Archive - Feb 2013

As we noted yesterday, the credit bubble is in full swing as high-yield covenant protections hit a new low in January. At the same time, new issue premia in high yield credit has remained extremely low (meaning demand is high) - even as leverage (measured in a number of ways) surges to post-financial-crisis highs. With low yields and technical demand so abundant, firms appear to be leveraging-up in favor of shareholders. But, as is always the case, there is a limit to just how much leverage can be piled on before credit spreads 'snap' and raise the cost of capital - hindering the equity price. Finally, for the 'cash on the balance sheet' advocates, US firms' Cash/Debt is its lowest (worst) since pre-crisis. Banks continue to delever, sovereigns relever, and non-financials taking their lead - this didn't end well last time... and this time, exuberance and positioning is very heavy.

Europe’s banks are totally insolvent and have not been fixed. No EU leader is going to tell you this because their jobs depend on convincing people that everything is fine. Bankia was supposedly “fine” right up until the truth came out. Just like the Wall Street banks were “fine” going into 2008.

Per C-Span: "The Senate Finance Committee will hold a confirmation hearing Wednesday for Treasury Secretary nominee Jacob "Jack" Lew. If approved, he will replace Timothy Geithner. Among the topics he will address include the state of the economy, strategies for reducing the budget deficits, economic ties with China along with questions about global currency war. Sen. Orrin Hatch (R-UT), Ranking Member of the Senate Finance Committee, said in a statement that the "We need a better understanding of his role at Citigroup, what his knowledge is of financial markets, whether he supports reforming our tax code, whether he believes in a robust trade policy and what kind of plan the Obama Administration has to confront our skyrocketing debt and our broken entitlement programs. As we move forward, I’m hopeful that Mr. Lew will answer some remaining questions that I have." According to AP, "After Wednesday's hearing, committee members will have two days to send questions to Lew to answer before they vote. The full Senate could vote on the nomination late this month."

Oh, this 35% Apple correction, drop in margins, increase in competition and decrease in competitiveness of products is a temporary thing. Seriously!!! That Reggie guy shouldn't even be allowed on TV. Really!!!

Reports indicating that Americans have invested more in equity funds here in 2013 than they did all last year have given rise to talk of the "Great Rotation". The idea is that Americans are selling fixed income investments bought during the financial crisis and now buying shares. We are less sanguine. There is a third asset class that needs to be integrated into the analysis: cash. After surveying the data and various reports, it looks to us that the flows into equities is not coming out of fixed income but rather money market funds and deposits.

The Eurozone is not a debt crisis that is "fixed," it is a debt crisis waiting to implode. The happy-talk that the Eurozone debt crisis has been resolved is ubiquitous. But when did ubiquitous happy-talk make it correct? Since the crisis is about debt--too much of it, and too much of it cannot and will not be paid back--then perhaps it would be prudent to look at two charts of eurozone credit.

As the AAA chart below shows, the gasoline price is now higher than it was a year ago, and has been for the past two weeks, which also automatically means it is the highest it has even been in history (naturally, the implications of this record high gasoline tax on the cash-strapped US consumer are painfully clear).  So with gas prices once again "an issue", it is time to trot out the worn out scapegoating usual suspects - those evil, evil hedge funds, whom everyone is perfectly happy to blame. Or at least pest exterminators and cab drivers. From Reuters:

At a filling station in Midtown New York last week, several people were prepared to blame traders on Wall Street as they paid more than $4 per gallon to fill up their cars. "It really is not supply and demand. It's definitely speculation," said John Keegan, an exterminator with pest control company Terminate Control, who was filling up his van. A cab driver said he was convinced the price would be just $1 a gallon if the government "stopped Wall Street trading oil."

Of course, what the exterminator and cab driver fail to understand, or just are happy to ignore, is that the same hedge funds that merely allocate the Fed's virtually "open-ended" excess liquidity into stocks, which are now beyond furiously overvalued by any benchmark, and which as we explained over the weekend are trading at a higher forward P/E multiple now than they were in 2007, have increasingly few choices where to park their money, and even with the threat of the Margin Hiker in Chief sending CME margins to 100% across the energy space, sooner or later, those $85 billion in fresh monthly liquidity will go into Brent, WTI, and of course, gas.

Confused by the latest scandal in Southern Europe? Unsure of which corruption claim is being denied in the Iberian Peninsula? Fear no longer, as the Corruptometer provides an at-a-glance map of which political party, encouraged by the actions of their leadership, is engaged in bribery, embezzlement, prevarication, falsehoods, scams, tax fraud, and money laundering. There are currently 314 of said politicians involved in 730 cases on the map and while the count is close, it appears Rajoy's Popular Party wins the overall cup for 'Most Corrupt'.

Following last night's expectations-filled State of the Union speech, we know that housing is rebounding and our stock market is rising but while these are pointed to as evidence that we are on the right track, it appears, from these three charts, that expectations for hiring, capital expenditure, and retail spending is bad and getting worse. Of course, the divergence between our current market's reality and an uncertain future is nothing new - but the spread is starting to become untenable as even with stocks at five-year highs, confidence remains weak. Simply put, the people know reality and only the talking-heads choose to ignore it.

In what may come as a surprise to some, advance retail sales for January printed on top of expectations of a +0.1% increase in sequential sales, although the forecast range was very wide, from -0.7% to +0.6% as many analysts were concerned what the impact of the payroll tax expiration would be on sales. This is a moderation of the January growth when retail sales rose 0.5%.  And while the headline number was goldilocks, the core reading excluding autos and gas came at 0.2% or slightly below expectations of a 0.4% print. What was even more curious is that the commerce department said department store sales rose the most since February 2012. Retail sales “relatively flat” as end of tax holiday likely had effect, says Bloomberg Government economist Nela Richardson. In B-grade economic news,  import price index up 0.6% M/m vs est. 0.8%  increase(range 0.2%-1.2% gain); prior revised to 0.5% drop from down  0.1%.

Platinum and palladium surged Tuesday on renewed concerns that supplies of the platinum group metals will shrink. Zimbabwe's government has given platinum producers two years to begin refining the precious metals in Zimbabwe. This means that production of platinum will drop, because mining companies are now expected to build refineries – something which they may not do, due to the real risk of confiscation and nationalisation of assets. Both metals climbed more than 1% yesterday with platinum for April delivery rising $21.10 to settle at $1,717.2/oz. Palladium for March delivery rose $12.80 to $771.40/oz. "The worry is that it's going to restrict production," said James Steel, chief commodities analyst at HSBC in New York. "That was the prime motivator for the price movement today."

The beginning of every year under the New "centrally-planned" Normal regime is no stranger to seemingly relentless rallies: while in the first 29 trading days of 2013 alone, the benchmark S&P 500 Index has gained a respectable 6.5%, such initial strength out of the gates has in fact been the norm over the past three years, with the S&P 500 returning 7.5% and 5.7% during the first 29 trading days of 2012 and 2011, respectively. And, just like in 2013, both prior occasions were spun by pundits as indicative of great rotations, economic recoveries and what not, until reality reasserted itself when the gobs of liquidity pumped by western central banks finally made their way to China and sent local inflation surging at which point China pulled the plug in the "great reflation." This time will not be different, especially since as we showed yesterday, the market is now more bullish than 99% of all prior readings. And while the recent spike in the market has been less acute than on previous occasions, what is notable about the current rally is the duration without any marked correction. As the following chart from Stone McCarthy shows, since March 2009, there have been only 4 times in which the rally continued for a longer period of time without a notable, or >5%, correction.

Just like yesterday, it was some anonymous Yen vigilante smacking down the USDJPY saying the initial G-7 statement was misinterpreted, so today it is the ECB's turn, which just smacked down the EUR royally, for the second time in a week following last week's Mario Draghi comments, when it said that:

• THE ECB IS WORRIED EURO STRENGTH WILL HURT RECOVERY IN CRISIS STATES

And just like yesterday the refutation came via shady pathways, i.e., an anonymous leak in D.C., so today, apparently the information comes from that venerable ECB conduit: Bild. What can one say - all is fair in central bank love and currency war.

• Obama Paints Wider Role for Government in Middle Class Revival (BBG)
• Obama to Seek a New Trade Deal With EU (WSJ)... or this is strawman why 2016 GDP will be higher
• Mobile phone sales fall for the first time since 2009 (Telegraph)
• Sequester Looms, No Deal in Sight (WSJ)
• Neither US party swallows a compromise (FT)
• Embattled Economies Cling to Euro (WSJ)
• For China, Spending Is Harder Than It Looks (WSJ)
• Bank of England's Sir Mervyn King says recovery in sight (BBC) - just a little more inflation first
• G7 fails to defuse currency tensions (FT)
• Japanese Leader Urges Firms to Boost Wages (WSJ) - so does the US one
• Fed Bank Chiefs Back Money-Fund Overhaul (WSJ), or force everyone out of MMFs and into stocks