The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Yesterday in the office, we were discussing when to take a little something off of the table. This upthrust has been very strong (itself a positive), but we tend to be wary when rallies are seemingly built on rumors. The 19th trial balloon of some new ECB intervention should not trump slowing fundamentals and peaking earnings.

With many of our holdings at multi-year highs, is this where we sell a bit of the long exposure? The key to running an asset allocation model is not so much what to do, as when. Is now the ideal time to sell?

I have called this move off of the March 2009 lows “the most hated rally in history.” The discontent of underinvested fund managers has been a positive. Indeed, the Bill Gross comments on the end of the cult of equities yesterday was itself bullish (I’ll have more to say on Gross later this week).

But its not just the Pimco boss; according to Merrill Lynch’s quant group, Wall Street’s “sell side strategists are now more bearish on equities than they were at any point in the last 27 years.” And we know as a whole, this group tends to get it wrong at key inflection points.

After the Fed liquidity fountain, this is perhaps the single most bullish thing I can think of. The difference being the Fed juicing is an artificial external input into markets; excess bearishness is pure behavioral finance at work.

Sell Side Consensus Contrary Indicator 
click for larger chart

Source:
Equity sentiment hits a record low
Savita Subramanian
Equity and Quant Strategy
BofA Merrill Lynch 01 August 2012

Killer line up:

My afternoon train reading:

• France and Italy Seek Ultimate Firepower for ESM (Spiegel Online)
• The Real Crash is dead ahead as 2008 is forgotten (Market Watch)
• Artificial Intelligence: The Answer to Wall Street’s Data Deluge (Institutional Investor)
• 1998′s John Reed to Sanford Weill: Split Up Citi (WSJ)
• Everything most people think about the budget is wrong (Salon)
• 5% of Americans Spend 50% of Health Care Dollars (The Fiscal Times)
• Henry Blodget’s Second Act (WSJ)
• Amazon’s recommendation secret (Fortune)
• Apple aims for salted earth in Samsung fight (CNN Money)
• How Google Street View is inspiring new photography (Guardian)

What are you reading?

>
‘Junk’ Loans Gain Leverage

Source: WSJ

Today’s Housing Bulls are pumped full of antibiotics and steroids, corn fed, genetically modified creatures from a lab. They are not natural; They are not grass fed, free-range, organic Angus cattle. They are unnatural, not found in the wild. These artificial constructs are a joint project of Congress and the Attorney General’s office and the FOMC.

Consider the Case Shiller data — up 2.2% monthly and down 1% year over year — disappointed slightly. But to really understand where Housing is in the cycle, we need to do more than merely look at the chart; we needs to put those data points into broader context. We need to imagine what an organic housing sector would look like versus the Frankenstein creature we have today.

In order to get these flat to negative numbers, an extraordinary amount of firepower has been thrown at Housing:

 1. First time home buyers tax credit

2.FOMC QE, Twist, driving mortgage rates down 100+ bps

3.Foreclosure abatements during robosigning

You can see the impact of these efforts reflected in the annotated chart:

>

Contextualizing Case Shiller Housing Data

Non-annotated origianl Case Shiller charts after the jump
Read the rest of this entry »

The Financial Times – ECB ‘ready to do whatever it takes’
The European Central Bank’s mandate allows it to fight excessive borrowing costs for eurozone countries, Mario Draghi, its president, said on Thursday, sparking a market rally amid hopes the bank would intervene to buy sovereign bonds. The euro strengthened and the bond prices of debt issued by stressed eurozone countries rallied after Mr Draghi said the ECB was “ready to do whatever it takes” to preserve the single currency. “Believe me, it will be enough,” he told a conference in London. Following days of market turmoil and concern that Spain’s high borrowing costs could force it to seek a full sovereign bailout, Mr Draghi suggested the ECB had a remit to intervene if market interest rates were not “inherent” to borrowers and interfered with the central bank’s implementation of monetary policy – its prime tool for fulfilling its core task of maintaining price stability.

The Wall Street Journal – Europe’s Central Bank Signals Action
Mr. Draghi’s resolute comments on Thursday, which sounded more similar to Fed Chairman Ben Bernanke than to Mr. Draghi’s predecessor, Jean-Claude Trichet, suggest the ECB has chosen to take bold action. Unlike politicians who must navigate parliaments and other euro-zone member nations to get things done, the ECB’s ability to print unlimited euros means it can match words with actions almost immediately, if it chooses. One option is for the ECB to start buying bonds again, but on a much larger scale. A more extreme step would be to set a ceiling on interest-rate spreads between weak and strong countries, though that would require an unlimited commitment that officials so far have been unwilling to make. It could also buy bonds of strong and fragile countries alike to jump-start the bloc’s economy. Spanish and Italian bonds strengthened sharply Thursday, and the euro and the British pound each gained more than 1% against the U.S. dollar. Stocks were positive in nearly all European markets, and the Italian and Spanish indexes each jumped more than 5%.Late Thursday, the Spanish 10-year bond was yielding 6.96%, down nearly half a percentage point from Wednesday. Lower yields mean stronger prices. The 10-year Italian bond was at 6.03%, down a similar amount.Shorter-dated bonds strengthened even more.

Comment

Source: Bianco Research

My early morning reads:

• Trickle of Libor lawsuits from rate-fixing scandal likely to become deluge (Washington Post) see also Bank of America, Barclays, Credit Suisse Sued Over Libor (Businessweek)
• Bartlett: The Fed Should Stop Paying Banks Not to Lend (Economix)
• What would Keynes do? (BBC News) see also Procyclicalists Across the Atlantic Too (Jeff Frankels Blog)
• Corn for Food, Not Fuel (NYT)
• Questioning El-Erian (Reuters) see also Bill Gross on Cult Figures (PIMco)
• Why being bad is better on Wall Street (MarketWatch)
• Tiger Management Helps Next-Generation Funds (DealBook)
• The Other Barbarians at the Gates (NY Mag) see also U.S. Army Purchases Riot Gear As Fears Over Civil Unrest Grow (Info Wars)
• Guy Adams: I thought the internet age had ended this kind of censorship (Independent)
• Facebook ‘likes’ and adverts’ value doubted (BBC News)

What are you reading?

Presidential Election Year Markets

Source: BeSpoke

How Important a priority is _____ ?

Source: Gallup

Back on March 6, 2009, I made two broad calls: One was a market call, the other was a political/sociological prediction. The market call (“The mother of all bear market rallies is coming”) was as good as the political call (“get long torches and pitchforks”) was as bad. Apparently, I can pick a market bottom but not a political one.

I am reminded of this whenever I travel abroad. It seems the public in Europe are much more attuned to how they are being abused by corporate interests, the government and politicos. In contrast, Americans tolerate a surprising amount of nonsense from the big institutions that run their society. It is as if we had our revolution a few centuries ago, and now we are on auto-pilot. So long as we are well fed and entertained — Bread & Circuses (panem et circenses) — the incumbency of elected officials was safe. We shall save the discussion of whether this makes McDonalds and the NFL the two most important companies in America for another time.

As it turns out, the public was slow to figure out how badly they were getting screwed. That seems to be changing. A recent Gallup poll asked Americans to prioritize what they want out of whoever is elected to the White House in November:

“Creating good jobs, reducing corruption in the federal government, and reducing the federal budget deficit score highest when Americans rate 12 issues as priorities for the next president to address. Americans assign much less importance to increasing taxes on wealthy Americans and dealing with environmental concerns.”

Jobs being number one is not a surprise — the post-credit crisis economic recovery has been very soft. But corruption at #2 is a pleasant surprise.

Now, some of my European friends are going to say this is not only belated but obvious. Certainly, the bailouts were a terrible idea in conception and an even worse one in execution. But recent events have conclusively demonstrated how corrupted bankers themselves are — with Congress, the NY Fed, and the White House in bed with them for the past 3 decades. Its a gnarly hornets nest of corruption, illegality and abuse of law.

There are lots of thing we can do about this, but I have a modest suggesting that would be a good start: No More Wall Street Banker Treasury Secretaries.

There is an inordinate number of people who understand business and economy that we should not have to keep going back to Wall Street for Treasury Secretaries. It would be much better for the nation to find someone from industry who understands finance rather than finding someone from finance who understands industry.

Consider where we would be today if we put Citi and Bank of America into prepacked bankruptcy (as was done with GM).

Two very cool interactive maps that look at the upcoming presidential elections:

Click for interactive chart:


Source: WSJ

2012 Election Map: The Race for the Presidency

Click for interactive chart:

Source: Washington Post

Afternoon train reading:

• 5 lessons Bernanke has learned on the job (Market Watch)
• How to Fix TheStreet.com (The Reformed Broker)
• A Split Not Taken at Citigroup (WSJ)
• When are insurers systemically important? (FT.com)
• Wall Street’s Kangaroo Court Gets a Black Eye (Bloomberg)
• The Tech 50: The Difference Makers (Institutional Investor)
• Apple-Samsung Patent Battle Shifts to Trial (NYT)
• Meet the Man Who Put the ‘@’ in Your E-Mail (Wired)
• Has the Meaning of “Nothing” Changed? (Slate)
• Where to Find Inspiration: 50 Quotes for Writers (Write To Done)

What are you reading?

Banks Need Just One Thing to Spur Lending: Borrowers

Source: WSJ

I have to rerun this hilarious cause its true cartoon from Saturday, just in case you missed it:

Real Life Adventures by Gary Wise and Lance Aldrich

hat tip LJS