Archive - Jul 25, 2013

There appears to be a level of optimism priced into every macro-economic forecast. Whether this is simply mean-reverting models or a systematic need to justify an ever-increasing equity market is unclear but over the past few years the consensus GDP growth forecast has fallen by around 0.7 percentage points over the year before its final release (as hope turns to reality). So just how bad is the current environment? With the latest update of Q2 2013's GDP consensus forecast now at 1.0%, the last year has seen the consensus drop a stunning 2.0 percentage points (almost triple the average loss of hope). Of course, as we noted here, we'll make it all up in H2 2013 (even as CEO after CEO adjust down their outlooks). Have no fear though - as Jason Schenker from Prestige Economics still believes we will get a +2.2% print for Q2 2013.

This morning’s news that the China leadership has launched a “mini-stimulus” package might confirm what we’ve long feared – China’s economic situation is more perilous than we thought. It looks like a comparatively modest supply-side package of tax cuts, export boosts and railway stimulus, designed to “arouse the energy of the market” according the State Council. But it could be the first of many new programs according to analysts. The state is clearly concerned. That it has been forced to act should be a wake up and smell the coffee moment for markets – the implications of China slowdown could be this year’s game changer in markets.

With regard to the disastrous Macondo oil well rupture that ended in 11 deaths and triggered the largest US offshore oil spill of all time (and uncountable ongoing ecological impacts), Halliburton has 'graciously' decided to plead guilty to destroying evidence. 'Guilty?' we hear you ask? When has any large US corporation not just settled in order to not be forced to admit guilt? Well, as Reuters reports, "their willingness to plead to this may also indicate that they'd like to settle up with the federal government on the civil penalties." The maximum statutory fine for this apparent midemeanour? $200,000! Or 0.0007% of expected revenues for 2013. Well, that'll teach 'em for sure - they won't be destroying evidence again, eh?

Gold owners are almost universally familiar with the story of Franklin Roosevelt criminalizing the ownership of gold back in 1933. The term gold ‘nationalization’ is often thrown around. But remember, with nationalization, it’s the state that takes control of an asset. Executive Order 6012 took assets from private individuals, and then gave those assets to a private company – the Federal Reserve. This isn’t nationalization. It’s just theft. You’d think that the entire nation would have been in an uproar. But surprisingly, this wasn’t the case. History shows that the likelihood of a government pillaging its citizens’ wealth is directly proportional to that government’s fiscal health.

The US government is essentially unique - and not in a good way - in how it treats its citizens living and working in foreign countries. No other country in the developed world imposes and effectively enforces as many burdens on its citizens abroad (and those who would do business with them) as does the US government. It is not likely to change in the foreseeable future. In fact, we would bet that the burdens will actually increase as the US government becomes more financially desperate. That is a significant incentive to act sooner than later... or before it is too late altogether. However unpleasant this reality is, it does not negate the need to internationalize. Quite the contrary. As spending on welfare/warfare related programs continues to rise, it is clear that US government will sink deeper into fiscal and moral bankruptcy, with political risk increasing in tandem. It is far better to deal with the burdens associated with internationalization than to leave your savings, your income, and yourself in range of a desperate government's wrecking ball.

Municipal finance is in sharp focus after Detroit filed the largest municipal bankruptcy in history. Detroit’s filing is arguably an isolated case and its fiscal problems are not indicative of the broader municipal credit landscape; but, the outcome of the bankruptcy process will dictate whether the value of the full faith and credit pledge backing GO bonds will be diminished going forward. The global hunt for yield has probably chased new investors into the Muni market who may not fully understand that in recent years it has become an ‘ownership not rental’ market.  In other words, it is unlikely holders of Munis can sell what they own, as liquidity in the secondary market is almost non-existent.

Parents old and rich? Eying that new Veyron as the stock market lifts your family wealth to all-time heights? Don't get carried away quite yet! As estates rise in size, most families give a greater percentage to charity rather than their heirs. As JPMorgan's CIO, Michael Cembalest notes, taxes as a % of the estate disposition remain roughly constant for estates greater than $5 million. What this suggests: wealthy families have in mind a baseline level of support for their heirs, and once it is met, they channel more assets to charities. On the bright side, bequests (parental transfers to children through their estates) are generally divided equally by child, irrespective of the child’s income, proximity to parents or behavioral differences vs. siblings (i.e. a suck up or drug-taking outcast). Various studies estimate that the “equal treatment of siblings” approach applies to 88%-92% of all estates.

Following our initial uncovering of the manipulation and monopolization of the metals warehousing business two years ago, the last few days have seen the public's attention grabbed by the reality of what the banks are actually doing. Following this week's hearing, as the Fed reconsiders banks roles in non-banking businesses (and the 'societal benefit'), it seems the CFTC has woken up. As the WSJ reports, the Department of Justice has opened an initial probe into the metals warehousing industry and the Commodity Futures Trading Commission has also sent letters to some firms telling them to preserve documents, in what is likely the beginning stages of an investigation.

In a brief but perfectly succinct interview on CNBC yesterday, Ron Paul shared his opinion on the need to own gold (and the physical demand for the manipulated metal) and the Detroit bankruptcy ("we're going to see more Detroits"). He concludes that "long term, you can expect governments not to change" and that they’ll keep taking on more debt and printing more money until people lose confidence in both the U.S. dollar and the U.S. military, both of which will be shake the foundation of a fiat/dollar system.

The company which has made missing and guiding lower into an artform did not disappoint, when moments ago AMZN missed and guided lower.

• Q2 Revenue of $15.7 billion missed expectations of $15.73 billion
• EPS of -$0.02 missed expectations of $0.06
• Firm guides to Q3 revenue of $15.4-$17.15 billion on consensus estimates of $16.99 billion
• Firm sees Q3 operating loss between $65-$440MM, on consensus profit of $84.5 million

But this data on its own is hardly enough to do the company justice. Here is this quarter in its full glorious context.

Stocks ended the day at the highs of the day with small gains as the internal anxiety implied (highs vs lows, adv vs dec) by the re-appearance of the Hindenburg Omen battled (Icahn vs Ackman-like) with the one-way-street predictability of a Hilsenrath-inspired 330RAMP Capital appearance. Hilsy's "no July Taper" un-surprise-note added 7 points to the S&P lifting it comfortably green (and knocked 5bps off Treasury yields). Trannies bounced hard after dropping to unchanged from the 6/19 FOMC levels (+1.4% from the lows) and along with the Dow ended the day practically unchanged. The Russell just kept on rising (+1%) as stocks ended the day at their highs. Despite the volatility (and close-to-close stability) in stocks, FX markets were the main movers today (and high-yield bonds) as EURUSD pushed back up to pre-FOMC 'Taper' levels from 6/19.

Following the debacle of free-and-easy mortgage money to anyone who could fog a mirror in the run-up to the last housing bubble (remember that was just 6 years ago), regulators proposed 'skin-in-the-game' rules which forced banks to hold certain amounts of the loans they made (as opposed to securitizing and selling off that yieldy risk to the next greater fool). Makes sense. However, in a major U-turn, with interest rates rising, mortgage rates spiking, and home prices now collapsing once again, it would appear the very same congress has folded. As the WSJ reports, more stringent lending standards on top of the market environment leave the watchdogs, which include the Fed and the FDIC, wanting to loosen a proposed requirement that banks retain a portion of the mortgage securities they sell to investors (representing a victory for an unusual alliance of banks and consumer advocates that opposed the new rules). Undermining the initial goal of imposing market discipline, former FDIC Chair Sheil Bair noted, "My sense is that Washington has lost its political will for serious reform of the securitization market." Indeed it has, Sheila.

"I worry about the effects on the long-run stability and efficiency of our financial system if the Fed attempts to substitute its judgments for those of the market. Such a regime would only increase the unhealthy tendency of investors to pay more attention to rumors about policymakers' attitudes than to the economic fundamentals that by rights should determine the allocation of capital." - Ben Bernanke, October 15, 2002

The Obama "Better Bargain for the Middle Class" roadshow continues. We can only assume in it he desperately tries to find a representative of said class, so far without success. We will spare readers the repetitive oratory streamed by the teleprompter which is a carbon copy from yesterday and cut straight to the money shots.

Thanks to the revelations this week of more sexts, Anthony Weiner's lead has evaporated in the mayoral race. As WSJ reports, among registered Democrats, 25% support City Council Speaker Christine Quinn and 16% support Mr. Weiner, a 14 percentage point swing in Ms. Quinn's favor compared with a poll taken several weeks ago. Mr. Weiner's unfavorability rating surged to 55% in the poll with only 30% still viewing him favorably (from 52% last month). But perhaps more for the ongoing humor of it than his policies and prowess, a stunning 69% of 18-29 year-olds believe he should continue to run for Mayor (and 61% of Bronx residents). Mr. Weiner "needs to get voters to give him a third chance," said one analyst, adding that "his negatives are at an all-time high. There's been a significant erosion in people's willingness to say he deserves another chance. They are more reluctant to grant that."