Quite a bit of negative news brewing so far this week which I have already addressed, such as the BFA/Bankia fraud, and the fact that Germany and the US are selling bonds that lose money, and get away with it simply because they are “safer” than other instruments of similar class.
Well, today I present a few key points of interest along the road to ruin –
1) Nearly every market is a loser this morning, BFA/Bankia is just one factor in the slump-fest today, as negative data and worse expectations flow through world markets – much larger than the typical daily volatility:
S&P 500 (SPX) -6.1%
Nasdaq Composite (COMP) -6.9%
Crude oil (NMN: CLN2) -16%
Spain Ibex 35 (XX:IBEX) -12.3%
Japan Nikkei 225 (JP:100000018) -10.3%
Hong Kong HSI (HK:HSI) -11.7%
Russia RTS (RTG: RTS) -20.3%
Euro vs. dollar (EURUSD) -6.2%
CBOE Market Volatility Index (VIX) +41%
Taking a macro view of these movements, it appears that a wave of consolidation is occurring – this likely indicates that institutional investors are taking their losses and trying to re-fortify their portfolios. The decline in Crude Oil, is telling – this gives us an indication that the major investors are betting on a substantial decrease in consumer-level activities such as travel, and this is an early indicator of impending economic slow-down. Russia and Spain’s substantial losses could well be warning signs that trouble will be forthcoming in those countries, and these warnings are amplified by the gross rise in Volatility (VIX) as I have previously indicated.
2) Looking specifically at the Short and UltraShort positions, which are “bets against” various markets, it is evident that we should expect a major down-turn in the near future. Based upon price and volume, the shorts rule (figures as of 5/30/12):
- UltraPro Short DOW30 [SDOW] – $ 22.44/+$ 0.81 – very high volume (over 16000/2min)
- UltraShort DOW30 [DXD] – $56.89/+$1.45 – with high volume (over 6000/2min)
- UltraPro Short S&P500 [SPXU] – $ 54.12/+$ 2.27 – highest price since January and 2nd highest volume in the past year at 34000 (high volume was 66000 on Friday 5/25)
- Ultra Short S&P500 [SDS] – $17.05/+$0.48 – volume over 3 million shares this morning, up over 1% already for the day, and up $2.25 [15%] since May 1st — WARNING SIGN
Taking the shorts and the VIX into consideration, there are a lot of “money guys” betting that things are going to get worse – they can say whatever they want, but their bets tell the truth anyway. VIX tells how much change is expected, and shorts/longs tell what direction is expected. Shorts say “down”, and thus VIX says “way down”.
3) JP Morgan mis-reported CDS trades, under-reported losses – Bloomberg reports, “JPM’s CIO unit was valuing some of its trades at prices that differed from those of its investment bank, according to people familiar with the matter. The discrepancy between prices used by the chief investment office and JPMorgan’s credit-swaps dealer, the biggest in the U.S., may have obscured by hundreds of millions of dollars the magnitude of the loss before it was disclosed May 10, said one of the people, who asked not to be identified because they aren’t authorized to discuss the matter.” In other words, JP Morgan and BFA/Bankia both got busted for doing the same thing – cooking the books in their high-risk investment divisions.
4) US Employment numbers are just Schitzophrenic: Zerohedge on the employment kobuki of the week: “That the ADP would miss today’s expectations of 150K is no surprise: after all as we have been explaining for a while, the only way the Fed will have a green light to proceed with NEW QE if it so chooses at the June 19-20 meeting, is if the economic data suddenly turn horrendous. Which means tomorrow’s NFP data is make or break: in fact, as far as markets are concerned, the worse the better…”
5) Switzerland is developing economic troubles: Zerohedge – As developments in the Eurozone veered from bad to awful, with Greece on the brink and Spain getting closer, Switzerland, a speck of land with 7.9 million people surrounded by Eurozone turmoil, has been bracing itself, according to the President of the Swiss National Bank and long-time euro-skeptic Thomas Jordan, for the collapse of the euro. “Our baseline scenario anticipates a protracted period of great difficulties,” he said. “The situation will only calm down when budget cutting and reform efforts start working in the Eurozone, which could be a long time. We’re preparing for very turbulent times.” And Greece’s exit, he said, “can’t be excluded”… And even if Greece remained in the Eurozone, “contagion could spread to other countries and escalate the debt crisis.” Less worried about trade and banking relationships with Greece, he saw the greatest dangers in the indirect consequences: “It’s conceivable that the entire European banking system gets into trouble. It would pull down the economy of Europe. Other highly indebted countries could get in trouble as well. That would pose high risks for us.”
6) Confirmation that Spain is just getting warmed up with Bank failures: Goldman Sachs has conveniently constructed the following analysis of Spanish banks, which replicated the loss provision calculation of Bankia, and applies it to the other listed banks. The result: in addition to the €19 billion in bail out costs for Bankia, Spain will need to spend at least another €25 in bailout funding for six other listed banks which include CaixaBank SA, Banco Santander, Banco Popular Espanol, BBVA, Banco Espanol de Credito SA, Bankinter SA.
7) Hary Dent sees Germany pulling out of Euro – listen here. This would be THE MOST disorderly exit of all…
8) And in the US, the debt chickens are coming home to roost: (MarketWatch)—The rating agencies have put the U.S. on notice, as Forrest Gump might say, again: Come up with a credible plan to deal with the budget deficit or face yet another downgrade. And that warning has investors wondering what, if any, moves to make with their money should Uncle Sam’s credit rating get dinged—again… If Uncle Sam’s debt gets downgraded, so too would government-sponsored debt. “Agency issues like GNMA, FNMA, and FNMC basically have government guarantees parallel to Treasuries and their ratings would likely fall sympathetically to match,” said Gocek.
If this hasn’t ruined your day, I apologize, and will try harder tomorrow… but at least you know, right?