Archive - Oct 2013

In the long term, it will ultimately be the fundamentals that drive the markets. Currently, the deterioration in the growth rate of earnings and economic strength are not supportive of the speculative rise in asset prices or leverage. The idea of whether, or not, the Federal Reserve, along with virtually every other central bank in the world, are inflating the next asset bubble is of significant importance to investors who can ill afford to lose a large chunk of their net worth. It is all reminiscent of the market peak of 1929 when Dr. Irving Fisher uttered his now famous words: "Stocks have now reached a permanently high plateau." Does an asset bubble currently exist? Ask anyone and they will adamantly say 'NO.' However, maybe it is precisely that tacit denial which might be an indication of its existence

By keeping interest rates near zero, the Fed has been hoping to push investors into the stock market. The hope here was that as stock prices rose, investors would feel wealthier (the “wealth effect”) and would be more inclined to start spending more, thereby jump-starting the economy. This has not been the case. Instead the entire capital market structure has become mispriced.

Already, the Chinese have stopped accumulating dollars - preferring safer currencies, infrastructure, hard assets and commodities and of course gold. Even a small amount of Chinese selling  could lead to substantial dollar weakness and much higher bond yields plummeting the U.S. into another recession.

Nothing further needs to be said...

UPDATE: Tepco Orders Evacuation of Fukushima Power Plant Workers

A 7.3 (according to USGS) magnitude earthquake just struck 311 miles ENE of Tokyo at a depth of 10km. The Pacific Tsunami Center has issued a warning and VOA reports a 1-meter high tsunami could hit Fukushima coast at 02:40 local - 1340ET)....

NHK radio and TV announcers airing repeated warnings to residents of #Fukushima to stay away from the coast. #tsunami #Japan

— Steve Herman (@W7VOA) October 25, 2013

The Obamacare tech team should add another pressing cyber issue to its to-do list. As Mother Jones reports, web secuirty experts warn that that Healthcare.gov (and various state exchanges), the Obamacare websites, has a security flaw that could make sensitive user information, including Social Security numbers, vulnerable to hackers. The website, reportedly, has a coding problem that could allow hackers to deploy a technique called "clickjacking," where invisible links are planted on a legitimate web page. Using this scheme, hackers could trick users into giving up personal data as they enter it into the web site, potentially placing Americans at risk of identity theft or allowing fraudsters to file bogus health care claims.

As Alan Greenspan described this week, in an interview with John Stewart on “The Daily Show,”

“We really can't forecast all that well. We pretend that we can but we can't. And markets do really weird things sometimes because they react to the way people behave, and sometimes people are a little screwy.”

Which means they don’t necessarily go along with your central planning, no matter how good you think it is. But still economists insist that, if they are allowed to monkey around with it, they can make an economy better. And therefore, the Fed, which has lived by the sword of QE, will probably die by it too.

First: we are not suggesting Japan's army is comprised of radioactive mutants - perhaps just those stationed within 10 kilometers of the Fukushima gift that keeps on giving alpha through gamma rays. We are merely saying that if one takes Abe's latest deluded ramblings that Japan is "ready to counter China's power" literally instead of merely more nationalistic bluster by a prime minister whose first term ended in the runs (literally), then the demographically crippled island nation that has a soaring food and energy inflation problem, sliding wages and radiation that comes in 100,000+ RDA dosage increments, would be well advised to have a few invincible X-Men in its army's ranks if indeed it has any intention of taking on China. Because as Walter Sobchak would say, "this is not Man(churia)."

A key challenge for most investors is meeting return bogies, but as Citi notes in the following 6 slides, generating a 10% return in this low-yield environment is still possible (aside from riding short-squeezes in #N/A P/E stocks) as long as you have the intestinal fortitude for the kind of leverage required...

As the status quo crumbles, the state responds in the only way it knows: expand control and become increasingly authoritarian.

"We Ought to Come Up with a Way of Stopping It" ... i.e. the Free Press

While no longer actively engaged in politcs, one of Ron Paul's crowning achievements while in Congress, was to bring some much needed sunlight to the balance sheet, the activities, and secret bailouts of the Fed, and according to some, was being responsible for the "transaprency, openness, and forward guidance" approach to monetary policy. The paradox here, as the whole Taper - Non Taper shocking episode provied, is that the Fed itself is now caught in a  reflexive Catch 22, and no longer can "renormalize" and extricate itself from its policy through "guidance" without in the process destroying everything it has achieved during the prior period of central planniing. Still, despite Ron Paul's unsung accomplishments there is much more to be done to expose just how actively the NY Fed's trading desk participates in the fixing of the S&P500's closing price day after day. For that, he will need the help of his son, Rand. Which is why as the Sunshine State News reports, "Sen. Rand Paul, R-Ky., is ramping up his opposition to President Barack Obama’s nomination of Janet Yellen to chair the Federal Reserve. Paul is teaming up with the Campaign for Liberty, chaired by his father former U.S. Rep. Ron Paul, R-Texas, to stand in opposition to Yellen and push legislation taking aim at the Fed."

Having fired a shot across Carl iCahn's bow yesterday, PIMCO's Bill Gross has a new target - once again talking his book...

Gross: By the way, I should spend more TIME like Bill Gates too -- we all should. He and Melinda are great paragons.

— PIMCO (@PIMCO) October 25, 2013

Perhaps more Americans should spend more time that way... instead of watching every tick in AMZN and dreaming of retirement...

Following record UMich misses, Gallup's economic confidence collapse, the slump in the conference board's measure of confidence, and Bloomberg's index of consumer comfort signaling major concerns among rich and poor in this country (in spite of record highs in stocks), today's Consumer Confidence data from UMich continues to confirm a problem for all those 'hoping' for moar multiple expansion. Falling for the 3rd month in a row, and missing expectations for the 2nd month in a row, this is the lowest confidence print in 2013. Perhaps even more worrisome for the 'hope and change' crowd is that the 12-month economic outlook has collapsed to its lowest since Nov 2011. It would seem that all that free money flooding our 'markets' has reached peak efficacy in terms of confidence inspiration, and as Citi notes, when this cycle has played out in the past, equity market corrections are often quick to follow...