S&P500 vs. 30 Year Treasury Note

For broad directional moves and at the truly big jumps in the equity market the 30 Year has moved as one would expect, that is in the opposite direction. This makes sense. Typically, as money flows out of the stock market and prices slump money flows into the bond market and bids bond prices up--or bids yields down, same thing. Unfortunately I could not figure out how to plot the 30 Year yield on this graph b/c it would have shown the same direction of movement as the S&P--i.e. as stock prices increase yields increase (b/c bond prices decrease) and vice-versa--and therefore the chart would have been a little easier to read.

However, after intial widening today the 30 Year is coming back in (meaning yields decrease and prices increase--sorry for the lingo) while the S&P continues to rally. I hope the 30 Year is the
one that's right b/c I'm long both it and VXX.

Jobs data and ISM

Nonfarm payrolls today were down 54K vs. 131K last month and vs. 105K that was expected.

The thing is that last month the Bureau of Labor Statistics’ Birth-Death Model (that adjusts for seasonal factors of businesses being created or going bankrupt) added 6K to the number. Stripping that out gives 125K lost in July. This month the Birth Death Model added 115K. Stripping that out we lost 169 jobs. While an adjustment is obviously warranted in some way I am not sure that this number is as positive as the market sees it.

The ISM employment data supports this. Employment dipped below 50 from 50.9 to 48.2, meaning that employment is shrinking as opposed to expanding although this number has hovered around 50 all year. Export orders are also shrinking dipping below 50 to 46.5 (vs. 52 in July.) Here are all the changes:

So only three components actually improved. The biggest improvement was in prices paid. While this might signal that disinflation is not much of an issue it also squeezes profit margins. Imports are up, which I see mostly an artifact not of strong domestic demand but rather of the strong dollar.

The most important numbers on the weaker side in my view are new orders, down strongly from 56.7 to 52.4, the lowest read all year and Business activity, which is also down to the lowest read since January. Backlog of orders, Supplier delivers, and employment as I mentioned above are also discouraging. The 30 Year came in about 4 points on this.

But, as always, it doesn’t pay to fight the tape.

Unemployment in Euroland

This morning the unemployment number for the aggregate Eurozone came in. 10.1%. It kinda shocked me b/c I remember looking at German unemployment a while back and thinking: Wow, that's a low price, errr, I mean, that's pretty low.

So when this number came in I wanted to see how German unemployment compares to Eurozone unemployment as a whole. The spread graph is below.

The disparity has never been greater since inception of the Euro. It'll be interesting to see how that evolves over the next few years as
a) there will be structural adjustments likely in "peripheral Europe" (i.e. the PIIGS.)
b) the falling Euro supports net exporters, benefiting countries like Germany and hurting countries like Greece or Spain.
c) in the other direction, how will labor mobility affect this as workers move from high-unemployment areas to low-unemployment areas.

More Thailand

Apparently, Thai armed forces have leveled the protester camp and a curfew has been put in place with violence escalating in the aftermath. The BBC has this.

Here are also some close-range pictures of what by now looks like civil war in Bangkok

Surprisingly, Thai equity markets have actually held up (in USD terms):


The possible good news that may come of this is that Red Shirt leaders have asked protesters to "go home." While I do think that their concerns need to be heard and while I support their right to force government to listen to them if the democratic process fails them, I do want the violence to stop. The downside is that there are multiple equilibria into which the situation could diverge:
a) protesters lay down arms and government and protesters come to the table.
b) protesters lay down arm, "go home" and are marginalized. Problems fester and re-erupt in a few months'/years' time.
c) without a leadership protesters split into violent factions and violence increases.

Here's a theory of why financial markets' interests can be anathema to peace. Short-term traders are interested in volatility. If Thai equity markets crap out--especially if it is on risk aversion while the fundamentals of the Thai economy remain intact--that provides a good buying opportunity, only to sell stocks when political tension has settled. You can see from the above graph that at least there is potential for Thai equities to reach 55 USD (this is the ETF that seeks to replicate the MSCI Thailand Index). The recent dip as a result of violence was a welcome buying opportunity. I would not be surprised if some traders were to hope for outcome b) above so they can sell and buy another dip in markets.

No Plan B for the European Currency Union

Today Secretary Geithner was on CNBC (which, as you probably know, I think is, in general, idiocy squared) and Erin Burnett interviewed him regarding the prospects of the Euro.

MS. BURNETT: And do you have a plan if it falls apart, I mean,
Paul Volcker again today was saying he thinks that there are some real
risks to the European Union as a concept and others, perhaps, even to
the Euro itself? I know you're a believer that Europe will stay
together. But are you working on a contingency plan in case there is
a dissolution of the Euro?

SEC. GEITHNER: Again, I'll say what I said before, absolutely
Europe has the capacity to manage through this. They made a decision
to do it and I believe they have the capacity to do that. Obviously,
they're going through their challenges, but they can manage those
challenges.

Michael Mussa, former chief economist at the IMF, in his book “Argentina and the Fund” makes the argument that one reason why Argentina was such a shitshow was b/c there was never a plan B considered, an orderly exit from the currency board. So if what Geithner says is true and not just to calm markets while behind the scenes IMF and European Commission are working hard to formulate an exit strategy for Greece and others in their position, then that could be very bad news if the ECU does find itself in a tight spot and needs to break up.

Thailand

The Atlantic Monthly has this on Thailand:

"Inside the Red-Shirt Camps The Atlantic's Jessica Olien relates, "When I first went into the camp, I was surprised by the orderliness and the industriousness of the people inside, who'd set up shops to sell food and red-themed merchandise, pharmacies, and even a massage parlor within the tent city. But the area still resembles a refugee camp: dwellings made of plastic sheets and bamboo; garbage strewn across the ground; the smell of rotting food and unwashed bodies permeate the air. Conditions will only get worse, assuming the government shuts off the water and cuts off supplies after the Thursday deadline."

A massage parlor.... omg, I love Thailand so much! I hope the violence stops soon.