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A Quick Overview

Below we briefly review updates of two charts we have employed in our recent market updates. The first one is a quick glance at several major indexes: the NDX, the SPX, the Russell 2000 and the DJIA. There have been multiple divergences between these indexes at their recent peaks, but there is also a divergence visible now that a rebound has begun – which is a direct result of the recent underperformance of momentum stocks. Note that we have taken this chart snapshot during the trading day, so it doesn't incorporate Wednesday's close yet.

The market has begun to bounce from a natural support level: lateral support in the NDX (as well as the Nasdaq Composite and the RUT) that has served as a support and resistance level on several previous occasions.

As you will see further below, although momentum and growth names are outperforming 'safe' stocks in Wednesday's trading, the trend toward safety is not undermined yet by this short term counter-trend move. There have been several short term pullbacks in the XLU-QQQ ratio since this new trend emerged in November, but the trend has continued all the same. On Tuesday, the ratio actually reached a new high for the move and is probably overdue for a pullback.

The Rydex sentiment measures we are keeping an eye on show practically no change since our last update. The only measure that is not firmly in cloud-cuckoo land just yet are total assets in bull and sector funds. However, relative to assets in money market funds and bear funds, they are near the peak levels recorded in early 2000. Bear fund assets and money market fund assets are at 17 year lows.

 

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The First $3 Billion of a Ukraine Bailout Immediately Go to Russia

This is really too funny. Apparently, the Ukraine owes $3 billion to Russia in bonds that have been issued under UK law. One of the stipulations of the bonds is that if the Ukraine's debt-to-GDP ratio should exceed 60%, the bonds will become immediately callable.

Once the Ukraine gets funding from the IMF,  this is of course going to happen right away – its debt-to-GDP ratio will then most definitely exceed 60%, so the first $3 billion of any aid the Ukraine receives in the form of loans will right away flow into Russia's coffers.

Of course there may be litigation first, but as Greek bondholders have found out, all those who held bonds issued under UK law were actually paid in full, while everybody else had to accept the 'PSI' and could basically go pound sand.

Of course it was all 'voluntary', but funny enough, the holders of Greek bonds issued under UK law didn't turn out to be as altruistic as all the other ones. At least we have not heard of any 'voluntary' contributions made by them. It seems rather doubtful that Mr. Putin will be eager to become a voluntary contributor to bailing out a government which he deems illegitimate. Instead he's going to take his money and run – or alternatively, make as-of-yet unspecified demands.

According to NBC:

 

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What the Economy Needs

We want to briefly comment on the suggestions that the Ukraine – this is to say the government of the Ukraine – allegedly needs to “borrow at least $35 billion”. This has been reported in terms such as these:

 

“The political crisis has cost Ukraine economically as the country is facing a possible debt default. Ukraine needs approximately $35 billion in aid to improve its economy, according to the country’s finance ministry.”

 

The last thing a country needs to “improve its economy” is a giant loan to its government. Government equals waste, even if it isn't prone to stealing, which we suspect the new administration in Kiev definitely is. Why should it be any different from the previous 'Orange Revolution' government? It's the same people, only fortified by a bunch of extreme right-wing nationalists this time, who incidentally hold a number of important portfolios, including everything relating to police, defense, national security and even the post of prosecutor general. Germany's news magazine Der Spiegel, which is largely sympathetic to the new government, reports this most recent tidbit from Kiev:

 

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Ukrainian Government Issues Arrest Warrant for Aksyonov

The latest in a series of futile gestures surrounding the situation in the Crimea is a warrant for the arrest of the Crimea's new prime minister, issued by the central government in Kiev:

 

“A court in the Ukrainian capital of Kiev has issued arrest warrants for the prime minister and parliament speaker of the country's autonomous republic of Crimea, the Prosecutor General's office said Wednesday.

Criminal charges had been brought against them and some other politicians in Crimea, said Ukraine's acting Prosecutor General Oleh Makhnytsky.

Last Thursday, the regional parliament of Crimea appointed Aksyonov, leader of the Russian Unity party, as prime minister in a closed session and announced that a referendum would be held over the future status of the territory on March 30.

Aksyonov said Saturday that he had asked Russian President Vladimir Putin to help ensure peace in the pro-Russian region. Ukrainian Parliament Speaker Alexandr Turchynov, who is also the country's acting president, later signed a decree to reject Aksyonov's new capacity.

 

(emphasis added)

Our guess is that Aksyonov's resolve has just been strengthened immeasurably. If they really mean it, then he has henceforth nothing left to lose. Just as Kiev thinks his government is illegitimate, so he believes the Kiev government to be illegitimate. The irony is that both governments were proclaimed by the same methods: First, protesters took over government buildings and thereafter, the respective parliamentarians appointed a new government. Both were slightly dubious affairs from a legal standpoint.

 

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Russian Troops in the Crimea

John Kerry is appropriately aghast at the “incredible act of aggression” by Russia in the Ukraine:

 

“You just don't in the 21st century behave in 19th century fashion by invading another country on completely trumped up pre-text," Kerry told the CBS program "Face the Nation."

 

This new-found respect for the sovereignty of foreign nations represents a laudable 180 degree change in US foreign policy. You just don't do that in the 21st century! Like e.g. invading Iraq by making up tall stories about “weapons of mass destruction” hidden there. It's just not done. As an aside to this: in February, the civil war currently raging in Iraq has cost yet another 1,705 lives, with 2,045 wounded. The death toll is a considerable increase from January's 1,284 dead and 2,088 wounded. Perhaps you weren't aware there is a civil war raging in Iraq? If so, that is no surprise. The Western media have fallen almost completely silent on the topic. Yet, this is what the famous 'mission' has actually 'accomplished'.

As Jason Ditz reports regarding the recent escalation in the Crimea:

 

“While US politicians have also ratcheted up the rhetoric, US officials concede that Russia’s troops in Crimea are setting up defensive positions and are in a “self-defense posture only.”

Reports from Crimea’s government say they’ve got Russian troops helping them protect government buildings in anticipation of the referendum, and with a sense that will easily back secession and re-accession into the Russian federation, it seems that Russia doesn’t need to “invade” at all, but simply needs to keep the interim government at bay until Crimean voters affirm the switch.”

 

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War Games Enlarged

Russia has put some 150,000 troops on alert according to media reports, enlarging 'previously planned' war games near the border with the Ukraine. Russian politicians naturally continue to complain about the situation in the Ukraine, and their tone of voice has become quite a bit more strident over the past two days.

Part of Russia's Black Sea fleet is actually stationed in the Crimea, so it is easily conceivable that a pretext for a military intervention could be concocted. However, we tend to think these recent developments are just old-fashioned saber rattling, in spite of the strong interest Russia has in what happens in the Ukraine. Obviously, betting on Yanukovich was a big mistake – he was simply too corrupt and too big of a gangster. Still, markets were slightly rattled early on Wednesday and the Ukrainian hryvnia continued its free-fall. Interestingly though, Ukrainian stocks concurrently kept rising (adjusted for the fall in the hryvnia, the rally is of course not worth mentioning).

According to Reuters:

 

“Ukraine's protest leaders named the ministers they want to form a new government following the overthrow of President Viktor Yanukovich, as an angry Russia put 150,000 troops on high alert in a show of strength.

President Vladimir Putin's order on Wednesday for soldiers to be ready for war games near Ukraine was the Kremlin's boldest gesture yet after days of sabre rattling since its ally Yanukovich was ousted at the weekend.

Moscow denied that the previously unannounced drill in its western military district was linked to events in its neighbor but it came amid a series of increasingly strident statements about the fate of Russian citizens and interests. U.S. Secretary of State John Kerry warned Moscow that "any kind of military intervention that would violate the sovereign territorial integrity of Ukraine would be a huge – a grave mistake".

With the political turmoil hammering Ukraine's economy, the central bank said it would no longer intervene to shield the hryvnia currency, which tumbled 4 percent on Wednesday and is now down a fifth since January 1. Wednesday's abrupt abandonment of Ukraine's currency peg sent ripples to Russia where the rouble fell to five-year lows and bank shares fell.”

[…]

Russia has repeatedly expressed concern for the safety of Russian citizens in Ukraine, using language similar to statements that preceded its invasion of Georgia in 2008.

"In accordance with an order from the president of the Russian Federation, forces of the Western Military District were put on alert at 1400 (1000 GMT) today," Interfax news agency quoted Russian Defence Minister Sergei Shoigu as saying.

Shoigu also said Russia was also "carefully watching what is happening in Crimea" and taking "measures to guarantee the safety of facilities, infrastructure and arsenals of the Black Sea Fleet," in remarks reported by state news agency RIA.”

 

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Vaporization in Bitcoin-Land

It is still not quite clear what exactly happened at Mt. Gox in Tokyo, the formerly biggest bitcoin exchange in the world. According to the exchange, the so-called 'transaction malleability' problem allowed hackers to initiate countless bogus transactions, stealing some 744,000 bitcoins. Even at the recently somewhat lower price of $600 per bitcoin (at non-Mt. Gox exchanges), this sounds like a lot of money. In fact, it sounds as if the exchange has essentially been bankrupted/vaporized, and no amount of 'trying to fix the problem' can actually, well, fix it. Mind, this is just a hunch on our part based on the fact that about $450 m. are said to have disappeared.

In spite of no longer allowing withdrawals (whether of bitcoin or any other forms of currency) since February 7, trading actually continued at Mt. Gox until February 25. During that time, bitcoin prices crashed on the exchange, and a two-tier price system developed. There have always been slight price differences between the various bitcoin exchanges, but our impression was that arbitrage transactions kept prices at most exchanges for the most part quite closely aligned. However, after it became clear that withdrawals from Mt. Gox were no longer possible, the price of bitcoin traded there decoupled rather noticeably. While the currency weakened at other exchanges as well, it did so to a far smaller extent.

This week, trading at Mt. Gox finally stopped and the site became inaccessible shortly thereafter. Access has been restored in the meantime, but all the site does at present is display the terse message that can be seen on the chart below:

 

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Protests Flare Up Again in Turkey

We had to laugh when reading the headline Growing authoritarianism in Turkey faces minor repercussions abroad” – this is precisely what we mentioned in our recent update on emerging markets. Our words with regard to the increasingly draconian and authoritarian legislation implemented in Turkey were:

 

“The vaunted 'defenders of freedom' in the West probably aren't going to object for even a millisecond.”

 

(emphasis added)

Obviously that was a case of 'right the first time'.

 

While the Turkish government is turning into a more authoritarian regime by limiting freedom of expression, controlling the judiciary, tightening its grip on power and controlling the media, it appears that Turkey is managing to maintain a “business as usual” relationship with the US and European countries without any repercussions, as long as Turkey protects the interests of Western powers in the region.

Diplomatic sources and experts who closely follow Turkish-American relations and Turkey's accession process to the European Union agree that recent important steps by the Turkish government, such as satisfying Western powers on the Cyprus issue and normalizing ties with Israel, are helping to keep potential criticisms from the US government and other Western countries at bay regarding problematic issues on democracy and freedom in Turkey.”

 

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Yanukovich Sulking in Hideout

Over the past several days, more and more of his political supporters have deserted Ukraine's president Yanukovich in light of the bloody confrontations between police and protesters in Kiev. In the end, all of them decided they would be better off without him. The final straw seems to have been news that Moscow wouldn't send any money after all until calm was restored in the Ukraine and a political solution to the conflict was found (we imagine the Russians were concerned their money might end up getting stolen, not an entirely unreasonable fear). Yanukovich thereupon apparently decided that he would be best served by disappearing in the presidential helicopter and was last seen heading toward an unknown retirement hideout by air. However, from there he immediately resumed complaining:

 

“Yanukovych was removed in a 328-0 vote in the 450-seat chamber. As protesters took control of central Kiev and flooded into his luxury estate, Yanukovych said in a speech from an undisclosed location that attempts to remove him from power were a “coup d’etat.”

The peace agreement, signed on Feb. 21 after all-night talks in Kiev with EU foreign ministers, envisioned a national-unity government within 10 days. Lawmakers approved a return to the 2004 constitution, curbing presidential powers.

Polish Foreign Minister Radoslaw Sikorski, who helped negotiate the EU deal signed by Yanukovych and the opposition, said there was “no coup in Kiev,” and that parliament is acting legally. Yanukovych had said in a statement published on his presidential website that he wouldn’t resign and deemed all of the new acts illegal.”

 

(emphasis added)

In spite of this rather feeble last-ditch show of defiance, Yanukovich can probably be safely regarded as history. It was an interesting development that Russia decided to ditch him by refusing to send the financial aid it had only promised to release a few days earlier. We would point to this interesting little news item in this context:

 

“U.S. Treasury Secretary Jacob J. Lew and Russian Finance Minister Anton Siluanov agreed on the importance of promoting economic and financial stability in Ukraine and the need for reforms that could be supported by an IMF program, according to the Treasury Department. “There needs to be stability in the Ukraine,” Lew told reporters in Sydney yesterday, adding he’d had a “very good conversation” with Siluanov.

Lew spoke with Arseniy Yatsenyuk, leader of ex-Premier Yulia Tymoshenko’s Batkivshchyna party, and encouraged Ukraine to begin discussions with the IMF as quickly as possible, the Treasury Department said.”

 

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The Crisis Worsens

We previously discussed Puerto Rico in these pages in October of last year (see “Puerto Rico’s Debt Crisis – Another Domino Keels Over”). At the time, the public debt crisis looked increasingly worrisome – in fact, it seemed as though Puerto Rico would eventually have to apply for a federal bail-out, and if it failed to get one, it might have to restructure its debt (it actually cannot do that, see further below). Several months have now passed and the situation apparently hasn't gotten better. Before we continue, allow us to point out though that noted contrarian Jeff Gundlach thinks that Puerto Rico will eventually be rescued – he believes that too many politicians have a vested interest in not letting anything bad happen:

 

“Municipal bonds are slightly overvalued, he said. Investors who are willing to tolerate volatility will get rewarded for the risk in Puerto Rico’s bonds. Too many politicians rely on votes tied to the stability of Puerto Rico to allow a crisis there, according to Gundlach. “Puerto Rico’s bonds are going to make it to the other side of the valley,” he said.”

 

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The Copy Machine is Fixed!

Last month we were slightly perturbed by evidence that the Fed's copy machine  seemed to be broken. After releasing FOMC statements throughout the year that looked like carbon copies of each other, the December statement boasted quite a few differences. We discussed the event in some detail at the time, so there is no need to go over the same ground again (as well-versed Kremlinologists, we offered what we believe was a reasonable explanation).

As the WSJ's trusty statement tracker reveals, the copy machine is back in working order – only, this time they have copied the December statement. There is really no point in parsing the de minimis semantic differences in a handful of sentences in which a single word or two were ever so slightly altered. The erroneous belief that these tiny changes hold clues to the thinking of the clueless really needs to be ditched. There are no secret messages hidden in there. If we know little, they are likely to know even less (their knowledge of the future state of the economy and how they will react to it policy-wise is usually strongly reminiscent of the CO2 concentration in the atmosphere if you get our drift…it's somewhere in the tiny region between nada and zilch).

The decisive point of the January meeting was contained in two sentences, namely the following:

 

“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month.”

 

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Turkish Lira Saved? Maybe Not …

Turkey's central bank is making an effort to restore some credibility to its faltering currency after failing to defend it by means of forex interventions last week. In defiance of political pressure (probably making use of the currently weakened position of the government), it has raised rates at a special meeting that has been breathlessly awaited by market participants. And it didn't exactly announce  baby step rate hikes either:

 

“Turkey’s lira strengthened the most in more than five years and bond yields declined after the central bank raised interest rates and signaled a return to a simpler monetary policy. Stocks fell.

The Turkish currency appreciated as much as 4 percent to 2.1626 per dollar, the biggest gain since November 2008. Yields on two-year benchmark notes fell 36 basis points to 10.70 percent and the Borsa Istanbul 100 Index of shares dropped 1.4 percent.

Governor Erdem Basci is fighting to halt a currency run that gained speed amid domestic upheaval and a global rout of emerging markets. Prime Minister Recep Tayyip Erdogan, who said yesterday he’s always opposed higher rates, is caught in a graft scandal that has ensnared several ministers and the chief executive officer of a state-owned bank. It spooked investors just as the reduction of monetary stimulus in the U.S. began sucking money out of riskier assets.

[….]

The central bank raised all its main interest rates at an emergency late-night meeting in an effort to shore up the lira, resisting government pressure and reversing years of policy aimed at stoking growth. The lira gained for a third day, adding 1 percent to 2.2313 per dollar at 1:06 p.m. in Ankara, paring losses that sent it to records lows against the dollar in eight of the previous 10 days. Interest rates had been on hold since August.

The Ankara-based bank increased the one-week repo rate to 10 percent from 4.5 percent, the overnight lending rate to 12 percent from 7.75 percent and the overnight borrowing rate to 8 percent from 3.5 percent. The central bank said the one-week repo rate, now at 10 percent, should be treated as the benchmark policy tool.”

 

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One of the Best Libertarian Sites Closes Down

 We are always pressed for time. As those who occasionally send us mail know, we even have frequently trouble keeping up with our mail – so much so that we might as well revert to snail mail. As a result, we have to carefully select what we read. In recent months, the 'Daily Bell' has made it to our list of 'must read' sites, so we are quite sad to learn that it will cease to publish new material as of July 16 (see the announcement of editor-in-chief Anthony Wile here).

Running a site like the Daily Bell is time consuming, and presumably has become a full time job, so we can understand Mr. Wile's decision. Still, it is a shame. Luckily though, at least the site's archive will remain online as an educational resource.

 

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Barroso Admonishes France

EU Commission president Manuel Barroso let it be known that France needs to present a 'credible reform plan' given the extension it has received with regard to reaching its 'fiscal target'. Good luck with that.

 

“European Commission President Jose Manuel Barroso said on Wednesday France needed to present a credible program of structural reforms as new data showed Europe's second largest economy slipping into a shallow recession.

Barroso, who was due later to meet President Francois Hollande in Brussels, said France must pursue reforms if the EU was to grant it two more years to bring its budget deficit down to 3 percent of economic output as promised. The extension would be approved "if France presents a credible reform program so that France can regain its competitiveness," Barroso told Europe 1 radio.

On Tuesday, the French parliament passed a landmark reform of the country's labor code, part of Hollande's efforts to convince European partners that he is committed to revamping the economy. But as preliminary data on Wednesday showed the French economy contracting by 0.2 percent in the first quarter, Barroso said that France needed to prove its commitment to pursue further structural reforms.

"The truth is that France has lost competitiveness over the past 20 years," he added.

Speculation of a cabinet reshuffle intensified on Tuesday after Foreign Minister Laurent Fabius, a former premier and finance minister, said France's giant Finance Ministry needed a "boss" to better coordinate economic policy. The remarks targeted Finance Minister Pierre Moscovici, whose left-wing firebrand junior minister Arnaud Montebourg has criticized budget cuts and had a series of run-ins with potential foreign investors in France.”

 

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Gold Follows Bitcoin Into the Abyss

Earlier today we joked that it looked like Cyprus was selling its Bitcoin reserves rather than its gold reserves. This goes to show that it is sometimes better not to say anything, because the markets can make one look like a fool in very short order. Gold had a bleak Wednesday this week, but it has an even bleaker Friday. There was no discernible trigger for the selling (in fact, what economic data releases there were should normally have been regarded as slightly bullish, as they indicate that economic weakness is spreading to the US).

So our best guess at this point is that the selling is largely 'technical' – weakness begetting more weakness, as support levels give way. Incidentally, the crash in Bitcoin has continued as well, although the only thing gold and Bitcoin have in common is that they are both non-state alternative currencies.

It seems more likely to us that some of the selling was initially at least triggered by squirrely algo trading, perhaps egged on by the increasing volatility in the Japanese bond market as Zerohedge suggests, or simply as a belated reaction to the ongoing weakness in the commodity complex more generally. It should be noted here that often the fundamental reason for a market move only becomes evident in hindsight, and often enough no such reason emerges at all (in which case the market concerned reverses just as mysteriously and quickly as it broke down).

 

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