As Everything Disconnects And Everything Is Soaring, Morgan Stanley Issues A Warning

Tuesday, February 21st, 2012

The latest report from Morgan Stanley’s Graham Secker can be summarized simply as follows: i) in January everything has disconnected as traditional linkages between asset classes have broken down, ii) also in January every major asset class (equities, treasurys, gold, oil) was up materially, iii) such a phenomenon has been seen only 5 times in the past 5 years, iv) a double digit decline followed 3 of the past 4 such surges. Then again, as Bob Janjuah lamented earlier, when a bunch of bespectacled economists who have never held a real job in their academic careers since transplanted with banker blessings to various central bank buildings, and who continue to plan the fate of the world in secrecy (a fate that can be summarized as follows: CTRL+P), as the only marginal decision makers, who really cares anymore?

From MS:

Breadth of positive returns across asset classes is rare …

Reading the January version of our global cross-asset strategy team’s excellent ‘Global In The Flow’, it struck us just how unusual performance trends were last month. While we’re all aware that we’ve just witnessed the best start to the year in equities since 1994, what was more interesting to us was the sheer breadth of positive performance across a wide array of assets. Effectively, the only major asset to fall in value in January was the dollar, and the only other laggards we could see were corn, coffee, coal and natural gas.

… and has often preceded equity market corrections

Unfortunately, the report in question hasn’t been in existence long enough for us to see just how rare such a breadth of positive performance is. So we have screened the past five years to identify periods of coinciding monthly price appreciation in the S&P, Treasuries, Oil and Gold. As shown in Exhibit 1, January 2012 was only the fifth month in the past five years when all four of these major asset classes have risen in unison. More interesting, on three of these four prior occasions that month proved to be a significant peak in equities and was followed by a substantial double-digit decline.

The traditional relationship between equities, treasuries and gold has broken down in recent months

While this analysis doesn’t guarantee that the market is about to suffer a reversal, it probably does reflect an abundance of liquidity plus rising investor optimism that this liquidity can lift asset prices across the board. Exhibit 3 and Exhibit 4 chart the longer-term performance of equities relative to USTs and to gold, and both clearly show a breakdown in the relationship in recent months. Of course, it is possible this gap can close through either falls in stocks or declines in the other assets, but we think it is unlikely this disconnect will continue for very long.

We see the breadth of recent strong performance as a warning sign

While we believe Exhibit 1 is a powerful argument to position for a market pullback, investors should note that this rule-of-thumb was less compelling in prior years. For example, although it gave correct sell signals in June 2000 and August 2002, it also gave a number of false sell signals during 2003 and at the end of 2004, as shown in Exhibit 2. We believe the macro environment going forward is more akin to the last five years than the preceding decade, and hence consider this signal is an important warning sign; however, we acknowledge that others may take a different view. [yes, like ChairSatan]

Speculators are bullish on equities, bonds and oil …

In seeking corroborating evidence to support the rule-of-thumb suggested by Exhibit 1, we have analysed CFTC positioning across similar asset classes. Exhibit 5 plots CFTC net speculative longs as a % of open interest for the NASDAQ (historically this metric has been a good predicator of European equity performance), US treasuries and the oil price. Within the chart the grey shading indicates areas when investors were net long all three asset classes based on a rolling 3-month moving average basis. To illustrate its efficacy for stocks Exhibit 6 then shows the S&P and MSCI Europe with the same periods again shaded grey.

… which has provided strong sell signals over the last decade

If anything, we think Exhibit 6 suggests the CFTC analysis is even more powerful than that shown in Exhibit 1, as there do not appear to be any false sell signals (although it was a little early at the tail end of 2010) even when we take the analysis back to 1999. Further, Exhibit 7 details some standard performance analysis around this data – for example, since July 1999 the average 6-month return from MSCI Europe has been 0% and the probability the market rises (hit ratio) is 54%. However, when we measure performance from periods when net longs were present across the three asset classes, we find the average subsequent 6-month return was -6.6% with a hit ratio of just 19%.

Ze charts:

Tags: Academic Careers, asset class, Asset Classes, Asset Strategy, Bank Buildings, Decision Makers, Fate Of The World, Laggards, Linkages, Morgan Stanley, Performance Trends, Price Appreciation, Secker, Secrecy, Sheer Breadth, Strategy Team, Surges, Treasuries, Treasurys, Unison
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Hungary Meltdown – Euro Contagion Spreading

Friday, June 4th, 2010

Euro-contagion has spread to Hungary. Parity for the euro may come sooner than anyone expected. Here are notes and analysis from a variety of sources on the unfolding euro/Hungarian meltdown, Round 2:

To all those who listened to Hugh Hendry’s recommendation to panic a week ago, congratulations- you are well ahead of the market today. Hungary CDS is now offerless as investors are shocked, shocked, that the country (and continent) is actually really bankrupt, as opposed to just make believe. IMF’s comments yesterday that it does not have the funds to rescue all of Europe are not helping. Hungary CDS is now essentially bidless last seen 120 bps wider, around 430/460 with the bid/ask spread at 30bps, and only dealers daring to take on any risk exposure as the risk off brigade has kicked the optimists out of the building. The one thing up today so far? Gold. NFP better be north of 100 million or else the stick save today will be a tad problematic.

Europe Tremors Resume: Spain Bund Spreads At All Time Wides, China Exporters Ditch Euro As CHF Surges, from ZeroHedge.com.

Another horrendous day shaping up for Europe. Spanish Bund spreads have surged to all time highs just south of 200 bps, Hungary confirms that it was not exaggerating comments about chances of (not) avoiding Greek situation, pushing its CDS even wider, the EURCHF has dropped to under 1.40 and the SNB has not intervened yet, while the EURUSD is down to 4 year lows below 1.21. The nail in the euro coffin is a report by Reuters that a growing number of Chinese exporters turn down euro payment, flatly refuting anything SAFE may be saying officially.

Chinese exporters who made a big push only a year ago to bill in euros are increasingly turning their backs on the wounded European currency and demanding dollars instead.

By contrst, Beijing last week said a report it was reviewing the euro portion in its mountain of foreign exchange reserves was groundless and it calmed markets by saying that Europe remained a key investment market.

But Chinese exporters and the local governments that oversee them are less confident. They are trying to keep a wider berth from the euro, at least for now.

Oh, and now the French PM is quoted as saying that he only sees good news in parity between the dollar and the euro. Too bad none of his bank share the sentimentm realizing all too well none of them will exist in that situation.

Add Hungary to the PIIGs List, from Big Picture.

The market needs a new acronym to replace PIIGS to include Hungary as a spokesman for the PM of Hungary said their economy is “in a grave economic situation” and the possibility of default is “not an exaggeration.” Markets rolled over after the comments and the euro fell to a new 4 year low vs the US$. Hungary 5 yr CDS is higher by 15 bps to 323 bps, the highest since July ‘09. Hungarian stocks are lower by almost 4% and European banks are all lower. With respect to the US jobs data, it’s not the headline number that will matter but what’s under the hood as census workers may add 500k+ to the figure. The private sector is expected to add 180k jobs and that is the only thing that matters as the census workers will be off the gov’t rolls by Sept. The birth/death model will also contribute as 186k jobs were added in May ‘09. The unemployment rate is expected to tick lower by .1% to 9.8%.

Now it’s Hungary’s Turn, from TraderMark.

Well this one came out of the blue. Looks like they pulled a Greece in their statistics department. Hmm, governments worldwide fudging the numbers to create an alternate sense of reality? Whodda thunk!

• Hungary’s is in a “grave situation” because the previous government “manipulated” figures and “lied” about the state of the economy, said Peter Szijjarto, spokesman for Prime Minister Viktor Orban. The forint fell for a second day, dropping as much as 2.1 percent against the euro.
• A fact-finding panel will probably present preliminary figures on the state of the economy this weekend, Szijjarto said today at a news conference in Budapest. The government will publish an action plan within 72 hours after the committee reports its findings, he said.
• “It’s clear that the economy is in a very grave situation,” Szijjarto said. “We need a clean slate to formulate our economic action plan, and the fact-finding committee will provide just that.”
• “It’s no exaggeration” to talk about a default, Szijjarto said today.
• Hungary needed a 20 billion-euro ($24 billion) international bailout to avert a default in 2008. Orban, who took over May 29 after winning elections by pledging to cut taxes and stimulate the economy, yesterday failed to get European Union approval for looser fiscal policy.
• “Investors are losing their patience,” Gyorgy Barta, a Budapest-based economist at Intesa Sanpaolo SpA, said in a phone interview. “This is part of a communications strategy that wants to tell voters one thing and the markets another. It’s getting too complicated, and the government now needs to come clean and present a convincing plan of fiscal consolidation.”

Oh well, nothing a hundred or two billion euro won’t fix. Get to work US taxpayer… err IMF.

Biggest Hungarian Commercial Bank Trading Halted On Budapest Stock Exchange, from ZeroHedge.com.

All trading in shares of OTP Bank, Hungary’s largest commercial bank, has been halted on the Budapest stock exchange after a plunge greater than 10%. Nothing to see here, go back to reading Goldman’s spin on things, and why everything all of this really should be priced in already.

Austria Next On The Implosion Radar; German, France CDS Blow Out, from ZeroHedge.com.

Austria, the country most exposed to weakness in Central and Eastern Europe, is back on the radar. After having avoided skeptical investor scrutiny even as the bulk of Europe was collapsing all around it, the country is today’s top CDS widener, yet still stunningly trades inside of France and Belgium. Look for this spread to blow out over the next week. Then again, the biggest CDS wideners are precisely the countries formerly seen safe: Austria, France, Germany and Belgium are all the top movers in CDS. So much for the whole North vs South division in Europe.

Goldman Sachs’ Desperate Attempt at Hungary Damage Control, courtesy of ZeroHedge.com.

Goldman Sachs to save the day…

Hungary – Greek-like crisis has already happened; Fidesz tries to free itself from campaign promises

Yesterday’s comments by Fidesz vice-president Kósa alleged that Hungary stands on a brink of a sovereign default due to its very precarious budget situation and continuously appearing ‘skeletons’ in the fiscal accounts while Michaly Varga, a deputy PM, claimed again that the ‘true’ 2010 budget deficit is closer to 7%-7.5% of GDP rather than the 3.8% assumed in the IMF-led program or 4.3%-4.5% forecasted by the NBH. Given the seriousness of the situation, Kósa declared that within a week the new government will announce a two-year crisis management plan that would include deep constitutional and structural reforms. Nevertheless, Kósa did not withdraw the plans to lower taxes which was one of the key election promises. He also declared that countries that were successful at crisis management ‘rejected the requirements of the World Bank and the IMF’ and expected the European Union to foot the bill for a potential external rescue of Hungary.

On the same day, European Commission President Barroso urged the new Hungarian government to speed up fiscal consolidation and implement structural reforms that would help maintain long-term fiscal sustainability and support economic recovery.

The Hungarian PM, Victor Orban, followed with declarations that the new government is committed to restoring fiscal stability and that the new economic plan, to be published within 72 hours after revealing the budget report, will include structural measures to boost growth and competitiveness as well as significant tax cuts.

IMF mission chief is due to arrive in Budapest for informal talks with the government. His visit is not a part of a formal review mission, which was postponed because of the parliamentary elections.

COMMENT: We believe that yesterday’s dramatic comments were intended for domestic consumption and were used to build a dramatic backdrop that would let Fidesz backtrack on a large share of its campaign promises and broadly continue with the fiscal policies of the previous government, as well as preparing the ground for another round of IMF talks. Exaggerating the state of public finances left by the previous government, pretty common as it is (the incoming UK government used very similar tactics), supports the arguments against fiscal expansion and, in the future, will back up the claims that the crisis management plan was successful in reducing public deficit. The party faces local elections in October and not following up on the election promises risks alienating the voters, while blaming the ‘imminent crisis’ and ‘fiscal skeletons’ helps it save its face. At the same time, inflating the deficit forecast gives it space for negotiations with the international lenders and increases the chances that the potential new program will allow for some fiscal loosening in 2010 and 2011.

The claim that the country is on a brink of sovereign default and risks following the Greek path does not hold up against the facts. Hungary has already faced a crisis and asked for IMF and EU assistance in late-2008. In this context, Hungary is some 18 months ahead of Greece. Next, Hungary is not an EMU member and by having its own currency and domestic and external debt benefits from having a captive investor base. Finally, Hungary still has access to the undisbursed tranches of the IMF/EU loans. Our analysis (New Markets Analyst 10/04) shows that under the current policies debt stock is stable and that the country will be able to rollover its maturing debt without a problem.

It seems that Fidesz has taken a major decision on the path of macroeconomic policy and is now preparing the stage for its announcement – first, by revealing the ‘true’ size of the deficit and, second, by following up with the two-year plan. We believe that the ‘good scenario’ is more likely, namely a new agreement with the IMF and the EU and broad continuity of the fiscal consolidation plans, although with some loosening due to the cost of the yet to be announced structural reforms and to accommodate some of the election promises. We continue to believe that a stabilization program is the most likely outcome, which should significantly reduce the perception of the Hungarian sovereign risk (for more information, please see New Markets Analyst 10/05).

The risk here is that the new government attempts to follow the Ukrainian and Romanian examples, leading to protracted and rocky discussions. The other risk is that the new government is too confident in its ability to influence the Forint (in earlier comments, Fidesz said that weaker currency will support Hungary’s competitiveness) and may be careless in its communications (as shown by yesterday’s comments from Kósa). The punishment from the market may come quickly and weakening of the currency beyond the pain level of banks and households (about EURHUF of 300) – which hold significant amounts of FX debt – would serve as a warning to the new government. Our research shows that among CE3 countries, Hungary is most exposed to risk sentiment and the widening of risk premia would hurt Hungary’s growth.

The ‘negative scenario’ in which the new government abandons the IMF program and lets the fiscal situation get out of control would actually help fulfil the claims that the country is indeed unable to access financing; we find that unlikely, though.

The news that the IMF mission chief will hold informal talks with the new government is neutral. Such a visit had to happen regardless of the course of Fidesz’s macroeconomic plans. IMF needs to learn more about these plans and both sides need to decide how they want to proceed. This should clarify the situation and help us know whether the next program is going to happen. We expect some follow-up news within the next couple of days.

Tags: All Time Highs, Bps, China, China Exporters, Chinese Exporters, Coffin, Contagion, Ditch, ETF, Eurchf, Eurusd, Gold, Hugh Hendry, Imf, Lows, Meltdown, Optimists, Parity, Reuters, Risk Exposure, Snb, Surges, Tremors
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T-bill Rates Fall Below Zero

Wednesday, December 10th, 2008

US T-BIll rates fell below zero today.

Bloomberg says: Treasury Bills Trade at Negative Rates as Haven Demand Surges

Treasuries rose, pushing rates on the three-month bill negative for the first time … The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.

Tags: Bill Rates, Bloomberg, Br, Img, Loc, Loom, Rose, Surges, Treasuries, Treasury Bill, Treasury Bills, United States, usd
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Panic-crash sentiment causes extreme volatility

Friday, November 21st, 2008

As fear stalked global equity markets over the past few days, volatility continued unabated and the CBOE Volatility Index (VIX) again scaled the panic levels of October 10. The following chart tells the story …

For some perspective on the current stock market correction, Chart of the Day provides the graph below, illustrating all major stock market corrections (15% loss or greater) of the Dow Jones Industrial Index over the last 108 years.

Each dot on the chart represents a major correction as measured by the Dow. For example, the bear market that began in 1973 lasted 481 trading days and ended after the Dow declined by 45%.

“Since 1900, the Dow has undergone a major correction 26 times or one major correction every 4.2 years. As it stands right now, the current stock market correction (October 2007 peak to most recent low which occurred yesterday) would measure slightly below average in duration but above average in magnitude,” according to the study.

“In fact, of the 26 major stock market correction since 1900, the current stock market correction currently ranks as the fourth largest in magnitude (only the corrections beginning in 1906, 1929, and 1937 were greater) and is the most severe stock market correction of the post-World War II era.”

Investor sentiment seems to be in panic-crash mode, and the market appears severely oversold with only 1.6% of the S&P 500 stocks trading above their 200-day moving averages. (The 200-day moving average is often viewed as a crude measure of the primary trend.) It can’t get much worse than this! But oversold conditions have so far not produced more than a temporary reprieve, and rallies (which are bound to happen from time to time) are therefore not to be trusted.

I am closely monitoring the surges in the US dollar and Japanese yen – low-yielding currencies previously used for funding risky investments – as a break of the uptrends in these two currencies will be a good indicator of the forced deleveraging selling starting to subside. Once this situation has played itself out, we should see a return to lower volatility levels and a return of confidence.

For a more lasting market turnaround to happen, I would like to see evidence of base formations, a 90% up-day, and relative outperformance by the financial sector.

Tags: Bear Market, CBOE Volatility, Cboe Volatility Index, Chart, Crude Measure, Dollar, Dow 30, Dow Jones, Dow Jones Industrial Index, Extreme Volatility, Financial Sector, Global Equity Markets, Investor Sentiment, Japan, Japanese Yen, Magnitude, Markets, Moving Average, Moving Averages, oil, Outperformance, Panic Levels, Rallies, Reprieve, risk, Risky Investments, S&P 500, Stock Market Correction, Surges, Trading, Uptrends, US Dollar, World War Ii
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