Month: February 2014

Presented with no comment…

via Zero Hedge http://ift.tt/1k1udKD Tyler Durden

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At one time it was the tough that got going when things started to get rough. Now, it’s just the money-minded that look, watch, and act before you know what has hit you. It’s not the tough that get going, you’d have to be a fool to stick to the investment in the emerging markets right now. Today, it would appear that the biggest outflow of financial investment since 2011 is currently taking place in emerging markets. The money is on its way elsewhere in the belief that the reduction in Quantitative Easing will bring about a slow-down now in the economies of the emerging markets.

• According to newly released statistics by EPFR Global, emerging market equity outflows increased by $6.3 billion in just one week (last week of January 2014). 
• That’s the highest withdrawal of investment since August 2011. 
• If we take January 2014 alone, then there has been an outflow to the tune of $12.2 billion in the month. 
• Bond funds in emerging markets have also seen a fall in January 2014 that amounts to $4.6 billion. 
• There is a very high chance that emerging markets shall now see a greater reduction as the world’s stock markets will be having the worst start to the year (and that means the worst since 2009 and the height of the financial crisis).

Stock markets are now waking up (with the hangover) from Quantitative Easing and the false buoyancy of the financial markets kept artificially afloat (while doing nothing to stabilize employment or create improvements in the economy that would be long-term effects). This has been coupled in an arranged marriage that can only end in divorce now that China’s economy is slowing and there are more than just signs of a downturn in currencies for Russia, and Turkey as well as Argentina and South Africa, for example.

• The Dow Jones has dropped by 5.3% since the start of the year. 
• January saw the first loss at the start of the year since 2009. 
• History repeats itself; we all got the gist of that long ago. Trouble is, we just never learn. 
• The NASDAQ has gone down by 1.5% since January 1st.

It might be a good bet to take the January reading as a good tell-tale sign of the rest of the year. The stock market looks as if it will fall and January’s reading has been right in 73% of the cases since 1929. 
The VIX (Volatility Index) increased by 26% in January 2014. Some are saying that the worst is still yet to come and this time it might be more than just scare-mongering that gets the better of you. Only 23.8% of people in a recent poll at the end of January (the American Association of Individual Investors Sentiment Survey) believed that the stock market would not go any lower. Complacently sit back, join the other bulls and the stampede will ensue as the market won’t be able to sustain you. The figure is a great deal lower than the all-time historic average that stands at 30.5% who believe that the market will go down.

The International Monetary Fund has already rung the alarm bells expressing the need for a coherent macroeconomic policy to deal with the volatility of emerging markets. Slower growth and falling currencies are bad news for the emerging markets, looking like good news for the USA. But, does the US worry about the effect that its policies are having on the economies of the rest of the world? Perhaps not immediately. But, then again, since when did the Federal Reserve actually think ahead with foresight?

• China’s growth will slow to 7.5% for 2014 according to the International Monetary Fund, but it could be as low as just 4% (Lombard Research). 
• The EU might start worrying about that since it exports to the value of $212 billion to the USA (2012). 
• The USA exports some $128 billion.

Estimates show that if China’s growth were to fall to 3% it would mean a reduction in global GDP to the value of1.5%. Good side of the coin would mean that oil prices would fall by 30% and base metals by as much as 40%.

But, it’s true to say that emerging markets might be going down the tubes these days with the withdrawal of investment almost lock, stock and barrel. People are scrambling to get out of there before it goes down any more. But, there are certainly right there the bucks to be made by buying up while they are low. Emerging markets might suffer right now, but that can only be temporary. Without the emerging markets, we can’t do a lot. They will have to go back up again at some time or the other.

Originally posted: Emerging Markets: Lock, Stock and Barrel

You might also enjoy: End of the Financial World 2014 |  Kristallnacht on Wall Street? Bull! | China’s Credit Crunch | Working for the Few | USA:The Land of the Not-So-Free  

 

via Zero Hedge http://ift.tt/1k1ubCr Pivotfarm

Across the spectrum of the US, Europe and Japan we have seen we see many stock markets that are “bending” towards pivotal supports and, Citi's FX Technicals group notes, A break below these supports, if seen, would suggest that we could see much more significant corrections lower across the board – "Any which way you look at it this market has a lot of potentially concerning developments but all the 'bricks' have not yet quite fallen into place here." However, as they add, VIX is showing such as move that "if seen" would almost certainly suggest a high to low move in the S&P of "double digit percentages."

Via Citi FX Technicals,

Looking across the spectrum of the US, Europe and Japan we have seen some bearish technical indicators develop in recent weeks

While these are certainly concerning, we need to see more evidence/breaks of more important levels before it suggests that we could see a more serious (Possibly double digit percentage) corrections across the board

S&P 500- How stretched is it on the weekly chart?

At the peak on 15 Jan 2014 the S&P was 12% above the 55 week moving average which itself was 20% above the 200 week moving average.

At the peak in 2007 the S&P was 8.5% above the 55 week moving average which itself was 14.5% above the 200 week moving average.

At the peak in 2000 the S&P was 14% above the 55 week moving average which itself was 29.5% above the 200 week moving average.

So the answer here is much more stretched than 2007 and a bit less stretched than 2000. In both those instances you would have expected (and in fact got) a correction down to the 200 week moving averages. In fact in both instances we ended going a lot further because of the knock on effect of another asset in the US. In 2000 it was the NASADAQ and we saw the NDX (Nasdaq100) drop over 80%. In 2007 it was the housing market and credit which induced a much deeper correction. In 1998 and 2011 the corrections were deep (Both 22%) but the “crisis” in both instances was predominately external (Russia default of 1998 and European crisis/Greek defaults in 2011)

Right now we are looking at the danger that the bigger catalyst here (like 1997-1998) might be “Fed tinkering with EM sinking”

The 55 week moving average is at 1,667 (10% off the highs) while the 200 week moving average at 1,385 is 25% off the highs and rising about 3 points per week.

S&P monthly chart could be important here in the coming months.

After a strong surge higher from 1994 to 1998 we saw a monthly close below the 12 month moving average in August 1998 (after closing above the 12 month moving average for 43 consecutive months) and we saw a 22% correction high to low. The price action then continued higher into 2000 for 24 consecutive monthly closes above before we eventually saw another monthly close below in October of that year and a high to low fall of 50%

After regaining the 12 month moving average in April 2003 it held above until December 2007(56 months). That culminated in a high to low fall of 58%

In December June 2010 (After only 11 months above on a closing basis) we saw a close below that culminated in a high to low move of 17%

Then after 11 monthly closes above we broke below in August 2011 with an eventual high to low move of 22%

We have now closed 25 consecutive months above this average which still stands quite a bit lower at 1,675 but rising about 23 points per month. If we were to see a close on a monthly basis below here, it would suggest that the “bend” could be heading for a break.

In addition a close this week/month below 1,768 would constitute a bearish monthly reversal off the high of the almost 5 year trend (Something we got in July 2007 before one last hurrah into a marginal new high in October)

“Any which way you look at it “this market has a lot of potentially concerning developments but all the “bricks” have not yet quite fallen into place here.

DJIA weekly chart: Also looks similar to 2000

Posted a bearish outside week last week (Something it just failed to do the week of 17 Jan 2000). The trend highs were posted the previous week in 2000 and never again seen in that cycle. So far we managed to get the bearish outside week 3 weeks after the trend highs were posted

A weekly close below the 55 week moving average at 15,184 would suggest the possibility of extended losses towards the 200 week moving average at 12,886 (22% below the trend highs)

In 2013 we had our 5th consecutive up year in the DJIA. In data going back to 1901 the only time we have had more the 5 consecutive up years was into the 2000 peak (9 consecutive up years from 1991)

Dow Jones Transportation index- Weekly chart

Posted an aggressive weekly reversal at the high of the trend channel from 2009. Good supports are met at

– 6,933-7,036 : Rising trend line and horizontal trend line
– 6,541: 55 week moving average
– 5,772 : Channel base support
– 5,378: 200 week moving average.

Dow Jones Transportation index- Monthly chart

A close this week below 7,036 (A stretch but not impossible) would give us a bearish outside month at the trend highs and suggest a move lower-possibly towards 5,500-5,600 again

VIX weekly chart: Setting up for a big test?

There have been 6 tests of the 200 week moving average on the VIX since 2011

Of these 6 we saw 5 failures to break it on a weekly close basis and one success in August 2011

That successful breach saw the VIX move from a low just over 14% to a peak of 48% (A similar peak to that posted in 2010). In 2011 that was accompanied by a 22% fall in the S&P and in 2010 by a 17% fall.

The 200 week moving average now stands at 19.37% with a potential double bottom neckline at 21.34%. A weekly close through this range would suggest an acceleration to the topside and target at least 30%+

Such a move , IF seen, would almost certainly suggest a high to low move in the S&P of “double digit percentages”

US bank index weekly chart: Weekly reversal at the trend peak

Suggests at least a test of converged trend lines and the 55 week moving average between 61 and 62.

Below here would suggest the danger of extended losses towards the 200 week moving average at 51.

E300 (Europe) Index: weekly reversal at the highs

Posted a clear bearish outside week yesterday at the high of 2011-2014 rally. This suggests the potential for further losses in the weeks ahead. Initial support is met at 1241 (trend line) an
d then 1228 (55 week moving average)

A weekly close below that latter level would suggest the danger of extended losses towards the converged trend line and 200 week moving average support around 1,106-1,108 (Around 18% off its peak)

CAC 40 (France) : Bearish weekly reversal and double top.

Again, this index posted a clear bearish weekly reversal at the trend high and in addition has the potential to form a double top.

The neckline stands at 4,051 and a close below would suggest at least 3,750 with interim support at the 55 week moving average (3,988)

Below here we see numerous converged trend line supports and the 200 week moving average in the 3,537 to 3,662 range

FTSE (UK) : Another bearish outside week at the high and possible double top

Completed a bearish outside week last week and has followed through to the downside this week.

Now testing good trend line and 55 week moving average support between 6,508 and 6,522. Below here further good support is met in the 5,990-6,105 range with the 200 week moving average at 5,891.

A weekly close 6,023 would complete a clear double top formation and suggest additional losses towards 5,200 or below.

Hdax index (Germany):Bearish weekly reversal at trend high

The HDAX Index is a total rate of return index of the 110 most highly capitalized stocks traded on the Frankfurt Stock Exchange. The HDAX has a base value of 500 as of December 31, 1987.

Initial support is met at 4,687 and below here converged 55 week moving average and trend line support comes in between 4,335 and 4,408

A weekly close below this range would suggest extended losses towards the 200 week moving average at 3,652 (28% off the trend high)

MIB index (Italy): Bearish outside week at the highs

Suggests a move lower to test the trend line and 55/200 week moving average supports in the 17,347 to 17,984 range

A weekly close below this range would suggest the danger of extended losses towards 14,855-14,900 again

Topix banks index (Japan) posts bearish outside week

Trend line support and the 55 week moving average support stands at 174.55-175.83 with further horizontal support met at 154.63.

Below here would suggest extended losses towards 132.

Topix index (Japan)

Failed to accelerate higher after the break of the May high of 1,290 in late December/early January and has fallen away sharply in recent weeks. The peak at 1,308 was pretty much the exact target of the double bottom completed in March last year.

A move to test the 55 week moving average at 1,147 looks to be a real possibility and a weekly close below would suggest a test of a potential double top neckline at 1,033.

A close below that support would target as low as sub 800 again with the 200 week moving average at 908

So across the spectrum of the US, Europe and Japan we see many stock markets that are “bending” towards pivotal supports. A break below these supports, if seen, would suggest that we could see much more significant corrections lower across the board.

via Zero Hedge http://ift.tt/1fzH5UQ Tyler Durden

Across the spectrum of the US, Europe and Japan we have seen we see many stock markets that are “bending” towards pivotal supports and, Citi's FX Technicals group notes, A break below these supports, if seen, would suggest that we could see much more significant corrections lower across the board – "Any which way you look at it this market has a lot of potentially concerning developments but all the 'bricks' have not yet quite fallen into place here." However, as they add, VIX is showing such as move that "if seen" would almost certainly suggest a high to low move in the S&P of "double digit percentages."

Via Citi FX Technicals,

Looking across the spectrum of the US, Europe and Japan we have seen some bearish technical indicators develop in recent weeks

While these are certainly concerning, we need to see more evidence/breaks of more important levels before it suggests that we could see a more serious (Possibly double digit percentage) corrections across the board

S&P 500- How stretched is it on the weekly chart?

At the peak on 15 Jan 2014 the S&P was 12% above the 55 week moving average which itself was 20% above the 200 week moving average.

At the peak in 2007 the S&P was 8.5% above the 55 week moving average which itself was 14.5% above the 200 week moving average.

At the peak in 2000 the S&P was 14% above the 55 week moving average which itself was 29.5% above the 200 week moving average.

So the answer here is much more stretched than 2007 and a bit less stretched than 2000. In both those instances you would have expected (and in fact got) a correction down to the 200 week moving averages. In fact in both instances we ended going a lot further because of the knock on effect of another asset in the US. In 2000 it was the NASADAQ and we saw the NDX (Nasdaq100) drop over 80%. In 2007 it was the housing market and credit which induced a much deeper correction. In 1998 and 2011 the corrections were deep (Both 22%) but the “crisis” in both instances was predominately external (Russia default of 1998 and European crisis/Greek defaults in 2011)

Right now we are looking at the danger that the bigger catalyst here (like 1997-1998) might be “Fed tinkering with EM sinking”

The 55 week moving average is at 1,667 (10% off the highs) while the 200 week moving average at 1,385 is 25% off the highs and rising about 3 points per week.

S&P monthly chart could be important here in the coming months.

After a strong surge higher from 1994 to 1998 we saw a monthly close below the 12 month moving average in August 1998 (after closing above the 12 month moving average for 43 consecutive months) and we saw a 22% correction high to low. The price action then continued higher into 2000 for 24 consecutive monthly closes above before we eventually saw another monthly close below in October of that year and a high to low fall of 50%

After regaining the 12 month moving average in April 2003 it held above until December 2007(56 months). That culminated in a high to low fall of 58%

In December June 2010 (After only 11 months above on a closing basis) we saw a close below that culminated in a high to low move of 17%

Then after 11 monthly closes above we broke below in August 2011 with an eventual high to low move of 22%

We have now closed 25 consecutive months above this average which still stands quite a bit lower at 1,675 but rising about 23 points per month. If we were to see a close on a monthly basis below here, it would suggest that the “bend” could be heading for a break.

In addition a close this week/month below 1,768 would constitute a bearish monthly reversal off the high of the almost 5 year trend (Something we got in July 2007 before one last hurrah into a marginal new high in October)

“Any which way you look at it “this market has a lot of potentially concerning developments but all the “bricks” have not yet quite fallen into place here.

DJIA weekly chart: Also looks similar to 2000

Posted a bearish outside week last week (Something it just failed to do the week of 17 Jan 2000). The trend highs were posted the previous week in 2000 and never again seen in that cycle. So far we managed to get the bearish outside week 3 weeks after the trend highs were posted

A weekly close below the 55 week moving average at 15,184 would suggest the possibility of extended losses towards the 200 week moving average at 12,886 (22% below the trend highs)

In 2013 we had our 5th consecutive up year in the DJIA. In data going back to 1901 the only time we have had more the 5 consecutive up years was into the 2000 peak (9 consecutive up years from 1991)

Dow Jones Transportation index- Weekly chart

Posted an aggressive weekly reversal at the high of the trend channel from 2009. Good supports are met at

– 6,933-7,036 : Rising trend line and horizontal trend line
– 6,541: 55 week moving average
– 5,772 : Channel base support
– 5,378: 200 week moving average.

Dow Jones Transportation index- Monthly chart

A close this week below 7,036 (A stretch but not impossible) would give us a bearish outside month at the trend highs and suggest a move lower-possibly towards 5,500-5,600 again

VIX weekly chart: Setting up for a big test?

There have been 6 tests of the 200 week moving average on the VIX since 2011

Of these 6 we saw 5 failures to break it on a weekly close basis and one success in August 2011

That successful breach saw the VIX move from a low just over 14% to a peak of 48% (A similar peak to that posted in 2010). In 2011 that was accompanied by a 22% fall in the S&P and in 2010 by a 17% fall.

The 200 week moving average now stands at 19.37% with a potential double bottom neckline at 21.34%. A weekly close through this range would suggest an acceleration to the topside and target at least 30%+

Such a move , IF seen, would almost certainly suggest a high to low move in the S&P of “double digit percentages”

US bank index weekly chart: Weekly reversal at the trend peak

Suggests at least a test of converged trend lines and the 55 week moving average between 61 and 62.

Below here would suggest the danger of extended losses towards the 200 week moving average at 51.

E300 (Europe) Index: weekly reversal at the highs

Posted a clear bearish outside week yesterday at the high of 2011-2014 rally. This suggests the potential for further losses in the weeks ahead. Initial support is met at 1241 (trend line) and then 1228 (55 week moving average)

A weekly close below that latter level would suggest the danger of extended losses towards the converged trend line and 200 week moving average support around 1,106-1,108 (Around 18% off its peak)

CAC 40 (France) : Bearish weekly reversal and double top.

Again, this index posted a clear bearish weekly reversal at the trend high and in addition has the potential to form a double top.

The neckline stands at 4,051 and a close below would suggest at least 3,750 with interim support at the 55 week moving average (3,988)

Below here we see numerous converged trend line supports and the 200 week moving average in the 3,537 to 3,662 range

FTSE (UK) : Another bearish outside week at the high and possible double top

Completed a bearish outside week last week and has followed through to the downside this week.

Now testing good trend line and 55 week moving average support between 6,508 and 6,522. Below here further good support is met in the 5,990-6,105 range with the 200 week moving average at 5,891.

A weekly close 6,023 would complete a clear double top formation and suggest additional losses towards 5,200 or below.

Hdax index (Germany):Bearish weekly reversal at trend high

The HDAX Index is a total rate of return index of the 110 most highly capitalized stocks traded on the Frankfurt Stock Exchange. The HDAX has a base value of 500 as of December 31, 1987.

Initial support is met at 4,687 and below here converged 55 week moving average and trend line support comes in between 4,335 and 4,408

A weekly close below this range would suggest extended losses towards the 200 week moving average at 3,652 (28% off the trend high)

MIB index (Italy): Bearish outside week at the highs

Suggests a move lower to test the trend line and 55/200 week moving average supports in the 17,347 to 17,984 range

A weekly close below this range would suggest the danger of extended losses towards 14,855-14,900 again

Topix banks index (Japan) posts bearish outside week

Trend line support and the 55 week moving average support stands at 174.55-175.83 with further horizontal support met at 154.63.

Below here would suggest extended losses towards 132.

Topix index (Japan)

Failed to accelerate higher after the break of the May high of 1,290 in late December/early January and has fallen away sharply in recent weeks. The peak at 1,308 was pretty much the exact target of the double bottom completed in March last year.

A move to test the 55 week moving average at 1,147 looks to be a real possibility and a weekly close below would suggest a test of a potential double top neckline at 1,033.

A close below that support would target as low as sub 800 again with the 200 week moving average at 908

So across the spectrum of the US, Europe and Japan we see many stock markets that are “bending” towards pivotal supports. A break below these supports, if seen, would suggest that we could see much more significant corrections lower across the board.

via Zero Hedge http://ift.tt/1fzH5UQ Tyler Durden

We sympathize with traditional stock and bond investors, who are faced with extremely poor choices today. QE has distorted the prices of all traditional asset classes to such an extent that none currently promises a fair return with modest risk…. Because the dominant force in securities-price movements today is government policy, particularly the governmental buying of bonds and stocks, there is a vulnerability to all trading and investing prospects that cannot be assessed or measured with confidence… Since there is no history of Americans losing confidence in the basic soundness of their currency and their government, and since monetary policy today is so manipulative and large, it will be hard to parse the reasons for any particular market moves in 2014.

      – Paul Singer, Elliott Management

As always, perhaps the best periodic commentary on the state of the “markets” (even if such a thing has not existed for the past 5 years) and global economy comes from the person whose opinion has not been swayed by fly-by-night screechers and book-peddling pundits who fit in CNBC’s octobox and who come fast and are forgotten even faster, and whose 37 year track record at Elliott Management, whose assets he has grown from $1.3 million to $23 billion, speaks for itself: Paul Singer.

 

 

Below are the key excerpts from his January letter.

VISION

Imagine how mainstream experts would have reacted to the following set of predictions in 2006: “In two years Lehman will be bankrupt; Merrill and Bear will be acquired in distressed takeunders; Citicorp, AIG, Chrysler, GM, Delphi, Fannie and Freddie will be taken over by the government facing possibly hundreds of billions of dollars of losses; and only 13 global megabanks will survive.”

The 2008 crisis had a lasting and profound impact on virtually the entire developed world. The financial system was brought to the brink of collapse; conditions were created for the radical monetary policy of the past five years and a severely distorted recovery; the plans and dreams of hundreds of millions of people were disrupted, in some cases catastrophically; and societal values were significantly twisted away from individual responsibility toward dependency. In fact, the consequences of the bubble, the bust and the policy aftermath are not yet in full historical view. Despite all the pain, policymakers
refuse to take responsibility for the bubble, the distortions of the bubble years, the ensuing failure to lay the groundwork for strong post-bust growth, the continued riskiness and fragility of the major financial institutions, the lack of appropriate policies to deal with the bust, or their total inability to deal with competitive and technological challenges in the labor market.

It is not that the path toward destruction was impossible to see. On the contrary, a number of people saw the disaster coming, even if they did not all see the timing or the shape of it. The strangest part of the whole series of events is that only a few large professional investors noticed the smoke and shouted “fire.” Policymakers, particularly at the Fed and including (importantly) Janet Yellen, paid some small lip service to the building risks, but they were wedded to their primitive “models” and had a completely inadequate grasp of modern financial instruments, leverage and the interconnectivity of financial institutions. Not only did policymakers fail to understand what was happening and how to deal with the crisis and its aftermath, but also many of those same policymakers, and ALL of the structures and assumptions that prevailed pre-crash, are still in place today. No apologies have been issued. There has been a great deal of partisan back-and-forth and successful lobbying, but sadly the financial system is still not sound. This may be impossible to prove until the next crisis, but you could have said the same about conditions leading up to the last one.

Policymakers were and remain asleep at the wheel. The lack of introspection at the Treasury, the Fed, Congress, the White House and other regulatory bodies is astounding. Instead of taking reasonable and conservative steps to strengthen the financial system and to reach consensus on what is necessary to generate growth, there has been a series of cronyist, ideological, punitive steps that have neither catalyzed the growth that this country needs nor made financial institutions safe. At the same time, the Administration has allowed (and encouraged) the Fed to carry the ball all by itself, heaping praise on it for saving the world at the very time that the White House is shirking its own responsibilities. The Fed’s “dual mandate” (to promote “maximum employment” as well as “price stability”) is bunk in today’s context. It seems as if the entire world is acting as if the Fed actually has a “total mandate” and the rest of the federal government gets to stand around and applaud its heroic efforts. In fact, what we have now is a lopsided recovery, gigantic price risk in financial markets because of QE, and unknown but potentially massive risks of inflation and the ultimate loss of confidence in the major paper currencies, all because the federal government is more interested in ideology than in getting the country back on track, and the Europeans are more interested in preserving the euro than promoting the prosperity of the sovereign nations of Europe.

* * *

For private investment firms like hedge funds, leverage in the modern world is a matter of semi-volition. True, it is much more readily available than in the past, but there are credit departments and initial margins limiting the size of positions. The big financial institutions, on the other hand, found themselves in an  environment starting a couple of dozen years ago in which leverage was entirely voluntary, subject to no real constraint because they were not required to post initial margins with each other. Since many of their positions were “hedges” in similar securities, they risk-underwrote those trades using models that projected very little possibility of generating losses. As a result, the entire system has become super-leveraged, super-interconnected and very brittle. Given the benefits of hindsight, we do not have to prove the proposition that the limits of leverage were exceeded in the recent past and that the system was improperly risk-managed by governments and by the managements of financial institutions. It is frustrating, therefore, that no meaningful de-risking of the financial system has occurred since the crisis. You will see a system primed for a rerun of 2008, perhaps even faster and more intense this time.

***

MONETARY POLICY GOING FORWARD

QE has created asset price booms, but historically high excess bank reserves are still generally not being lent, and monetary velocity remains relatively low. But last spring, we witnessed the first tangible sign that the Fed may be trapped in its current posture. The Fed cannot retreat due to excessive debt in the system, the fragility of major financial institutions (still opaque and overleveraged) and the prospect that a collapse of bond prices could lead to a quick, deep recession. This situation may be the early stages of a phase in which the Fed is afraid to act because it has the “tiger by the tail,” and perhaps is beginning to realize that the current situation carries significant risks. QE has not generated a sharp upsurge of sustaining
and self-reinforcing growth thus far. What it has done is lift stock and asset prices and exacerbate inequality. If investors lose confidence in paper money, as evidenced by either a hard sell-off in one of the major currencies or a sharp fall in bond prices, the Fed and other major central bankers will be in a pickle. If they stop QE and/or raise short-term rates to deal with the loss of confidence, it could throw global markets into a tailspin and the worldwide economy into a severe new recession. However, if they try to deal with the loss of confidence by stepping up QE or keeping interest rates at zero, there could be an explosion in commodity and other asset prices and a sharp acceleration in inflation. What would be the “exit” from extraordinary Fed policy at that point? The current, benign-looking environment (low inflation and
stable economies) is by no means ordained to be the permanent state of things. At the moment, “tapering” is expected to get underway, but that prospect represents a tentative, slight diminution of bond-buying. It contains no real promise of normalizing monetary conditions. If the economy does not light up, the impact of another year of full-bore QE is impossible to predict. Five years and $4 trillion have created economic and moral distortions but very little sustainable value. Maybe the sixth year will produce the “riot point.” Nobody knows, including the Fed.

 

As we and others have said, the Fed is overly reliant upon models that do not account for real-world elements of instruments, markets and traders in the derivatives age. Models cannot possibly take into account unpredictable interactions among huge positions and traders in new and very complicated instruments. Thus, the Fed should be careful, humble and conservative. Instead, it is just blithely plowing ahead as if it knows exactly what is going on. Intelligent captains sail uncharted waters with extra caution and high alert; only fools think that each mile they sail without sinking the vessel further demonstrates that they are wise and the naysayers were fools. This is a formula for destruction. The crash of 2008 should have been smoking-gun evidence of the folly of this approach, but every mistake leading up to the crash, especially excessive and “invisible” leverage and interest rates that were too low, has been doubled down upon in the years since.

via Zero Hedge http://ift.tt/1gExkrv Tyler Durden

We sympathize with traditional stock and bond investors, who are faced with extremely poor choices today. QE has distorted the prices of all traditional asset classes to such an extent that none currently promises a fair return with modest risk…. Because the dominant force in securities-price movements today is government policy, particularly the governmental buying of bonds and stocks, there is a vulnerability to all trading and investing prospects that cannot be assessed or measured with confidence… Since there is no history of Americans losing confidence in the basic soundness of their currency and their government, and since monetary policy today is so manipulative and large, it will be hard to parse the reasons for any particular market moves in 2014.

      – Paul Singer, Elliott Management

As always, perhaps the best periodic commentary on the state of the “markets” (even if such a thing has not existed for the past 5 years) and global economy comes from the person whose opinion has not been swayed by fly-by-night screechers and book-peddling pundits who fit in CNBC’s octobox and who come fast and are forgotten even faster, and whose 37 year track record at Elliott Management, whose assets he has grown from $1.3 million to $23 billion, speaks for itself: Paul Singer.

 

 

Below are the key excerpts from his January letter.

VISION

Imagine how mainstream experts would have reacted to the following set of predictions in 2006: “In two years Lehman will be bankrupt; Merrill and Bear will be acquired in distressed takeunders; Citicorp, AIG, Chrysler, GM, Delphi, Fannie and Freddie will be taken over by the government facing possibly hundreds of billions of dollars of losses; and only 13 global megabanks will survive.”

The 2008 crisis had a lasting and profound impact on virtually the entire developed world. The financial system was brought to the brink of collapse; conditions were created for the radical monetary policy of the past five years and a severely distorted recovery; the plans and dreams of hundreds of millions of people were disrupted, in some cases catastrophically; and societal values were significantly twisted away from individual responsibility toward dependency. In fact, the consequences of the bubble, the bust and the policy aftermath are not yet in full historical view. Despite all the pain, policymakers
refuse to take responsibility for the bubble, the distortions of the bubble years, the ensuing failure to lay the groundwork for strong post-bust growth, the continued riskiness and fragility of the major financial institutions, the lack of appropriate policies to deal with the bust, or their total inability to deal with competitive and technological challenges in the labor market.

It is not that the path toward destruction was impossible to see. On the contrary, a number of people saw the disaster coming, even if they did not all see the timing or the shape of it. The strangest part of the whole series of events is that only a few large professional investors noticed the smoke and shouted “fire.” Policymakers, particularly at the Fed and including (importantly) Janet Yellen, paid some small lip service to the building risks, but they were wedded to their primitive “models” and had a completely inadequate grasp of modern financial instruments, leverage and the interconnectivity of financial institutions. Not only did policymakers fail to understand what was happening and how to deal with the crisis and its aftermath, but also many of those same policymakers, and ALL of the structures and assumptions that prevailed pre-crash, are still in place today. No apologies have been issued. There has been a great deal of partisan back-and-forth and successful lobbying, but sadly the financial system is still not sound. This may be impossible to prove until the next crisis, but you could have said the same about conditions leading up to the last one.

Policymakers were and remain asleep at the wheel. The lack of introspection at the Treasury, the Fed, Congress, the White House and other regulatory bodies is astounding. Instead of taking reasonable and conservative steps to strengthen the financial system and to reach consensus on what is necessary to generate growth, there has been a series of cronyist, ideological, punitive steps that have neither catalyzed the growth that this country needs nor made financial institutions safe. At the same time, the Administration has allowed (and encouraged) the Fed to carry the ball all by itself, heaping praise on it for saving the world at the very time that the White House is shirking its own responsibilities. The Fed’s “dual mandate” (to promote “maximum employment” as well as “price stability”) is bunk in today’s context. It seems as if the entire world is acting as if the Fed actually has a “total mandate” and the rest of the federal government gets to stand around and applaud its heroic efforts. In fact, what we have now is a lopsided recovery, gigantic price risk in financial markets because of QE, and unknown but potentially massive risks of inflation and the ultimate loss of confidence in the major paper currencies, all because the federal government is more interested in ideology than in getting the country back on track, and the Europeans are more interested in preserving the euro than promoting the prosperity of the sovereign nations of Europe.

* * *

For private investment firms like hedge funds, leverage in the modern world is a matter of semi-volition. True, it is much more readily available than in the past, but there are credit departments and initial margins limiting the size of positions. The big financial institutions, on the other hand, found themselves in an  environment starting a couple of dozen years ago in which leverage was entirely voluntary, subject to no real constraint because they were not required to post initial margins with each other. Since many of their positions were “hedges” in similar securities, they risk-underwrote those trades using models that projected very little possibility of generating losses. As a result, the entire system has become super-leveraged, super-interconnected and very brittle. Given the benefits of hindsight, we do not have to prove the proposition that the limits of leverage were exceeded in the recent past and that the system was improperly risk-managed by governments and by the managements of financial institutions. It is frustrating, therefore, that no meaningful de-risking of the financial system has occurred since the crisis. You will see a system primed for a rerun of 2008, perhaps even faster and more intense this time.

***

MONETARY POLICY GOING FORWARD

QE has created asset price booms, but historically high excess bank reserves are still generally not being lent, and monetary velocity remains relatively low. But last spring, we witnessed the first tangible sign that the Fed may be trapped in its current posture. The Fed cannot retreat due to excessive debt in the system, the fragility of major financial institutions (still opaque and overleveraged) and the prospect that a collapse of bond prices could lead to a quick, deep recession. This situation may be the early stages of a phase in which the Fed is afraid to act because it has the “tiger by the tail,” and perhaps is beginning to realize that the current situation carries significant risks. QE has not generated a sharp upsurge of sustaining and self-reinforcing growth thus far. What it has done is lift stock and asset prices and exacerbate inequality. If investors lose confidence in paper money, as evidenced by either a hard sell-off in one of the major currencies or a sharp fall in bond prices, the Fed and other major central bankers will be in a pickle. If they stop QE and/or raise short-term rates to deal with the loss of confidence, it could throw global markets into a tailspin and the worldwide economy into a severe new recession. However, if they try to deal with the loss of confidence by stepping up QE or keeping interest rates at zero, there could be an explosion in commodity and other asset prices and a sharp acceleration in inflation. What would be the “exit” from extraordinary Fed policy at that point? The current, benign-looking environment (low inflation and
stable economies) is by no means ordained to be the permanent state of things. At the moment, “tapering” is expected to get underway, but that prospect represents a tentative, slight diminution of bond-buying. It contains no real promise of normalizing monetary conditions. If the economy does not light up, the impact of another year of full-bore QE is impossible to predict. Five years and $4 trillion have created economic and moral distortions but very little sustainable value. Maybe the sixth year will produce the “riot point.” Nobody knows, including the Fed.

 

As we and others have said, the Fed is overly reliant upon models that do not account for real-world elements of instruments, markets and traders in the derivatives age. Models cannot possibly take into account unpredictable interactions among huge positions and traders in new and very complicated instruments. Thus, the Fed should be careful, humble and conservative. Instead, it is just blithely plowing ahead as if it knows exactly what is going on. Intelligent captains sail uncharted waters with extra caution and high alert; only fools think that each mile they sail without sinking the vessel further demonstrates that they are wise and the naysayers were fools. This is a formula for destruction. The crash of 2008 should have been smoking-gun evidence of the folly of this approach, but every mistake leading up to the crash, especially excessive and “invisible” leverage and interest rates that were too low, has been doubled down upon in the years since.

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Tickets to see this year's frigid battle between Seattle and Denver would have cost no more than $85 if they had kept pace with the government's perspective of inflation (CPI). If Super Bowl  tickets had tracked the S&P 500's reflationary trajectory, they would cost $275. Instead, in what is the biggest surge in face-value prices YoY ever – more than doubling last year's – the highest Super Bowl tickets this year cost $2,600 face value, a record high.

Source: Bloomberg

However, resale tickets – where the market really sets the price – tell a quite different (and more) negative story. 

As ConvergEx's Nick Colas notes, in the 48 hours prior to the weekend before Super Bowl XLVIII, the average price paid for a ticket was $2,505, which ranks as the cheapest since the 2010 game.  Prices have fallen fast, too, down almost $1,000 and more than 27% in just three days.  Meanwhile, current hotel and airfare inflation for the New York area isn’t even close to what New Orleans experienced last year.

Note from Nick: Is New York City “The best corner in the game” to host a Super Bowl?  You’d think so, given Gotham’s popularity as a tourist destination and first-class sporting venues in New Jersey to showcase the actual event.  And you’d be wrong.  This year’s game has less of the frenzied pricing for tickets, rooms and amenities compared to past events.  Beth’s been looking at Super Bowl economics for the last four years and has all the details here.
 
It was billed as the most expensive Super Bowl on record, but it isn’t.  Despite Costco selling trip packages starting at $14,000 for two people and the National Football League (NFL) jacking up its maximum face value ticket price by more than 100%, a Super Bowl experience is a relative bargain-buy this year.  And while it didn’t pan out to be the priciest on record, the 2014 showdown between the Denver Broncos and the Seattle Seahawks is indeed the “most amateur” in 32 years.  Peyton Manning is the only participant to have a Super Bowl ring; just three other Broncos have been to the game without winning; and no Seahawk has ever played for an NFL championship.  In other words, this year’s game showcases the fewest players with prior Super Bowl experience since 1982.

Which generally means both teams are really, really hungry for a win.  And coupled with the relative wealth of the New York City metro area, it wasn’t unrealistic to expect record high costs of attending the game.  Regardless, we analyze pricing surrounding the game every year, because in addition to being the most popular game in America’s most popular sport, the Super Bowl is also a useful case study in economics that allows us to gauge both the confidence of high-end consumers as well as the pricing of temporarily scarce resources.  The game occurs every year at roughly the same time, so this year’s data is comparable to other periods.  And obviously, the content is the same.  We summarize the costs of attending the 2014 edition below.

We’ll start with the ticket price to the game.  Getting into Super Bowl I in 1967 would have cost you $12, assuming you were lucky enough to pay face value to the NFL, which as we know today is no easy feat.  From there, stated ticket prices went to $50 in 1984, $100 in 1988 and $500 in 2003.  Today, the prices printed on the ticket for Super Bowl XLVIII in East Rutherford, NJ are between $500 and $2,600.  The NFL actually reduced the price of its cheapest ticket by $100 this year, but boosted the maximum price by 108% from last year’s $1,250.  The logic behind this huge price increase involves the population density of the Northeast, the probability for a greater number of fans driving to the game (saves money on airfare and rental cars) and the NFL’s desire to close the gap between resale and face value prices.

 

However, no one pays sticker price with the exception of very lucky lottery winners (roughly 30,000 entries for a chance at one of the one-thousand $500 seats), close friends and family of NFL players and coaches, and lucky season ticket holders for one of the two Super Bowl teams.  The “street price” always sets you back a bit more, but this less so this year than in recent years.  Resale prices started out high – $2,700 on average the Monday after the conference championship games – but fell fast and fell sharply.  As of January 24, with nine days to go before the Super Bowl, the cheapest price in the aftermarket was $1,779, which was $409 less than the same period a year ago and $809 less than in 2012.  By Monday, January 27 we found an upper-deck seat available for $1,242.

 

As for the cost of a plane ticket, it’s considerably higher than normal this weekend, though airfare inflation is nothing compared to what visitors to New Orleans experienced last year.  A nonstop, roundtrip flight from Denver to the New York area this weekend goes for about $480, compared with just $230 two weeks from now, or an increase of 196%.  Flights from Seattle to New York are available for $752 this weekend, versus $328 on a typical weekend, marking a 129% inflation rate.  Last year’s matchup between the Baltimore Ravens and the San Francisco 49ers in New Orleans resulted in airfare inflation of 335%.

 

The difference in hotel inflation this year is even starker.  The cheapest room still available within five miles of the Meadowlands is at the Knights Inn in South Hackensack, NJ; this 2-star accommodation is going for $133 a night, or 85% more than its usual nightly rate of $72.  For a more upscale experience, the Four Seasons in Manhattan has rooms available for $1,150 a night, or 82% more than the normal $633 nightly rate.  As of press time, there are plenty of rooms still available (ranging from 2- to 5-star options); last year though, the only choices this late in the game were 3-star hotels in the $2,600 to $2,700 range outside of downtown New Orleans.  Inflation there was as high as 1,645%.

Corporations, too, are getting somewhat of a break this year.  The cost of a 30-second ad stands at an exorbitant $4 million, but that’s flat from last year, when big companies faced a 14% markup from 2012.  Still, $4 million is tied for a record high, and the ad slots sold out months in advance of the game.  And as an indication of the relative importance of football versus baseball and basketball, Super Bowl ad sales generate more revenue than ALL of the World Series and the three game of March Madness Final weekend.

So what do we gather from all of this data?  At first glance, it would seem as though the mood of the high-end consumer is a little gloomier than in the past couple of years.  Resale ticket prices – where the market really sets the price – imply more about the economy than NFL-mandated pricing decisions, and this year’s aftermarket is quite soft and getting softer by the day.  And yes, the cost of traveling to New York City this weekend is more than double the norm, but it’s relatively “cheap” versus what New Orleans experienced last year.
 
To be sure, there are some noteworthy economic signals in the data, but a couple of distinct factors indicate that a lukewarm economy is note the sole reason for this year’s relatively soft pricing.  First, the abundant supply of hotel rooms in New York, as well as a total of three major airports in the area, means that resources for getting to the game aren’t as scarce as they are in most other cities in the country (i.e. New Orleans).  It’s basic economics – more supply equals less pricing power.  Also, East Rutherford was blanketed by over a foot of snow last week, and the current forecast for Super Bowl Sunday calls for a high of 38 degrees.  It’s really no surprise that a lot of people prefer to watch the game from the comfort of their own living room, especially with the super technologically-advanced TVs these days.
 
Luxury items are of course a good way to gauge the relative health of the upper middle to upper classes, though pricing a “Bucket list” item (such as the Super Bowl) is a bit harder than just luxury goods in general.  Next year’s game in is Glendale, AZ; it will be 73 and sunny on Sunday.  Since there is a Super Bowl every year, perhaps some people are waiting for a more climatically appealing destination before crossing this item off their bucket list.  True fans, however, will show up regardless of the conditions – they’re not in it for a fun vacation.  The NFL must have understood the pressure on pricing from a cold weather game, and its decision to hold the game in the Northeast in the dead of winter actually made the experience more affordable for diehard fans.  As a result, this year we’re uniquely able to isolate the value of the event to the true fan versus the event-driven bucket list person.  It is certainly enough to command a premium for tickets, airfare and lodging.  But we’ll likely have to wait for next year’s Super Bowl to have a reasonable economic comparison point to past warm weather games.

via Zero Hedge http://ift.tt/1kzYwWA Tyler Durden