Archive - Jun 25, 2013

A mere 39 days after the once-largest-market-cap company in the world came to market with its bond issues, those that saw 'value' in the 3.85% coupon are not having a great run. The 30Y issue is now down 14% from the break price (and down over 18% from high price to low price since issuance). What is perhaps most notable is that while AAPL's equity price has also struggled, it is only down 9% in that period. And don't blame it all on those pesky Fed-driven rates, AAPL's spread (credit risk) has risen from ~90bps to over 110bps in this time.

Jean-Claude Trichet, the former head of the European Central Bank, in an interview with CNBC stated that there was only so much that central banks could do to save the economic situation at the present time.

Goodbye housing (non)recovery... except for those private equity-cum-landlord firms and offshore oligarchs who pay all cash of course. "The 30-year fixed mortgage rate on Zillow(R) Mortgage Marketplace is currently 4.38 percent, up fifty basis points from 3.88 percent at this time last week. The 30-year fixed mortgage rate hovered between 3.82 and 4 percent late last week, before spiking up near the current rate over the weekend. This represents the highest rate on Zillow Mortgage Marketplace since July 2011."

Presented with little comment but we've seen this picture before a few times...

The modern-day role of the Fed is to distort these prices, effectively to disrupt the economy’s guidance system. The purpose is to fool you into making improper decisions. This deception threatens social harmony and individual well-being. Distorting prices, especially systematically, is the equivalent of drugging a person and then having him make major life or financial decisions. Drugs and price distortions have the same effect on decision-making - the mind is unable to properly receive and process information. The Fed’s behavior of distorting prices is deliberate dishonesty calculated for government advantage. The policy is designed to deceive others to behave in a manner which is ultimately harmful to these individuals. It is outright fraud! A government that can only survive via fraud has reached the desperate stage. It can create great harm in its death throes but its survival is unlikely.

Bill Gross, of PIMCO and serious bond duration pain, finally comes clean: the man who has been criticizing the Fed for years for one after another misguided policy (all of which ultimately culminate with the New York Fed's markets desk going "wave it in" this or that) to the point where he began sounding like a Zero Hedge broken record, opines on the taper. And it is here that Bill's colors truly shine through: "We agree that QE must end. It has distorted incentives and inflated asset prices to artificial levels. But we think the Fed’s plan may be too hasty." In other words, please let me have my Fed and central-planning criticizing cake (but don't actually enact my free market suggestions) and let me eat my management fees too (and no monthly redemptions please). And there you have it: populist critic by day, pandering P&L defender by night.

With the nation's short-term funding markets in crisis mode - no matter how much they are jawboned about temporary seasonal factors - it seems yet another indicator of stress is flashing the red warning signal. China's sovereign CDS has spiked by the most since Lehman in the last 3 days - up 55% to 140bps. This is the highest spread (risk) in 18 months and looks eerily similar to the period around the US liquidity market freeze. Hedging individual Chinese bank counterparty risk is hard (given illiquidty) and so it would seem traders are proxying general risk of failure via the nation's sovereign risk (and stocks which also languish at post-Lehman lows). On a related note, Aussie banks have seen there credit risk rise 50% in the last month as they suffer domestically and from the China contagion.

Technologies for gathering information, mining it, and using it, as the Snowden debacle shows, are phenomenally effective and cheap. But they're not perfect. Not yet.

Bulls make money, bears make money, feral hogs gets slaughtered (by Fed faux hawks)

The global Central Banks are in damage control mode. The big story here is China, then Japan then the US. But all of them are losing control of the markets.

While mass layoffs are hardly the stuff of dream recoveries, the following chart from Stone McCarthy may just clarify the un-recovery hopes this year a little more. Non-withheld individual income taxes were up sharply year-over-year in the last few months reflecting moves by taxpayers to accelerate income into 2012, in anticipation of tax hikes in 2013. However, now we have passed the prior year's tax liabilities deadline, and payments in June are just for the current year, there is a problem. Individuals make estimated payments if they expect they won't satisfy their current year tax obligation through withholding and as the chart below shows, non-withheld tax payments were down 3.0% versus the comparable period last year - hardly the stuff of consumer-spending-driven recoveries as clearly individuals are not expecting incomes to rise at all this year in aggregate. With every analyst and strategist pointing to H2 2013 as the hope-and-change driven recovery that satisfies a market's extrapolation way beyond current data, we suspect this tax-based deterioration signals more disappointment for the dreamers.

Well, I'm not going to say I told you so... Wait a minute... Yes, I am...

The market deals extremely poorly with paradigm shifts or cycle changes. One reason for this is that there has been no need for any strategy except for the just-buy-the-dip mantra. This may have ended and that could be the best signal to the markets since the global financial crisis started. Sorry to be the messenger, but the only way for investors to understand risk and leverage is by having them lose money. Essentially then, the balance of this year could be an exercise in re-educating the market to long-lost concepts such as loss, risk, inter-market correlations and price discovery. We even predict that high-frequency trading systems will suffer, as will momentum-based trading and, most interestingly, long-only funds. Why? Because, at the end of the day, they are all built on the same premise: predictable policy actions, financial oppression and no true price discovery. We could be in for a summer of discontent as policy measures and markets return to try to search out a new paradigm. This will be good news for all us.

There is no greater crime in Washington today than speaking truth about the US economy in public.  This is why Ben Bernanke is not being reappointed for another term as Fed Chairman.

With the spigot about to be turned down there will be a marked effect on earnings and profits in American corporations as borrowing costs rise and as all of the gains that could be taken were utilized from our very low interest rate environment. Much of the corporate earnings gains during the last two years did not result from growth but from financial management which was to be anticipated and expected. Those schemes, however, have been brought to an end by the rise in interest rates. In the meantime the Fed, in every manner possible, will try to downplay what Mr. Bernanke has done. The Governors will make speeches. Tidbit swill be handed to the Press. Calming remarks will come from every corner of the great machine and every stock guru on the planet will focus on the Bernanke's remark that the overall economy is improving. Fortunately I have seen this game before exorcised by every Fed during the last forty years. The correct response is, "Bah Humbug" and the correct viewpoint is to watch what they do and not what they say. They will say what suits them. What they do will be a different story.