Worst Week In 5 Months For Stocks

Cash equity markets closed the day very marginally in the green – ending the worst week in over five months. S&P 500 futures are bleeding red after-hours as we note significant volume came in after the President began speaking – from which we closed down 1%. Cross-asset correlations were extremely high today as it seemed all about equities (and equities were all about AAPL). Credit markets (and volatility) were not enjoying the morning party as much as stocks but by the close equities reverted back down to reality. Gold remains the week’s big winner (post-election) but we note that 10Y yields fell from over 1.75% into the election to under 1.60% at their lows today. The USD ended the week +0.6% and Treasury yields down 10-15bps. AAPL gained 1.75% (phew) but traded extremely technically with heavy volume around VWAP into the close which helped Tech slightly outperform Financials on the week (-2.5% vs -3.1%). A day of technical bounces and all eyes on stocks…

An ugly week for US equities…


with a clear winner – Gold… as it seems equity ‘profits’ are rotated into real assets and bonds…


The capital structure in general was not buying was stocks were selling today… the upper lefty chart shows that credit/volatility/rate (HYG/VXX/TLT) were deceidely less sanguine about things than stocks all day… Across the broad basket of risk assets that our CONTEXT model represents, everything was pegged to stocks all day – we have seldom seen cross-asset-class correlations (lower right) this high and suggests a market very much on edge…


And here is AAPL’s fascinating day…ensuring it did not close the week below its 55-week average…


and where the S&P stands…bouncing off its 200DMA… holds at swing highs from July, bounced to Draghi’s edge, then was sold in size…


Charts: Bloomberg and Capital Context

Did Petreaus Betray Us (And If Not Us, His Wife… After The Election Of Course)

Update, in which we find the true reason for the affair: Petraeus Won’t Testify on Benghazi Next Week, Senate Aide Says.  In other words, next time one is called to testify before a panel over the deaths of 4 people including one US ambassador, one just pulls the infidelity “get out of testimony” card and all is well.

* * *

A mere few days after the re-election of our president, CIA Director David Petraeus annoucnes his resignation:


The reason – an extra-marital affair…


Of course, the defense is already known: Petreaus did not commit that affair… the government did it for him

Via AP:

David Petraeus has resigned as director of the CIA after admitting he had an extramarital affair.


According to his letter of resignation, Petraeus asked President Barack Obama on Thursday to allow him to resign, and on Friday the president accepted.


Petraeus said in a statement that he had shown “extremely poor judgment” in having an affair.

and From the Director of National Intelligence…



Today, CIA Director David Petraeus submitted his letter of resignation to the President. Dave’s decision to step down represents the loss of one of our nation’s most respected public servants. From his long, illustrious Army career to his leadership at the helm of CIA, Dave has redefined what it means to serve and sacrifice for one’s country.


Since he took over as Director in September of last year, he and I have worked together to tackle some of the most challenging issues faced by the Intelligence Community in more than a decade. Under his leadership, the CIA remained instrumental in providing our policy makers decision advantage through the best possible intelligence. I’m particularly thankful for Dave’s unwavering support and personal commitment to my efforts to lead the Intelligence Community and integrate our intelligence enterprise.


Whether he was in uniform leading our nation’s troops in Iraq and Afghanistan, or at CIA headquarters leading the effort to generate intelligence used to keep our nation safe, Dave inspired people who had the privilege of working with him.


I have spent more than five decades serving our country–in uniform and out–and of all the exceptional men and women I have worked with over the years, I can honestly say that Dave Petraeus stands out as one of our nation’s great patriots.


On behalf of the entire Intelligence Community, I thank Dave for his service, his support and his continued friendship.


James R. Clapper

Are Markets And Macro Repeating 2008?

In mid 2008, when macro data surprises were very weak, equity markets continued to push inexorably higher; happily ignorant of reality as The Fed has your back, ‘bad is good’, and the impossible was still impossible. This rally front-ran the economic surprise data – as economists had (in their ubiquitously extrapolant manner) over-cooked the downside and a reflexive bounce and rate cuts swung us into the green economically and market-wise. That surge in macro surprise data proved fleeting and we crashed a few short months after. Four years later and once again we are told that ‘bad is good’, every central bank is just dying to add more liquidity fuel to the fire, and macro data is ‘surprising’ to the upside. However, instead of following the 2009, 2010, and 2011 patterns, we are mimicking that 2008 pattern as 3-month S&P return turns red while ECO data is still rising. We suspect the hope-driven ‘magic’ in that ECO data will rapidly fall to the bottom-up-biased earnings data we discussed earlier and while ‘expecting’ a 30% plunge in stocks is a little much – we’ve seen this kind of hopeful optimism dashed before on the rocks of reality.


Guest Post: Trade Deficit – Increase In Exports To Be Short Lived

Submitted by Lance Roberts of StreetTalk Live,

The U.S. trade balance in September improved, largely on petroleum, with a rebound in exports.  This was good news for a single economic data point and it sent mainstream economists to mistakenly begin boosting third quarter GDP estimates to 2.9% from the 1st estimate of 2.0% that we saw last month.  By the numbers for September, the trade deficit narrowed to $-41.5 billion from $-43.8 billion in August with exports bouncing 3.1%, following a 1.0% decline in August and a 1.08% decline in July.  Imports increased 1.5% after slipping 0.2% in August, 0.6% July and -1.5% June.  In fact this is the first uptick in imports since March. 

The important point is that the trend of exports, and imports, has been negative as the recession in Europe, and slowdown in China, have reduced end demand.  This has been very much reflected in the third quarter corporate earnings announcements and forecasts through the end of the year.

The chart below shows the trend of deterioration in imports and exports and its net effect on the economy.  As always, it is trend of the data that is far more important than any single data point.  Economics change at the margin and understanding the direction of the data is far more important when trying to develop a macro outlook.



There has been a wide variety of anomalous data as of late, such as the surge in employment and the boost to GDP by government spending, which has boosted the economic results.  However, as economist are busy ramping up third quarter GDP estimates, it may be worth noting that had it not been for an outsized government expenditure in defense related spending – growth in the third quarter would have been unchanged at 1.3%.  The chart below shows defense related spending as a percent of GDP since the beginning of 2011.  As you will notice there has been a negative contribution to GDP in the last three prior quarters until just before the election which gave a 0.64% boost to GDP.  Sustainability will be the key issue. 



In that same regard the boost in exports, which reduced the trade deficit, also may be an ephemeral artifact due to disruptions in the flow of trade-data reporting related the impact of Hurricane Sandy.  Due to the late October arrival of the storm – some of the reports on imports have likely been delayed leading to a shortfall in the trade estimates.  Such distortions should be corrected in next month’s reporting which will send economists scrambling to reduce the GDP estimates once again.  (We are also like to see a rather large downward revision to defense spending as well in the next month now that the election is over.)

Regardless of such distortions in the short term the longer term trend of imports and exports is clearly one of deterioration which will keep downward pressure on both economic activity and corporate earnings reports.  What is important to understand, as it relates to economic growth, is that while the shrinking in the trade gap was led by the petroleum deficit, which decreased to $21.7 billion in September from $23.5 billion in August, it was the non-petroleum goods shortfall that is the most concerning.  The shortfall in non-petroleum related goods actually grew to $35.2 billion from $34.9 billion for the prior month.

As we have discussed previously the importance of exports, as it relates to economic growth should not be overlooked.  At 13% of the gross domestic product (as opposed to housing and automobile manufacturing which comprise about 2.5% each) the drag on exports from a recessionary Eurozone will slow economic growth.  As the chart below shows – historically when exports, as a percentage of GDP, have turned down the economy has fallen into a recession.



The chart below shows real, inflation adjusted, GDP with a polynomial trend line.  As you can see the trend of growth in recent quarters has slowed rapidly.  There is no reason why, at this particular point in time, that the economy should begin sprouting “green shoots” when many of the broad macroeconomic indicators are showing signs of significant deterioration.  Furthermore, the negative outlooks from corporations, and the weakness in earnings and expectations, also signal a weaker economy ahead.



It is for these reasons that the recent positive boosts to the trade deficit data are more likely temporary in nature and will be revised away in the months ahead.  

Again, it is important to remember that the most recent data is for a single month.  If the data is truly improving we will need to see a string of consecutive positive months ahead.  This is highly unlikely.  The negative trends of the import and export data is pointing to a weaker economy, and a recession, in the months ahead.   As we discussed in our recent article on recession probabilities: Regardless of when the NBER officially announces the start date of the next recession – the damage will have already been done to investors. The current decline in earnings and revenue, the drop in exports and the weakness in incomes will likely impact stock prices long before the mainstream media recognizes that a recession has set in. As stated above there are many confirming indications that a recession is already underway in the U.S. economy – the only question is how long it will be before the stock market recognizes it and begins to realign prices with revised valuations.”

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