Archive - Apr 5, 2012

US Households haven't shaken their 'junk bond' credit rating, given their poor income statement and balance sheet. Reversing Mitt Romney's famous quote "corporations are people", Bank Of America remains skeptical of this self-sustaining recovery - expecting second half growth to slow significantly as businesses and households react to the risk of a major fiscal shock (and in the short-term, momentum looks unsustainable). From an income statement perspective, 'a paycheck just ain't what it used to be' with food and energy prices rising and payroll growth (typically a good proxy for income growth) is disappointingly timid leaving real disposable income diverging weakly from a supposed job recovery. The balance sheet perspective has been helped by the rise of the equity market but the recovery in net worth in the last three years has barely outstripped income growth, leaving the ratio deeply depressed. The upshot is that the recent pick-up in consumption is not being fueled by income or wealth gains, but mainly by drawing down savings. Many households remain deeply distressed and react to higher costs of living by drawing down savings further. In sum, a true virtuous cycle still seems a long way off. As weather effects fade and gas pain builds the data should soften. BofA expects businesses to recognize the risks of the fiscal cliff first and pull back on hiring. Then with weaker job growth and with the growing awareness of the cliff, consumers will likely start delaying some discretionary spending.

They're Too Big To Fail!

What's your wild guess? 

Earlier today we listened with bemused fascination as Blythe Masters explained to CNBC how JPMorgan's trading business is "about assisting clients in executing, managing, their risks and ensuring access to capital so they can make the kind of large long-term investments that are needed in the long run to expand the supply of commodities." You know - provide liquidity. Like the High Freaks. We were even ready to believe it, especially when Blythe conveniently added that JPM has a "matched book" meaning no net prop exposure, since the opposite would indicate breach of the Volcker Rule. ...And then we read this: "A JPMorgan Chase & Co. trader of derivatives linked to the financial health of corporations has amassed positions so large that he’s driving price moves in the multi-trillion dollar market, according to traders outside the firm." Say what? A JPMorgan trader has a prop (not flow, not client, not non-discretionary) position so big it is moving the entire market? And we are talking hundreds of billions of CDS notional. But... that would mean everything Blythe said is one big lie... It would also mean that JPMorgan is blatantly and without any regard for legislation, ignoring the Volcker rule, which arrived in the aftermath of Merrill Lynch doing precisely this with various CDO and credit indexes, and "moving the market" only to blow itself up and cost taxpayers billions when the bets all LTCMed. But wait, it gets better: "In some cases, [the trader] is believed to have “broken” the index -- Wall Street lingo for the market dysfunction that occurs when a price gap opens up between the index and its underlying constituents." So JPMorgan is now privately accused of "breaking" the CDS Index market, courtesy of its second to none economy of scale and fear no reprisal for any and all actions, and in the process causing untold losses to, you guessed it, its clients, but when it comes to allegations of massive manipulation in the precious metals market, why Blythe will tell you it is all about "assisting clients in executing, managing, their risks." Which client would that be - Lehman, or MFGlobal? Perhaps it is time for a follow up interview, Ms Masters to clarify some of these outstanding points?

Bribes for surgery.

With the record first quarter in the books we perform a quick postmortem and find some stunning things, the first of which is that the 12% YTD growth in the S&P YTD has been entirely due to multiple expansion: consensus 2012 EPS has declined by 2% since the start of 2012. Why multiple expansion? Because as Goldman (this would be "bad" Goldman in the face of David Kostin, not "good" Goldman ala Peter Oppenheimer who top ticked the market two weeks ago by telling everyone to get out of bonds and into stocks) which still has a 1250 year end price target says "the ECB reduced “tail risk” via the LTRO." Which means that as of today, the market is officially overvalued: "Since December the forward P/E multiple has expanded by 10% from 12.1x to 13.2x, above its 35-year average of 12.9x" even as EPS estimates have actually declined by 2% since the beginning of the year! It gets funnier when one accounts for the outsized impact of just one company. Apple. "Apple continues to have a significant impact on sector- and index-level results. Info Tech contributed 399 bp of the S&P 500 12% YTD return, but AAPL alone accounted for 179 bp or 15% of the rise in S&P 500 during 1Q. The company constitutes 22% of the Info  Tech sector’s market cap and generates 22% of its earnings. Consensus expects year/year EPS growth in 1Q 2012 of 6% for S&P 500 and 12% for Info Tech, but excluding AAPL these expectations fall to 4% for both Tech and the index. While Information Technology was the only sector to see margin growth in 4Q 2011, margins declined without Apple. In 1Q 2012, Tech margins are expected to grow by 16 bp YoY in total, but fall 33 bp without AAPL." Finally as the chart below shows, 2012 forward EPS have been declining ever since July, when they peaked just short of 114, and are now down to just about 105. In other words: without Apple and the margin boosting impact of the LTRO, the quarter (and really last two quarters) would have been a disaster. As noted earlier (and to Spain's detriment) the LTRO effect has now phased out. How long until the Apple mania meets the same fate?

Too close for comfort. 

A few weeks ago when discussing the imminent debt ceiling breach, and the progression of US debt/GDP into the 100%+ ballpark, we reminded readers that in February S&P said it could downgrade the US again in as soon as 6 months if there was no budget plan. Not only is there no budget plan, but the US is about to have its debt ceiling fiasco repeat all over as soon in as September. Which means another downgrade from S&P is imminent, and continuing the theme of deja vu 2011, the late summer is shaping up for a major market sell off. Minutes ago, Egan Jones just reminded us of all of this, after the only rating agency that matters, just downgraded the US from AA+ to AA, with a negative outlook.

The only sector of the S&P 500 that was not red today (and for that matter the week) is Tech as AAPL managed another wonderful 1.45% rally today (up 5.6% on the week - it's best performance in 3 weeks and notably AAPL hasn't had a down week since 1/13 -0.6%). As SNL might say, "we need more parabola". Volume was average (for equities and futures) today but bigger blocks came through to sell into the close ahead of the long weekend and tomorrow's early excitement. Financials once again struggled and along with Energy are the worst of the week but it is the majors (in particular Morgan Stanley) that has been hammered this week as MS is -8.2% from Europe's close on Monday with the rest of the TBTFs down around 6% - finally catching up to credit's weakness. Equities closed down marginally but sold off in futures after the close - back below VWAP - having dropped all the way to reconnect with IG and HY credit's less ebullient perspective this week (before credit extended its losses to its widest in three months!). Treasuries managed to entirely recover their post-FOMC spike closing near the low yields of the day/week with the 7Y belly outperforming on the week down around 5bps (with 30Y -1bps on the week). Commodities halted their descent (much to the chagrin of media commentators it seems) as Oil outperformed on the day (and into the green for the week) over $103. Gold and Silver are still underperforming the USD's gains on the week (up 1.4%) led by EUR and CHF weakness. FX chatter was dominated by the spike-save in EURCHF (taking out Goldman's stops) and the mirror CAD strength JPY weakness relative to the USD. It seems EURUSD has become relevant again as it heads back towards 1.30 the figure (3 months lows). VIX went briefly red around the European close and broke 17% before closing marginally higher on the day as the term structure steepened a little more once again.

Just a few thoughts and facts before the employment report for March is out. No time like just before the report to issue some thoughts so that the next day you can be shown to be horribly wrong, but here it goes.

Private sector reports from ADP, Bloomberg, and Challenger Gray and Christmas point to continued improvement in economic conditions. Better to go with this flow than to fight the tape.

What we need to understand is that we are in one of the most dangerous phases of this crisis at the moment. The priests of fiat are being attacked from all sides. People have awoken to the Fed and how criminal and deceitful this organization is and the existential threat it poses to economic freedom and hence human liberty. The arguments against the Fed are blistering and the only rebuttal the Fed has is to spout the same old nonsense like “we saved the world” or some trite derivative of this fallacy. The only thing they saved are untalented speculators from their bad bets. What the Fed has systematically done is literally transfer all of the bad debts and bets from the banks to the taxpayer. We are living this reality to this day. This fact is becoming increasingly understood throughout society, hence the emergence of the tea party and then last year’s Occupy Wall Street movement. So the thing I want my readers to really internalize is that the Fed and indeed TPTB generally are getting slaughtered in the intellectual arena and they know it. As a result, they feel cornered and will thus act increasingly aggressive to prove they are right and everyone else is wrong.

While most of the time, it seems, investing in Emerging (or Growth) market countries is entirely focused on just that - the growth - with little thought given to the lower probability but high impact event of a growth shock. Goldman uses a variety of economic and corporate factors to compile a Growth Vulnerability Score including excess credit growth, high levels of short-term and/or external debt, and current account deficits. Comparing growth expectations to this growth shock score indicates the BRICs are now in very different places from a valuation perspective. Brazil remains 'fair' while India looks notably 'expensive' leaving China and Russia 'cheap'. It seems, in Goldman's opinion that markets are discounting large growth risks too much for China and Russia (and not enough for India). Finally, for all the Europeans, Turkey is richest of all, with a significant growth shock potential that is notably underpriced. Goldman's China-is-cheap perspective disagrees with Nouriel Roubini's well-below-consensus view of an initially soft landing leading to a hard landing for China as 2013 approaches as he notes the pain that commodity exporters feel in 2012 is only a taste of the bleeding yet to come in 2013.

Report: China Surpassed U.S. in 2010

For all those who have long been curious what the precious metals "queen" thinks about allegations involving her and her fimr in gold and silver manipulation, how JPMorgan is positioned in the precious metals market, and how she views the fringe elements of media, as well as JPMorgan's ethical limitations to engaging in 'wrong' behavior, the answers are all here.