Archive - Jul 22, 2013

Existing home sales dropped 1.2% month-over-month - the biggest drop in 2013 - against expectations for a 1.5% rise. Critically though, this is for a period that reflects closings with mortgage rates from the April/May period - before the spike in rates really accelerated. Inventory rose once again to 5.2 months of supply (vs 5.0 in May) and you know the realtors are starting to get concerned when even the ever-optimistic chief economist of the NAR is forced to admit that 'stunningly' "higher mortgage rates will bite." With mortage applications having collapsed since May, we can only imagine the state of home sales (especially as we see all-cash buyers falling) for July.

By now even the most confused establishment Keynesian economists agree that when it comes to economic "growth", what is really being measured are liabilities (i.e., credit) in the financial system. This is seen most vividly when comparing the near dollar-for-dollar match between US GDP, which stood at $16 trillion as of Q1 and total liabilities in the US financial system which were just over $15.5 trillion in the same period. What, however, few if any economists will analyze or admit, and neither will financial pundits, is the asset matching of these bank liabilities: after all since there is no loan demand (and creation) those trillions in deposits have to go somewhere - they "go" into Fed reserves (technically it is the reserves creating deposits but that is the topic of a different article). It is here that we can discern directly just what the contribution of the Fed to US GDP, or economic growth.

Two minutes of rational thinking in the world of irrational omnipotence in which we live. Howard Marks explains that we’re in a low return world. Refuse to recognize that and demand traditional returns, without recognizing that the market simply may not accommodate you, at your own risk - "The market is not an accommodating machine... it will not 'give' you consistently high returns. Blindly accepting more risk to get the returns you 'expect' or 'deserve' is a big mistake."

In Portugal, it seems the compromise deal between the ruling party and its junior partner is back on track following the failure of all-party talks last week. As Citi notes, PM Coelho is on the wires saying he will once again reshuffle his cabinet, with Paulo Portas likely to become deputy PM in charge of negotiating with the Troika. Portas has made it clear he wants to discuss a softening of the terms of the country’s bailout program which obviously will make for a bumpy road ahead in terms of relations with the Troika, but is probably necessary if the ruling coalition is to hold on to power amid growing popular unrest. While debt restructuring remains a tough proposition (given the contagion and precedent - Portugal debt-to-GDP is lower than Italy's for instance), the likelihood of a further substantial bailout (up to EUR76bn) remains high.

The proud Q1 debt-to-GDP outliers, where the local economies are expected to continue plunging and thus send the stock markets (if mostly that in the US) surging, are the following:

• Euroarea: 92.2%, up from 88.2% a year ago
• Greece: 160.5%, up from 136.5% a year ago
• Italy: 130.3%; up from 123.8% a year ago
• Portugal: 127.2%, up from 112.3% a year ago
• Ireland: 125.1%, up from 106.8% a year ago
• Spain: 88.2%, up from 73.0% a year ago
• Netherlands: 72.0%, up from 66.7% a year ago

It must have been the weather: at least that is what we expect McDonalds will blame the latest (in a long series) of Q2 revenue misses, but also earnings as moments ago the fast food giant reported $1.38 EPS in Q2 earnings, while revenue of $7.08 billion missed expectations of $7.09 billion. The internals were just as ugly: Q2 comp sales rose 1% on expectations of a +1.5% print; Europe was down -0.1% with the bulk of the hit coming strangely enough from Germany and France. The rest was in line, with global comp sales up 1% vs Exp. 1%, however this being the weakest of all categories it is hardly offsetting what is becoming increasing a weak lower-end consumer story, as well as one of FX headwinds with forex eating into Q2 EPS by $0.02. Sadly, after reading the press release it appears the neither cold or hot spring/summer weather was at scapegoated fault (as it was for Coke and Google): "McDonald's results for the quarter reflect our efforts to strengthen our business momentum for the long-term," said McDonald's President and Chief Executive Officer Don Thompson. "We remain strategically focused on the global growth priorities that help us better serve our customers. While the informal eating out market remains challenging and economic uncertainty is pressuring consumer spending, we're continuing to differentiate the McDonald's experience by uniting consumer insights, innovation and execution." Innovation in the $1 meal? Good luck. More importantly, someone actually told the truth about end-demand, and the fact that consumer spending is deteriorating. Unpossible.

With earnings season in full swing as some 20% of the S&P is expected to report, the quieter macro picture moves to the backburner especially with the Fed now silent for a long time. Looking at key central banks events, at the Turkey central bank meeting this week, Goldman expects that the bank is more likely to deliver a moderately hawkish “surprise” and hike the lending rate by 100bp to 7.5% (7.0% for primary dealers), and leave the key policy (1-week repo) and the borrowing rates unchanged at 4.5% and 3.5%, respectively.  Among the other central bank meetings this week, benchmark rates are expected to remain unchanged in New Zealand, Philippines and Colombia, in line with consensus, while a 25bp cut is expected to be announced at the Hungary MPC meeting.

• Earthquake Sends Kiwis Screaming From Wellington Buildings (BBG)
• China quake death toll more than doubles to 54, hundreds hurt (Reuters)
• In 2011, Michigan Gov. Snyder said bankruptcy wasn't an option for Detroit. Two years later, he changed his mind (WSJ)
• GlaxoSmithKline says Chinese laws might have been violated (FT)
• SEC Tries Last Ditch Move to Put SAC’s Cohen Out of Business (BBG)
• Detroit’s Bankruptcy Reveals Dysfunction Common in Cities (BBG)
• Obama to start new offensive on economy (FT)
• As WTI and Brent reunite, Gulf of Mexico faces squeeze, not glut (Reuters)
• Extended Stay Files for Public Offering (WSJ)
• Apple Developer Website Hacked: Developer Names, Addresses May Have Been Taken (MacRumors)
• Treasuries Not Safe Enough as Foreign Purchase Pace Slows (BBG)

Don't look now but futures are up as usual, driven higher by both good and bad news. The biggest event of the weekend, if largely priced in, was the victory by Abe's coalition in the upper-house leading to the following seat breakdown. Of course, judging by the Yen and market reaction, which barely managed to eek out a gain: its first in four trading days, the event was largely of the "sell the news" type despite such bold proclamations: "Abe’s victory in the upper house is bullish for Japanese equities and the Japanese economy as a whole, as the removal of political headwinds bolsters the government’s ability to press forward with all ‘three arrows’ of its growth strategy," John Vail, Tokyo-based chief global strategist at Nikko Asset Management Co., which manages $162 billion, wrote in an e-mail. Elsewhere in Europe, Portugal bond yields have plunged by roughly 60 bps on news that the Portuguese President Silva has backed the centre-right coalition government, consequently ruling out snap polls. Well, what else is he going to do? This also comes on the heels of a Goldman report that said a second bailout for the country will be necessary and will likely be discussed in the fall. That too is bullish. What also was bullish in Europe apparently is that government debt hit a new record high of 92.2% of GDP. Remember: debt is wealth so just buy more futures. Looking forward to the US, the market will focus on the latest existing home sales data, the Chicago Fed activity index, as well as earnings report releases from McDonalds, Texas Instruments and Halliburton and a bunch of other companies that will beat EPS and miss revenues.

Detroit will be followed by many cities, and this was not hard to see coming, not at all - as exemplified by the ample warnings given not just by me but by at least one other pundit who was derided for her candidness.