The markets seem to be reallocating resources: from Treasurys to stocks ... from gold to euros.
What is this new Goldilocks thesis? The bulls argue: 1) we're moving to greater clarity on taxes; 2) Europe is showing determination to stay together; 3) China is bottoming; and 4) corporate balance sheets are in good shape.
Bears are not so amused by these arguments. It's all a fantasy, they say: 1) We will get growth with rising taxes and lower spending; 2) we will have unlimited stimulus that will not cause inflation; 3) we will shift from bonds into stocks without a bond crash; and 4) the government will easily be able to afford the higher interest rate expenses they will soon have to pay.
The cheaper yen: Is it the big story of 2013? I said yesterday that there was something odd going on — that gold was being sold on a day when the dollar was weaker, that the euro was being aggressively bought, and I speculated that there was some type of pair trade that was going on, or even unwinding. Whatever, it looked like it involved selling gold and buying the euro.
One way to finance new positions is to borrow the money. The oldest borrowing around — the yen carry trade, whereby you borrow cheap yen and invest outside Japan — appears to be a leading culprit in some of these trades.
Last night, the Japanese government reported that its exports fell for the sixth straight month. Expect the Bank of Japan to announce new stimulus measures, maybe as soon as Thursday. That means a cheaper yen, one of the key objectives of incoming Prime Minister Shinzo Abe.
Traders have been anticipating this for months. Overnight, the yen fell to its lowest level in a year against the dollar; same with the euro.
The yen carry trade is back, and it may be a big help financing the reallocation that appears to have begun.
1) Hedge funds get bullish ... is that bad news?
A trader sent me a chart from Business Insider that caught my eye. Hedge funds are the most exposed to the equity market they have been since 2006. Responding to a survey asking, "What is your current net exposure to the equity market?," the weighted net exposure was about 45 percent, the highest since 2006, when it was over 55 percent.
This, of course, is a contrarian indicator ... if a lot of traders have heavy exposure, how much more is there that can go in?
This deal makes sense for a simple reason: Knight is the largest wholesaler, and Getco is among the fastest and best high-speed trading systems. Put the two together, and you have a market leader in stock transaction.
The company will remain public, but at what valuation? Hard to say, since we haven't seen Getco's financials. Given how fragile the trading business is (as witnessed by the trading glitch that almost destroyed Knight), expect it to trade at some kind of discount, even when the financials are made known.
3) "Government Motors" no more: The Treasury Department is getting out of General Motors. GM said this morning it would repurchase 200 million of the U.S. Treasury's 500 million shares for $27.50 a share. There will be a full exit of the remaining 300 million shares in the next 12 to 15 months.
GM is buying the stock back at a premium. Far from being an overhang, the stock, which had closed yesterday at $25.49, immediately traded up to near the purchase price in the pre-open.
Consensus earnings estimates should increase because of the share count reduction.
What's next? How about a dividend? How about this: Getting GM back into the S&P 500. The free float will be going up appreciably — it will be approaching 60 percent, a good argument for considering it for inclusion — again.