Archive - Oct 24, 2012

Both capitalism and democracy promise the opportunity for upward mobility. Capitalism offers upward mobility to anyone with a profitable idea or productive skillset and work ethic. Democracy implicitly promises a "level playing field" of meritocracy, where talent, drive and hard work open opportunities for advancement. Crony capitalism offers wealth to the class that already possesses it. Feudalism bestows "rights" to wealth to a favored few. In a way, upward mobility is a real-world test of a nation's economic and social order: if upward mobility exits in name only, then that nation is neither capitalist nor democratic. Stripped of propaganda and misleading labels, it is a feudal society or a crony-capitalist economy masquerading as a capitalist democracy.  The wealth that could have been transferred to the next generation has been consumed suporting a "middle class" lifestyle and providing the next generation with what was once the basis for advancement: a university education, healthcare insurance, a reliable vehicle, etc. Now that jobs are hard to find and compensation is low, the next generation still needs the accumulated wealth of the household to get by. That is not upward mobility, it is downward mobility, on a vast and largely unnoticed scale.

On the surface, today's New Home Sales number was great (as always tends to happen just before a presidential election): a print of 389K seasonally adjusted annualized units sold in the US (ignoring the 37.3% collapse in the Midwest), which was a 5.7% increase from August's downward (unlike initial jobless claims, when one is attempting to report an increase, the last number is always revised downward) revised 368K (was 373K). This number was the highest adjusted print since April 2010, which makes for great headlines. So far so good, until one looks beneath the headline and finds that the 389K number (to be revised lower next month), is based on a September unadjusted number of 31K in actual sales, consistting of 3K sales in the Northeast and MidWest each, 16K in the South and 9K in the West. This is the unadjusted number, which as last week's BLS fiasco with Initial Claims showed, applying seasonal adjustments is the easiest and best way to manipulate any data set (for more see X-12 Arima's FAQ). This was the lowest print since February's 30K, the same as August's 31K, and well below the 35K from May 2012.

Each and every day, a veritable smorgasbord of CEOs are trotted out before our very eyes to spew forth their company's vision and how it's all looking so rosy. Of course we hang on every word as gospel and react accordingly. Similarly, a rise in consumer sentiment is more ammunition for bulls to argue that animal spirits are here and we can go back to the old re-leveraging ways of spending-more-than-we-have (or ever will have). There's only one problem - when push comes to shove and real capital has to be put to work, its not happening! Expectations for capital expenditure (investment in growth and maintenance) has plunged in the last few months, while at the same time, consumer sentiment has surged (no doubt led by an ebullient equity market and inherent recency bias). As we wrote previously, in an environment of soaring liquidity and free money, the hurdle rate on new investments collapses, as does the requirement to invest in CapEx, both growth and maintenance. In fact, as we have shown over the past year, the age of the global asset base has hit a record high across the world, both in the developed and developing countries, leading to record low return on assets on record low assets (and record debt encumbrance, but that's a different story). And since companies are forced to dividend cash to shareholders at a record pace (in lieu of fixed income in a ZIRP environment), there is less and less cash left to support CapEx spending (or hiring!).

For all those wondering why next time Mario Draghi will need to pull a "Merkel Lampoons Greek Vacation" next time he comes to Berlin, and is accompanied by 7,000 policemen, here is the Goldmanite's full speech, with the five key lies highlighted for general consumption.

Printing trumped the European recession until the spigots were either turned off or became ineffective. What else is that you can promise the markets after “limitless” and “uncapped” play out? With short rates at just above Zero, with everything promised now except the kitchen sink and with the economies in a major part of Europe falling into the abyss where is it that you think we are going besides down? I would argue that the central banks did what they could, delayed the inevitable but that it was always a question of when and not if before earnings turned grim and the markets reversed.

With all the hope slooshing around the world, it is likely no surprise that some risk-reward connections have 'broken' or become misaligned. In an effort to simplify the view of asset class risk and return, we present Morgan Stanley's Yield vs Volatility chart. It seems relatively plain to see that the Russell 2000 (and European stocks SX5E) are dramatically over-priced (under-'yielded') relative to their risk, while Asian and European High Yield credit (and to a lesser extent Asian and European Investment Grade Credit) are trading notably cheap relative to their volatility. So for all those performance chasing asset-allocators who remain fundamental bulls, buying European High Yield credit seems the best bang for your buck - instead of piling into more Russell 2000 beta...interestingly the S&P 500 appears 'fair' compared to risky sovereigns, global stocks, and global credits from a risk-reward perspective.

The latest headline out of broke Europe, where Germany entering recession apparently benefits from a rising EURUSD even as Mario promises to print even more currency, is perfectly expected: the insolvent Spanish region of Andalusia has requested even more bailout aid. From Bloomberg:

• Spanish region of Andalusia says it is seeking more aid from Spain
• Andalusia Says Spain Must Help as Regions Shut Out of Markets
• Fund set up by central government to aid regions is only option

And what we have said all along:

• Amount for Spanish regions’ fund was “underestimated:” Andalusia spokesman says

Everyone's favorite internet narcissism site has exploded in the pre-market. After reporting some not as bad as expected numbers, analysts at Citi, BofAML, and Stifel have upgraded the wunder-stock to BUY and that has sent this 14% of float shorted stock up 25% - to its huge gap-down level from 7/26 (last earnings). Technical squeeze of all-clear? With 23 Buys, 15 Holds, and 4 Sells, what can go wrong? Especially with ~$16bn of market cap from lockup expirations due to hit within two months.

The Goldman pro-inflation emissary is now in Berlin. We can only hope he is not using a wheelbarrow as a pedestal. Here are his quotes...

No surprise Europe remains highly vulnerable to sudden sentiment shifts. How to stablise it? The usual smoke & mirrors are conveying what might or might not be good news on Greece [since denied]. The crisis in Europe may be contained, but it clearly isn't solved. "Europe is like an overweight dinosaur on a crash diet, that's got really really bad toothache with not a dentist in sight." But But But.. yesterday's ructions weren't just about the political shenanigans that pass for markets these days. There are deep undercurrents roiling these placid markets. All of which leads us to wondering what happens next? If this continues what hope for next year? Low low yields and global economic depression? Boy scout time...

Literally minutes ago we made it clear that the Greek FinMin is now officially lying on the tape, declaring his "hope" as a fact. It took Germany moments after our post to chime in and confirm that indeed, things are very, very serious, if the finance minister of a country is now blatantly lying. Via BBG

• GERMAN SPOKESMAN: NO BASIS FOR 2-YR GREEK EXTENSION REPORTS - DJ

And EURUSD spike on the rejection of the lie. In other news, the market is about as unmanipulated as the Mitt Romney flash smash yesterday.

After absorbing the latest PMI reports from Europe, as well as yet another disappointing German IFO survey which in turn was followed by a sharp rise in volatility, saw equity markets in Europe print lows of the day. However ever since, equities staged an impressive recovery and are now in positive territory, supported by investors looking to capitalise on oversold conditions and in part by short-positions being squeezed. The sharp and unpredictable mood swings resemble one suffering manic depression and it remains to be seen whether stocks will be able to hold onto gains. The move higher in stocks has been led by the tech sector, which has been one of the worst performing sectors over the recent weeks. Looking elsewhere, EUR underperformed its peers, largely driven by a lower EUR/GBP (by-product of deterioration in EU credit markets, as well as good sized buying by a UK bank in GBP/USD).

What better way to start the morning for EUR trading algobots (which at last check account for 50% of the volume and rising) than with a bout of total confusion over the Greek bailout (non) extension. On one hand we have the Greek FinMin Stournaras saying a two year grace period has been reached - something which the European core has said is not standalone, and which will need much more bailout cash, and on the other we once again have Germany flat out denying this report, saying the official Troika reports has not been completed, and that Greece is expected to show deviations from the fiscal plan. From Kathimerini: "Finance Minister Yannis Stournaras has informed journalists that there is an agreement between the Greek government and the troika on all aspects of the austerity and reform program and the coalition is likely to be in a position to submit the measures to Parliament by the end of the week.  “The package has been sealed,” Stournaras is reported to have told journalists, less than 24 hours after coalition partners Democratic Left and PASOK expressed objections to some aspects of the measures."  And yet, moments ago, headlines blast that GERMANY DEP FINMIN:TROIKA REPORT ON GREECE NOT YET FINISHED and GREEK REPORT TO SHOW DEVIANCE FROM AGREED GOALS, KAMPETER SAYS. Go figure it out.

Unlcear if as on recent occasions, there will be 7,000 policemen protecting him: Mario Draghi travels to Berlin today to meet with key German parliament members involved in the eurozone crisis policy.  This private meeting is the ECB president’s effort to defend his new bond buying plan as a legitimate instrument in its monetary policy arsenal. Germany’s legislative backing is critical for Draghi’s plan to buy up Spanish and other eurozone area government bonds. The Bundesbank president, Jens Weidmann, says the program is tantamount to financing governments by printing money, which is prohibited by the ECB’s founding treaty. ECB presidents normally give evidence to the European parliament but rarely if ever address national legislatures especially behind closed doors.  This journey is highly unusual but a critical sell for Draghi. Today’s session will be followed by a press briefing at 4pm local time by Mr. Draghi and Bundestag leader Norbert Lammert.

• China May Forgo Easing as Economy Rebounds, Survey Shows (Bloomberg)... or as food and house inflation has never gone away
• China Edges Out U.S. as Top Foreign-Investment Draw Amid World Decline (WSJ)
• Fed to keep buying bonds despite firmer U.S. growth (Reuters)
• Bernanke Seen Attacking Jobless Rate With QE Until His Term Ends (Bloomberg)
• Mortgage applications plunge 12%, down for third week in a row (Dow Jones)
• Exchanges Retreat on Trading Tools - Fund Managers, Regulators Say Certain Orders Are Risky, Aid High-Speed Firms (WSJ)
• Europe Bank Chief to Defend Bond-Buying Plan (WSJ)
• Japan, China Envoys Met Last Week for Talks on Island Feud (Bloomberg)
• Goldman’s Pill Says ‘Guerrilla’ ECB to Impose Losses on Skeptics (BBG)
• Chance rise of an Obama defeat (FT)
• King Says BOE Is Ready to Add to QE If U.K. Recovery Fades (Bloomberg)
• Rajoy Sees Case for Slowing Spain’s Austerity as Economy Shrinks (BusinessWeek)
• Hong Kong Intervenes to Defend Peg as Upper Limit Tested (Bloomberg)