Wednesday, January 4, 2012

Correlation Trades Breaking Down: Decoupling, Distress or Distribution?; Kodak Prepares for Bankruptcy

There have been, for many months, certainties in global markets from which investors and speculators could readily rely upon and profit from. The most obvious of these is the straightforward relationship of the Euro and US stocks.

Whenever the Euro was positive against the US Dollar, stocks would post gains as well. Euro down, stocks down. A simple trade for those speculators adroit enough to move money quickly in and out of currencies and stocks. It also created a very nice hedge for monied investors with a keen sense for geo-politics and the movement of money.

Another of these correlation trades has been in effect for years, even decades. when the Dollar Index (^DXY) moved higher, the price of a barrel of oil would go lower, since oil and almost all other major commodities are priced in dollars. A stronger dollar would thus buy more oil, or wheat, or soybeans, for instance.

Today, however, these two stalwarts of the inner, holistic trade deviated from their seemingly-predetermined paths. The Euro was off sharply, but stocks finished with modest gains or were flat, nonetheless. And the Dollar Index was up nicely, (80.097 +0.434 0.54%), but oil marched higher despite the obvious overpricing and general lack of demand over the past two weeks.

The oil moves could be partially blamed on the Iranians and Europeans. Europe has set the parameters for a complete embargo of Iranian oil. For its part, Iran says it doesn't need to sell oil to europe as it has many other trading partners, China being the largest. The Iranians also say they can effectively shut down shipments of oil from other countries by blocking the Strait of Hormuz, disrupting the free flow of energy from the region to Western nations.

While that's all well and not-so-good, it still doesn't explain the dislocation of the Dollars-for-oil trade and is entirely based upon speculation.

As for the Euro and US stocks, it wasn't a large move away from the direct correlation, but notable. Then there's silver and gold, the two precious metals that should always move in tandem, as they have for maybe thousands of years. Gold was up, silver down on the day, making silver, already a cheap cousin, even cheaper and wildly undervalued compared to gold, where the standard gold-silver ratio has traditionally been somewhere between 12:1 and 16:1, now stands at a stunning 55:1. It has been higher over recent years as gold shot up much faster than silver, but, if global tensions are accelerating, both metals should become good bets short term, though it stands to reason that silver would appreciate at a much faster rate, as it did in the first four months of 2011.

All of that implies that both the gold and silver (and not to mention stocks, commodities and currencies) markets aren't rigged, a condition that reams of evidence over many years say is so.

OK, then what's up with these markets if correlation trades, usually among the most reliable and steady, continue to break down? Is it decoupling for Europe, global distress or some technical distribution which the markets haven't anticipated from a zero interest rate policy and massive money printing (in shady but effective forms) by central banks around the globe? If oil goes up as the Dollar Index improves, so will stocks, and the precious metals will do whatever the manipulators deem necessary. It's not yet a trend, but bears watching, because decoupling often is a harbinger of even more fractured conditions in markets, which would make perfect sense in this mad world.

Something else bearing watching is the anticipated disappearance of the Kodak moment. The film maker has been on the ropes for years as the company failed to develop a strategy shifting from film cameras to digital photography, and the stock has suffered badly, losing almost all value over the past decade. A Wall Street Journal report today that the company was preparing to file a chapter 11 bankruptcy either this month or by early February should they not find buyers for their digital patents - valued, dubiously, at over $1 billion - sent shares plummeting.

Shares of Eastman Kodak (EK) finished the day down 0.18, to 0.47, a 28% decline. The company has also received a delisting notice from the NYSE, as the price of the stock has traded below $1 for more than a month, in violation of exchange rules.

That the company would eventually commit corporate hari-kari should come as no surprise. The stock traded as high as the low 80s in the late 1990s, and dropped permanently below 60 when the dotcom boom went bust in 2000-2001. Since then, the losses have mounted and the share price decline has been precipitous. This is a dead company without a product or strategy, which has wiped out its dividend, shareholders, and soon, pensioners, sure to be shuffled off to the Pension Benefit Guaranty Corporation, another backhanded bailout by the US taxpayer.

Dow 12,418.42, +21.04 (0.17%)
NASDAQ 2,648.36, -0.36 (0.01%)
S&P 500 1,277.30, +0.24 (0.02%)
NYSE Composite 7,612.15, -12.17 (0.16%)
NASDAQ Volume 1,654,986,250
NYSE Volume 3,553,585,250
Combined NYSE & NASDAQ Advance - Decline: 2475-3130
Combined NYSE & NASDAQ New highs - New lows: 102-34
WTI crude oil: 103.22, +0.26
Gold: 1,612.70, +12.20
Silver: 29.10, -0.48

No comments: