Ok, it is now official.
The National Institute for Mental Health has declared this summer’s stock market legally insane, suffering from paranoid schizophrenia and multiple personality disorder.
They offered as Exhibit A the love/hate relationship with Mario Draghi and Exhibit B an obsessive-compulsive fascination with European bond yields.
All of these syndromes led to a market this week which went essentially nowhere, while deluding itself into thinking it was making several different bullish and bearish statements.
However, a calm and rationale observer could see that the modest +0.4% weekly increase in the S&P pushed the SPX to its highest close in about three months. And that is Exhibit C, with 4 out of 5 down days on this week, yet hitting this newish closing high by the end of Friday? (Madness indeed, or some new kind of math by alchemy?)
So what were the inmates of the institution saying this week?
“In the coming weeks we will design the ‘appropriate modalities’for such policy measures.” --ECB President Mario Draghi, after promising to the prior week to “do whatever it takes, and I promise that it will be enough.” (surely the ravings of a madman, using obscure phrases while thinking he is saying something)
“I will do what I always do, act in the best interest of Spaniards.” --Spain’s Prime Minister Mariano Rajoy, but who then, according to press reports, dodged three pointblank questions on whether Spain would seek further financial assistance. (a classic clinical case of avoidance of reality and our Exhibit D) Bloomberg quoted Standard Charter analyst Thomas Costerg, who said “Rajoy maintained a stance of ‘constructive ambiguity’ on European assistance.” (“constructive ambiguity”? yes, they are all surely in la-la land)
Alan Abelson jumped on the theme of delusional market commentators in this weekend’s Barron’s, calling Friday’s labor report, “Headline or Headfake? There is ‘less’ to this week’s employment report than meets the eye.”
Abelson quoted an article by Zero Hedge, which said:
“Happy by the headline establishment survey print of 133,245 which says that the US "added" 163,000 jobs in July from 133,082 last month? Consider this: the number was based on a non-seasonally adjusted July number of 132,868. This was a 1.248 million drop from the June print. So how did the smoothing work out to make a real plunge into an "adjusted" rise? Simple: the BLS "added" 377K jobs for seasonal purposes. This was the largest seasonal addition in the past decade for a July NFP print in the past decade, possibly ever.”
And we should not forget Mr. Bernanke and the FOMC announcement this week, which while non-committal did have a slight change in language which prompted our own David Moenning to say, “the Bernanke put is still very much in play. The argument can be made that Bernanke’s Fed has been laying the groundwork for another round of quantitative easing for some time now.”
Dave added on Friday, regarding the initial disappointment over both the Fed and FOMC announcements, “To those who suggest that "The Bernank" and "Super Mario" and are merely dragging their feet, too frightened to take action, I'm going to suggest that the prudence displayed by these two grownups is a breath of fresh air - especially for those of us forced to watch the children at play all day long at the corner of Broad and Wall.” (Exhibit E, infantile behavior by supposedly grown men and women)/
There was also the case this week of “mass communal hysteria” (Exhibit F) as huge buy-side fund managers such as Vanguard and Fidelity fled en masse from doing business with Knight Capital Group, after the market-maker found a way to lose $440 in a morning or $10 million per minute. BusinessWeek reported Saturday on several developments on Knight’s situation: “Goldman Sachs came to the rescue in buying Knight’s mistaken trading positions, which have to be settled by August 6, Knight found some short-term financing at the end of the week and some major customers resumed order-routing, and several buyout firms are supposedly looking into acquiring Knight’s operations, which formerly accounted for 10% of U.S. equity volume.”
BusinessWeek also had a quote from NYSE chief Duncan Niederauer related to Knight (and perhaps also a small dig at the Nasdaq): “The structure that has evolved over the last decade in the U.S. has led to inexorable fragmentation, really an emphasis on speed, a feeling that if something is faster than by definition it’s better. We are understanding that speed is not always better.”
Zero Hedge had another item which caught our attention, seeing as how we are occasional fans and traders of products by “ETF-developer” Direxion, which caught attention a few years ago for developing the first fairly liquid triple-leveraged ETF’s (have we lost our minds also?).
“It was fun (not really) while it lasted, but America's habitual gamblers have finally grown tired of the theta sucking monsters known as uberlevered ETFs. End result: Direxion is announcing it is closing nine of its 3X levered ETFs due to lack of interest.” (but for the crazies like us out there, many 3X ETF’s still do remain, including the triple-leveraged long and short SPX products, SPXL and SPXS, and the 3X financials long and short FAS and FAZ).
But we know we can find some anchored rationality in the cold hard facts of earnings season, so let’s see what StreetAccount had to say about this week’s cumulative earnings picture:
S&P 500 (408 reports):
EPS - Beat rate now at 70% versus 73% in Q1 and trailing-four-quarter average of 72%
Revenue -Beat rate now at 42% versus 65% in Q1 and trailing-four-quarter average of 63%
“According to FactSet, the blended growth rate for Q2 S&P 500 EPS now stands at 4.3%, up from 2.7% at the end of the quarter, but still well below the 7% expected at the start of Q2. The blended growth rate for revenues now stands at 0.7%, down from 3.4% at the start of Q2.” StreetAccount has also been making a rather big deal of the impact of “the macro sentiment on the reporting day for any given set of earnings.” (so good earnings, bad market day equals punishment, bad earnings, good market day equals reward...yes, that will have to be Exhibit G of irrationality).
(In addition to several major earnings reports from the likes of PG, GM, GMCR, KF, and PFE, all of which beat on EPS with mixed revenue pictures, there were July retail sales which were mostly better than expectations, with a few real clunkers thrown in, and auto sales which showed some stalling from earlier in the year).
And finally, we had Forbes and others reporting on Bill Gross of Pimco and their August Investment Outlook, with Steve Schaefer’s headline, “Pimco's Bill Gross Says Stocks Were A Ponzi Scheme For The Last Hundred Years.” (What is that old definition of insanity, which investors in the S&P for the past 10 years might embrace?…”Insanity is doing the same thing over and over and expecting different results.”)
Let’s leave it there and try and end on a brighter note. Surely the Olympics has been inspiring, with Gabby Douglas and the U.S. women’s gymnastics gold, the American swimmers and Michael Phelps, South African double-amputee runner Oscar Pistorius, and Britain finally putting some medals up on the board, to the delight of the local populace. (We will try and forget about teams trying to throw matches and athletes tossed for indiscreet tweets).
And we thought the most amusing Twitter comment of the week was the following:
“This is awkward. The Olympics have not long started and Greece is already 16 medals in debt.” --Prince Charles @Charles..HRH
David W. (aka The Underground Trader)