This week presented a tale of two weeks. Another calendar chocked-full-o catalysts, we have massive pessimism leading into the FOMC meeting on Wednesday. SPX decided to discount Fed intervention down to a zero probability, which led me to trim-down my risk exposure, taking equities to under 60%. Then, the market soldoff, underwhelmed by the outcome of Mario Draghi’s ECB meeting on Thursday.
Some observers played contrarian in their reaction to the ECB’s press conference, most notably Ambrose Evans-Pritchard (The Telegraph) & Simon Hobbs (CNBC)–two splendid contrarian realists who’ve been bearish-leaning for years. They noted that we got what we wanted out of Mr. Draghi: a description of the infrastructure by which peripheral nations can seek relief.
I’m always fascinated by how fickle the market is. Truthfully, everything from Mr. Draghi’s [now famous] “belive me” pronouncement up through Thursday’s press conference has been an exercise in the same disinterest with which Eurocrats have treated their entire demise. Yet, after spitting-up a bit, the market managed to keep its food down this time, as expected. That’s the importance of behavioral finance. Sentiment had eroded, the shorts were all-in, and that left the market oversold.
I had a good grasp on the intraday S&P 500 technicals on Wednesday, so I was able to call the bottom. I took the opportunity to buy the dip, replacing the equity exposure and the beta I had shed earlier in the week. New positions in Yelp (YELP) and Yum! Brands (YUM).
Enjoy this summer reading from my Newsstand, as you watch the waves from the beach on this steamy summer weekend…
After weighing the gold, auditors drill small holes to check a number of bars’ purity. Results will be released at year-end.
Tett warns of the potential for a run on US’s $2.4t MMF industry (down from 2009 high of $3.6t), a critical source of short-term working capital/commercial paper (CP) funding for corporations.
Carloads -2.6% and Intermodal +3.6 (y/y cumulative ytd volume); -1.5% and +5.1 respectively (vs. this week last year).
12 of 20 carload groups posted gains: Petroleum products +46.8%, Farm products +14, Motor vehicles/equipment +8.7; Metallic ores -38.1%, Iron/Steel scrap -29.6, Grain -7.2.
Corporate pensions now only 68.7% funded in July (-290bps m/m). Assets were +1.2%, outpaced by liabilities +5.5% due to falling interest rates.
Draghi’s Delivery: ECB’s Anti-Crisis Bargain Emerges After 2-1/2 Years | Businessweek
Much argument over how material Draghi’s statement was; he implied that ECB would buy sovereign debt on secondary market as long as countries formally request EFSF aid first–meaning they submit to fiscal discipline in exchange for monetary easing.
Global Purchasing Managers Index (July 2012): Aggregate Slip Lower, Surprise Collapse in Germany & France | Business Insider
After May & June started a negative trend, July’s Global PMI slipped a bit lower. AsiaPac remained in contraction with Australia especially weak; Germany & France collapsed with rest of Europe; US still expanding but decelerating to post-2009 lows.
Monthly Auto Sales (July 2012): Ford & General Motors Report Big Unexpected Drops | Business Insider
Vehicle sales y/y: F -4% v. +0.8E; GM -6.4% v +2.1E. [Not sure if this miss has anything to do with rumored "channel stuffing," but remember how Japan's 2011 earthquake distorted supply chains.]
Wall Street Recommends US Treasury Launch Floating Rate Notes & Issues Warning on Student Loan Bubble | Treasury Borrowing Advisory Committee (TBAC)
TBAC unanimously recommends the Treasury issues Floaters ASAP; suggest using Treasury’s General Collateral repo rate as FRN’s index (not Fed Funds or T-bills) and introducing GCF futures.
Equity sentiment hits a record low | Merrill Lynch
Sell Side Consensus Contrary Indicator shows that 43.9% of strategists are bullish on equities–the lowest alltime reading. [#Despondency]
Correspondence between Tom DeMarco & Tim Geithner: FHFA Won’t Allow Mortgage Principal Reduction Act (PRA) | ZeroHedge
FHFA’s DeMarco tells Geithner that risks of PRA outweigh rewards. FHFA is independent GSE, but Geithner tries to pursuade him with “best decision for the country.”
Chart: Years of Soaring US National Debt & Neglect of Public Investment (1975-2011) | New York Times
Annotated comparison of median household income to each household’s share of national debt. Also, shows neglected Infrastructure and Research & Development investment. In 1981, Reaganomics’ supply-side approach revived R&D to 1950-60s glory, but that unwound in 90s.
US Postal Service to Default This Week | 24/7 Wall St.
USPS will likely miss $5.5b debt payment to US Treasury this week; another $5.6b due in September. Losing ~$25mm/week, post office is collapsing under its pension, which Congress doesn’t guarantee.
The Fed On Gold Price Manipulation: Fed Chairman Arthur Burns’ Memorandum (June 30, 1975) | ZeroHedge
Memo to President Gerald Ford, cc’d Secretary of State Henry Kissinger & future Chairman Alan Greenspan. Discusses the post-Nixon Shock relationship between Gold & fiat, including how the US’s lack of control threatened its plan to control global liquidity. Treasury opposed the Fed’s perspective, which prompted Fed to systematically undermine UST credibility thereafter.
Report That Facebook’s (FB) Ad Model Is a Scam | naked capitalism
FB was charging Limited Run for ad clicks, of which only 20% were verifiable and 80% were bots. FB also wouldn’t let them change their name unless they agreed to $2k/month in ad spending.
International Association of Insurance Supervisors (IAIS): When are insurers systemically important? | FT Alphaville
IAIS proposed guidelines for flagging “Globally Systemically Important Insurers (G-SII)” alongside TBTF banks; comment period ends 7/31. Biggest criteria (40-50% weight) is non-traditional/non-insurance activities.
3D printing for manufacturing: New techniques to embed electronics into products | The Economist
Examples: Xerox (XRX) printing circuitboards with silver, conductive ink; Optomec/Aurora Flight Sciences/Stratasys using 3D printing to manufacture products like drone wings.
Complete European Calendar (August & September 2012) | Deutsche Bank
Highlights: Aug 2- ECB Governing Council meets. Aug 20- €3.1b Greek bond redemption (GGBs owned by ECB & EIB). Sept 12- German Constitutional Court ESM ruling & Dutch parliamentary elections.
The Market Removes Its Own QE Punchbowl | ZeroHedge
For 4th time in 2012, SPX has rallied on QE3 rumors when 5y5y inflation breakevens neared critical 2.0% level–the floor at which Bernanke has historically intervened for fear of deflation.
11 Straight Quarters of Corporate Profit Growth Likely to End in 3rd Quarter | FactSet
SPX -9.3% while 3q12 y/y EPS growth estimates were reduced from +4.8% to 3.5% between March & June; then SPX +6.4% while growth reduced further to -1.6% on June 30.