple Inc.!

Phil’s short term trade ideas have been mostly bearish. (We included a section on Phil’s put buying adventure in last week’s newsletter.) We’ve been expecting a correction and wonder if this is the beginning of a significant move down.

Discussing his view of the Treasury and stock markets going into next week, Lee Adler wrote to his subscribers,

“The markets face another week on relatively easy street in terms of Treasury supply.

“Even though the Treasury is auctioning a big slug of longer term paper, it is paying down bills. Thursday will see a cash paydown to the market, and the big note and bond settlement a week from Monday will see only $23 billion in new paper, which is about half of the usual mid month supply hit. The government has benefited from a surge in tax receipts toward the end of March and in early April. If that continues through April 15, then overall, April will be a light month supply wise.

“The market only had about 40 minutes to react to the expected weak jobs report in the stock index futures. The reaction wasn’t what I expected. I had thought that a bad jobs report would be like ringing the bell for Pavlov’s dogs as traders salivate in anticipation of the next treat [more quantitative easing] from their handler, Ben. The guys trading the futures didn’t agree with me, and they dumped.

“Holding down yields during note and bond auction week is Job One for the government and its co-cartel members the Primary Dealers [firms which buys government securities directly from a government, with the intention of reselling them to others], who still hold record long positions in their longer term Treasury portfolios (chart above).

“So I think the Primary Dealers will be happy to have more bad news to keep the cash flowing into the government bond market. With no big economic releases coming this week, the best way to do that is to shake the stock market tree.

“The public is still buying bonds like mad and the markets are getting renewed help from the foreign central banks and the commercial banks in the last 2 weeks. That could underpin a return to a bullish tone for stocks once the big Treasury auctions are out of the way on Thursday. All in all, the pattern looks weak for stocks and strong for bonds early in the week, with Thursday afternoon shaping up as an opportune time for reversal.” (Explore Wall Street Examiner’s Professional Edition – try it risk free for 30 days!)

Ryan Vlastelica shares our worries that the market has been running up too far too fast. He wrote, “Since October, estimates for first-quarter earnings growth have tumbled while the S&P 500 has surged. With the earnings season starting next week, the outlook is not as sunny as in previous quarters.

“Investors will assess whether slower growth is priced into the U.S.stock market, or if the S&P 500′s retreat from Monday’s four-year high is the start of a larger decline – if results disappoint.

“After the S&P 500′s rise of about 30 percent since October, there is concern that buying interest is not strong enough to drive further gains, particularly after soft March U.S. employment figures were released on Friday… (chart by Yahoo)

“Friday’s nonfarm payrolls (NFP) report was a disappointment, with just 120,000 jobs added in March, short of expectations for a gain of 203,000 jobs. Stock futures fell 1 percent in a shortened session, with the cash market closed entirely.” (Wall Street Week Ahead: Will earnings spark further declines?)

The weakness in NFP may, rather than sending the market down, revive hopes for another QE, thereby raising share prices. This market is singing, “what’s good is bad, what’s bad is good, you find out when you reach the top, you’re on the bottom.” (Bob Dylan) We will see.

Tim of The Psy-Fi Blog explained why he believes this is a dangerous market. It has something to do with the scientific method (read the whole article to discover what):

“I think there’s danger for anyone executing anything other than the suggested default option of a low cost, globally diversified, occasionally rebalanced portfolio. Active private investors are engaged in an arm’s race with the securities industry and most of the big guns are facing the wrong way. The problem is that darned scientific method, which is why there’s also never been a more dangerous time to invest…

“The idea that we’re in an arms race against a better equipped, better funded and far less moral enemy isn’t one that most private investors take on, but they should. Despite our manifest deficiencies we aren’t without our own weapons – the behavioral weaknesses of the financial industry itself. We can fight a successful guerrilla war by refusing to engage in a pitched battle on their terms: trade rarely, go where they don’t go and never, ever believe you have to react in seconds or even minutes and hours. When High Frequency Trading algorithms can execute faster than you can blink you’re wasting your time, your money and throwing away your intellectual advantage: faster is not better.” (Why There’s Never Been A More Dangerous Time To Invest)

From the PSW Strategies Section

Phil and PSW members post numerous trade ideas during the day in the chat section. Selling (options), doubling down, scaling in, rolling forward… These are a few of the methods that are commonly mentioned.

The following is a detailed example of a trade idea by Phil. This strategy can be applied to buying any stock that you want to own as a long-term holding. (Note: Microsoft is trading lower now, at 31.38 on 4-9.):

“If you REALLY like a stock and REALLY want to own it at the net price – then why not sell a put on that stock? Let’s say I like Microsoft (MSFT). I could buy 100 shares for $32.29 and just cover it by selling a Jan 2014 $30 call at $4.90, for net entry of $27.39. I make $2.61 if the shares get called away. Very dull.

“I could also just sell the Jan 2014 $27 put for $2.50. Then I make (keep) the $2.50 if MSFT is over $27 at expiration – better but not thrilling. My net entry is $24.50, if the shares get put to me. That’s the difference between the price of the stock if it gets put to me, $27, and the money I collected from selling the put, $2.50, i.e., net $24.50.

“I could also buy the Jan 2013 $25/30 bull call spread (bcs) for $4. If I sell a Jan 2014 put against this bcs, I would collect $2.50, bringing my cost go down to a net $1.50 in cash ($4 for the bcs minus the $2.50 collected from selling the put).

My upside is $3.50 if MSFT holds $30 to Jan 2013 AND holds $27 to Jan 2014…

“Bull call spreads are NOT good for cashing out early in general as you get locked into the trade if you don’t have good margin (and good timing to use it with). You are far LESS likely to make quick money on a straight bull call spread, but it depends on what underlying you select. Mostly, a bull call spread is about burning premium – you sell more than you buy and it helps to have the stock move in your favor, of course.

“In the MSFT example above, the net delta on the bull call spread is just $0.22 so a $5 move up in MSFT (15%) is barely going to make you $1. On the bright side, a $5 move against you will only cost you $1, and that means you have plenty of time to react before the net drops 50% and makes it too difficult to roll, which is why we like these – they need less hedging…”

Discussing the markets, Phil wrote, “If you UNDERSTAND why something is happening, rather than panicking with the herd – you can calmly jump in and take advantage of opportunities when they present themselves…

“Who wants a market that goes up and up and up – where’s the sport? Even the Nasdaq finally blew its 15-week winning streak and that helped us decide to stay bearish going into yesterday’s [Thursday’s] close. I simply don’t see anything in particular to be bullish about at the moment.”

For more on our strategies for buying stocks at a discount, go to Strategies for Buying Stocks.

Click here for a free trial to Stock World Weekly

Tags: Bad Jobs, Bond Auction, Cartel, government securities, Lee Adler, Move Down, Nasdaq, Pavlov, Screws, Slug, Stock Futures, Stock Index Futures, Stock Indexes, Stock Markets, Stock World, Tax Receipts, Term Paper, Trading Futures, Treasury Stock, Week From Monday
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Boehner Humiliated, Cancels Vote, Stock Futures Tank; Stocks and Treasuries Unusually Correlated

Friday, July 29th, 2011

by Michael ‘Mish’ Shedlock, Global Economic Trends Analysis

Thursday morning Bloomberg reported House Majority Leader Cantor Predicts House Republicans Will Pass Debt Plan Today

House Majority Leader Eric Cantor predicted Republicans would pass a debt-limit increase plan today as some freshman lawmakers pledged support for the measure in the face of unified Democratic opposition in the Senate.

Vote Cancelled

Kiss that prediction of Cantor goodbye. Thursday evening Republicans put off vote on debt limit because Boehner clearly lacks the votes.

An intensive endgame at hand, Republican leaders abruptly postponed a vote Thursday night on legislation to avert a threatened government default and slice federal spending by nearly $1 trillion.

“The votes obviously were not there,” conceded Rep. David Dreier, R-Calif., after Speaker John Boehner and the leadership had spent hours trying to corral the support of rebellious conservatives.

The decision created fresh turmoil as divided government struggled to head off an unprecedented default that would leave the Treasury without the funds needed to pay all its bills. Administration officials say Tuesday is the deadline for Congress to act.

Senate Democrats stood by to scuttle the bill — if it ever got them — as a way of forcing Republicans to accept changes sought by Obama.

Based on public statements by lawmakers themselves, it appeared that five of some two dozen holdouts were from South Carolina. The state is also represented by Sen. Jim DeMint, who has solid ties to tea party groups and is a strong critic of compromising on the debt issue.

Others said conservatives wanted additional steps taken to try to ensure that a constitutional balanced-budget amendment would be sent to the states for ratification. As drafted, the legislation merely requires both houses of Congress to vote on the issue.

Even before the House voted, Reid served notice he would stage a vote to kill the legislation almost instantly.

“No Democrat will vote for a short-term Band-Aid that would put our economy at risk and put the nation back in this untenable situation a few short months from now,” he said.

Boehner Humiliated

Boehner was humiliated and justifiably so. He had nothing to gain and everything to lose by attempting to ram-rod a gaseous bill through the House that was guaranteed dead-on-arrival in the Senate.

Majority leader Cantor made matters worse by predicting passage.

Stock Futures Tank in Unusual Correlation with Treasuries

Please consider U.S. S&P 500 Futures Retreat as McCarthy Says No Vote on Debt Plan Tonight

Futures on the Standard & Poor’s 500 Index fell after the U.S. House of Representatives postponed a vote to increase the nation’s debt limit, boosting concern that the lawmakers are far from an agreement to avoid default.

S&P 500 futures expiring in September lost 0.8 percent to 1,286.9 at 12:28 p.m. in Tokyo. The decline suggests the U.S. equity benchmark may extend its 3.3 percent slump from the past four days when markets open in New York.

Stocks and Treasuries are moving in tandem twice as often as they normally do, a sign investors are growing convinced the U.S. will lose its AAA credit rating and that an impasse among lawmakers may spur losses in both markets. The S&P 500 has risen or fallen together with 10-year Treasury notes 80 percent of the time in the last 10 days, compared with the average since 2000 of 41 percent, according to data compiled by Bloomberg.

Not Raising the Debt Ceiling Would be Blessing

I am sticking to what I said in Not Raising the Debt Ceiling Would be Blessing; Debt Limit Analysis; Interactive Map, You Decide What Not To Pay

All things considered, especially since Boehner’s credibility is gone in his latest gaseous proposal, the best thing for Congress to do would be to NOT hike the debt ceiling and work out a credible plan over the next month.

Is Mish a “closet Liberal-humanist?”

In response to that post I received a humorous email from “BC” who wrote…

Mish, your choices reveal your empathy! Are you a closet Liberal-humanist?!

Your choices favor the elder working class, the working-class and poor ill, unemployed, poor and “food challenged”, and imperial legionaries and auxiliaries against the corporate-statists!!!

Are you one of those maladjusted working-class types who just doesn’t “get it”?!

Wink , wink ;-) ;-).

To see my choices as to what I would cut and to make your own choices about what to do if the debt ceiling is not raised, click on the above link for an interactive map.

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

Copyright © Michael ‘Mish’ Shedlock, Global Economic Trends Analysis

Tags: Balanced Budget Amendment, Bloomberg, David Dreier, Debt Issue, Debt Limit, Debt Plan, Democratic Opposition, Eric Cantor, Federal Spending, Global Economic Trends, Holdouts, Jim Demint, John Boehner, Michael Mish, Mish Shedlock, Party Groups, Republican Leaders, Senate Democrats, Senate Vote, Stock Futures
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Moody’s Puts US AAA Credit Rating on Review, Places 7,000 Municipal Ratings on Review as a Result; Bernanke Slapped Already?

Thursday, July 14th, 2011

by Michael ‘Mish’ Shedlock, Global Economic Trends Analysis

At long last the bond vigilantes have a spotlight on US debt. Please consider Japan Stock Futures Fall as Yen Rises as Moody’s Reviews U.S Credit Rating

Moody’s Investors Service put the U.S., rated Aaa since 1917, under review for a credit-rating downgrade for the first time since 1995 on concern the government’s $14.3 trillion debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes even though the risk remains low. The rating would likely be reduced to the Aa range and there is no assurance that Moody’s would return its top rating even if a default is quickly cured.

Federal Reserve Chairman Ben S. Bernanke told Congress the central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling. The Fed last month completed a program to buy $600 billion of Treasury bonds that aimed to stimulate the economy by reducing borrowing costs, boosting stock prices and spurring consumer spending.

Moody’s Places 7,000 Municipal Ratings on Downgrade Review

Bloomberg reports Moody’s Places 7,000 Municipal Ratings Tied to U.S. on Downgrade Review

Moody’s Investors Service placed 7,000 municipal ratings on review for possible downgrade after it warned the U.S. may lose its Aaa investment grade.

Gold Soars as Bernanke Pledges More Stimulus

At 12:30 I reported Bernanke Pledges More Monetary Stimulus, Dollar Tanks, Gold Soars to Record High

The ping-pong match between the ECB and Fed to see who can make the worst policy decisions the fastest, switched back in favor of the Fed today with Bernanke’s pledge to pour on the monetary stimulus if needed.

Most think it’s a given that the stock market will soar when Bernanke starts QE3. I don’t. Just because it did last time does not mean it will every time.

One of these times Bernanke is going to react in a way that spooks the bond market in a major way, and the market will slap him silly just as happened to Jean-Claude Trichet and the ECB over Trichet’s “no default” insistence.

Bernanke Slapped Already?

The market was relatively giddy when I made those comments. I was on the road having lunch when I made those comments. I have internet access now at 8:46 PM, for the first time since.

This is the way things looked after the close.

S&P 500 Intraday Chart

As I type, I note that the S&P futures are down 4 points to 1308. I also note that gold held nearly all of its gains today as did the $HUI, unhedged miner index.

$HUI Intraday Chart

I caution that it is too early to say what the market is reacting to, if indeed it is reacting to anything at all. However, this could be the start of the bond and equity markets either having had more than they can take from the monetarist policies of Bernanke and/or the fiscal policies of Congress.

I repeat my caution that one of these times, the market is going to spit directly in the face of Bernanke when he pulls one of his monetarist stunts. I do not know if this is the time, but the sooner it happens the better off the US and the rest of the world will be.

University of California Economist Brad DeLong (who is calling for more monetary easing), should put this in his pipe and smoke it. DeLong is blind, but I assume he can still breathe.

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

Tags: Aa Range, Aaa Credit, Bloomberg, Consumer Spending, Debt Limit, ECB, Federal Reserve Chairman, Global Economic Trends, Government Bonds, Japan Stock, Michael Mish, Mish Shedlock, Moody S Investors Service, Ping Pong, Policy Decisions, Soars, Stimulus, Stock Futures, Stock Prices, Treasury Bonds
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