Archive - Dec 2012

We don't often comment on the idiocy of the self-reported and almost entirely reinforcing homebuilder survey but today's print had some under the surface ridiculousness that we felt needed sharing. The NorthEast saw the biggest jump since January after flat-lining for six months. We can only assume that the dismal reality of what Sandy left behind has encouraged all those displaced New Jerseyites to rush out to buy another home. Other regions were either lower or a small positive. Residential Contruction jobs continue to drop, entirely ignoring the NAHB's hope.

As Plan B (or Plan ZZ) is back on the table, markets (in their infinitely efficient wisdom) have retraced all of the Obama spike from last night. GOP's Boehner takes the stand to explain Plan B, we presume, at 10ET. Live webcast here (calls or puts today?)

When the US has become the equivalent of a Eurogroup Belgian summit at 4 am, with interim red headlines the only market moving variable, all one can do is sit back and laugh. In the meantime, here are the obligatory headlines:

• BOEHNER SAID TO BE MOVING TO `PLAN B' ON FISCAL CLIFF
• BOEHNER SAID TO PLAN BILL WITH TAX HIKES ON INCOME OVER $1M
• BOEHNER SAID TO CONTINUE NEGOTIATIONS WITH PRESIDENT OBAMA

One wonders what Plan A was... Of course, Obama demanding $400,000 as the threshold, so we will by plan ZQX before this is all over. Perhaps it is time for Chained Employment to go alongside Chained CPI - just think of the savings? In the meantime, Obama's plan involves cutting spending at some point in the future, but first hiking it by $80 billion. We hope the Belgian caterers, made so filty rich thanks to an insolvent Europe, i) open a Constitution Avenue office, and ii) launch a 10x levered ETF.

Short and sweet from the Chairman of the fermentation committee: "the central banks of the world are poised to simultaneously embark on aggressive new rounds of quantitative easing. There will be lots of focus on Thursday's BOJ comments. This is a world even Keynes could not conceive." Of course, Keynes never worked out of 1954 Stalingrad, or 2012 Washington, D.C.

While most market participants are well aware of the broad risk-on / risk-off tendency in asset markets over the course of the last few years; this year - most notably as the facts of companies' earnings came under scrutiny in the last quarter - we saw a new pattern emerge. As equity markets levitated on hope of another injection of central bank largesse, so reality was suspended and valuation multiples simply didn't matter as "it's all about the future", but as Q3 Earnings Season began and exhibited its worst tendencies in years, starkly highlighting 'what lies beneath' so stocks traded in a 'Reality-On' mode. This then rapidly disappeared from view as Q3 earnings season ended and 'Reality-Off' mode was re-engaged. We can only assume, given GE's warning, how bad Q4 will be and the question then remains, will stocks re-engage 'reality-on' and retest reality lows?

With the entire "market" a synthetic algo-traded derivative (and facilitated by the fat pipe between Liberty 33 and Citadel) reflecting merely where the ES and VIX trades, and completely ignoring such trivial things as underlying corporate cash flows (see next post on market performance vs earnings) or GDP, concerns about fundamentals have become a total joke. This is obviously exacerbated by such "extenuating" circumstances as tropical storms which are designed to make any negative data irrelevant. Of course, for those still curious about such old school metrics as actual economic performance, untainted by Fed intervention (such as $85 billion in offsetting flow per month), here is one chart, showing the correlation between total FedEx package shipments and Real GDP. And no, sorry, you can't blame this one on Sandy, on the Cliff, or any of the other spin talking points. From Bloomberg: "The level of FedEx package shipments began to slump as early as the first quarter of 2012 and now appears to be signaling weaker economic conditions for 2013. In late March, FedEx made mention of cooling conditions, with CFO Alan Graf noting the economy was not as strong as  the company hoped it would be a year earlier. According to Fred Smith, FedEx CEO, “Fundamentally, what’s happening is that exports around the world have contracted and the policy choices in Europe and the United States and China are having an effect on global trade."

For the green-shoot-minded, last month's albeit record high Spanish bank loan delinquencies was occurring as its first derivative was slowing. Well dash those hopes as this month sees bad loans not only rise to record highs (above 11% for the first time in history) but the pace of this drastic deterioration accelerated at the fastest pace since June. We are sure somewhere a Spanish finance minister is eschewing the 2nd or 3rd derivative as an indication that the worst is over but reality is that as FROB proudly notes the number of banks who have invested in its bad bank - in a strange and twistedly ironic reacharound whereby the bad banks themselves (all domestic, no foreign, Santander 16% stake!) are buying up the assets of the nation's bad banks - the sheer size and scale of this level of bad loan and deterioration (double in two years) is far beyond anything the sovereign's bad bank is prepared for. Of course, none of that matters as Draghi's magical OMT remains the ultimate backstop to any reality emerging. Spain - getting worse, faster.

In March 2012, Okayama Metal & Machinery became the first Japanese pension fund to make public purchases of gold, in a sign of dwindling faith in paper currencies. Okayama manages pension funds for about 260 small and mid-sized companies in the Okayama area. "By diversifying currencies, we aim to reduce risks associated with them," said Yoshi Kiguchi, the fund's chief investment officer. "Yields become stable if you put small amounts into as many types of holdings as possible." Of its 40 billion yen ($477 million) in assets, the fund has invested around ¥500 million-¥600 million in gold, he said. Initially, the fund aims to keep about 1.5% of its total assets of Y40bn ($500m) in bullion-backed exchange traded funds, according to chief investment officer Yoshisuke Kiguchi, who said he was diversifying into gold to “escape sovereign risk”. Other pension funds in Japan are following their lead according to the Wall Street Journal. Japanese pension funds are diversifying into gold "largely to mitigate the damage from possible market shocks"... Mitsubishi UFJ Trust and Banking Corporation said it has secured more than Y2 billion in investments from two pension funds for a gold fund it started in March.

• Obama Concessions Signal Potential Bipartisan Budget Deal (BBG)
• Cerberus to sell gunmaker after massacre (CNN)
• With New Offers, Fiscal-Cliff Talks Narrow (WSJ)
• Judge rejects Apple injunction bid vs. Samsung (Reuters)
• U.S. policy gridlock holding back economy? Maybe not (Reuters)
• President fears for Italy’s credibility (FT)
• Struggles Mount for Greeks as Economy Faces Winter (WSJ)
• Abe leans on BoJ in post-election meeting (FT)
• Bank of Japan to mull 2 percent inflation target as Abe turns up heat (Reuters)
• EU exit is ‘imaginable’, says Cameron (FT)
• Mortgage Risk Under Fire in Nordics as Bubbles Fought (BBG)
• Sweden cuts interest rates to 1% (FT)
• External risks impede China recovery, more easing seen (Reuters)

By this point it has become clear to everyone that all fact-based news can be safely ignored, and all that matters is the ongoing Fiscal Cliff pantomime as has been the case for the past month. Sure enough, looking at the futures, it is clear that following yesterday's detailed disclosure, the market is convinced, that a deal is virtually assured. This is in stark contrast to 48 hours ago, when it thought the opposite. It will likely continue thinking this until Boehner has a TV press conference later today and bursts the latest bubble of bipolar enthusiasm which has now shifted to euphoric for the time being.

The US dollar is mixed. Softer against the European complex, but firmer against the dollar bloc. It is essentially flat against the yen. Equity markets are advancing and the Nikkei, which gapped above the 3-year downtrend line yesterday, extended its gains by another 1%. Spanish and Italian bond yields are lower. Japanese yields continue to edge higher, with the long-end of the curve continuing to steepen gradually. The 10-20 year spread is near a 13-year high, for example. The BOJ's Shirakawa met with Abe briefly (20 minutes, according to press reports). The last big event of the week is the BOJ meeting that concludes on Thursday.

Bryant saw a flash on the screen: the explosion. Parts of the building collapsed. The child had disappeared. Bryant had a sick feeling in his stomach. “Did we just kill a kid?” he asked the man sitting next to him. “Yeah, I guess that was a kid,” the pilot replied. “Was that a kid?” they wrote into a chat window on the monitor. Then, someone they didn’t know answered, someone sitting in a military command center somewhere in the world who had observed their attack. “No. That was a dog,” the person wrote. They reviewed the scene on video. A dog on two legs? The above article is a must read for every American citizen, particularly those that get up in arms about domestic gun control, but never think twice about the horror caused by our foreign policy, which regularly murders innocent children overseas.

In the recent aftermath of the US just concluding its fourth consecutive fiscal year with a $1 trillion+ deficit, we have been flooded with requests to show how the current fiscal situation stacks up in a big picture context. Very big picture context. For all those requests, we present the following chart showing total US Federal debt/GDP as well as Deficit/(Surplus)/GDP since inception, or in this case as close as feasible, or 1792, which appears to be the first recorded year of historical fiscal data. We can see why readers have been so eager to see the "real big picture" - the chart is nothing short of stunning.