On interpreting data, by Peter Tchir.
If on the morning of May 19th you had been given advance copies of all the economic releases globally, could you have made money?
It’s a strange question, but if you knew the data that was going to be coming out of the U.S., China, and Europe would you have been long S&P at 1,295, or IBEX at 6,566, or Hang Seng 18,951?
Would it have helped if you knew that the Euro would go from 1.278 to 1.23 or that Spanish 10 year bond yields would go from 6.24% to over 75?
Only treasuries and oil seemed to react as expected. The bad economic news has pushed “safe” rates lower and oil has also declined since May. But most other risk assets have done surprisingly well. Stocks remain up since then, and virtually all credit indices, and high yield in particular, are at better levels than on May 18th.
It would be nice to say the market was reacting well to a solution in Europe, but the yield on Spanish bonds and the FX rate make that harder to believe.
So what to do? Can stocks remain strong in the face of so much weak data and little progress in Europe? I ‘m not sure and there is a part of me that is screaming to get out of remaining longs and get short, but I’m not there yet. Last week’s early strength followed by weakness seems like another potential bear trap. We got the rally two Friday’s ago, more because the market had gotten too short than anything particularly exciting out of the summit.
On LIBOR, gold, crashes and much more in this week’s things that make you go hmmm. Courtesy Grant Williams.
“Bob Diamond…retorted in a memo to staff that “on the majority of days, no requests were made at all” to manipulate the rate. This was rather like an adulterer saying that he was faithful on most days.”
– The Economist
“Groucho: You know I think you’re the most beautiful woman in the world? Woman: Really?
Groucho: No, but I don’t mind lying if it gets me somewhere”
– Dialogue, A Night In Casablanca
Guest post by Vix and more.
In July 2010, I saw Spain as the keystone in the euro zone puzzle:
“Spain is the tipping point in the European sovereign debt crisis as I see it. In a nutshell, as goes Spain, so goes Europe.”
Two years later, I still believe that Spain is the most important line in the sand that euro zone leaders have to grapple with and the country whose fate is probably most intertwined with the future of the euro.
The chart of the week below shows weekly bars of EWP going back five years. The dominant feature in this chart is the financial crisis of 2008-2009. Various iterations of the euro zone crisis can be identified in the bottoms in June 2010, September 2011, November 2011, etc. EWP was in a gradual downtrend from April 2011 to March 2012, but fell sharply until the beginning of June. The most recent bounce in the Spanish ETF still looks somewhat tentative on the charts and is likely to be tested in the weeks and months ahead.
As concerning as the equity situation looks in Spain, the country’s credit default swaps (just 8% off of their all-time highs at 578) and yields on sovereign debt (yields on the 10-year bond are 5% below their all-time highs at 6.95%) indicate an even greater degree of financial stress.