Archive - Oct 21, 2013

Just two weeks ago we discussed the dismal smog that had closed roads and ariports around Beijing during the recent holiday. The situation has got worse, far worse, since then. As Reuters reports (and the stunning images below show), choking smog all but shut down one of northeastern China's largest cities on Monday, forcing schools to suspend classes, snarling traffic and closing the airport in the country's first major air pollution crisis of the winter. An index measuring PM2.5, or particulate matter with a diameter of 2.5 micrometers (PM2.5), reached a reading of 1,000 in some parts of Harbin, the gritty capital of northeastern Heilongjiang province and home to some 11 million people. A level above 300 is considered hazardous! China’s leadership is concerned about air quality because it is a constant source of public anger.

Thanks to a considerable downward revision of the magical NAR numbers, the existing home sales MoM 'beat' expectations for September but the two-month average shows the largest drop in sales since June 2012. From the "cylical peak" in July, of course extrapolated by any and all apologists as confirming the voyage to the moon, it seems, just as we noted, that "affordability" - long shunned by the bulls (because, like you know, interest rates are still low compare to the 1970s...) - has collapsed to five-year lows; worse, in fact, than we expected. With 33% of all transactions cash, it is little surprise that affordability has fallen to a five-year low as home price increases easily outpaced income growth.

What do you expect to happen? The causal chain cannot be disrupted by wishful thinking. Bubbles will pop, and increasingly leveraged, fragile systems will crash. Hoping causal consequences will magically vanish is a strategy doomed to catastrophe.

That the US is set to have its third consecutive quarter with revenue declines (followed by the fourth in a few months, when all the misses will be blamed on - what else - the Tea Party), is by now well-known and greeted by stocks which have given up on any fundamentals (that this happens even as "one-time" restructuring charges which actually recur every quarter, such as JPM's most recent $9 billion in fees, are added back to non-GAAP EPS, and make EPS increase is just as well-known). But it is not so much the US we focus on in this blurb, but Europe, where for some mindboggling reason the consensus has rapidly shifted in recent months, toward a prevailing sentiment of recovery. So here is a quick datapoint from Deutsche putting the European "recovery" in context.

Last week, the main area of focus was the political situation in the US where Democrats and Republicans finally agreed upon a short term fix to reopen the government and extend the debt ceiling. The conclusion of this saw equity markets rally to all time highs in Europe and the US, with the USD continuing to slide as markets turn their attention to the Fed’s QE programme and push back expectations of when the central bank will begin to pull back on asset purchases. With the government now reopen, attention will turn to the numerous data releases that were delayed but will now take place over the next two weeks, including the jobs report which is due on Tuesday. The release of this report will once again be used to help predict when the Fed will begin to taper QE however, recent comments from Fed members have suggested that October is likely to be too soon trim bond buying due to the lack of key macroeconomic data and the unknown economic impact as a result of the government closing for 16 days.

All those who claim there is no inflation, and a tsunami of hot central-bank money flooding the world, are advised to check out the housing numbers reported overnight by UK's property website Rightmove, according to which asking prices in London saw an "unsustainable" 10% month-on-month increase in October. This sent the typical asking prices in the capital to £544,232, a new record high surpassing the previous high set in July by more than £28,000. But if you thought a 10% increase in one month was bad, what is the proper adjective to describe a 12% increase in home prices in... one week!?

Economy Minister Fabrizio Saccomanni, a former deputy governor of the Bank of Italy, acknowledged that "more could have been done." He said political squabbling had complicated the government's work, but pointed out that that the budget keeps Italy's deficit below 3% of gross domestic product, as European Union rules require. "Everybody hates this budget, but the stock market is up and the spread is down," Mr. Saccomanni noted.

• FHFA Is Said to Seek at Least $6 Billion From BofA for MBS Sales (BBG)
• Record Pact Is on the Table, But J.P. Morgan Faces Fight (WSJ)
• Magnetar Goes Long Ohio Town While Shorting Its Tax Base (BBG)
• Mini-Wall Street' Rises in Hamptons (WSJ)
• Obama to call healthcare website glitches 'unacceptable' as fix sought (Reuters)
• Starbucks Charges Higher Prices in China, State Media Says (WSJ)
• Cruz Is Unapologetic as Republicans Criticize Shutdown (BBG)
• Berlusconi struggles to keep party united after revolt (Reuters)
• SAC Defections Accelerate as Cohen Approaches Settlement (BBG)

Following last week's last two day panic buying driven not by data (since in the US it has been delayed until late October and November, and elsewhere in the world it is just getting worse) but by the catalyst that the US isn't going to default (yes, that's all that is needed to push the S&P to all time highs) and just hopes that the tapering - that horrifying prospect of the Fed reducing its monthly monetization by $15 billion from $85 to $70 billion in line with the decline in the US deficit - will be delayed until March or June 2014 because, you see, the Fed isn't sure how the economy is doing, it makes no sense to even comment on the market. Squeezes, momentum ignitions, rumors about what Messers Bernanke and Yellen had for breakfast, Goldman's 2015 S&P forecast of 2100: that's the lunacy that passes for market moving factors. News, and reality, have long since been put in the dust. Just keep an eye on flashing read headlines, and try to buy (remember: anyone caught selling by the NSA is guaranteed a lifetime of annual IRS audits) ahead of the algos. That's what Bernanke's centrally-planned "market" has devolved to.

It was only two months ago that France's socialist president, Francois Hollande, in his quest to show just how great his allegiance was to the eat tax the rich "fairness doctrine" and socialist causes espoused by the glorious leader on the other side of the Atlantic, and to said glorious leader himself, that France was prepared to almost singlehandedly invade Syria (and surrender shortly thereafter) on the basis of several fabricated YouTube clips. So strong was the socialist bond. Less than 60 days later, how quickly the alliances within the second coming of the Comintern have changed: over the weekend, Spiegel and Le Monde revealed that the US NSA secretly monitored tens of millions of phone calls in France and hacked into former Mexican President Felipe Calderon's email account. The spy agency monitored 70.3 million phone calls in France over a 30-day period between December 10 and January 8 this year, Le Monde reported in its online version, citing documents from Snowden. And so, recently demoted to B-grade economic status in Europe, France - America's European lap dog in virtually everything - is suddenly apopleptic and shocked, shocked, that spying went on here.

Every month we say it, and every month it just keeps getting worse: RIP Abenomics... until next month, when it will be RIP-er. Overnight Japan posted its latest, September, trade numbers which were absolutely abysmal, as the trade deficit rose to a fresh record high of 932 billion yen ($9.5 billion), the 15th consecutive monthly shortfall. The deficit for April-September rose to nearly 5 trillion yen ($51 billion), also a record for the first half of the fiscal year. The reason: as we warned in January when we predicted that the surging import costs of energy and food as a result of the plunging yen will far outweigh any incremental benefits for exports, is that, well, surging cost of energy and food far outweighed any incremental benefits for exports courtesy of the ongoing Yen devaluation. But at least Japan's 0.1%, like the 0.1% in the US and Europe, have their wealth effect. The rest can just go on a diet. And walk getting there since they can't afford gas.