Archive - Mar 20, 2012

Bernanke's splendiferous defense of all things holy and Central-Bank-like this afternoon has a little for everyone - if you spent the time to listen/read his entire lecture. For those who did not, perhaps the following word-cloud sums up his perspective - and its odd subliminal messaging. The words Gold and Standard appear more times than Central and Bank; the words Policy and Economy are almost equal in number and very close together in this 'randomized' word-cloud; Collateral and Essential appear infrequently but oddly proximate when the random hand of Worldle is applied; the Dollar got its rightful tiny mention; and the Inflation-Deflation debate will rage on - as Inflation slightly outnumbered Deflation but the randomizer did its job and strangely placed Inflation next to Bad and Deflation next to Great. There was no mention of Oz, Unicorns, Beard-Trimmer, Ron Paul, or Those-Bloody-Bears-On-YouTube.

Banzai7 News declares Wall Street win in Illinois...

Nope, I wasn't drunk.

It is widely known that US corporate profits recently hit an all time high. What is less known is that in Q4, profit margins for the first time rolled over by 27 bps, and double that if one excludes Apple. What is very much irrelevant, is that to Wall Street none of this matters, and the consensus (of which GMO's Jim Montier says "the Wall Street consensus has a pretty good record of being completely and utterly wrong") believes that Q4 will be largely ignored, and margins will continue soaring ever higher. Well, the same Montier, has a thing or two to say about this consensus surge in profits ("it is almost unthinkable that it will remain at current levels over the course of the next few years"). More importantly he looks at the Kalecki profits equation, and finds something rather peculiar. Namely Japan. Because while taking the profits equation at its face value would surely explain the 10.2% in corporate profits, of which a whopping 75% is thanks to America's burgeoning deficit, it would imply that Japanese corporate profitability, where there has been not only a long-running current account surplus, but zero household savings, and massive fiscal deficits, should be off the charts. Instead it is collapsing. Why? Montier has some ideas which may force Wall Street to renounce its bullish views, although probably won't. However, the implications of his conclusion are far more substantial, and if appreciated by corporate America (whose aging asset base is the problem), may ultimately result in a revitalization of the corporate asset base, however not before the dividend chasing frenzy pops in the latest and greatest bubble collapse.

In a succinct and chart-laden presentation, Professor Antony Davies, of Duquesne, offers a simple perspective on just how bad things are for the US (in terms of debt or obligations). Putting the interest cost in the context of war-spending, his analysis is interesting given the recent and dramatic rise in interest rates. Current interest payments, given the US Government's lowest ever 3% interest cost, are $440 billion, or three times the annual operating expenses of the Iraq and Afghanistan wars. While his discussion of a market-set interest rate is perhaps a little off-the-mark given the extent of QE programs and their reach-around prime-dealer duration-reducing effects, it is nevertheless true that the more money the government is spending on interest, the less money is available to provide services and his punchline on what happens should rates rise even modestly from here sums the real problem the US faces (even as a currency issuer as opposed to a currency user - given the inherent instability that making totalitarian use of the reserve status would incur).

And vague smells of extortion.

One simple chart.

It was all ponies and unicorns as the EU-ECB-IMF 'Troika' mission found 'no sign of reform fatigue' in their report today, noting the 'remarkable' nature of the fiscal adjustment. Perhaps they should have asked someone outside of the halls of government as this tragic story from The Guardian notes the Portuguese death rate rising as health and welfare cuts from the 'remarkable' austerity package are biting at the people hard. During February, there were 20% more deaths than normal and the cost cuts are blamed as a visit to the ER has more than doubled. There is a general strike, as we noted earlier, on Thursday as the leader of the unions notes "They are driving the country towards disaster". While the IMF believes that Portuguese debt is sustainable, most practicing market participants who do not have a gun to their head see full well the unsustainable nature of the Portuguese debt load seeing the IMF's position as "wishful thinking". There is a growing tension as Irene Pimentel notes "I worry that democracy is at stake" and on the people's apparent stoicism for now, "I think it will explode eventually, it is impossible for people to remain this passive." At least Portuguese bonds are happy, and accept the culling of the Portuguese population at the altar of the euro, as a worthy supplication, worth at least 250 basis points.

Canada's natural resources minister told delegates at the International Energy Forum in Kuwait that his country was on the cusp of becoming an "energy superpower." Canada ranks No. 6 in terms of global oil production, but much of its crude exists in the form of oil sands. European leaders are considering a measure that would classify oil sands as an environmental issue, prompting Canada to threaten to take the issue to the World Trade Organization. With the U.S. political system in a deadlock over Canadian crude, the Ottawa government is now working to convince the international community that the global market is in jeopardy if polices "discriminate against oil sands."

Turning on the screens this morning to red pixels was an odd feeling for anyone who has traded stocks this year and while the low was put in soon after the US open the slow and steady weak volume limp higher in equities (led by financials and too-hot-to-handle Apple) got ES (the e-mini S&P futures contract) back up to close at 1400 on the nose (-4pts on the day). Investment grade credit was generally an outperformer relative to stocks today (though AAA corporates were net sold perhaps on rotation back into Treasuries) though the roll in credit derivative markets hinders comparisons a little, however, high yield credit dwindled a little (on light flows) into the close. Commodities were the hardest hit of the day - dramatically underperforming the implied weakness of a modestly stronger USD. Silver, which recovered well off its lows of the day, was equal worst performer with Copper as China's slowdown story dominated. Interestingly Oil also fell as increased supply news hit pushing WTI under $106. Gold outperformed (though was lower on the day) and stands down only 0.6% on the week now (less than half the losses of the other metals/oil). Treasuries (as we already noted) broke their record losing streak with a modest 1-2bps compression in yields close to close (after being closed for the Japan session last night). A relatively large jump up in EURUSD near the US day session open was the biggest news in FX markets but that leaked away all day as the USD limped high off that low (helped by AUD and JPY weakness). VIX managed to rise once again.

During the last 31 years of the US Treasury bond rally, the 10Y interest rate has never risen for 10 consecutive days and today's very modest 1.6bps rally ensures that will continue. Yesterday's weakness equaled the previous 9-days-in-row record from 6/26/06. The rise in 10Y rates over this 10 day period equals the Oct 2011 jolt in percentage terms as we hold at those 10/28/11 swing highs in rates. The previous 8 times that 10Y rates have risen for 7 days or more, the next 10 days have seen an average 16bps compression and next 20 days a 31.5bps compression (following the consecutive break). This of course is wreaking havoc with mortgage rates as according to Bloomberg's bankrate.com data, we are back above 4% for the 30Y fixed for the first time this year and this week has seen mortgage rates jump their most in 16 months.

When it comes to predicting consumer spending patterns, especially those of the baby boomers who are traditionally reliant on fixed income (but lately have had to migrate back into the workforce, as retirement prospects diminish, in effect displacing the young 18-24 year old Americans where unemployment is now at a substantial 46%), the following two charts from today's David Rosenberg letter do a great job at explaining the schism between interest and dividend income. The former, as is well-known, has been crippled and is plunging courtesy of Bernanke's ZIRP policy, which makes cash yields on savings and fixed income instruments virtually negligible, and the latter, which while rising, has a long way to rise if it is to catch up to lost annuity potential. It is here that the primary tension for the Fed resides: it has to force investors to switch their mindsets from the capital preservation of fixed income, to the risky behavior of pursuing stock dividends. It is also here that we see the lost purchasing power of the US consumer: interest income is down $450 billion from 2007-2008 levels to roughly $1 trillion, while dividend income has risen to $825 billion, which is where it was at the prior peak. In other words, when all is said and done, Bernanke's ZIRP policy has eliminated $450 billion in purchasing power, even if he has succeeded in reflating the equity bubble. Yet while bonds at least have capital preservation optics, what happens to dividend stocks whose cash flow yields can be eliminated at the bat of an eye, if and when the next flash crash materializes, or the next financial crisis is finally too big for the central planners to control?

In light of the news that Apple is issuing a dividend with the stock flirting with all-time highs, it might be a good time to assess where Apple is with its two products, the Iphone and the Ipad. There is no arguing with the success of these products, but that is not the real story that needs addressing. The real story for Apple is battery chemistry and much like the automakers it fails.

As reported earlier, Consumer Reports has concluded its analysis of the New iPad's running temperature. The results, based on a live CNBC update:

• New iPad runs up to 12 degrees warmer than the old iPad2
• New iPad warms up to 116 degrees
• This is not as hot as some of the warmest laptops which hit 120 degrees.

Naturally, much of this was to be expected from a product that has more advanced equipment, which also happens to generate greater power output. It is also unclear if this will provoke a recall, accelerate global warming (and thus facilitate economic "beats") and/or whether one will now have the iSkillet in a twofer special.