Archive - May 2013

At the center of any military campaign is the art of deception. In the military nothing is done without a strategy, generally planned well in advance, and the misdirection of the enemy is always part of any campaign. It would be a political disaster for Israel to attack Iran. We may begin our consideration with this premise. On the other hand, it would be politically acceptable for Israel to respond to any aggression that was inaugurated by Iran. Self-protection is always a respectable retort. The Israeli attacks are not irrelevant.

The 'most hated' rally as mainstream media types prefer to call this manufactured 'market' is flashing red warning symbols under the surface wherever one looks (from complacency to earnings and macro) but, for now, none of that matters. All too often valuations for nominal equity prices are justified by data that is just as supported by fiat largesse as the flow-driven headline-making indices themselves. However, as Diapason Commodities' Sean Corrigan points out in this simple-to-understand chart, valuations for stocks are at extremes relative to the 'real' (even nominally inflated) economy. One glance at the chart of equity price relative to core capital goods orders and the message is clear - this is not an attractive time to be 'buying'; instead a time to be 'selling high' from all your gains. But that is not a narrative that plays well with asset-gathering commission-takers (who are just as dependent on the Fed since 'the AUM must flow' to keep them in the way they are accustomed - paging Larry Fink).

The U.S. stock market rally has recently passed its fourth anniversary after the terrifying lows of March 2009. During that time, massive and unconventional reflationary policy from the Federal Reserve has managed to lift the S&P 500 to new all-time highs. But perhaps even more improbably, it has finally (for now?) built a floor under U.S. residential real estate prices. This 'Less Bad' Recovery continues in other ways as well. Jobs have been created. Not good jobs. Not high paying jobs. Not full time jobs. But some rudimentary sets of tasks and responsibilities that could be called jobs. There has also been deleveraging. But here, too, the scale of debt reduction is nothing close to the unadjusted figures often touted in the media. Americans, and more generally, OECD citizens, remain highly burdened by debt. When combined with poor wage growth, this explains the continued suppressed demand so pervasive in developed nations. And of course, oil prices – as expressed through prices at the pump – remain stubbornly elevated and are likely to persist at their new elevated level. Combined, these factors have kept a lid on consumer confidence and make for a precarious disparity between the stock market and the real economy. Welcome to the Great Constraint - a growing failure to thrive.

Wall Street got into the single-family home business about a year ago. The win-win idea is to buy and rent until prices increase enough to make selling profitable. Investors can improve neighborhoods by fixing up vacant or damaged properties and providing lower-cost housing to people who are recovering from a foreclosure. But, as The Sacramento Bee reports, a responsible landlord is not guaranteed, and while no one is bashing renters, experts say it is human nature to care more for where you live when you own. The idea of a long-term home means more attention is paid to its upkeep and more consideration is given to neighbors, but "renters can change the culture of a neighborhood. In West Palm Beach, FL (where landlords are required to get licenses), applications are up from 296 in 2011 to 399 last year with one entity owning 150 'unregistered' homes: "it's a free-for-all, there's no such thing as a community anymore."

The mainstream media was cock-a-hoop to use Warren Buffett's recent diatribe against being a bond buyer (because prices are artificially high due to the Fed creating phony money and at some point the Fed will stop) as more evidence that stocks are the only game in town. TrimTabs' CEO Charles Biderman questions Buffett's seemingly disingenuous one-sided perspective - "stocks are just as vulnerable as bonds to the Fed withdrawing the narcotic known as free money, why does Mr. Buffett say stock prices are reasonable? To me, logic says stocks are just as overpriced as bonds." Biderman's point is that one cannot look at one market without implications for the other, and as we have noted numerous times, the only thing that matters is the flow (not the stock) of the balance sheet expansion. The Fed is buying up the entire US Government deficit and then some, Biderman explains, "that means there is lots of extra cash floating around the financial markets bidding up the prices of not just bonds but stocks as well;" so while we agree with Mr. Buffet that at some point bond prices have to drop significantly, so do stocks.

When a 'blog' puts the words Fibonacci, Gold, and Stocks in the same post, it well and truly earns its 'tin-foil-hat'-wearing "digital dickweed" honors. And so, we present, for the edification of all those who believe in gold as the only sound numeraire for judging value; for those who believe it's never different this time; and for those who believe in dead-cat-bounces; the Dow in Gold in the 30s, 70s, and Now...

While notably 'not' the Fed's opinion, Dallas Fed head Richard Fisher provided more than a few compellingly truthy comments in this excellent discussion with CNBC's Rick Santelli. It is fiscal policy that is holding us back, he warns, "we have a massive fog here," and despite the extremely accommodation monetary policy, we are not seeing the transmission to job creation." The "conditions of total uncertainty," mean the politicians are holding us back; but it is when Santelli asks him about the Fed's exit that things get a little uncomfortable, "no central bank anywhere on the planet has the experience of successfully navigating a return home from the place in which we now find ourselves." When pressed he exposes the flaw (much to the chagrin of Kuroda and Bernanke we suspect), "somewhere we have to have practical limits as to where we can build the balance sheet. We're moving in the direction of a $4 trillion balance sheet. We know we can't go on forever."

Who's the lady in the Pic.?

Is the low implied volatility a harbinger of good things to come, or just one final act in luring the sheep to the yield chasing slaughter...

Two weeks ago we reported about one of the biggest daily withdrawals of eligible gold from the JPM gold vault, it not on an absolute basis, then certainly on a relative, when in one day over 260k ounces of gold were withdrawn, leaving a record low 141.6k ounces, or just over 4 tons of gold in the vault. Subsequently, we tracked the daily additions and withdrawals of gold from the vault to see if any other major withdrawal request would come, instead discovering instance after instance of JPM reclassifying Registered gold into Eligible, which is how the vault saw its eligible inventory rish back to 195K ounces as of yesterday, without any actual net additions or more importantly withdrawals. It seems the pause of withdrawals has ended, and as of yesterday, another delivery led to a withdrawal of 53,658 ounces, or 28.5% of the total, leaving a fresh record low inventory of only 137,377 eligible ounces in the vault.

May Nein 2013...

Earlier it was Bank of America reporting a perfect trading quarter, with profitability on 60 out of 60 trading days, and now it is JPMorgan's turn. Moments ago, Jamie Dimon's firm filed a 10Q in which, among other things, it announced than in the quarter ended March 31, it was profitable on 63 out of 63 trading days and had one day in which it gained more than $200 million, or said simply another case of trading perfection unmatched anywhere in the known universe except perhaps by sellers of newsletters on Twitter. It was not immediately clear why JPM got a freebie of three extra profitable trading days in the quarter compared to BofA, although we suspect Jamie Dimon's presidential cufflinks may have something to do with it. What is clear is that the probability of one firm trading without error for an entire quarter, let alone two (and soon more as other banks file their 10-Qs) is slim to quite slim. Although not nearly as slim as whoever the hot chick is on Dancing with the Stars this season, which we are confident is the only thing the bulk of the population cares about. For everyone else, there's E(rror free)-trade.

When you donate hundreds of thousands of dollars to re-election campaigns and push more hundreds of thousands of dollars through lobbying, you expect a little more back than the measly $95.6 million that SolarCity received in stimulus grants. The company, chaired by none other than Elon Musk, had applied for $325 million in federal aid in the same program that 'helped' Solyndra (and Tesla) and is now, according to the Wall Street Journal, suing the government for underpayment of green-energy subsidies. It seems SolarCity are using the M.A.D. defense, claiming that "they could lose millions more," if the government fails to provide the subsidies they asked for. As National Review details, SolarCity is one of the solar companies that is being investigated by the IRS after Treasury found that it "repeatedly overstated the value of its investments." So far the Treasury has paid out over $17 billion in green-energy stimulus grants and this case is not without precedent as a number of other renewable-energy firms are set to file suit.

There are a dozen significant economic indicators that are warning that the U.S. economy is heading into a recession.  The Dow may have soared past the 15,000 mark, but the economic fundamentals are telling an entirely different story.  If historical patterns hold up, the economy is heading for a very rocky stretch. But most average Americans are not that concerned with the performance of the stock market.  They just want to be able to go to work, pay the bills and provide for their families.  During the last recession, millions of Americans lost their jobs and millions of Americans lost their homes.  If we have another major recession, that will happen again.  Sadly, it appears that another major recession is quickly approaching. The following are 12 recession indicators that are flashing red...

From the November lows, the S&P 500 has gained an impressive 21.5%. This is at an annualized rate of over 50% with 4 very modest 'dips' that have been snapped up by those that should know better. The Dow topped 15,100 - yay! Until the last hour of the day, VIX was very much not in agreement with the exuberance in stocks but the mid-afternoon swoon in stocks (Druckenmiller?) that corrected futures to VWAP was just what was needed to spark some furious volatility selling euphoria and crush VIX back to its lows of the day. Despite the equity excitement, 'most shorted' names actually underperformed (for once) but every effort at selling was met with a squeeze (especially into the close). Treasuries ended lower in yield for the second day in a row with stocks higher. Credit markets remain under-impressed for the second-day with IG and HY both wider on the day. Commodities generally improved on the day (with Copper's early euphoria fading as the day went on) as the USD leaked lower (with everything stronger against it aside from AUD). Today was the highest average trade size in S&P futures of the year (on sub-average volume).