Archive - Dec 2012

While much will be made of the greater-than-50 level for HSBC's China Services PMI, we note that the drop in the last two months is the largest in 15 months and takes the index back to its lowest levels since August 2011. While China's Manufacturing PMI was lauded as evidence that all is well and the slowdown has stopped, we note that in the history of the China Services PMI, it has only been lower than the current print in five of the forty-four months. It seems perhaps the transition is not going quite as according to plan.

...

Forget Citius, Altius, Fortius ("Faster, Higher, Stronger"), the real Olympic challenge among Europe's nations is Pinguissimam, Ignavissumi, Bibe Maxime (Fattest, Laziest, Drunkest). As WaPo notes, there's nothing like tales of butter-eating, wine-guzzling, yet somehow-still thin Europeans to add to American angst over holiday calories and upcoming resolutions, but while overall Europeans are fairly healthy, a recently-released report by the Organization for Economic Cooperation and Development (below) found that the prevalence of diseases such as diabetes and asthma has also increased — in part because of better diagnosis, but also thanks to underlying causes such as drinking, smoking and eating fattening foods. Here’s a look at which Europeans are most obese, most inactive and drink most (no, it's not the Brits):

If truth in advertising were being strictly enforced, the BLS might be renamed the BS.

We have shown the recent surges in both sales and capitalization of several far, far smaller weapons-makers in the US: Smith & Wesson and Sturm, Ruger (along with the world's seemingly inexorable demand for 'bulk ammo'), but one can only wonder whether the market cap. of Kalashnikov (the maker of the world's most popular rifle) would be greater than that of AAPL if the firm had been based in the US and gone public at inception.

Today the Reserve Bank of Australia (RBA) cut the its rates by a quarter of a percentage point to 3.0 percent, as panic set in that the resources boom is fading quicker than anticipated. Note that rates have not been this low since the aftermath of the global financial crisis.  This strategic move was done in effort to rekindle the demand in some of the country’s weaker sectors in hopes that they would offset the rapid decline in the mining sector.

"When we finish with Assad, we will fight the U.S.!" one Nusra fighter shouted in the northeastern Syrian city of Ras al Ayn when he was told an American journalist present.

Did you catch that?  We are literally allied with some of the same fighters that we battled in Iraq!  The bigger point is we are supposed to be willing to give up our freedoms and civil liberties to fight an enemy that we are supporting in Syria?  Our “leaders” have no shame.

Eleven states made Forbes' list of danger spots for investors including California, New York, Illinois, and Ohio. They warned (and with the cliff it is even more critical), if you have muni bonds in these states - clean up your portfolio; if your career takes you there - rent, don't buy! Two factors determine their list of 'fiscal hellholes'. The first is whether there are more takers (someone who draws money from the government) than makers (the gainfully employed). The second is a state credit-worthiness score (via Conning) based on large debts, uncompetitive business climates, weak home prices, and bad trends in employment. Conning rates North Dakota the safest state to lend money to, Connecticut the most hazardous. A state qualifies for the Forbes' death spiral list if its taker/maker ratio exceeds 1.0 and it resides in the bottom half of Conning’s ranking. See below for the 11 states to avoid...no matter what Bob Toll, Larry Yun, Bob Pisani, or Alexandra Lebenthal tells you..

If you want to send a roomful of 100 wealth managers into an icy chill, have Russell Napier address them. Napier’s presentation, “Deflation in an Age of Fiat Currency,” is thought-provoking, and the precise polar opposite of investing as usual. US stock markets aren’t cheap, not by a long chalk. Napier, like us, favors the 10-year cyclically adjusted price / earnings ratio, or CAPE, as the best metric to assess the affordability of the market. At around 21, the US market’s CAPE is near the top end of its historic range. The S&P 500 stock index currently trades at a level of around 1400. Napier believes it will reach its bear market nadir at around 450, driven by a loss of faith in US Treasury bonds, and in the dollar, by foreigners.

And so yet another saga of a trader who bet on AAPL rising, just before it tumbled, ends in tears, this time with what appears to be near certain incarceration of another small, 2-bit trader. As we previously reported, back in November, as AAPL stock was in freefall, none other than the firm of everyone's favorite financial permabull, Rochdale, ended up being a proud if involuntary holder of nearly $1 billion in AAPL stock. The scapegoat for AAPL's price drop: one ex-trader David Miller. What Miller is accused of, is buying 1.6 million shares of AAPL on the day of the company's last earnings announcement in hopes, of course, the stock would surge. It didn't. Furthermore, Miller was in reality executing a trade for a client who had only wanted to buy 1,625 shares, but Miller was confident enough the stock would go up, he bet the firm's money to buy the difference. Sadly, neither the AAPL earnings announcement, nor its stock price, did quite as planned. End result: $5 million loss, Miller terminated and now arrested and charged, and Rochdale left scrambling for a bailout.

US equities tried to escape the draw of a strong Treasury market and weak gold market all day but kept being dragged back to reality (with a late-day dive on decent volume making the most interesting moment of the day). The day-session range was relatively low but volumes were ok as we leaked lower on the day. NASDAQ was the weakest (thanks to AAPL's push back towards it 'generational low') and TRANS outperformed - but the latter was playing catch up to the rest from yesterday's weakness (still lagging on the week). S&P futures clung to VWAP most of the afternoon in a rather uneventful day even as VIX pushed 0.5 vols higher to close above 17% for the first time in three weeks - notably divergent from stocks. EUR strength (+0.8% this week!), while modestly supportive, has largely decoupled from equity movements this week as correlations across risk assets have dropped notably.

Beggaring thy neighbour has consequences. Neighbours might turn around and bite back. How long until other nations join with Brazil in declaring trade measures against the United States is uncertain, but there may be few other options on the table for creditors wanting to get their pound of flesh, or nations wishing to protect domestic industries. After all, the currency wars won’t just go away; competitive devaluation is like trying to get the last word in an argument. The real question is whether the present argument will lead to a fistfight.

With humans long gone from the trading arena and algorithms left solely in charge of the casino formerly known as "the stock market", in which price discovery is purely as a function of highly levered synthetic instruments such as ES and SPY or, worse, the EURUSD and not fundamentals, numerous valuation dislocations are bound to occur. Such as company equity value trading well below net cash (excluding total debt), or in other words, negative enterprise value, meaning one can buy the cash at a discount of par and assign zero value to all other corporate assets.  In other far more rare cases, some companies may trade with negative EV even if they have positive LTM free cash flow (EBITDA-CapEx). Usually these arbs are rather well hidden, and certainly not within the roster of the far more popular S&P500 companies. We did a quick CapIQ search of all Russell 2000 companies (avoiding microcaps) for whom Net Cash > Market Cap. There were a total of 10 companies among the universe of 2000 that fit these criteria. We then further subdivided the category into companies with negative (far less valuable) cash flow, and positive cash flow. There were just 4 companies in the last category. They are highlighted in the table below.

While China's equity index continues to plumb new depths, the macro data of the past two weeks has been the crutch for US equity bulls losing faith in the fiscal cliff negotiations - growth is up, investment is up, and inflation is down - with analysts hailing the news as evidence that the Chinese economy has "truly bottomed out." As Michael Pettis, of China Financial Markets, notes though "I think we need to be very cautious and refrain from allowing ourselves to get too caught up in the huge sigh of relief that the sell side is heaving. Growth rates in China will continue to slow dramatically in the next few years, and if there are temporary lulls, as there must be, these do not represent any sort of “bottoming out” at all." His perspective is simply that Beijing cannot afford 'politically' to allow the transition/adjustment/reforms to take place too fast - and occasionally needs "to step on the investment accelerator." The bottom-line, he notes, is that "you can get as much growth as you like if you expand credit, but once expanding credit has become the problem, it cannot also be a permanent solution to slower growth. The country’s balance sheet continues to deteriorate – and the most recent growth spurt implies faster deterioration – and this, ultimately, is the main constraint of the Chinese growth model."

With the Italian economy in its fourth recession in the last ten years and unemployment soaring, a supermarket has come up with a novel way of hiring. According to Germany's Mittelstands Nachrichten, customers who spend over EUR30 will receive a lottery ticket and the grand prize winners will be given "temporary part-time assistant jobs" at the supermarket. We are not really sure where to go with this - but somewhere in this odd arrangement is a sad reflection of the European society's deterioration...