Archive - Jan 2013

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.

Hope is dying in the US. The performance of financial markets affects everyone. For savers and investors, these markets represent the means to an improved life, at least as they define it. We are twelve years into this new century and Americans are losing their hopes, dreams and aspirations. Twelve years in, the S&P 500 has returned a total of 14%. That puny return has not come close to covering the decline in purchasing power of the dollar during the same period. The country's financial condition is deplorable and cannot continue much longer. So, too is virtually everything else the government has touched whether it be education, Amtrak, the post office, Social Security, Medicare, ad nauseum. Nothing government has done has not been a Ponzi scheme dependent upon additional theft from taxpayers to keep going. The system is now broken. There is no one to blame for this other than government. Despite this obvious conclusion, government is still seen to be a savior by a large proportion of the country.

That didn't take long, did it? I guess it's bullish when your most dangerous competitor catches up to you in customers BEFORE you've fully developed your business model or method of monetization, right???!!!

Cramer called it the greatest piece of financial TV history. He was the only one. Here is Art Cashin's take on last week's 1 hour slow motion trainwreck between Ackman and Icahn. "While it diverted trading desks and floors somewhat – like a car chase – it was about as meaningful. Traders wondered if the performance dented the confidence of mom and pop investors watching at home. It certainly didn't make the financial arena sound solid and businesslike."

Where ever you look - apart from AAPL (-0.5%) - risk-related assets are on another tear this morning. Following the better-than-expected (though totally noisy) goods orders headlines - which a mere scratch below the surface show to be considerably less exuberant than expected, EURUSD surged back up to unchanged, 10Y Treasury yields pushed back above 2% for the first time in 9 months, and S&P 500 futures touched 1500. Bonds and stocks are modestly recoupling but not as much as one would think given the 10Y shift. Meanwhile CAT is up 2.5% on a cautious outlook and BA is down 0.6% (as driver of the macro rally?).

Yet another government data release, yet another epic case of baffle with BS. As expected (and as pretweeted by us) The headline Durable goods orders was a massive 4.6% increase M/M, rising to $230.7 billion from $220.7 billion, the biggest beat to expectations of a 2.0% headline print since December 2011. A key reason for this was the ridiculous 56.4% explosion in Nondefense aircraft and part from $5.1 billion to $7.9 billion, while Nondefense aircraft soared by 10.1% to $14 billion. Excluding this incredibly volatile data set, the headline number would have been a miss, and will likely be revised lower next month, because the primary driver of the boost was Boeing, which said it had received 183 orders in December, compared to 124 in November. One wonders how many of these fully cancelable orders were for the Dreamliner. Ah details. And more details: the only consistent series that matters for a credible Capital Expenditure picture without monthly aberations, is the orders of Non-defense Capital Goods excluding Aircraft category, which rose by a whopping 0.2% month over month. But more importantly, looking at this on a Year over Year basis, as this is a seasonal series and looking at it on a sequential basis makes zero sense, we just experienced a whopping -4.3%, negating the transitory 1.5% Y/Y bounce posted in November, and resuming the downward glideslope in the key corporate CapEx indicator.

There have been some important developments in the interest rate differentials that help explain recent price action in the foreign exchange market. It is not simply rhetoric weighing on the yen, for example. Japanese 2-10 year interest rates remain softer on the year and over the past three months, while monetary conditions have tightening in Europe and US 10-year yields are higher.

In one sense the trajectory of money is similar to what recently occurred with Lance Armstrong which is that he admitted to doping. The financial markets have been living on the drugs provided by the world’s central banks and that has been more and more and ever more money pumped into the system. We have become addicted to the stuff and never mind that more pieces of green and blue paper decrease the value of the currency because, with the possible exception of gold, there is nowhere else to go and so the global slosh of capital keeps driving the markets higher; all of the markets. Many point to the rise in the markets as a sign that conditions are improving but this is not the case. If things were getting better then the fundamentals would be telling a very different story.