Archive - May 2013

The grace period between February and mid-May, when the US spent like a drunken sailor without regard for even structural limitations, and raked up over $300 billion in debt, or said otherwise when it was without an official debt limit, is over as of this weekend as we reported, and starting Monday the clock has been reset and wound up to the amount of the debt previously incurred in the phantom period. Courtesy of today's Daily Treasury Statement we now know that the new and improved debt target ceiling, at which the US immediately finds itself is: $16,699,421,095,673.60.

The Dow completes its 19th week in a row with a green close on a Tuesday - there are no superlatives left. As a gentle reminder, since February 1st, the Dow has gained 9.85%; absent Tuesdays it is up a mere 0.5%. Despite equity strength, bonds rallied, VIX rallied, the USD ranged violently (Fed's Bullard and Dudley) to end unchanged, and commodities drifted lower on another dismally low volume day. Correlations between stocks and the rest of risk-assets have completely broken down today.

Chaos Theory turns 50 years old this year, celebrating half a century of flapping butterfly wings in Brazil creating tornadoes in Texas.  That most famous example is especially appropriate, since it was a meteorologist named Edward Lorenz who first outlined why seemingly consistent and knowable systems can still go wildly wrong.  As it turns out, as ConvergEx's Nick Colas reminds us, small errors in measurement or observation at the start of a time series can significantly change how things look at the end.  In the current low volatility, one-variable central bank driven global equity markets, Chaos Theory may seem a quaint relic of past crises.  However, its central lesson – that complex interrelated systems create unexpected outcomes from seemingly benign inputs – is still relevant.  Students of economics like to think of their discipline as scientific, just like physics or other hard sciences.  They would do well to embrace the intellectual honesty neatly encapsulated by the central lessons of Chaos Theory. The problem is that current market price action - that slow steady grind higher - indicates marginal buyers don’t fret very much about the future.  No matter how little we really know about it.

We thought most readers would be rather surprised to learn what the result of a simple Bloomberg query comparing S&P EBITDA per share (BBG mnemonic TRAIL_12M_EBITDA_PER_SHARE) to the S&P looks like. For one: not only is corporate LTM EBITDA per share not at all time highs (it is well off the record levels seen in 2008), but it is at levels last seen in January 2007. But perhaps most surprising is what happens when on juxtaposes the S&P500's EBITDA level relative to the actual S&P. The stunning result is charted below:

They've got the look!

With US Macro no longer the clean dirty shirt, the 'hope' of a recovery from the Spring swoon has faded rather quickly according to Goldman's latest Global Leading Indicator (though obviously not David Kostin). The modest April pick up - driven mainly by sentiment indicators as opposed to hard data - has faded as the reality of economic deterioration was more pronounced as both the Philadelphia Fed headline and the New Orders less Inventories components (the advanced proxies for Goldman's Global PMI aggregate) fell to the lowest level in more than six months. The S&P GSCI Industrial Metals Index also made new lows and fell for the third month in a row. The CAD and AUD TWI Aggregates weakened, driven primarily by a weaker AUD, and US Initial Claims also worsened from last month. But apart from that... as Goldman notes, the decline in momentum was a bit more substantial in May than many had expected.

Presented with no comment...

The question Du Jour is, "Has margin compression been fully priced into this stock?" or more to the point "Is it time to buy Apple shares as a value play?"

With Tim Cook being fried on Capitol Hill, it is perhaps ironic that the issue of taxes is front-and-center in the European parliament today. However, as usual, the always-willing-to-tell-the-truth Nigel Farage points out the gross hypocrisy of a political elite calling for higher taxes (on the wealthy and more broadly in peripheral nations) when the reality is that the higher-ups in the European parliament have their marginal tax rates capped at 12%. Of course, none of that matters because stocks are rising and interest rates are falling; but perhaps the 60% of Greek youth or 57% of Spanish youth, as we discussed here, might be intrigued at the new normal idea of 'fair share' in Europe.

Up until today, the narrative was one trying to explain how a soaring dollar was bullish for stocks. Until moments ago, when Bill Dudley spoke and managed to send not only the dollar lower, but the Dow Jones to a new high of 15,400 with the following soundbites.

• DUDLEY: FED MAY NEED TO RETHINK BALANCE SHEET PATH, COMPOSITION
• DUDLEY SAYS FISCAL DRAG TO U.S. ECONOMY IS `SIGNIFICANT'
• DUDLEY: FED MAY AVOID SELLING MBS IN EARLY STAGE OF EXIT
• DUDLEY: IMPORTANT TO SEE HOW WELL ECONOMY WEATHERS FISCAL DRAG
• DUDLEY SAYS HE CAN'T BE SURE IF NEXT QE MOVE WILL BE UP OR DOWN

And the punchline:

• DUDLEY SEES RISK INVESTORS COULD OVER-REACT TO 'NORMALIZATION'

Translated: the Fed will never do anything that could send stocks lower - like end QE - ever again, but for those confused here is a simpler translation: Moar.

One more treacherous rift across Europe.

Curious how to trade those Goldman recommendations, such as today's uberbullish "strategic" call seeing nothing but blue skies all the way through 2015? Here is a quick reminder courtesy of your friendly FX wizard, Goldman's Tom Stolper. "On April 18 we recommended going long EUR/HUF. Our view has been that higher US yields would hurt a number of EM currencies (including the HUF). We also thought that ongoing monetary easing in Hungary would further compress interest rate differentials, leading to a gradual weakening in the currency. Although both macro drivers materialized, the HUF strengthened, contrary to our expectation.... we recommend closing the position with a potential 2.86% loss (including negative carry of about 32bp in total)."

Concentrated power and wealth are intrinsically sociopathological by their very nature. We have long spoken of the dangers inherent to centralization of power and the extreme concentrations of wealth centralization inevitably creates. There is another danger of centralization: sociopaths/psychopaths excel in organizations that centralize power, and their ability to flatter, browbeat and manipulate others greases their climb to the top. In effect, centralization is tailor-made for sociopaths gaining power. Nothing infuriates a sociopath or a sociopathological organization more than the exposure of their sociopathology, and so those in power will stop at nothing to silence, discredit, criminalize or eliminate the heroic whistleblower.

Following the dismissal of KPMG over insider trading 'issues', Herbalife has just announced it will be hiring PricewaterhouseCoopers as their new auditor:

• *HERBALIFE HIRES PRICEWATERHOUSECOOPERS :HLF US
• *HERBALIFE SAYS PWC TO RE-AUDIT FY10, FY11, FY12 :HLF US

Indications point to a modest rise from the pre-halt close of $49.87. Full PR below:

It was our expectation that while if not slowing down its rate of money-creation (i.e., reserve-production) - something that won't happen for a long time as it would crash the stock market - the Fed's reserves would at least revert to being accumulated at US-based banks. No such luck. In fact as the latest H.8 report demonstrates, as of the most recently weekly data, the Fed's policies have led to foreign banks operating in the US holding an all time high amount of reserves, surpassing $1 trillion for the first time, or $1,033 billion to be precise.