Archive - May 2013

We discussed previously the slowing of the global economy and the drag on global trade and it appears that despite some hope-ridden headline data from China, things are definitely troubling under the surface. As Bloomberg Brief's Michael McDonough notes, while superficially, export growth was a rare bright spot in the first quarter, it may have been exaggerated by exporters inflating invoices. Excluding exports to Hong Kong, March’s export growth would have fallen 4.8 percent year-on-year compared with the reported 10 percent. China’s exports to 14 of its top 20 trading partners declined in March year-on-year. Tepid global demand may continue to weigh on China’s exports and domestic economy - and in its vicious cycle manner, feed back into global growth (and stain the US 'clean' shirt).

Jeff Gundlach has been asked "Why Own Bonds?" twice in his career. The first time was in the 90’s when bonds and stocks were highly correlated. If stocks rose, bond prices fell, and vice versa. Therefore, investment managers decided that they should only own stocks as there was no advantage in being diversified. Unfortunately, we all know how well this turned out. Today, investment managers are making the same decision but for a different reason. With the Fed’s artificial suppression of interest rates to historic lows; the return from owning bonds has become painful particularly for underfunded pension funds. That pain, combined with the inflation of asset prices via continuing QE programs, has forced managers into overweighting stocks. The other reason that managers are jumping into stocks is due to the belief that interest rates are going to start rising on “Tuesday.” Gundlach clarifies, “Let me be clear. This is absolutely wrong. Yields are NOT going to rise any time soon.”

Ye Festival of Greater Fools continues...

As reported earlier, JPM's head commodity maven, Blythe Masters (her very rare public appearance can be seen here) suddenly finds herself in hot water for, among other things, allegedly lying under oath, obstructing justice and "engaging in a systematic cover up" to "approve schemes" seeking to defraud the states of California and Michigan in electricity trading (Enron flashbacks are more than welcome). So just who is Blythe? Most people on this site should be very familiar with her work by now (the NYT has a good recap), so instead of reconnecting the dots, we will once again dig up the presentation by one very young Ms. Master, introducing her then quite innovative product: the Credit Default Swap, titled appropriately enough "The J.P.Morgan Guide To Credit Derivatives" (by Blythe Masters). Because it is always best to let one's work speak.

Hawks Desperate to Drum Up an Excuse for War

While everyone was focusing on the quantitative component of today's BLS number, it appears what was once again missed in all the noise was the mention of the quality aspects of today's BLS report: those parts which actually look at the quality of new jobs, not only their earnings power (which as we showed in the breakdown of the April job gains were all toward the lower paying spectrum of available jobs) but also taking productivity and labor demand into the picture. It is here that we find this month's biggest BLS report weakness, and surprising finding: an implied 618,000 worker decline?

Wondering why we didn't push any higher on today's seemingly awesome payrolls print? Wonder no longer... The S&P 500 futures just surged up to perfectly tap the lower edge of the November 2012 up-trend. Today's volume is heavy - centred around the spike - with average trade size very large (highest in 2 months) - are pros buying the highs or selling? Do we go on to greater things and retest the upper-edge? or is this the squeeze that ends it? Who knows - but given what CNBC thinks, we will never fall again.

Quite a day. European stocks exploded on the noise of the US payrolls beat this morning. Unusually Germany's DAX outperformed (as opposed to high beta momo monkeys like Spains IBEX or Italy's MIB) taking it to its best 8-day run in 18 months (sure, why not) and within 0.25% of its all-time intraday highs (but highest close ever). All European indices surged and while euphoria reigned throughout (for some reason), European sovereign bonds leaked higher in spread (deteriorated). EURUSD reversed its losses on NFP and stabilized unch from that data point (though 55 pips higher on the day) as EURJPY was the dominating pair. German and Swiss 2Y remain negative though both saw rates rise today. Europe's VIX collapsed from 20.5% to under 17.5% today, its lowest in 2 months. Today's 'squeeze' in Europe had started early in credit and it seems stocks just played catch up when the NFP print hit. 

Europe has already entered a Japanese sort of existence and America will be coming next in our opinion. We are caught in a trap of our own making and this will be the price for the printing of all of this money. As China has reached its apex and begun a gradual grinding down in their economy, as Japan wrestles with insolvency, as Europe falls further into its sinkhole; America will follow.  Make hay while you can but you may also wish to notice that the fields are shrinking and that less hay may be forthcoming. Borrowers have reaped the benefits. Those with money have paid the price. Wealth that can be redeployed is evaporating. Buying power is in decline. There is always a price. The reason is simple enough; it is the consequence of what the central banks are doing.

The suicide rate among middle-aged Americans climbed a startling 28% in the last decade as the rates in younger and older people held steady. This period dominated by two stock market crashes, a real-estate crash, and a hyper-repressive Fed saw a stunning 40% surge in the suicide rate among 35-64 year old white men and women (with non-Caucasian rates steady). 39 out of 50 states registered a statistically significant increase in suicide rates among the middle-aged. As AP reports, the CDC report contained surprising information about how middle-aged people kill themselves: During the period studied, hangings overtook drug overdoses in that age group, becoming the No. 2 manner of suicide. But guns remained far in the lead and were the instrument of death in nearly half of all suicides among the middle-aged. Today's payrolls data will do little to lift the spirits of the middle-aged worker; we live in cruel and unusual times.

Sure, why not...

And now for the glass half empty part. Following the better than expected jobs report, driven by women job additions and low-paying jobs, we got the non-manufacturing ISM and Factory Orders both of which missed expectations. The ISM dropped from 54.4 to 53.1, below expectations of 54.0, and the lowest since July 2012, with the employment number dropping from 53.3 to 52. Since this number focuses on services, one has trouble footing this with what the BLS said was a jump in jobs in Services sector but one can't have anything. Elsewhere, factory orders dropped 4%, down from a downward revised 1.9% (was +3%), and below expectations of -2.9%, with March durable goods revised even lower from -5.7% to -5.8%. This was the biggest Factory Goods drop since August 2012. Of course, as Joe LaVorgna just said on a TV, it is best to just "ignore" all data that is missing expectations, or not complying with the narrative.

For those lucky enough to not be male and aged 25-54, and having been able to get a job in April, the following chart is redundant. For everyone else, curious which industries were adding jobs in April, here is the full breakdown. With the bulk of job additions in such "high paying" sectors as leisure and hospitality, temp help and retail, one can see why corporate revenues are going nowhere fast.

There were signs of anxiety yesterday afternoon when the 'most shorted' names started to levitate but this morning's exuberance has crushed the shorts and provided the ammunition to take the cash S&P 500 index above not just 1600 but above 1615 (with the cash index somewhat unusually trading at a premium to the futures). Since Wednesday's close, the Russell is up around 2%, the 'Most Shorted' names are up a remarkable 3.8% in the same time.

On the surface, the April jobs number was better than expected: in the grand scheme of things, it kept in line with the growth of the overall US labor force (which grew by 210K per the household survey) - the bare minimum in needs to keep the unemployment rate in line. A quick look beneath the surface does reveal the usual question marks, however.