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RANsquawk EU Market Re-Cap - 21st September 2012



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Guest Post: The iKrug

It appears it is after all not Scott Sumner who 'saved the US economy' by urging the helicopter pilot to create even more money ex nihilo than hitherto. What will save us instead is Apple, or rather, its latest product, the iPhone 5. Who needs Bernanke when this wondrous device stands ready to pull the economy up by its bootstraps? A story has made the rounds lately – propagated by 'economist' (we should use the term loosely…) Michael Feroli at JP Morgan, that sales of the iPhone "could potentially add from one-quarter to one-half of a percentage point to the growth rate of U.S. gross domestic product in the final quarter of the year”. If we were to assume that he is correct, then what this would mainly tell us is how useless a statistic GDP actually is. However, what really takes the cake is a small posting of Krugman's on the same topic entitled “Broken Windows and the iPhone 5”. This view is erroneous – economic laws are not dependent on economic conditions. This is akin to arguing that the laws of nature will cease to be operational on Wednesdays. In Krugman's capable hands, a fallacy becomes a 'theory'.



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The US Will Spend Between $3 And $7 Per Gallon Of Gasoline "Saved" By Consumers Driving Electric Vehicles

Sometimes you just have to laugh - for fear of the hysterical crying fit that would ensue from recognizing our shameful pathological reality. To wit: Reuters is reporting on a CBO study that shows the US electric car policy will cost $7.5bn by 2019. The report finds that the government's policy will have 'little to no impact' on overall gasoline consumption. 25% of the cost of the program is going up in Fisker Karma-inspired smoke as part of the $7,500 per vehicle tax credit and the rest of the cost is in grants to such well-deserved and successful operations as GM's Chevy Volt - which will backfire since the more electric vehicles the automakers sell (thanks to government subsidy) the more 'higher-margin' low-fuel-economy guzzlers it can sell and still meet CAFE standards (re-read that - amazing!) In 2012, 13,497 Chevy Volts and 4.228 Nissan Leafs have been sold (all that pent-up demand) as the CBO notes that despite the $7,500 subsidy, the cost-differential to conventional cars remains too wide - inferring a $12,000 tax credit would be more comparable; as the U.S. government will spend anywhere from $3 to $7 for each gallon of gasoline saved by consumers driving electric vehicles.



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The Commodity Matrix: What Is The Resource Of Tomorrow, And Who Will Benefit From It?

While it is impossible to predict where the S&P will be in 10 years (or even 1), one can safely make some assumptions about what the world will look like in a decade (assuming of course it hasn't blown up by then). It will be hungry, it will be thirsty, it will demand resources, and it will be crowded (and it will certainly have lots and lots of wheelbarrows carrying pieces of paper to and fro the local bakery). Implicitly then, countries which control the production and export of various key natural resources and commodities channels will become increasingly more strategic and important. However, for some economies, such as the Middle East, whose entire export-based welfare is reliant on a core set of commodities, this export-benefit may be a doubled-edged sword, should it lead to militant antagonism by one time friends and outright enemies, and/or complacency leading to lack of revenue stream diversity.  In order to determine who the key resource players in the future will be, we present the below commodity trade matrix which answers two questions: how important is a commodity to a country, and how important is a country to a commodity. As GS notes, those on the riskier side of this equation are economies that are heavily reliant on oil, such as the Middle East or even Russia (which albeit scores better on other hard commodities). On the other hand, food exporters enjoy relatively better diversity in their trade portfolios. We highlight the LatAm economies here, while Canada and the US also look healthy. Will food (and water) be the oil of the future, and will the next resource war be not over black, or even yellow, gold, but, pardon the pun, edible gold?



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The Payoff: Why Wall Street Always Wins - An Excerpt

...the pushback from Wall Street was intense and multi-pronged. The Blob oozed through the halls of government, seeking, through its glutinous embrace, to immobilize the legislative and regulatory apparatus, thereby preserving the status quo. The executive jets of the Wall Street air force flew sortie after sortie, transporting high-ranking emissaries from new York to Washington to meet with the SEC, [Senator Chris] Dodd and [Senator Richard] Shelby staff, and the staff of other senators on the Banking Committee. Some of the executives, no doubt less enthusiastically, even met with Josh and me. The research companies and market experts Wall Street employs also raised their voices against us. At times it got ugly. Ted was called a crackpot and dangerously uninformed. He was accused of “politicizing” market regulation (a strange notion considering he wasn’t running for election). It seemed as if Wall Street, which wasn’t used to someone on Capitol Hill asking in-depth questions about arcane issues, wished to silence or marginalize its critics. Industry people would always ask me, “What got Kaufman so interested in this stuff?” Used to politicians whose top priorities were to please their home-state business interests and raise money, they had trouble fathoming that Ted was so interested because it was the right thing to do. He believed in fair markets. And because he was genuinely concerned about emerging issues that threatened the stock market, where half of all Americans keep a sizable portion of their retirement savings.



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Jim Grant: We Are Now All Labrats Of Bernanke And The Fourth Branch Of Government

You put Jim Grant on TV and someone mentions the Fed and the result every single time is the equivalent of waving a red curtain in front of a rabid bull. This time was no different, as the Interest Rate Observer once again let Bernanke, with whom he clarified is no longer on speaking terms, have it. The ensuing central-planner bashing was in line with expectations, and just as we presented yesterday in "The Experiment Economy", so too does Grant believe that the Fed is "learning by doing" and follows up by clarifying that this is an experiment, "and we are lab rats in the financial markets." He then proceeds to lament that the credit markets, clueless NYT econopundits notwithstanding, have now lost all informational value as every rate instrument is purely in the manipulated domain of the Fed. "We are all living in a land of speculation and manipulation" is Grant's summary of the current predicament of anyone who wishes to trade these "markets" and it may as well be the best synopsis of the New (ab)normal. And aside from an odd detour into Government Motors, Grant once again hones in on the only true antidote to central planner idiocy, gold: "the best thing about gold is that it's got no P/E multiple. Gold is a speculation on an anticipated macroeconomic outcome, the systematic debasement of currencies by central banks. Why wouldn't they do QE4? What intellectual argument do they have against doing it again, and again, and again." Well...none.

 



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Don't Hold Your Breath For The High-Beta Performance Chase - It Already Took Place

When there is nothing left to base your permabullish stance on (earnings collapsing, top-line misses, end of surprise factor from ECB/Fed, and sentiment uber-bullish) there is always 'career-risk'. The high-beta performance chase - the need to reach for high-beta names/sectors/indices in the hope that if the market keeps ripping, your performance is levered and you don't lose your job - has been proffered by many 'strategists' for their optimistic short-term projections and year-end targets for the S&P. The problem with this thesis is that it already happened - and dramatically! Since Draghi uttered his magical words, the high-beta Russell 2000's P/E has soared relative to the other major indices. Just as it did during the LTRO exuberance, RTY has seen its P/E surge more than 2x more than the Dow (and reached an epic 9x above the Dow - at 22x Forward earnings on Friday). Since then, the beta-chase has actually decelerated, so either the chase is over, or PMs see 'flatter' as the new 'killing it'.



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CME Lowers Initial ES And Other Key Equity-Related Margins By 12%

It doesn't get much more obvious than this. The S&P at multi year highs, and what does the CME do? Why it lowers initial (as in please come in and open new positions) spec margin for not only the E-Mini, but virtually every other major market "reflexive" product in existence including S&P, Dow Jones, Nasdaq, and subsector futures currently traded, by 12%. As a reminder, the last time that "other" asset class rose to multi-year highs, that would be gold, it hiked margin nearly every single day, with a culmination of two margins hikes in one day on May 4. Naturally, the margin hiker-in-chief is not as worried about stocks attaining the same bubble status since if anything it will merely cement reelection chances. That said, should WTI ever dare to go up above $100 watch as the CME proceeds to decimate anyone who dares to be long WTI futures on margin.



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Guest Post: How to Navigate An Economy Weighed Down By Government Meddling and Cronyism

If you wanted to sum up the just-concluded Casey Research/Sprott Inc. Summit titled Navigating the Politicized Economy, you could say "The situation is hopeless but not serious." More than 20 speakers – many of them world-renowned financial experts and best-selling authors – gathered in Carlsbad, CA, from September 7 to 9 to ascertain exactly how hopeless, and what investors can do to protect themselves.



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Credit Underperforms As Stocks End Unch (At Highs)

Equity markets rallied into the close (pre-OPEX and index re-weightings tomorrow) to end near their highs for the day but this was only enough to get back to practically unchanged. The Dow was the only index to manage a green close on the day-session (as AAPL dragged NASDAQ lower and the S&P couldn't get above Tuesday's or Wednesday's closing levels). With the CDS market rolling today (and indices being recomposed), we saw a somewhat unusual selling pressure into the roll - suggesting many credit longs were less than willing to roll that long into the new index (though technicals do make this uncertain). HYG underperformed. Stocks seemed to levitate back up to track Gold and the afternoon's weakness in Treasuries (unch on the day but 3-4bps higher in the afternoon) and strength in Oil dragged risk-assets more in sync with stocks (after suggesting weakness in the middle of the day).



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Poor New Yorkers Spend 25% Of Income On Cigarettes

It sucks to be poor. It sucks to smoke (broadly speaking). But most of all, it sucks to be a poor smoker in New York. This is the finding from a study conducted by RTI's Public Health Policy Research Program which shows that low-income smokers in New York spend 25 percent of their income on cigarettes, a finding that led a smokers' rights advocate to say it proves high taxes are regressive and ineffective. Bloomberg reports: "In New York, with the nation's highest cigarette taxes, a pack of cigarettes can cost $12, though many smokers have turned to cheaper cigarettes bought online and by using roll-your-own devices. Wealthier smokers — those earning $60,000 or more — spend 2 percent on cigarettes, according to the study." The imminent solution: hike taxes even more of course. After all it is not like broke New York City needs the cash broke smokers will stop using EBT cards and other forms of cheap credit to feed addictions. And while at it, hike school tuitions a little more: in a society in which the only peddled hope of regaining the American dream is graduation with an advanced pottery degree, and in which (non-dischargeable) student debt costs nothing, what is the downside?



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Guest Post: European Car Engine Sputtering

According to data released by ACEA (European Automobile Manufacturers’ Association) new passenger car registrations fell 8.9% in August after a decline of 7.8% in July. In 2011, Germany produced 5.8 million passenger cars, of which 77% (4.5m) were exported, making cars and parts the most valuable export good (EUR 185bn). A heavily export-dependent German automotive industry looks vulnerable to setbacks in important markets.



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Bernanke Fails At Herding Cats Again As Market Simply Front-Runs The Fed... Again

Once again, the unintended consequences (or fundamental flaw as we noted previously) remain front-and-center, just as with prior episodes of QE, we have seen the market surge into the very assets that the Fed has promised to buy (in this case into Eternity). 30Y current coupon mortgages spread to 10Y Treasuries has fallen - rather stunningly - below 20bps. An all-time record low by a mile. Homebuilders and broad equity markets are not so excited as in his failed attempts to drive people into risky assets (stocks), those 'smart' people have simply front-run the Fed's MBS buying deluge  - more than willing to sell the market back to the Fed while reaping some additional yield.



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US Credit Formation And Destruction Since The Second Great Depression

On September 15, 2008 (aka Q3) 2008 everything broke. What happened next has been a piecemeal triage by one (then all) central banks to stop the crunch in the world's credit markets, by monetizing the bulk of public issuance (i.e., creating money out of thin air), and thus keeping GDP from collapsing, while private sector debt creation has stalled and in many cases has been put in reverse. And while the US household balance sheet which we showed earlier is important from a stock perspective of asset, liability and wealth allocation, as everyone knows money (if not wealth) comes from credit, and should the credit formation system be shuttered it means game over. So what, according to the Fed's Flow of Funds, has been the credit creation, and destruction, since Q3 2008, i.e., during the neverending Great Depression Ver 2.0? Well, of the $2.8 trillion in total debt created (table L.1 in Z.1), $5.8 trillion or 208% has come from, you know it, Uncle Sam: this is the amount by which US Treasurys have risen, and will continue to rise as long as the two key sectors continue to delever. These sectors are the Household at $855 billion in deleveraging in the past 4 years, but most importantly the Financial Sector who have unwound a whopping $2.9 trillion in debt since Q3 2008. Which brings up an interesting question: why has the Financial Sector refused to lever, and why did it delever by $162 billion in Q2 2012 - the most since Q2 2010? Simple - regulations such as Basel III (which will eventually be scrapped) and lack of confidence in a system, in which the central counterparty is and will be the central bank. In other words, the more Treasury issuance is monetized by the Fed, the greater the penetration of central-planning, the lower the confidence in the system, the greater the deleveraging by everyone else, until finally, as David Rosenberg predicted, the Fed owns everything! Is this the biggest Catch 22 of the modern Depressionary market? You bet.



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Oililocks: Why Obama Needs Crude "Just Right"

The performance of CRB's sub-industrials relative to Oil has been a consistently useful indication of economic sentiment. Given the recent performance, Oil prices suggest a significant drop in US Manufacturing PMI - sub-40! This leaves President Obama with a dilemma: one the one hand he needs to pressure Oil down (SPR jawboning?) in order to maintain some semblance of economic growth and recovery (and perhaps jobs) but given the highly correlated (and QEternity-driven liquidity spillover) asset markets, a lower oil price fundamentally suggests lower global growth and technically drags risk-assets lower - which in turn moves stocks lower. Once again an encumbent tries to find the Goldilocks-level of Oil - too hot and growth slumps, too cold and markets slump, just right and get re-elected.



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