The T Report: What do Natural Gas and Equities Have in Common?
EVERYTHING!
I have been reading more and more articles about how the bottom may have been put in for natural gas. Producers are slowly but surely figuring out ways to cut production in response to low prices. Demand is being created as U.S. industrial production picks up and more projects that take advantage of cheap gas come get approved and some even come on-line. LNG, while years off, is also starting to add support. All of this seems normal. Supply and Demand shift according to Price.
THEN WHY DOES EVERYONE EXPECT THAT IF THE S&P CAN JUST PUSH ABOVE 1,400 RETAIL WILL BUY STOCKS, BUT AT 1,350 RETAIL WILL SELL? Why is conventional wisdom so convinced that higher stock prices increase inflows, when everything about normal supply and demand says the exact opposite? Maybe retail actually sells stocks as they go up, because they have profits they want to take off the table? The only people buying stock above 1,410 last Monday were capitulating shorts, underinvested perma-bulls, and fools who really believe retail doesn’t understand something as basic as buy low, sell high.
I was wrong about London driving prices higher. Yesterday’s late day fade was followed by more weakness in Europe. Greece is yet to form a government and there is real concern about what sort of government will be formed and what it will do with bonds maturing this week. In the end, I don’t think the government will have the time, or guts to do anything drastic with bonds that are maturing in May. There is €450 million due to private holders on May 15th. It looks like there is €3.3 billion due to the ECB and EIB on the 18th. I don’t think the Troika or Greece is really ready to unleash an “uncontrolled” default, so the new government will be convinced to borrow the money it needs to pay both bond maturities. If it was just the private bonds outstanding, I would be far more concerned that this issues reaches crisis stage next week, but with the ECB expecting to get paid in full on such a large bloc, the political pressure brought behind the scenes from the rest of Europe “to do the right thing” will be too much for the newly formed government. They will get some immediate concessions and promises of renewed talks to revise the plan. Ultimately Greece leaves the Euro, but it won’t happen in a disorderly way in May.
Spanish banks are another area of contention. The market seems to bounce back and forth between excitement that they will get bailed out, and fear that they are such a mess. The likely outcome is some form of bailout that ultimately just makes everyone realize both the banks and the country are in deep trouble and will never pay back 100% of their debt while denominated in Euros. The choice will be restructure and/or currency reversion. Italy is in pretty much the same boat, with the bright side being that the boat is holed at the water line rather than below, but it is a much bigger boat.
Worth noting is that Spanish stocks are outperforming Germany and France again (the divergence between the economies was more than priced in). Spanish and Italian bonds, while weaker, are only marginally so. Spanish CDS is a lot wider though at 495 (+20) while Italian CDS is only 5 wider (445). So the primary outlier of the day is Spanish CDS.
U.S. 10 year trades 28 bps wide of German 10 year. This isn’t anything new, yet somehow it has been catching my eye lately. We still trade tight of France and even the U.K., but it does seem a bit surprising that no one ever really mentions the spread of treasuries to bunds, though the FX complicates the matter. Not sure there is a point to pointing this out, but I can’t help having this feeling that this is important.
The Euro is actually holding in okay. I think in this round of the crisis we will see relatively little correlation between the Euro and risk-on/risk-off assets. The Euro short crowd is too big, and there is growing concern that countries leaving may actually generate flows that strengthen the Euro. I’m not sure I would be long the Euro here, but I wouldn’t be short, and I would look at it less than ever as a cue for the next leg in the risk-on, risk-off saga.
In spite of having being wrong since 3pm yesterday, I think we will see a bounce off these lows. The “growth” rally will gain some strength. There are already talks of a growth summit. It won’t work, but it will sound good. Retail may actually allocate a bit of their hard earned cash to stocks, they might sell some winners in fixed income or take some money out of cash and buy stocks. We have had enough bad data, particularly in Europe, that it would only take one decent print to spark a bit of buying, even if the economic data turns out to be an outlier.