What takes other Political Journalism majors (and CTRL-C/V minors) pages and pages of verbose essays full of acronyms and meaningless gibberish to refute, Bill Gross asserts in less than 140 characters.
Gross: The crash on Oct 19 1987 showed that portfolio insurance puts were dangerous. R central bank “puts” in the same category?Very likely
— PIMCO (@PIMCO) October 19, 2012
Needless to say, he is absolutely correct.
We indicated yesterday, as GOOG re-opened, that the day's Volume-Weighted-Average-Price (VWAP) would be a critical level in the next day or two. The earnings SNAFU heard around the world and the sheer mania and herding going into earnings meant only one thing - the big boys will want out in a hurry (big crowds and small doors). And so the onslaught of talking heads appeared to play down this 'aberration', to talk up the future, and explain why everyone should BTFD. The machines, however, told a different story. From the moment we reopened, GOOG was tickled higher by market-maker algos desperate to allow their institutional order-flow out at anything like a VWAP level (the level that their bonuses are judged on and commissions paid from). Sure enough, by the open of the day-session today, we had reached yesterday's closing VWAP and a flood of large block size sell orders hit the market. Watching VWAP today will be key - that's what the machines will be doing as they revert every dip to dump at this mystical level.
Yesterday, we presented Art Cashin's unique perspective on the US equity market's darkest day 25 years ago. However, as Art notes, there was another event 555 years ago that offers some insight into the current state of the world. On this day in 1457, the government banned that most sacred of pastimes - golf. Most notably, Cashin reflects on the eventual backfire from this government intervention - as always seems to be the case.
Although we showed these earlier, we believe the charts showing the trendlines in the two most critical components of US household purchasing power deserve to be shown again, without much if any commentary necessary. Just because.
While as Bloomberg reports the EPS beat to miss ratio so far is 68%:32%, the scariest statistic of the day goes to Deutsche Bank who said that "The beat-to-miss ratio... is running 41%:59% for revenue." This means nearly 50% more misses than beats in the earnings season so far. DB continues: "Recall that Q2 was also one where we saw better EPS beat but weaker revenue performance so it seems that companies have been eking out earnings by squeezing costs and wages." Now as every entry level analysts, Treasurer and CFO knows, there are 1001 ways to boost ESP cut corporate overhead (and those exclude accounting gimmicks, ahem all banks and GE), chief among them of course is laying people off and replacing them with part-timers and temps (something that has been going on in the US for 3 years now as we first showed in 2010), there is precisely zero way to hide the fact that there is simply less demand for products and services at the very top level in a world in which 2% growth, formerly known as stall speed, is the New Killing it, and in which real disposable income just turned negative once again, not to mention the endless collapse in average hourly earnings.
GOOG’s ill timed oops in the early afternoon dumped the S&P 500 approximately 12 handles from what been shaping up previously as a fourth straight “checkmark” session. The technology behemoth provided another example of a non-financial firm’s missing earnings expectations by a country mile. Despite the shocking nature of the disappointment, the TICK never registered a print worse than –925 in the immediate wake of the surprise headline, a highly unusual phenomenon given the aggressiveness of the downward move. This suggests large institutions stayed with their VWAP buy programs out of confusion or necessity. We can envision only two scenarios for such adherence to purchasing in the face of clear extremely negative news on, what was at the time, the third biggest stock in America...
EU leaders committed to establishing a euro-area bank supervisor by year-end, leaving the door open for supplying direct aid to Spanish banks. The EU must now agree on the structure that makes the ECB (European Central Bank) the main supervisor by January 1st. This new system was created to break the link between banks and governments at the root of the zone’s financial crisis and will roll out in the next year and expect to cover all 6,000 eurozone banks by January 2014. “Our goal is banking supervision that’s worthy of the name, because we want to create something that’s better than what we currently have,” Merkel told reporters. Germany and France argued contentiously about the timing. Berlin has insisted the supervisor be effective before the ESM can begin cash injections into Spanish banks, those transactions are not foreseeable to occur until the latter half of the year, around the time of Germany’s national elections. Angela Merkel said it would take more than a few months before the supervisor was fully effective and direct bank recapitalisation could be considered. However, the agreement appeared to upset German finance minister Wolfgang Schaeuble's efforts to delay and limit the scope of European banking supervision. Germany has been averse to see its politically sensitive Savings and Cooperative banks come under outside supervision. It rejects any joint deposit guarantee under which wealthier countries might have to underwrite banks in poorer states.
Yet again Germany was forced to compromise and agree on what can only be viewed as a partial agreement on EU banking supervision. Under the agreed timetable, a legal framework for the new ECB-based supervisor would be finalised by the end of this year and then it would take six to 12 months to get the supervisor up and running. Still, German Chancellor Merkel insisted that direct recapitalisation of banks by the ESM will only be available once fully fledged supervision is in place and ruled out retroactive bank recapitalisation. This, together with the fact that Spain is yet to ask for monetary assistance prompted market participants to book profits. In particular, selling pressure was most evident across the financial sector, where Italian and Spanish banks underperforming for much of the session. As a result, EUR/USD traded lower, with large option expiries today and on Monday between 1.3000 and 1.3050 preventing the pair from posting large losses. Going forward, the second half of the session sees the release of the latest Existing Home Sales from the US and Canadian CPI.
Today's just announced revenue and EPS misses from both megacaps McDonalds and GE (in addition to MSFT, GOOG, INTC, IBM and everyone else) merely adds to what has so far been an abysmal earnings season, and one which is set to continue for far more weakness into Q4 (why? Hint: China, and its unwillingness to ease, and thus provide the much needed demand oomph US corporates need). Yet, the pundits will claim, economic conditions in the US have improved. How does one reconcile this disconnect? Simple: as Bloomberg Brief shows in two simple charts, what we are undergoing is not the first, but second case of annual deja vu, as the economy supposedly picks up in Q3 and Q4, courtesy of the latest and greatest artificial sugar high from the Fed, only to slide promptly back into decline once the initial euphoria fizzles. However, this time there is a major difference: corporate Y/Y revenue (and in many cases EPS) comps have turned negative, which means that unlike before when corporations would be the silver lining in a dreary macro environment once the economic downward trend resumed, this time around there won't be a convenient Deus Ex to provide a last gasp reason to hold on to the myth that things are getting better. This, in turn means, that with "dividend" assets no longer attractive, the investing/trading crowd will rush into hard assets like crude (recall the $125/barrell Brent barrier for economic decline)... and gold. But that is a story for another day.
- Debt Fuels a Dividend Boom - Firms Collect Payouts, and Investors Get Yield; 'Reminiscent of the Bubble Era' (WSJ)
- Black Monday Echoes With Computers Failing to Restore Confidence (BBG)
- Poll: Obama Leads in Wisconsin, Iowa (WSJ)
- Gold Imports by India Seen Climbing First Time in Six Quarters (BBG)
- Europe pushes ahead towards ECB bank supervision (Reuters)
- ... And fails: Summit fails to agree timetable for aid to failing lenders (FT)
- Toyota Prius Dominates California as State’s No. 1 Model (BBG)
- Italy raises €18bn in huge bond sale (FT)
- Diplomacy inbox fills up as U.N. awaits U.S. presidential vote (Reuters)
- Goldman braced for more revelations (FT)
- China power brokers agree preferred leadership team (Reuters)
- EU, Japan Warn Against New US Swaps Rules (WSJ)
- Why VaR is the most meaningless contraption ever: Morgan Stanley shows the ‘flaky’ side of model (FT)
- Made in France Trumps Consumer Choice in Hollande Jobs Quest (BBG)
- North Korea threatens South over propaganda balloons (Reuters)
... Europe would be worried to quite worried:
- Anti-bailout Syria: 30.5%
- New Democracy: 27% - Currently ruling
- Golden Dawn (nationalists): 14%
- Pasok and Democratic Left: 5%
In other words, the anti-bailout party and the neo-nazis would have a near majority in parliament.
Yesterday for the first time in years, the irrelevant headlines out of Europe, which continues to pretend to shuffle money out of one pocket (Germany's) into another (everyone else's), was well-deservedly backstage to the Google earnings fiasco one day ahead of the 25th anniversary of Black Monday (which is today). The EU summit was one of the more toothless ones in a long time, with no discussions at all of the one item that matters - Spain's bailout (as well as Greece's) - but with a lot of fluff considerations for a EU banking union and joint deposit guarantees - events which, like in the June summit, Germany has implicitly gone along with for the ride, but explicitly has said only over its dead body and in which it will not participate (note we said "pretends" above). The summit continues today for a second day, and will hardly make any more news than it did yesterday. In real news, GE missed revenue expectations and joins virtually every other company this earnings seasons in confirming deteriorating unfudgable topline conditions. Elsewhere, in Greece a pool by VPRC for Greece Tomorrow showed that the anti-bailout Syriza party would win outright with 30.5% of the vote, with New Democracy getting 27% and the Pasok coalition partners getting 5%. The Neo-Nazis would get 14%. Also notable is that on Sunday Spanish regions Basque country and Galicia hold local elections. As Rabobank warns, Galicia is Rajoy’s home region, and traditional stronghold of his Popular Party. A poor PP showing may highlight political hurdle to making bailout request, thus challenging the recent OMT-inspired support to Spanish bonds. This in turn would confirm what we have said all along, namely that a bailout request means an end to the current ruling regime and political chaos. Finally, the November 25 Catalonian elections may also trigger Spanish euphoria reversal.
Readers may recall that Ron Paul once surprised everyone with a seemingly very elegant proposal to bring the debt ceiling wrangle to a close. If you're all so worried about the federal deficit and the debt ceiling, so Paul asked, then why doesn't the treasury simply cancel the treasury bonds held by the Fed? After all, the Fed is a government organization as well, so it could well be argued that the government literally owes the money to itself. He even introduced a bill which if adopted, would have led to the cancellation of $1.6 trillion in federal debt held by the Fed. Of course the proposal was not really meant to be taken serious: rather, it was meant to highlight the absurdities of the modern-day monetary system. In a way, we would actually not necessarily be entirely inimical to the idea, for similar reasons Ron Paul had in mind: it would no doubt speed up the inevitable demise of the fiat money system. Control can be lost, and it usually happens only after a considerable period of time during which their interventions appear to have no ill effects if looked at only superficially: “Thus we learn….to be ignorant of political economy is to allow ourselves to be dazzled by the immediate effect of a phenomenon."
Between stagnating incomes and centrally-planned spillovers into housing and transportation costs, workers in this country are increasingly pressured to move to more 'all-in affordable' areas (if they can). As a recent study by the Center for Housing Policy shows, the housing and transportation cost burdens of moderate income households living in the 25 largest metro areas problem is getting worse; moderate-income households pay a disproportionate share; Moderate-income homeowners carry heavier cost burdens than renters; and the combined burden of housing and transportation costs is greatest where costs are out of sync with local incomes - not always the places with the highest absolute costs. Of course QE is designed to 'help' homeowners... and yet the middle-class continues to be squeezed.