Guest post by Doug Short.
I’ve updated the charts below through today’s close. The S&P 500 is now 7.66% off its interim high set on September 14th, the day after QE3 was announced. We’re still above the 10% correction benchmark. The 10-year note closed today at 1.58, which is 30 basis points off its interim high of 1.88, also set the day after QE3 was announced. The historic closing low was 1.43 on July 25th. But the big news today is Freddie Mac’s Weekly Primary Mortgage Market Survey. The 30-year fixed has set an all-time low of 3.34 percent.
Are yields heading lower? If the post-election selloff in equities continues, the 10-year yield could certainly revisit the levels of late July. Japan is an example (admittedly an extreme one) of a developed nation with its own currency that has experienced a relentless demand for government bonds, as this chart illustrates. Currently Japan’s 10-year yield is around 0.75, less than half that if its US counterpart.
Here is a snapshot of selected yields and the 30-year fixed mortgage one week after the Fed announced its latest round of Quantitative Easing.
Guest post by Peter Tchir.
First, today’s move seemed bullish to me. Yes we failed to hold the highs of the days. That isn’t good. But we didn’t break to new lows as we closed and that’s not bad given all the concerns about Europe. Even more importantly we didn’t completely give up when Obama made his sheech. I can’t be bothered to correct that typo because Obama was so disappointing.
I’m not sure that I would consider the election a strong endorsement of his policies. If anything I viewed the election as reasonably split and indicative of a divisive country. He definitely won, so he shouldn’t capitulate but seriously, isn’t it time for some for cooperation? Not that the republicans were any better. I can’t tell whether they are behaving as sore losers, or arrogant winners that somehow haven’t accepted they lost.
We need to do a few things. Work together to create a reasonable plan forward. It won’t make everyone happy but we need to do what is best for the economy, and to some extent, the market. I don’t agree with everything that Ben does, but while he is out there trying to promote growth through liquidity the politicians have been messing it up. I didn’t expect hugs and kisses on day 1 but the politicians need to understand the people aren’t happy, and the only real mandate, from those in the center, is to figure out some useful compromise.
Of all the issues discussed in this space, undoubtedly the one that captures the imagination of most readers is the subject of VIX-based exchange-traded products. I get more questions about the construction of these products, how they respond to the VIX futures term structure, what factors influence performance, etc.
For these reasons I thought it might be instructive to update my VIX ETP landscape chart and include performance data from the September 14th market closing high of SPX 1465 to today’s close of SPX 1377. During that period, the SPX declined 6.0% on a close-to-close basis, while the VIX jumped 27.4% during the same period.
So how did the VIX ETPs fare while the market was selling off?
In examining the graphic below, the first thing you probably notice is that only 5 of the 19 VIX ETPs were able to manage gains during the selloff. In fact the average (mean) VIX ETP performance was a disappointing -4.9%, while the median return was -6.7%. Even more interesting, the inverse volatility products actually outperformed their long volatility counterparts and had the top performer of all, the VelocityShares Daily Inverse VIX Medium-Term ETN (ZIV).
Guest post by Vix and more.
The S&P 500 index fell as low as 1388 today, down 86 points or 5.9% from its September 14th high of 1474.
The table below summarizes all the peak-to-trough pullbacks in the SPX since the March 2009 bottom. Note that while a 5.9% drawdown is right in the middle of the pack in terms of the magnitude of the drop, the 36 days that it has taken for stocks to fall that far makes the current pullback the fourth longest in terms of peak-to-trough duration. Of course, these statistics all assume that today’s low will mark a bottom – and while recent market action supports that thesis, there are no guarantees that SPX 1388 will hold.
Also worth noting is the fact that 2012 is the first year that has seen more than one pullback with a duration of at least a month. There are several ways to interpret this. One, of course, is that when there has been weakness as of late, that weakness has persisted for a long time. Another way to interpret the lengthy pullbacks might be that the tendency of the bulls to buy on the dips has diminished the likelihood of sharp downward moves in stocks.
Some statistics on the before/after elections performance of markets. Via Doug Short.
Today the S&P followed the time-honored pattern of post-election selloff. Of the 16 presidential elections since the middle of the last century, the close before the election has been a gain 13 times. The day after the election has posted a gain only six times. Today’s 2.37% post-election selloff was the second worst in 60 years, the worst being the -5.27% gut-wrencher the day after Obama’s first victory.
Earlier today: As I type this, about 90 minutes after the US equity markets opened, the major indexes are selling off. The S&P 500 is down over two percent. In my S&P 500 daily update for yesterday, I pointed out that Election Day or the day before prior to 1984 (when it was a market holiday) have usually recorded gains, at least as far back as the middle of the last century.
But what about the day after elections? The pattern of “second thoughts” appears to be the norm. Here is a table showing the 16 Election days starting with Dwight Eisenhower’s 1952 win over Adlai Stevenson. It’s the same table I posted yesterday, but this version adds the S&P performance for the day following the election.
Guest post by Peter Tchir.
Is Europe really going to let Greece go and risk a series of exits? That was my concern last week when I invoked quotes from Planet of the Apes. Nothing much has happened since then to change that view.
Greece has a vote that may or may not pass. If it doesn’t pass, the process of a nasty Greek exit and full default is likely accelerated. If they pass it, which I expect they will, then that process is likely just delayed. Until the “official sector” takes losses on all of its dumb purchases of Greek bonds and restructures the loans that were made that never had a chance of getting paid back, there will be no other course for Greece. The fact the European officials either don’t see it, or are just ignoring it is a major concern. Greece and the risk of a painful and chaotic exit for Greece that affects the other weak countries is a real risk. I expect a small pop when the vote is done and it “passes”. If it doesn’t pass I will quickly get very nervous about the markets, but history tells us it will pass and everyone will pretend this time it will work. At least for a couple of days we can live that fairytale.
Then there is Germany. The comments coming out of Germany are growing more hostile. Germany today mentioned direct influence on other country’s budgets. Draghi specifically tried to point out to Germany that the European debt crisis is hurting Germany already and will hurt it more. He is clearly trying to make it easier for Germans to get on board with some aggressive ECB action. If you are truly an optimistic, you can think Draghi said this as a warning shot before he acts “independently”. While not completely at the beck and call of Germany, the ECB is far less independent than our Fed. Draghi has already made it clear that the IMF would be a model for any new programs, so he has given away some independence. He won’t just act unilaterally and aggressively. That leaves us with the conclusion that he is pushing Germany, and that Germany needs to be pushed. Back in September, Merkel sounded downright dovish. She pointed out even to her own finance people that the ECB had to remain independent. That is not the message that came out last week when she appeared to backtrack on letting banks get direct bailout money, and that message was further diminished by today’s comments. Germany will be hurt by not supporting more aggressive action, but people know smoking is bad, and yet many still do.
Guest post by Azizonomics.
I wondered during the final debate whether Mitt Romney might steal a phrase from Ronald Reagan and ask Americans if they were better off than they were four years ago. It has worked for the Republicans before, and all the polling data pointed to the idea that voters were looking at the economy as the top issue.
Yet Romney did no such thing. Perhaps that was because by a number of significant measures, many Americans are better off than they were three or four years ago when America was mired in the epicentre of a global economic crisis. While America is in many cases just catching up to ground lost in the 2008 crash, and while many significant and real doubts remain about the underlying fundamentals of the American and global economies, the American economy has reinflated since early 2009.
A few reflections on the market by Hussman of Hussman Funds.
Is the economy at an inflection point, or are we simply in the calm before the storm? Though economic reports have been relatively muted on balance, they have also come in somewhat above expectations in recent weeks – particularly the advance estimate of third quarter GDP at 2%, and October non-farm payrolls at 171,000. The lack of clear deterioration in recent reports begs the question of whether this is enough to dispose of any concern about recession, and instead look forward to continued positive – if slow – economic progress.
The answer to that question largely depends on how one draws inferences from economic data. The consensus of Wall Street economists, as well as the broader economic consensus, has never successfully identified a U.S. recession until well after it has begun. I believe that much of the reason is that economists tend to interpret reports one-by-one as what I’ve called a “stream of anecdotes.” From that perspective, a series of positive anecdotes, such as the reports we’ve recently seen on GDP and non-farm payrolls, encourages views that the economic landscape is all clear.
The problem is that the stream of anecdotes approach places no structure on the data – there is no analysis of leading/lagging or upstream/downstream relationships, no examination of the frequency and size of revisions to the data – particularly around economic turning points – and no attempt to place the data points into a larger “gestalt” that captures relationships between dozens of other economic reports. Moreover, it’s natural for analysts to gauge “trends” by comparing recent reports to past data, with a look-back horizon somewhere in the range of 13-26 weeks. If analysts then form expectations by extrapolating recent surprises, it then becomes very easy to produce regular “cycles” of economic surprises. We’ve been able to generate that phenomenon even using randomly generated data. In practice, the cycle of economic “surprises” tends to run about 44-weeks in U.S. data (see The Data Generating Process). As it happens, much to the chagrin of conspiracy theorists, we would expect the present cycle to peak out roughly the week of the election.
A few observations via TF Market Advisors.
The week started positively. In spite of fears related to hurricane Sandy, risk assets started the week on a positive note. Wednesday, when U.S. markets finally opened, the rally was a bit tentative, but then it gained strength on Thursday. We had remained positive that morning on risk, in a large part because of The Visible Hand of central banks. But as the day wore on, we became concerned that news out of Europe was not good. We recommended getting out of risk-on trades and ultimately on Friday morning became bearish over fears that the European “Maniacs” would finally do it and let Greece implode, causing problems for Spain and Italy.
Apple certainly helped the bear case as it broke its 200 day moving average and triggered an avalanche of selling – I’m assuming a lot of algorithms were set up to push on that once it broke.
With the election looming, some allegedly good numbers out of China and the speed of the correction, so clearly led by one stock, I wouldn’t be surprised to see some stability early in the week, and even a bounce, particularly if some people get caught short Apple here and the algorithms decide to sweep it the other way.
In spite of the potential to bounce, and in spite of lingering thoughts on Spanish OMT (the thoughts are fears when short, and hopes when long) we are in mild “risk off” mode. I’m not expecting a big sell-off, but events in Greece and comments from various Troika representatives send a chill down my spine. After 2.5 years of trouble, they still don’t seem to understand credit.
Guest post by Doug Short.
In last weekend’s update, I characterized the collective trend for my featured world markets as a roller-coaster ride moving wildly between weekly losses and gains. Over the past week the roller coaster headed up, with the average of the gang of eight at an even 1.50%. China was the big winner with the Hang Seng edging out the Shanghai Composite for the top spot, up 2.63% and 2.60%. Germany’s DAXK and France’s CAC 40 finished third and fourth at 1.83% and 1.67% respectively. The S&P 500, shut down by Sandy for two days, finished last with a fractional gain of 0.16%.
The four-week table below documents the roller-coaster pattern I mentioned at the outset. Let’s add two weeks to the front end for a snapshot of the weekly average for the past six weeks: -1.31%, 1.36%, -1.42%, 2.02%, -1.38% and 1.50%. Quite a ride!