Archive - Dec 7, 2012

Pearl Harbor Day 2012

By now there can be no doubt that due to Bernanke et al's endless intervention in any and all capital markets, the "market" is no longer a mechanism that discounts the future in any way. In fact, instead of predicting the future, all the market has become is a backward looking race in which collocated algos respond to historical data - flashing red headlines - and attempt to out run each other in who can buy or sell more free for all, knowing full well at least one other greater fool will be behind them to pick up the pieces. Sadly, fundamentals as a driver to valuaton no longer exist. But such is life under central planning.  Yet there is one thing that the market responds to - it is politicians and the uncertainty that political risk brings with it. This certainly includes that most political of organizations, the Federal Reserve, whose stimulative intervention into capital markets two months before the presidential elections was without precedent. Yet even here, the market has managed to decouple from reality, and is trading at level far greater than what political uncertainty risk implies. As the chart below from Citi's Matt King shows, a correlation between BBB spreads and a broader proprietary uncertainty index, there is currently a roughly 50% political risk premium that is not being priced into stocks.

Increasingly it is appearing that all those things formerly considered "fixed", are not. Latest case in point, Egypt where despite the general population's very finite attention span having been fully exhausted on all things Cairo-related back in the spring of 2011, the locals counterrevolutionary natives are once more getting restless and absent some miracle, the days of the US puppet appointed "democrat"-cum-self appointed dictator Mursi are numbered.

It is a truism that food is expensive in America. What if we ask, "is 'real' food expensive in America?" Apologists often cite four reasons why people (and more particularly, low-income people) tend to eat so poorly in America. None of these excuses hold water.  What it boils down to is convenience, marketing and engineering: processed food and fast-food are engineered to "taste good" (i.e. salty, fatty and sweet), marketing hypes them 24/7 and Americans have been brainwashed to worship convenience above all else. So please don't claim real food is "too expensive" to eat. What's "too expensive" is unhealthy processed and fast foods.

Since the financial crisis erupted in 2009, it would appear that Spanish banks saw the writing on the wall early on. Following the path laid out by their American cousins, the following chart suggests that en masse a decision was made that bigger was better (and safer) as the Too Big To Fail model was clearly the industry standard. From 50 major entities, the Spanish banking system is now dominated (well pre-total collapse that is) by 14 considerably larger firms. This is about the most literal definition of the old saying: "TBTF or bust." Although in this case it is "and"... Because the bigger the firm, the more systemically entwined it becomes and the less capable the government is of letting any pain actually occur... quite remarkable. How long before there is just one big Spanish bank? (bad bank, worse bank, worst bank, all coming soon).

When people think of the conventional battery of options the BLS applies to fudge the monthly payrolls number, the labor force participation is the first thing that comes mind: after all the thesis is that old workers are increasingly dropping out of the labor force and retiring. Nothing could be further from the truth as can be seen in this chart of workers aged 55-69, i.e. the prime retirement age. But perhaps a far more important secular issue is the complete lack of pickup in the prime worker demographic, those aged 25-54, which in November dropped by 400k to 94 MM. This is a level first breached in April 1997, in other words in the past 15 years not a single incremental job has been gained in this most productive and lucrative of age groups!

At 11:00 am Eastern, the GOP's John Boehner will continue the teleprompted farce, and in not so many words, will announce there has been no progress on a Fiscal Cliff compromise. Alternatively, he may have bought some deep OTM SPY calls expiring shortly, and will misrepresent the situation behind the scenes in hopes for a quick trend reversal, just as he did back on November 16, providing the only "goalseeked" catalyst that could halt a drop in the SPX on its way to unchanged for the year, and, in collaboration with Nancy Pelosi, preventing AAPL from sliding below $400.

EURUSD is 'weak' (under 1.2900) this morning, having given a week's worth of gains back in just 2 days as it appears (quite unsurprisingly) that even the core or Europe is now becoming embroiled in a total economic depression. While it seems unlikely that the much-discussed optimal-strategy of Germany leaving the EUR will occur before Merkel's re-election, we suspect there will be growing angst that their economic woes are due to their other European cousins. To wit, Germany's Industrial Production Capital Goods (just as we have also seen in the US) have fallen off a cliff in the last two months (almost -3 sigma); it has only been this bad twice in the last twenty years. Perhaps, we need to replace the youth unemployment records with German Capital Goods production as the 'new' scariest chart in Europe, since it seems the Money McBags of the disunion has mounting troubles of its own.

... in under 140 characters no less

After its biggest miss in four years (following the pre-revision spike to the biggest beat in three years), UMich Consumer Confidence came at 74.5 relative to an 82.0 expectation (biggest miss on record). Hugely down from last month's final print of 82.7, this is the first negative print since July to the lowest since August. Expectations for the future crashed its second largest absolute print on record (-13 to 64.6) to the lowest since Dec 11.  In the typical election year we see a rise in hope and confidence into the election and then a drop off after - it seems we are following that path...

In order to make sense of the price action COMING OUT OF the number, we first need to know what positioning was GOING INTO the number.

What the granular data shows is that instead of a 146K gain in November, there was actually a drop of 114K jobs when broken down by worker "vintage." But where it gets simply stupid, is that of the 4 age group buckets (16-19, 20-24, 25-54, and 55-69), the biggest gainer continued to be America geriatric work force, which added 177 jobs. As for that key segment of the workforce, the 25-54? Jobs here declined by a whopping 359K in November. And this is good news?

In light of the composition of today's NFP pickup, driven by retail, waste and administrative and hospitality and leisure, all low-wage jobs, even as Construction jobs posted their first decline in many months on the "housing recovery" and on Hurricane Sandy rebuilding, we refreshed the chart showing that there is a quality not just quantity component to the jobs number. Sadly, the quality, in the form of Y/Y change of average hourly earnings, continues to be non-existent.

Looks like Sandy was not an issue at all in the November jobs report which beat in both the number of jobs added, at 146,000 on expectations of 85,000, while the unemployment rate declined to 7.7% from 7.9%, where it was expected to post as well. Watch this space next month for prio revisions: September and October saw 49K downward revisions combined. November will suffer the same fate.