Archive - Nov 2013

It's a full-on "Baffle with BS" onslaught this morning. On one hand, the Case-Shiller Top 20 Composite Index rose by 13.3% Y/Y, better than the 13.00% expected, and the highest annual price increase since 2006. Unfortunately, the ramp is coming to an end, especially since the touted NSA data shows that monthly price increases have slowed for the fifth consecutive month, and stood at just 0.7%. At this rate the sequential price change in October will be negative. This is further reinforced by today's "other" housing report: the September FHFA House Price Index, which unlike Case-Shiller rose 0.3%, below expectations and in line with last month. So on one hand home prices are better than expected, on the other: worse. Clear as mud.

Call it the last hurrah for Private Equity and hedge funds as they scramble to "telegraph" that there is still some interest in rental property conversions. Despite ever louder cries that the REO-to-Rent and the general surge into rental properties is over (see our report on RealtyTrac's latest data due out shortly), as many PE firms seek to cash out and to flip their existing exposure, today's Housing Permits number for October showed just the opposite.  Because while permits for single-family housing units was virtually unchanged month over month, barely rising from 615K to 620K on a seasonally adjusted annualized basis, it was the structures with 5 units or more, aka rentals, that exploded by the most in the past two months going back all the way to 2008.

As we showed very vividly yesterday, while the world is comfortably distracted with mundane questions of whether the Fed will taper this, the BOJ will untaper that, or if the ECB will finally rebel against an "oppressive" German regime - with $3.5 trillion in asset (and debt) creation per year, is China. China, however, is increasingly aware that in the grand scheme of things, its credit spigot is the marginal driver of global liquidity, which is great of the rest of the world, but with an epic accumulation of bad debt and NPLs, all the downside is left for China while the upside is shared with the world.  Which is why it was not surprising to learn that China has drafted rules banning banks from evading lending limits by structuring loans to other financial institutions so that they can be recorded as asset sales.  And while we are confident Chinese financial geniuses will find ways to bypass this attempt to curb breakneck credit expansion in due course, in the meantime, Chinese liquidity conditions are certain to get far tighter. This is precisely the WSJ reported overnight, when it observed that yields on Chinese government debt have soared to their highest levels in nearly nine years amid Beijing's relentless drive to tighten the monetary spigots in the world's second-largest economy.

IN CHINA, THE GOLD RUSH CONTINUES as Chinese people buy jewellery, coins and bars as a store of wealth protection from inflation. The worlds largest jewellery group, Chow Tai Fook Jewellery Group Ltd., established in 1929, saw sales jump 49% during the first half of 2013. 

• M&A Mystery: Why Are Takeover Prices Plummeting? (WSJ)
• Hedge-Fund Fight Club Traded Illegal Tips Not Punches (BBG)
• Speed Traders Meet Nightmare on Elm Street With Nanex (BBG)
• A new wave of U.S. mortgage trouble threatens (Reuters)
• Penny Lane: Gitmo's other secret CIA facility (AP)
• US hardens threat to leave Afghanistan with no troops (WSJ)
• Russian Prison Stuns Captain of Greenpeace’s Bombed Ship (BBG)
• ECB's Weidmann Warns Central Banks Might Be Too Dominated by Fiscal Concerns (WSJ)
• China Air Move Splits Japan as Carriers Obey New Rules (BBG)
• Inside the Breakup of the Pritzker Empire (WSJ)

If yesterday Goldman was pitching going long of the S&P in AUD terms (the world renowned Goldman newsletter may cost $29.95 but is only paid in soft dollars) as its first revealed Top Trade of 2014, today's follow up exposes Top Trade #2: which is to "Go long 5-year EONIA vs. short 5-year US Treasuries." Goldman adds: "The yield differential between these two financial instruments is currently -61bp, and we expect it to reach around -130bp. On the forwards, the differential is priced at around -95bp at the end of 2014 at the time of writing. We have set the stop-loss on the trade at a spread of -35bp. The choice of Treasuries over OIS or LIBOR on the short leg is motivated by the fact that yields on the former could underperform more than they have already in relative space as the Fed scales down its asset purchase program."

In fitting with the pre-holiday theme, and the moribund liquidity theme of the past few months and years, there was little of note in the overnight session with few event catalysts to guide futures beside the topping out EURJPY. Chinese stocks closed a shade of red following news local banks might be coming  under further scrutiny on their lending/accounting practices - the Chinese banking regulator has drafted rules restricting banks from using resale or repurchase agreements to move assets off their balance sheets as a way to sidestep loan-to-deposit ratios that constrain loan growth. The return of the nightly Japanese jawboning of the Yen did little to boost sentiment, as the Nikkei closed down 104 points to 15515. Japan has gotten to the point where merely talking a weaker Yen will no longer work, and the BOJ will actually have to do something - something which the ECB, whose currency is at a 4 year high against Japan, may not like.

It might have been the Republican shutdown (according to one person at the White House, at least). It might have been the fault of the Syrian leader Bachar Al-Assad gassing his people with chemical weapons.

It’s interesting, disturbing and pathetic that this article emerged so shortly after we highlighted the fact that there is about to be a huge, and potentially disruptive reset in home equity loans over the next several years. So while we are still dealing with the ramifications of the prior housing bubble and the HELOCs associated with that debacle, we are right back at it. Extracting additional equity from another phony housing bubble to remodel homes that likely aren’t worth anywhere near what people think once private equity and money laundering oligarchs are done with their binge buying. As we have said many times before, QE makes a society lose its mind.

We are sure it was all planned a long time ago but the irony is not lost on us. A day after the US pisses the Israelis off with a sorta kinda deal with Iran, for the first time in Israel’s history, the Israel Air Force launched the “Blue Flag” training exercise – an international air force exercise with participation by the US, Italian and Greek air forces.

"London Gold Market Fixing Ltd., a company controlled by the five banks that administers the benchmark, has no permanent employees. A call from Bloomberg News was referred to Douglas Beadle, 68, a former Rothschild banker, who acts as a consultant to the company from his home in Caterham, a small commuter town 45 minutes south of London by train. Beadle declined to comment on the benchmark-setting process."

A great many long refuted Keynesian shibboleths keep being resurrected in Krugman's fantasy-land, where economic laws are magically suspended, virtue becomes vice and bubbles and the expropriation of savers the best ways to grow the economy. According to Paul Krugman, saving is evil and savers should therefore be forcibly deprived of positive interest returns. This echoes the 'euthanasia of the rentier' demanded by Keynes, who is the most prominent source of the erroneous underconsumption theory Krugman is propagating. Similar to John Law and scores of inflationists since then, he believes that economic growth is driven by 'spending' and consumption. This is putting the cart before the horse. We don't deny that inflation and deficit spending can create a temporary illusory sense of prosperity by diverting scarce resources from wealth-generating toward wealth-consuming activities. It should however be obvious that this can only lead to severe long term economic problems. Finally it should be pointed out that the idea that economic laws are somehow 'different' in periods of economic contraction is a cop-out mainly designed to prevent people from asking an obvious question: if deficit spending and inflation are so great, why not always pursue them?

Even the most ardent of bulls would 'admit' that the period of the last 90s was a bubble in US equities. What started at the margin quickly morphed into a euphoric valuation for any and everything that could be pitched. Even The Fed's Jim Bullard 'knew' there was a bubble back then... Today's recovery of the NASDAQ to 4,000 - levels not seen since this period - is quickly dismissed by those that need things to go higher on the basis of earnings, multiples, or some such forward-looking hope-based methodology that reinforces their bias. However, Tobin's Q - among the longest-lived and most well-respected of longer-term valuation methodologies has just reached levels only ever seen during the 1999/2000 bubble. BTFATH valuation?

Even we were shocked when we ran the numbers on this one...

Just as many expect that the #1 buyer of Treasuries (the Fed) will soon begin paring back its purchases, the top foreign holder (China) may cease buying, thereby opening a second front in the taper campaign. Little thought seems to be given to how the economy would react to 5% yields on 10 year Treasuries (a modest number in historical standards). The herd assumes that our stronger economy could handle such levels. That is why when it comes to tapering, the Fed is all bark and no bite. But the market understands none of this. This is not unusual in market history. When the spell is finally broken and markets wake up to reality, we will scratch our heads and wonder how we could ever have been so misguided.