Archive - Jan 28, 2013

There are numerous myths flying around the screens we all remain glued to - from inflows suddenly becoming correlated with equity market performance to a 'real recovery' in housing. TrimTabs CEO Charles Biderman paid a brief but fact-full visit to CNBC's Rick Santelli and the two somewhat skeptical gentlemen expounded on four of the critical fallacies supporting hope in our markets currently. First, the last time inflows were this big we saw dramatic reversals in stocks; and coincidentally, secondly, we also saw companies buying back less stock (in fact we saw float rising at those periods) and sure enough that is what Biderman notes is happening in January too. Third, current 'economic' euphoria appears due to the drag forward of incomes into Q4 2012 due to tax concerns (which is being spent/saved now) - however that means Q1 2013 and on will be negatively impacted (even if we see a decent print in Q4 GDP) as that pull-forward reverts; and finally, fourth, interest rates are rising and simultaneously refinances have plunged - hurting the 'housing recovery' meme which has been the driver of a lot of euphoria (be careful what you wish for). It appears facts, once again, get in the way of a good story.

G4+CHF can fight the currency wars longer and more aggressively than small G10 and EM countries can.  However, as Citi's Steven Englander notes, it also takes a lot of depreciation to crowd in a meaningful amount of net exports. His bottom line, GBP, CHF and JPY have a lot further to depreciate.  In principle, the USD can easily fall into this category as well, but right now the USD debate is focused on Fed policy – were it to become clear that balance sheet expansion will end well beyond end-2013, the USD would fall into the category of currency war ‘winners’ as well. Critically, though, the reality of currency wars is that policymakers do not use FX as cyclical stimulus because of its effectiveness; they use it because they have hit a wall with respect to the effectiveness of fiscal and monetary policies, and are unwilling to bite the structural policy bullet. The following seven points will be on every policymakers' mind - or should be.

Back in July 2008, just before all hell broke loose and the S&P was trading in the upper 1,200s, everyone's favorite permabull, JPM strategist famously reiterated his S&P 500 price target for the end of 2008: 1450. Two months later Lehman filed for bankruptcy, and 4 months later the S&P closed 2008 some 40% lower than said price target. Another two months later and anyone who had listened to Tom Lee lost 50% of their investment. Today, as the Fed's balance sheet crosses $3 trillion, and the global central banks have pumped a total of some $15 trillion into the markets, Tom Lee ws back on CNBC with what is his most permabullish prediction ever: he now expects the S&P to generate some 150 in earnings to which he applies a 17x multiple. His conclusion "If you put a 17 multiple on $150, the S&P really sort of peaks around 2,400 or 2,500." In Dow terms, this means a Dow Jones Industrial Average of, drumroll, 20000. He does, caveat it, however: "that's obviously 4 years away." And if Tom Lee was off by 40% in 4 months, we can't help but wonder what the hit rate on his 4 year prediction will be, and if, by using the same ruler extrapolation mechanism he applies to corporate earnings nand multiples one extrapolates the Fed's balance sheet at some $7 trillion in 4 years, what a loaf of bread will cost just as the DJIA crosses 20,000. For future humor purposes, it may be useful to bookmark this post.

As Mark Carney steps aside from his role at the Bank of Canada to undertake all manner of easy money in the UK, we thought a reflection on the 'stealth' QE that he has been engaged with, very much under the radar, in the US' neighbor-to-the-north was worthwhile. It seems quietly and with little aplomb, Carney's BoC has grown its balance sheet by over 21% YoY - the most since 2009. If that was not enough to make someone nervous, the quantity of Canadian government bonds on the BoC's balance sheet has grown at a remarkable 46% YoY! All of this has taken place during a time when 'supposedly' the Canadian economy has been reasonably strong and foreign demand for debt high. With Canada's CAD267bn debt due in 2013, we suspect this 'stealth' QE will continue to rise.

Below is a live stream from Egypt which contrary to promises from the US department of state, appears to not be fixed after all. Contrary to some naive expectations, yesterday's 30-day curfew imposed by the president in various Northern cities in hopes of cooling tempers has not achieved its goal, and may soon need to move to the capital Cairo where the riots are back. So while we wait for Athens' Syntagma square to emerge from hibernation, here is a preview of how a very "fixed" Europe, where one will soon need scientific notation to express the levels of youth unemployment, will look like once the snow melts.

There may be rotation out of bonds (there isn't), but don't tell the Direct bidders, who submitted a total $22 billion in bids for today's $35 billion Two Year auction, and well below last month's $18.2 billion, and were hit on just under half of this tendered amount, taking down a massive $10.4 billion, or precisely 29.99% of the entire auction. This was the second highest Direct takedown in history only less than October's 35.41%. What is curious is that Indirect buyers, traditionally strong buyers of the 2 Year point on the curve, and taking down on average 31% in the past year, were left with just 18% of the auction, slightly better than last month's record low 17.7%, and the second lowest as far as our time series goes. The balance of 52%, as always, was left to the Primary Dealers, who will promptly turn around and flip it back to the Fed at the first opportunity now that the Fed is monetizing across the curve and not just to the right of the belly. Other metrics of today's auction included a 3.77 Bid to Cover, roughly in line with the trailing 12 month average, and higher than December's 3.59, while the final high yield was not surprisingly, 0.288, just inside of the 0.289% When Issued at 1 PM trading. Overall hardly a flight from Treasurys, at least in the segment where the nominal return is absolutely laughable, and an indication that nobody believes for a second that ZIRP may be ending any time soon.

Untubbed...

The US Postal Service may be a woefully overstaffed anachronism of a bygone era, with a painfully mismatched cost and revenue structure, which last year reported a massive, and record, $15.9 billion annual loss for the last Fiscal year, but that doesn't mean it is going away without a fight. As of yesterday, the USPS valiantly hiked the price of first-class mail by another 2.6%, to 46 cents, up from the 45 cents which in turn was hiked a year previously. Alas, somehow we doubt this latest increase in pricing which is supposed to keep up with inflation, will do much for the long-term viability of the government service which employes some 500,000, and which has warned would run out of cash by October 2013 for two simple reasons: the ongoing collapse in mail volume sent via the USPS (with free or more effective alternative widely adopted), and a cost structure that unlike the revenue side, has managed to stay leaps and bound ahead of inflation courtesy of some rather vocal labor unions.

While it may be a little early for humor this week, this was just too ridiculous to pass up. As Keep Talking Greece notes, Charis Theocharis - Greece's new revenues general secretary - recently appeared at a conference and made the rather intriguing "me neither" reply to an audience member's “I have no money to pay property taxes" comment. “Me too, as all of you, I have difficulties to pay the property taxes,” a rather perplexed Theocharis told the audience in an effort to continue his speech. This follows former deputy PM Theodoros Pangalos, a PASOK MP for several decades, who had often claimed he could not pay property taxes for his more than 50 residences. If those who have salaries cannot pay property taxes, what should the unemployed or the pensioner do who has a roof over his head but no other income?

On December 7, I published an article entitled “Deutsche Bank: Explaining The $12 Billion Loss That Never Was.” The piece outlined a series of complaints filed by former Deutsche Bank employees. One of those employees, Matthew Simpson, claimed to have discovered  “substantial anomalies” in the firm’s credit default swap book while working at Deutsche’s credit correlation desk. Deutsche -- of course -- denied the allegations but did fire a top derivatives trader after an internal investigation into the matter and ultimately paid $900,000 to settle a related SEC whistleblower case filed by Simpson. Reuters broke Simpson’s story in the summer of 2011.

You might have to read this post twice to make sure your eyes didn’t deceive you.  This article is actually completely different from our recent pieces on stealth inflation, but is even more infuriating.  In this case, a grocery store called Fresh Markets decided to sell milk at a bargain basement price as part of a promotion, yet the state has deemed the price “too low.”  As a result, the chain is being forced to raise the price.  Yep, at a time when millions are struggling every day to make ends meet, this is what the state of Louisiana has decided it a priority that the cost of milk is higher for consumers in the state.  This is exactly what happens when bureaucrats exert to much influence in our daily lives. No one can seem to put a banker in jail, but sell milk too cheap and regulators are all over you.

Determining the “pain threshold” beyond which the euro appreciation would significantly impair the recovery is crucial at this juncture. Deutsche Bank's quantification of this “pain threshold”, is not fixed but depends critically on the pace of global growth. If world demand accelerates from a current pace of 1.3% YoY to 4.2% YoY by Q3 2013 (30% below trend), as per OECD forecasts, the EURUSD exchange rate which would be consistent with maintained competitiveness would stand at 1.37 (not far from where we are). However, if growth is lower (as we humbly suspect) the threshold for currency strength to hamper growth is considerably below current levels.

A billion folks in the west would be quietly applauding....

Maybe Uncle Warren doesn't like to 'make it rain' (see here) because Becky forgot her umbrella again? And yes, the fact that even TMZ is on to the Octogenarian of Omaha, and his perpetual arm candy, is probably most amusing of all.

Two months ago we demonstrated one of the biggest paradoxes of the current iteration of the US welfare state, in which a single mom earning gross income of $29,000 has the same disposable income after all net benefits as a worker who has gross income of $69,000. The same logic is applicable to all those who instead of working, opt to receive foodstamps, disability payments, and the occasional Obama phone, all the while dropping out of the labor force and making the BLS' job of indicating a dropping unemployment rate a little easier. And while the US is fully intent on converting an ever rising portion of the population into these "comfortably poor" zombies who no longer have any marketable skills, and are completely unqualified to be competitive in an increasingly more specialized workforce, one place where such welfare handouts will no longer be tolerated is Japan, of all places. As Japan Times reports, "welfare benefits will be slashed by ¥74 billion over a three-year period starting from fiscal 2013, after a government panel found that some people are making more on the dole than the average low-income person who is not spends on living costs, it was learned Sunday." We await with eager amusement as this attempt to impose austerity on the comfortably poor takes place in the US next. Considering there was nearly a revolution in California a few weeks back when EBT cards malfunctioned for a few brief hours, the outcome of a comparable belt-tightening in the US would have truly hilarious, not to mention lethal, consequences.