Archive - May 28, 2013

UPDATE: S&P 500 futures plunged back to the lows of the day as soon as cash closed.

The streak is alive. For the 20th Tuesday in a row, The Dow Jones Industrials have closed green. With an average gain of 80 points, since 1/25, the Dow is up an impressive 11% but absent Tuesdays is merely unchanged at +0.2%. Today saw significantly volatility in stocks though with Nikkei and S&P futures giving up all their gains at one point only to bounce back into the close for a glorious victory. Volatility was everywhere as the collapse of the JGB market spills over. VIX rose 0.5 vols to 14.5% (disagreeing with stocks). FX markets jerked and gapped with JPY ending down around 1% from Friday's close. Commodities diverged today with Copper and Oil rising and Gold and Silver sliding even with the 0.75% gain on the USD this week. High yield credit slid lower all day but we suspect this was dominated by rate risk as Treasury volatility exploded. 10Y yields rose by their most (+16.5bps or 5-sigma) since Oct 2011 to close at their highest since April 2012.

Remember the face on the left: it belongs to Mike Hedlund, and it will become much more popular in the coming months and years, because following a historic court decision, Mike just saw the bulk of his student loans discharged following a 10 year battle with the US legal system and his student loan lenders. A decision that will open the floodgates for countless cases just like his, leading to yet another taxpayer funded bailout amounting to hundreds of billions in deferred dollars (read government debt that has to be inflated away) and for which the final bill will again be footed by... you dear US taxpayer.

Based on over 100 years’ worth of data, anyone who is looking to invest for the long term by buying the market today can expect, at best, a 4% real return per year over the next 20 years (this includes both dividends and capital appreciation after inflation).

We must have discovered a new bug in excel, because when we took median new home prices (which a week ago hit an all time high) which we then divided by the average American's purchasing power expressed through real disposable income per capita, we got this chart...

Spanish economic data does not always pass the sniff test. A simple example that JPMorgan's Michael Cembalest explains is that as unemployment rose from 10% to 25% from 2008 to Q2 2012, Spanish banks reported stable non-performing loans of 3%. The latest Mad-riddle, as he calls it, has to do with corporate profits but recent headlines from PM Rajoy, explaining his approach to solving the country's devastating youth unemployment problem just beggars belief. Simply put, as Bloomberg reports, he proposes to create a mechanism to temporarily exclude tax rebates granted to companies for hiring young people from the calculation of the government budget deficit - which, his twisted logic prompts, "would enable immediate action because we’d lower contributions to the Social Security system and this would facilitate and encourage hiring. So in summary, his suggestion to boost youth employment is... to further misreport the deficit and to underfund social security even more. With Spanish data already questionable (as we discuss below), this simply exaggerates an already farcical situation.

There has been much speculation in the recent past over what the bottom-line impact of surging stock buyback activity has been on the overall S&P earnings: after all, by removing shares from circulation, the denominator in "per share" calculation gets smaller and smaller with every incremental buyback. Courtesy of JPM we finally have a definitive answer to this long-running question. Of the change in S&P TTM operating earnings between Q3 2011 and the just completed Q1 2013, a stunning 60% or $2.20, of all "gains" of $3.70 have been the result of buybacks. The remainder: a tiny $1.50 is due to actual organic growth. This means that nearly 60% of the bridge between the LTM operating earnings of $94.60 as of Q3 2011 to $98.30 at Q1 2013 has come from corporate management teams engaging in shareholder friendly activity.

Corruption thrives when good people do nothing. Societies rebound when good people do something. Isn't it time to make democratic capitalism happen. Democratic capitalism is about worthwhile production and exchange by communities of people who give a damn. It is expressly not about either crony-driven concentration of wealth or government redistribution.

Shale gas is the latest hot potato that is being passed around the world. Are you with the in-crowd or out on limb? Ready to take the dive and place your country’s future in shale gas or go it as usual with domination of our energy sources with the petrol industry?

What is the only thing better than Foreclosure Stuffing to provide an artificial supply-side subsidy to the housing market? How about completely clogging the foreclosure pipeline, by halting all foreclosure sales, which is just what the three TBTF megabanks: Wells Fargo, JPMorgan and Citi have done in recent weeks. Under the guise of 'ensuring late-stage foreclosure procedures were in accordance with guidelines', the LA Times reports that these three banks paused sales on May 6th and all but halted foreclosures. Perfectly organic housing recovery - as we noted earlier... and guess what states the greatest number of 'halts' are in from these banks - California, Nevada, Arizona - exactly where the surges in price have occurred.

Moments ago the US Treasury sold another $35 billion in 2 Year paper in what can only be classified as one of the weakest 2 short-end auction in the recent past. While the high yield rose notably from 0.233% to 0.283%, it is still at negligible ZIRPy levels associated with Bernanke's extended promise to keep the short-end as virtually equivalent to cash currency. With increasing rumblings that the Fed may be tapering, tightening, and otherwise pushing the short-end higher over the next two years, there was little such fear manifesting in the auction's yield which telegraphs nothing but smooth sailing for the next two years in terms of where Bernanke sees yield: perhaps a better indicator will be demand for the 3 Year auction next week which is seen on the cusip of the ZIRP time barrier.  That said, the internals were ugly, with the Bid to Cover sliding from 3.63x to 3.04x, the lowest since the 3.03x seen in February 2011. But it was the general abdication by Direct bidders, who took down a tiny 12.6% of the auction compared to a TTM average of 21.58%, and the lowest since July 2012. Same with Indirects who were left with just 21.93% of the allocation, meaning Dealers had to end with 65.47% of the auction. This was the highest Dealer take down since April 2009. Oh well: at least they will have plenty of "money good" collateral against which to rehypothecate and use the cash proceeds to buy stocks and other risk assets, at least until such time as the Fed proceeds to monetize this paper as well.

Today's episode: Open Caption

With the euphoric market once again serving as a much needed distraction from far bigger geopolitical issues, many have forgotten the plethora of scandals the Obama administration has recently found itself engulfed in. This may change shortly, following news that the head of the US Department of Justice, Eric Holder himself, is now being investigated for lying under oath. Will he too receive an extended absence of leave (with pay) after pleading the fifth, or will the circle of lies slowly but surely start to unwind? Of course, in the New Normal it is probably not only expected, but given, that the chief legal enforcer is just a little more equal when it comes to the same justice he is tasked to enforce.

Over the weekend, when discussing the latest casualty of Bernanke's disastrous monetary policy, the US corporate pension plan, we touched on a topic that has been a recurring theme on these pages: "the start of the unwind of the welfare myth, if only in the private sector for now, made worse by Ben Bernanke's endless tinkering in what was formerly a free market, should be making the guardians of the status quo very, very nervous... and certainly has the disciples of the Bismarckian welfare state delusion on their toes, because they can see very well what is coming down the road." Moments ago none other than Germany's finance minister, Schrodinger Schauble, explained just why this observation is at the core of all modern problem, going so far as using the R-word in the context of Europe (first, and then everywhere else).

With lumber prices limit-down again (and now over 28% from their March highs), we are left assuming that they are building houses with hopium, as opposed to wood, these days...

Gross: What hath Kuroda wrought? JGB yields a bigger influence on Treasuries than tapering potential.

— PIMCO (@PIMCO) May 28, 2013