Archive - Feb 4, 2013

Back to square one. Spain is in the spotlight once again with data unsettling enough to shatter the Euro’s 4 month rally against the dollar. Record unemployment coupled with depressing growth data and political woes paint Spain to look like a sinking ship.

Did Carl Icahn just take his feud with Bill Ackman to the next level? He very well might have, and the stakes have never been higher...

This week's Barron's cover looks like a pretty strong warning sign for stocks (not only the cover, but also what's inside). However, there may be an even more stunning capitulation datum out there, in this case a survey that we have frequently mentioned in the past, the NAAIM survey of fund managers. This survey has reached an all time high in net bullishness last week, with managers on average 104% long. The nonsense people will talk – people who really should know better -  is sometimes truly breathtaking. Recently a number of strategists from large institutions, i.e., people who get paid big bucks for coming up with this stuff, have assured us that “equities are underowned”, that “money will flow from bonds to equities”, and that “money sitting on the sidelines” will be drawn into the market. These fallacies are destroyed below. And finally, while, theoretically, the “inflation” backdrop is a kind of sweet spot for stock, even to those who insist that stocks will protect one against the ravages of sharply rising prices of goods and services, As Kyle Bass recently explained, the devaluation of money in the wider sense was even more pronounced than the increase in stock prices. Stocks did not protect anyone in the sense of fully preserving one's purchasing power. The only things that actually preserved purchasing power were gold, foreign exchange and assorted hard assets for which a liquid market exists.

As the government continues its ongoing scheme of handouts for everyone, it is worth perhaps reflecting on this behavior as non-optimal. Of course, printing money and handing it out for various grants, subsidies, and handouts was really wealth creating, the rent-seeking behavior would continue forever and everyone would be rich. However, as Professor Michael Munger points out, sometimes more money will be spent in total trying to compete for a grant or handout than the amount of money being given away. These costs are rarely considered in policymaking, but perhaps they should be. Of course, what really happens is the government awards money to organizations with the best lobbyists - not necessarily those that need it most or offer the best services. Perhaps its time for all of us to learn that you can't just (costlessly) keep giving money away.

Break the markets to save themselves...

Up until now, Argentina's descent into a hyperinflationary basket case, with a crashing currency and loss of outside funding was relatively moderate and controlled. All this is about to change. Today, in a futile attempt to halt inflation, the government of Cristina Kirchner announced a two-month price freeze on supermarket products. The price freeze applies to every product in all of the nation’s largest supermarkets — a group including Walmart, Carrefour, Coto, Jumbo, Disco and other large chains. The companies’ trade group, representing 70 percent of the Argentine supermarket sector, reached the accord with Commerce Secretary Guillermo Moreno, the government’s news agency Telam reported. As AP reports, "The commerce ministry wants consumers to keep receipts and complain to a hotline about any price hikes they see before April 1."

In the same way as any and every risk-asset in the world, the price of yield-providing CMBS (commercial mortgage backed securities) have risen to post-crisis highs in the last few months. These are some of the epicentric deals from the crisis that now trade close to par once again. However, the last month or so has not seen CMBS prices push higher with stocks and it appears, as the FT notes, that the reason is becoming clear in the post-holiday-shopping period. CMBS cash-flow streams are set to drop considerably as up to 15 per cent of the country’s suburban retail centres forecast to close over the next five years in the face of online competition. Retail is regarded as an especially risky component of CMBS as a mall can go downhill if an important tenant shuts its store because other tenants are usually able to renegotiate their leases if a traffic-driving anchor tenant leaves. That can have severe consequences for CMBS exposed to the mortgage on the property.

It was just a matter of time before the most powerful crony capitalist bank in America decided to join the housing trade.  Making money running the food stamp program just wasn’t enough for Your Crony Highness Jamie Dimon and company, it’s time to join his financial oligarch brothers in the bidding war to corner the housing market and become your overlord.  That way they can control how you eat (food stamps) and where you sleep.  It’s become very clear what the large financial interests in these United States are attempting.  Funnel all the low interest crony American money, with a dash of Chinese laundered money, into the “housing recovery.”

The magnitude of the euro's slide on Monday is typically not asscoiated with one-day events.  The market may be cautious ahead of the ECB meeting on Thursday, but we expect this pullback in the euro will prove to be a new buying opportunity.  We anticiapte the euro holds above $1.34.  We note that Spanish yields have been rising in aboslute terms and relative to Germany for the better part of three weeks.  This has been happening as the euro rose.  The main driver of the fx market is the portfolio shift associated with the realization that EMU will be here tomorrow and the next day and the passibe tightening of euro area monetary conditions.  At the same time the Federal Reserve has renewed its commitment to buy $85 bln of long-term assets for months to come.  

Following our earlier discussion of the echo-boom in housing, David Stockman appeared on Yahoo's Daily Ticker with Lauren Lyster to pour come much-needed cold water 'reality' onto the hopes of an increasingly sheep-like investing public. Homebuilder stocks up 100%-plus simply reflects that "we are in a bubble once again." The former CBO Director added that "in a world of medicated money by the central bank, things aren't what they appear to be," as he explained there is "no real organic sustainable recovery." 

Earlier today the US Treasury released its latest Borrowing Estimates for Q1 and Q2 of calendar 2013. In brief: in the ended quarter, the Treasury borrowed some $297 billion, $9 billion more than the $288 billion previously predicted. One reason for this miss is the build up of cash in the quarter which ended at $93 billion instead of the $60 billion initially expected. However the extra cash buffer will be used in Q1, in which Treasury now expects to burn some $63 billion instead of the $30 billion forecast before, ending the quarter with $30 billion in cash. To get there, Treasury will need to raise some $331 billion in debt in January through March, just shy of the prior estimate of $342 billion in funding need in this quarter. And since the US debt to the penny counter has been stopped since the debt ceiling breach, and is still at the December 31, 2012 debt limit of $16.432 billion, this means we now know, approximately, that US debt on March 31, 2013 will be $16,763,730,050,569.10, give or take a dime, or said otherwise, assuming a generous 1% sequential growth in Q1 GDP, a 105% debt/GDP in two months.

While it was relatively well-known (or expected) that YUM's China business was hurting (after its PR snafu), this is considerably worse than expected (hoped for). Revenues and earning met considerably lowered expectations but the outlook is drastically slashed:

*YUM SEES CHINA COMP SALES JAN AND FEB COMBINED DOWN 25% :YUM US
*YUM! SAYS CHINA DIVISION JAN. EST. COMP SALES FELL 37% :YUM US

which leaves them expecting *YUM SEES YR ADJ. EPS DOWN MID-SINGLE DIGITS VS $3.25, EST $3.57. But there's always hope...* YUM! SEES KFC CHINA COMP SALES POSITIVE IN 4Q :YUM US. The stock is down 8% after-hours (for now). The question is - of course - WWJCD?

Following Europe's worst day in months, the US stock markets saw the biggest drop of 2013 today. For those shunning the brief period, aside from 12/28 swings, this is the worst drop in the S&P 500 futures since early November on a relatively high volume day. EUR's weakness was a major driver (just as it was on the way up) jawboned by various CEOs and leaders and pressured down to almost a 1.34 handle (down over 1% against the USD as JPY gained 0.6% against the USD). Treasury yields clattered lower - to Friday's lows - and credit markets remained much less exuberant (as stocks played catch-down). Gold was relatively bid even as the USD gained, testing up to $1675.  Homebuilders continue to slip lower and with AAPL's ongoing demise, there was no OPEX/month-end pump to save Tech and implicitly the rest of the market. HY Bond ETFs and synthetics remain weak but selling is thin in bond-land - it seems everyone knows that the cash market can't stand a herd heading for the exit all at once. VIX jumped a considerable 1.75 vols to 14.65% - its highest close of the year.

Following our most recent discussion of David Tepper's apparently 'now' bearish bias to financials (based on his $400mm BWIC), it appears that his latest "balls to the wall" thesis is not playing out so well. The S&P 500 just touched the key 1491.50 'Tepper Balls'-Day highs... meanwhile VIX has jumped by the most this year from Friday's lows...

These days one has to laugh with the Japanese, as the temptation to laugh at them is just so high. Because, sadly, the endless barrage of negative developments surrounding the "Land of the Rising Sun" may soon require a constitutional amendment replacing that key adjective to "Setting." And while everyone knows that Japan's economy is the Keynesian voodoo religion's event horizon laughing stock, caught between a 30 year deflationary implosion which is the only permissive factor allowing it to sustain interest payments on a 235% debt/GDP mountain, and a banking, debt and funding crisis should the government "succeed" in generating inflation, it is the intangibles that will be the proverbial straw that breaks this particular camel's back. Intangibles, such as 2011's tsunami and Fukushima explosion, which have made sure that every piece of domestic sushi will be pre self-cooked for generations. Yet glowing in the dark may have just been the beginning: now Japan also has a toxic, photochemical smog problem to boot.