Frontrunning: January 18

  • Foreign Hostages Die in Algeria’s Battle With Terrorists (Bloomberg)
  • The latest bank to soon join the currency wars: McCafferty Says BOE Must Keep Open Mind on New Policy Tools (Bloomberg)
  • US debt talks complicated by timing (FT)
  • BOJ eyes open-ended asset buying, agrees new inflation goal (Reuters)
  • AmEx Says U.S. Card Income Fell 42% as Loss Provisions Increased (BBG)
  • Call to raise age for US’s Medicare (FT)
  • Obama Promise to Raise Middle Class Living Already Seen in Peril (BBG)
  • China Exits Slowdown as Quarterly Growth Tops Forecasts (BBG) - actually, as new Politburo says to make it appear that way
  • Britain to drift out of European Union without reforms (Reuters)
  • Republicans weigh interim debt-limit hike (FT)
  • Abe's aide says Japan shouldn't fret if yen falls to 100 vs dlr (Reuters) ... and it was 90 just a few days ago
  • PBOC May Seek More Liquidity Operations (Dow Jones)

So Much For That "Record Inflow" Into Equity Funds - Domestic Equities See $4.2 Billion Outflow In Most Recent Week

The most talked about story of the last week was undoubtedly the relentless chatter about that massive $18 billion in equity fund inflows as reported by Lipper (not ICI), which tracks primarily institutional and ETF flow of funds, and which, as we explained even before the Lipper data came out, was driven exclusively by a surge in bank deposits into the year end, to be recycled for risk investment purposes by the commercial banks' own prop desks. The details, however, were largely ignored by the mainstream media which took that inflow as an indication that the tide has finally turned and that the great rotation out of bonds into stocks is on. Turns out that just as we expected it was a year end calendar asset rebalancing. As Lipper reported earlier, the enthusiasm for US stocks appears to have abruptly ended, with a whopping $4.2 billion pumped out of domestic equities, offset by some $4.5 billion invested in non-domestic equities. The blended flow? Just $286 million going into equities. Now our math may be a little rusty, but $18 billion followed by $0.2 is not really indicative of an ongoing rotation out of bonds and into stocks, and is more indicative of a one-time, non-recurring event, just the opposite of all the Bank of America addbacks.

China, Japan Do Their Best To Add To The Overnight Multiple Expansion

China’s monthly data dump was the main macro update overnight, which however with ongoing mockery of the Chinese data "goalseeking" and distribution methodologies, most recently by the likes of Goldman, UBS and ANZ, had purely political window dressing purposes for the new Chinese politburo. Sure enough, that all the data came precisely Goldilocks +1 was enough to put a smile on everyone's face. To wit - Q4 GDP growth came in just higher than consensus (+7.9%yoy v +7.8%). On a full year basis the economy grew by 7.8%, also a tad above expectations. Then we got industrial production, also just higher than expected (+10.3% v +10.2%) and retail sales - just higher as well (+15.2% v +15.1%). Much more important than meaningless, jiggered numbers, was the announcement from the PBOC that in light of the entire world going "open-ended" on easing, China - which now can't afford to lower rates for fears of rampant inflation together with importing everyone else's hot money - announced it will start short-term liquidity operations as additional tool for controlling liquidity, engaging in a reverse repo on a daily basis, which will have a maturity of less than 7 days. This way the central bank will be able to reacted almost instantly to any inflationary spikes across the economy, as it too has no choice but to ease although not by the conventional inflation targeting methods now used by everyone else.

Guest Post: The Unadulterated Gold Standard Part 4 (Intro To Real Bills)

Following Part 1 (History), Part 2 (Interventionism),  and Part 3 (money vs. credit), Part 4 considers another kind of credit: the Real Bill, designed to provide a bridge between service providers and supply chains. Although initially appearing inflationary, it is the restriction of counterfeit credit that keeps Real Bills in tact as they will inevitably spontaneously circulate as a clearing mechanism for transactions (thus avoiding the credit inflation). In practice, the Real Bill is nothing more than the invoice of the wholesaler on the retailer.  Opponents of Real Bills have a dilemma.  They can either oppose them by means of enacting a coercive law, or they can allow them because they will spring into existence and circulate in a free market under the gold standard.  We can hope that the principle of freedom and free markets leads everyone to the latter.

A Tale Of Two New York Cities: The Rich And The Hungry

New York's apparent success as a financial and cultural center of the world (and anchor for the liquidity flood of the world's central banks via bank er bonuses) has an ugly side. The inflationary impact of the extremely wealthy is squeezing food prices to the point that many low income families simply cannot afford to eat. A dismally real picture of the situation in New York is exposed in a report by Food Bank NYC - One City, Two Realities. As The Daily News notes, many of the report’s findings are truly worrisome. For instance, between 2011 and 2012, the percentage of households with annual income below $25,000 that had trouble affording food increased a whopping 30%, with 70% of these households with kids reported difficulty affording 'needed' food. NYC's unemployment rate remains well above the nation's average and 54% of those are struggling as according to the Food Bank, “low [no] income families are making the difficult decision to reduce the nutritional quality of their meals by purchasing less expensive and unhealthy foods in order to afford the mandatory expenses that would keep a roof over their heads.” Participation in government food assistance programs continues to rise, and demand for emergency food programs continues to intensify as 54% expect to need assistance (SNAP) in the next 12 months.

Does This Look Like A Recovery?

A few years ago back when I used to watch an occasional bit of television, I would always have an internal debate with myself: which was more funny– Comedy Central, or CNBC? It was always a toss-up. One channel has talking puppets. The other has Steven Colbert. Both are satires of our bizarre reality. These days it seems financial media has surged ahead in this contest, rolling out one expert guest after another to beat a steady drum that economic recovery has settled on terra firma. Now, I’m an optimistic guy... and there are plenty of good news stories around the world. But just looking at the numbers, it’s clear that there is a major disconnect between sentiment and reality. On one hand, western governments and mainstream media sources tell people that their economies are recovering and moving forward. Sentiment is high, confidence is growing. Unfortunately the data show a completely different story...

Goldman's Most 'Event-Risk-Prone' US Equities

With the Dell LBO potentially heralding the renaissance of re-leveraging risk transfer from equity-holders to credit-holders, Goldman's screen among investment grade and high-yield companies attempts to uncover the names most likely to engage in shareholder-friendly (or more specifically bond-holder unfriendly) events. From quantitative screens on cashflow, leverage, and cash to stock 'cheapness', industry suitablity, and management reputation, the following 47 names warrant further attention (in both CDS and equity markets).

Time Dependency Of Bull Markets

Stock market performance during bull markets is mainly (89%) explained by the duration of the bull market (defined as an uptrendwithout any pull-backs of 20% or more). The conclusion: As long as no shock rocks the boat, the expected market return is +22% per annum. The current bull market (+117%) is a tad ahead of the expected performance. Time-dependency matters more in bull markets. In bear markets, fundamentals (or initial conditions) matter most. What does this mean for current market environment? Valuation is, depending on what you look at, either cheap (P/E ratio) or expensive (P/E 10,Tobin's Q, regression etc). Hence, all eyes have to be on the look-out for any external shocks.

The "Big Three" Banks Are Gambling With $860 Billion In Deposits

A week ago, when Wells Fargo unleashed the so far quite disappointing earnings season for commercial banks (connected hedge funds like Goldman Sachs excluded) we reported that the bank's deposits had risen to a record $176 billion over loans on its books. Today we conduct the same analysis for the other big two commercial banks: Wells Fargo and JPMorgan (we ignore Citi as it is still a partially nationalized disaster). The results are presented below, together with a rather stunning observation.

US Mint Out Of Silver Coins - Suspends Sales

As we noted earlier this month, the demand for both gold and silver 'physical' coins has been record-breaking as 2013 began. So much so, that now after selling over 6 million silver coins in 2013 so far, the US Mint has run out of silver eagles and has suspended sales. Furthermore, the Mint is saying that it will not restart sales until January 28th! With all asunder proclaiming victory and crisis averted based on the nominal price of stocks at five-year highs, Swiss interest rates no longer negative, and Spanish bond yields at 5%, it seems there are still a few that demand the wealth-preserving safe-haven of hard assets as the escalation of the currency wars shows no sign of abating.

Guest Post: Mr. Abe's Trigger

The newly elected Japanese Prime Minister, Shinz? Abe, has caused quite a stir. The leader of the Liberal Democratic Party, which scored a landslide victory in 2012’s election, he’s promised to restart the Japanese economy, whatever it takes. How will he do this? By “bold monetary policy”, what he means—and what he has said—is to end the independence of the Bank of Japan, and have the government dictate monetary policy directly. The perception is, the Bank of Japan will not only print yens and buy government bonds à la Quantitative Easing of old - it is also generally thought that Mr. Abe and the incoming Japanese government fully intend to target the yen against foreign currencies, like Switzerland has been doing with the euro. This perception is what has been driving the Nikkei 225 index higher, and driven the yen lower. But why was this decision triggered?

US Drones, Boots Arrive In Mali

Absolutely "nobody" could have possibly anticipated that the week old French incursion into Mali could already have such disastrous consequences: a botched hostage rescue attempt by French commandos while leaving behind one of their team, a downed pilot on the first day of the confrontation, rebels that succeeded in capturing a strategic village and military post, and today, yet another hostage crisis in Algeria that has seen tens of hostages killed, potentially including Americans, following another botched rescue operation. Yet, in some ways, perhaps the stars have aligned just right for the US, which as Bloomberg reports, has wasted no time in sending not only drones in the air, but also boots on the ground.

Dow Jones Closes Just Shy Of 5 Year High As Intel Beats EPS, Misses Revenue And Guides Lukewarm

Stocks surged (apart from AAPL) gloriously out of their super-narrow recent range, driven by recycled JPY rumors and some potential 'give' by the Republicans, and the rest of the risk-on complex tracked higher with it. Treasury yields pinged back to higher on the week as the S&P took out recent highs amid a very large surge in average trade size - something that often marks a climax in trend. It seems the selling of vol has hit its short-term limit (as VIX flatlined in general today) and so FX and credit were the levers today. Gold and Silver also surged on the day as Oil popped on the growing tensions in Algeria. In a premature release, Intel exposed an EPS beat, revenue miss, and weak guidance which sent algos scurrying and the share price snapping up and down into the close (and falling after). The bottom-line seems to be that the BoJ joining the infinite print brigade (and some very mixed US macro data) was enough to break us out of a narrow range - but the VWAP reversion into the close appears anything but follow through for the next leg up - as trade size suggests short-term trend change.

You Wanted Inflation, You Got It: Japanese Gasoline Price Rises To Eight Month High

When one thinks of open-ended, "inflation targeting" one usually thinks of soaring markets, at least in nominal terms, exploding central bank balance sheet, and happy central planners. What one usually does not think of, is, well, inflation targeting. Because while the shadow banking financial system, perfectly devoid of deposits, has for now provided a sufficient buffer from trillions of reserve injections from spreading into the broader economy of the US and Europe, and has primarily impacted stock markets as unsterilized liquidity injections are used by banks to bid stocks, Japan has been far less lucky in this regard. As it turns out, the massive slide in the Japanese Yen in the past 2 months on nothing but ongoing promises of open-ended action, something Europe has perfected, and the US most recently enacted, may have already achieved its goal of pushing inflation. only not to the desired 2% level, but about 50% higher. Luckily, it is for such trivial things that nobody really every needs, such as fuel and consumer products - just ask the BLS.

Republicans Considering "Temporary" Debt-Ceiling Increase

In what is sure to be a complete non-starter with the Obama administration, WSJ reports that Paul Ryan said that "Republicans are discussing whether to support a short-term increase in the nation's borrowing authority, possibly linking the debt ceiling to future talks aimed at reaching a major deficit deal....Mr. Ryan said no decisions have been made about how to approach the debt and spending negotiations, but that leaders hope House Republicans will reach consensus on a strategy by the end of the week. The former vice-presidential candidate said "we're discussing the possible virtue of a short-term debt limit" increase that would lead to broader deficit talks with Senate Democrats and the White House. "We hope to achieve consensus on a plan to proceed so we can make progress on controlling spending and deficits and debt," Mr. Ryan said." The logical question immediately arose, and promptly received a non-answer "Mr. Ryan wouldn't say what he meant by a temporary debt-ceiling increase, declining to give a specific increase figure or timeframe for an extension."

Guest Post: Misunderstanding Austerity, Stimulus and Demand

Keynesian policy requires an expansionist Central State and Bank bent on imposing central planning on every level of the economy. Keynesians are natural partners with the neofeudal financial Aristocracy which benefits so enormously from Keynesian print-borrow-blow policies. The standard Keynesian cargo-cult analysis of our economic woes: 1. The problem is a lack of aggregate demand, i.e. people buying stuff and services; 2. As a result, the economy is running below capacity, i.e. economic output is below potential; 3. The solution is fiscal and monetary stimulus, i.e. the Central State borrowing and spending trillions on politically directed programs and the Federal Reserve printing and injecting trillions of "free money" dollars into the financial sector to boost borrowing and lending. The cargo-cult program has failed for a number of fundamental reasons. Let's illuminate these reasons with a few thought experiments.

Boeing: Deliveries Vs Orders

One of the questions emerging from the latest batterygate affair, this time not involving A123 or any other government subsidized lithium batter maker, is whether customers who have already preordered Dreamliners, some as far back as 2004, may end up just saying no over concerns how long it will take Boeing to resolve its problems, and opting for other airplanes from the company, or even choosing some of Airbus' offerings. Because it may come as a surprise to some that while a whopping 848 airplanes have been ordered, only some 49 have been delivered, virtually all of which are now grounded. What else may be surprising? The charts below summarize where Boeing is on the delivery vs preorders picture.

2007 Deja Vu As Goldman Sees $150 Oil By The Summer

While Brent closed 2012 at around its average closing price for the year, suggesting some stability, rolling a front-month contract garnered returns over 10% underscoring Jeff Currie's (Goldman's chief commodity strategist) note that money can still be made in a low volatility environment. However, he does note the incredible divergence between near-record-high geopolitical risks and near record-low Brent crude volatility relative to stocks. The key is that while Currie expects the global oil to remain cyclically tight (inventories low in 2013-14), with a $105.50 average for WTI; in an interview earlier today in Frankfurt, he said he wouldn't be surprised "if we woke up in summer and [Brent] oil cost $150" per barrel.