While the annual Harvard senior survey of graduating students always provides an informative glimpse into the past, present and future of graduates from the US' most prestigious (whether or not this is deserved is a different question) institution, the topics most interesting for us and our readers revolve, not surprisingly, around money. Here are the key observations of what students in all "non-Harvard" universities across the nation may be missing (or not).
With everything else in uncharted territory: central bank balance sheets, the stock market, global debt, it was only a matter of time before that old-school indicator of exuberance - margin debt - also joined the ranks of things that are "off the charts." Never one to disappoint (except when Waddell and Reed dumps a "massive" 75,000 ES trade which promptly kills its liquidity replenishment points of course), the NYSE has reported that April margin debt, as expected, hit all time records, just in time for the S&P's own all time high fireworks spectacular. Rising from the just shy of summer of 2007 levels posted in March, or $380 billion, April margin debt not surprisingly rose to a record high of $384 billion. Additionally, even when netting out account credit metrics, such as Free Credit Cash and Credit Balances in margin accounts, total investor net worth just hit an all time record low of ($106) billion.
In a world of shrinking 'quality' collateral to back the ever-increasing leverage and reach-for-yield practicalities of a centrally-repressed market, it seems the actions of the BoJ (as we warned over a month ago) may have just removed the last best hope for keeping Japanese rates stable. As the chart below shows, JGB volatility is simply off-the-scale relative to the other major bond markets. Sustainable? How much return (yield) would you demand for such risk (volatility) before just jettisoning the position?
Ron Paul kept a sign on his desk during his time in Congress that read: "Don't steal. The government hates competition." These days, perhaps a more appropriate saying would be – "Don’t violate people's civil liberties. The government hates competition." In the Land of the Free, it would appear they actually want to make this a law with the introiduction of bill S1057, "prohibiting the use of unmanned aircraft systems by private individuals to conduct surveillance of other private persons." So what the esteemed Senators are telling us is that it’s bad (and hence should be unlawful) to invade people’s privacy. Unless the government is doing it, in which case it’s just fine. Simply put, "No Drones for you."
Syria Goes Hot: Russia To Deliver Weapons, Deploys Air Defense; Israel Warns Russia; Obama Demands No Fly ZoneSubmitted by Tyler Durden on 05/28/2013 - 16:32
Those who were intently following the USDJPY pair formerly known as the stock market today missed the biggest news of the day: the proxy war in Syria just went hot, following a confluence of news, first that Russia insisted "it would deliver anti-aircraft missiles to Syria despite international criticism, as fears of spillover from the conflict grew" and in logical retaliation to yesterday's decision by Europe to lift an arms embargo to the Al Qaeda-supported, Qatari mercenaries operating in Syria, also known as "rebels. This lead Israel's defense minister Moshe Yaalon to immediately signal that "its military is prepared to strike shipments of advanced Russian weapons to Syria." Meanwhile back in the US "the White House has asked the Pentagon to draw up plans for a no-fly zone inside Syria that would be enforced by the U.S. and other countries such as France and Great Britain, two administration officials told The Daily Beast." And just to make it very clear that Russia is not bluffing, it announced overnight that its four regiments of S-300 air defense systems have been deployed at the Ashuluk firing range in southern Russia as part of another snap combat readiness check of the Russian armed forces "The missions will be carried out in conditions of heavy electronic warfare to test the capabilities of the air defense units to the highest limit." And to think: yet another threat of a global war over some natgas pipelines from Qatar to Europe, and a threat to Gazprom's monopoly.
UPDATE: S&P 500 futures plunged back to the lows of the day as soon as cash closed.
The streak is alive. For the 20th Tuesday in a row, The Dow Jones Industrials have closed green. With an average gain of 80 points, since 1/25, the Dow is up an impressive 11% but absent Tuesdays is merely unchanged at +0.2%. Today saw significantly volatility in stocks though with Nikkei and S&P futures giving up all their gains at one point only to bounce back into the close for a glorious victory. Volatility was everywhere as the collapse of the JGB market spills over. VIX rose 0.5 vols to 14.5% (disagreeing with stocks). FX markets jerked and gapped with JPY ending down around 1% from Friday's close. Commodities diverged today with Copper and Oil rising and Gold and Silver sliding even with the 0.75% gain on the USD this week. High yield credit slid lower all day but we suspect this was dominated by rate risk as Treasury volatility exploded. 10Y yields rose by their most (+16.5bps or 5-sigma) since Oct 2011 to close at their highest since April 2012.
Remember the face on the left: it belongs to Mike Hedlund, and it will become much more popular in the coming months and years, because following a historic court decision, Mike just saw the bulk of his student loans discharged following a 10 year battle with the US legal system and his student loan lenders. A decision that will open the floodgates for countless cases just like his, leading to yet another taxpayer funded bailout amounting to hundreds of billions in deferred dollars (read government debt that has to be inflated away) and for which the final bill will again be footed by... you dear US taxpayer.
We must have discovered a new bug in excel, because when we took median new home prices (which a week ago hit an all time high) which we then divided by the average American's purchasing power expressed through real disposable income per capita, we got this chart...
Spanish economic data does not always pass the sniff test. A simple example that JPMorgan's Michael Cembalest explains is that as unemployment rose from 10% to 25% from 2008 to Q2 2012, Spanish banks reported stable non-performing loans of 3%. The latest Mad-riddle, as he calls it, has to do with corporate profits but recent headlines from PM Rajoy, explaining his approach to solving the country's devastating youth unemployment problem just beggars belief. Simply put, as Bloomberg reports, he proposes to create a mechanism to temporarily exclude tax rebates granted to companies for hiring young people from the calculation of the government budget deficit - which, his twisted logic prompts, "would enable immediate action because we’d lower contributions to the Social Security system and this would facilitate and encourage hiring. So in summary, his suggestion to boost youth employment is... to further misreport the deficit and to underfund social security even more. With Spanish data already questionable (as we discuss below), this simply exaggerates an already farcical situation.
There has been much speculation in the recent past over what the bottom-line impact of surging stock buyback activity has been on the overall S&P earnings: after all, by removing shares from circulation, the denominator in "per share" calculation gets smaller and smaller with every incremental buyback. Courtesy of JPM we finally have a definitive answer to this long-running question. Of the change in S&P TTM operating earnings between Q3 2011 and the just completed Q1 2013, a stunning 60% or $2.20, of all "gains" of $3.70 have been the result of buybacks. The remainder: a tiny $1.50 is due to actual organic growth. This means that nearly 60% of the bridge between the LTM operating earnings of $94.60 as of Q3 2011 to $98.30 at Q1 2013 has come from corporate management teams engaging in shareholder friendly activity.
Corruption thrives when good people do nothing. Societies rebound when good people do something. Isn't it time to make democratic capitalism happen. Democratic capitalism is about worthwhile production and exchange by communities of people who give a damn. It is expressly not about either crony-driven concentration of wealth or government redistribution.
What is the only thing better than Foreclosure Stuffing to provide an artificial supply-side subsidy to the housing market? How about completely clogging the foreclosure pipeline, by halting all foreclosure sales, which is just what the three TBTF megabanks: Wells Fargo, JPMorgan and Citi have done in recent weeks. Under the guise of 'ensuring late-stage foreclosure procedures were in accordance with guidelines', the LA Times reports that these three banks paused sales on May 6th and all but halted foreclosures. Perfectly organic housing recovery - as we noted earlier... and guess what states the greatest number of 'halts' are in from these banks - California, Nevada, Arizona - exactly where the surges in price have occurred.
Moments ago the US Treasury sold another $35 billion in 2 Year paper in what can only be classified as one of the weakest 2 short-end auction in the recent past. While the high yield rose notably from 0.233% to 0.283%, it is still at negligible ZIRPy levels associated with Bernanke's extended promise to keep the short-end as virtually equivalent to cash currency. With increasing rumblings that the Fed may be tapering, tightening, and otherwise pushing the short-end higher over the next two years, there was little such fear manifesting in the auction's yield which telegraphs nothing but smooth sailing for the next two years in terms of where Bernanke sees yield: perhaps a better indicator will be demand for the 3 Year auction next week which is seen on the cusip of the ZIRP time barrier. That said, the internals were ugly, with the Bid to Cover sliding from 3.63x to 3.04x, the lowest since the 3.03x seen in February 2011. But it was the general abdication by Direct bidders, who took down a tiny 12.6% of the auction compared to a TTM average of 21.58%, and the lowest since July 2012. Same with Indirects who were left with just 21.93% of the allocation, meaning Dealers had to end with 65.47% of the auction. This was the highest Dealer take down since April 2009. Oh well: at least they will have plenty of "money good" collateral against which to rehypothecate and use the cash proceeds to buy stocks and other risk assets, at least until such time as the Fed proceeds to monetize this paper as well.
With the euphoric market once again serving as a much needed distraction from far bigger geopolitical issues, many have forgotten the plethora of scandals the Obama administration has recently found itself engulfed in. This may change shortly, following news that the head of the US Department of Justice, Eric Holder himself, is now being investigated for lying under oath. Will he too receive an extended absence of leave (with pay) after pleading the fifth, or will the circle of lies slowly but surely start to unwind? Of course, in the New Normal it is probably not only expected, but given, that the chief legal enforcer is just a little more equal when it comes to the same justice he is tasked to enforce.
Over the weekend, when discussing the latest casualty of Bernanke's disastrous monetary policy, the US corporate pension plan, we touched on a topic that has been a recurring theme on these pages: "the start of the unwind of the welfare myth, if only in the private sector for now, made worse by Ben Bernanke's endless tinkering in what was formerly a free market, should be making the guardians of the status quo very, very nervous... and certainly has the disciples of the Bismarckian welfare state delusion on their toes, because they can see very well what is coming down the road." Moments ago none other than Germany's finance minister, Schrodinger Schauble, explained just why this observation is at the core of all modern problem, going so far as using the R-word in the context of Europe (first, and then everywhere else).