Market is continuing frustrating many. As assets have climbed higher, despite the pros being bearish, the tide is now turning. The bears have been “proven” wrong, and are now joining the bulls. With the absence of volume, the collapse in vol, and now the bears joining the bulls, things could start to get very interesting going forward. It is not time to get overly bearish yet, but watch that 1300 level. From Bloomberg;
Strategists at the biggest banks are capitulating on their bearish forecasts after the best start to a year for global stocks since 1994 and gains of more than 7 percent in emerging-market currencies.
Just two weeks after saying that investors should “remain cautious,” Larry Hatheway, the chief economist at UBS AG (UBSN), raised his recommendations on global shares and high-yield bonds in a Jan. 23 note to customers entitled, “Wrong, but not too late.” Royal Bank of Scotland Group Plc (RBS), and Benoit Anne, the global head of emerging-markets strategy at Societe Generale (GLE) SA, said their estimates for developing nations were proven wrong.
The MSCI All-Country World Index (MXWD) climbed 5.7 percent in January, surprising strategists at Bank of America Corp. (BAC),Goldman Sachs Group Inc. (GS) and Barclays Plc (BARC) who had forecast first-half losses because of Europe’s debt crisis. JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C), which predicted the rally in stocks, say it will continue as the U.S. housing market rebounds and China eases lending restrictions to bolster economic growth. (Full article here.)
Hudson giving an overview of current affairs with a fired up Lauren Lyster fresh back from Davos.
Guest Post by D Short.
The Q Ratio is a popular method of estimating the fair value of the stock market developed by Nobel Laureate James Tobin. It’s a fairly simple concept, but laborious to calculate. The Q Ratio is the total price of the market divided by the replacement cost of all its companies. Fortunately, the government does the work of accumulating the data for the calculation. The numbers are supplied in the Federal Reserve Z.1 Flow of Funds Accounts of the United States, which is released quarterly.
The first chart shows Q Ratio from 1900 to the present. I’ve calculated the ratio since the latest Fed data (through 2011 Q3) based on a subjective process of extrapolating the Z.1 data itself and factoring in the monthly averages of daily closes for the Vanguard Total Market ETF (VTI). Note: The Q4 data won’t be released by the Fed until March 8th.
IBM and Procter & Gamble have sold bonds with the lowest interest payments on record for US marketed corporate issues, as investors accept low returns for the safety of owning debt from secure companies, http://ftalphaville.ft.com/thecut/2012/02/02/864831/highly-rated-us-industrial-bonds-set-records/
Britain faces spending cuts “almost without historical or international precedent” over the next few years and, painful as the squeeze has been so far, it amounts to less than a 10th of what is planned by the 2016/17 fiscal year, http://ftalphaville.ft.com/thecut/2012/02/02/864861/ifs-warns-on-scale-of-spending-cuts/
The bill to revamp City regulation includes a “gaping hole” that could prevent important warnings from reaching the chancellor of the exchequer , Ed Balls, Labour’s shadow chancellor, has told the FT. Mr Balls – an architect of the current regulatory system which dispersed power between the Treasury,http://ftalphaville.ft.com/thecut/2012/02/02/864631/balls-sees-gaping-hole-in-city-revamp/
Foreign first-time-buyers are clambering to get into the London office market as sovereign wealth funds and cash-rich individuals seek stable assets amid the uncertainty in the global financial markets. http://ftalphaville.ft.com/thecut/2012/02/02/864611/foreign-buyers-snap-up-london-office-space/
Another melt up low volume day. Below are some short term charts. Note how the SPX actually traded higher a few sessions ago. Watch the Viox index carefully here. We might get the total inverted panic if we attack those SPX highs.
Also note the Golden Cross eveyrbody is talking about. The market is hitting long term resistance charts and there is a fairly big wedge in the SPX. All in all, we would expect the market to break away rather brutally soon. Just pick the direction via cheap gamma.
As the markets are cheering “great” PMI figures, Europe remains under the same debt problems. We have learnt of the EFSF, the LTRO and other fancy words over the past year. We have also learnt, once again, don’t fight the Fed, as their stealth book is rather big.
The markets have continued the climbing of the wall of worry, but just as last year, we are getting that Teflon market deja vú again. Bears have shorted a dull, boring , no volume market. As the Golden Cross (according to many 100% sure signal) is “happening”, the shorts are feeling the pain, and have to cover positions in a light volume market.
The Vix has come off quite a bit over the past months, but is still trading rich compared to the realised vol. Term structure is at extreme levels, and at 20 year highs. This implies investors are still pricing a big risk in future, as longer term variance swaps trade at big premium to short term swaps. People have been panicking about having theta in the book, as the “market is not moving”. We are probably reaching the point where the last inverted panic is about to happen, ie people will sell short term vol in order for the implieds to “catch” up with realized vols. We are slowly approaching the time to be selling some long term vol vs buying short term vol. Why, well, things could start to rock sooner than later. Remember, Europe is still looking for China to save IT. From Spiegel;
Many in Europe have been eyeing Beijing’s trillions as a possible solution to the continent’s debt crisis. During her trip to China, German Chancellor Angela Merkel plans to promote investments in the debt-ridden euro-zone countries. But the Chinese have so far been tight with their money. Will Merkel succeed in getting Beijing to bend?
Bondholders negotiating a debt swap with Greece may get a sweetener tied to a revival in economic growth that would ease the impact of accepting a lower interest rate on the new bonds, Bloomberg says, http://ftalphaville.ft.com/thecut/2012/02/01/861911/growth-linked-sweetener-for-greek-bondholders/
Paul Volcker has defended proposed trading rules for US banks that are being criticised by foreign governments as likely to disrupt the operation of their national bond markets. Japanese, UK and Canadian regulators, http://ftalphaville.ft.com/thecut/2012/02/01/861901/volcker-says-bond-markets-are-not-at-risk/
The Chinese manufacturing sector has made a surprisingly strong start to the year, the FT says, with domestic orders cushioning the impact of Europe’s debt woes, according to an official survey. The purchasing managers’ index, http://ftalphaville.ft.com/thecut/2012/02/01/861981/chinas-official-pmis-gain-ground-in-january/