Archive - Jul 26, 2013

Given more than his normal 30-second soundbite on mainstream media, Marc Faber is able to discuss in considerably more detail his views on the massive growth in global financialization (when compared to real economies) noting that "one day, this financial bubble will have to adjust on the downside." This will occur via either an inflationary burst or a collapse of the system. Simply put, "it's gonna end one day," either through war or financial collapse, "it will be very painful." The Gloom, Boom, and Doom Report editor notes current asset valuations are driven by excess credit creation, printing money, and distorted market signals, and the unintended consequences of the effect on investor psychology are perfectly mis-timed. Faber concludes with a discussion of the inflationary impact of US monetary policy and where it is seen (and not seen) and the global social unrest implications of middle class discontent.

How does one destroy an idea? Further, how does one destroy the truth? Corrupt governments have been struggling with this dilemma since men wore loincloths and worshiped fire. Fortunately for those of us in the “lower strata” of social organization, honorable ideas and indelible truths have a life of their own. Even when a culture as a whole remains oblivious and unguarded, the facts tend to rise to the surface one way or another. The reality which elitists at least partly understand, is that the truth cannot be destroyed, but it can be forgotten, at least for a time. This is a never-ending process...

This fall, the US government might go the very same way as Detroit and end up filing for chapter-11 help. In other words, it will end up asking itself to bail itself out.

It's been an odd earnings season so far. Talking heads are replete with examples of ad hoc names that have exceeded beaten-down earnings expectations choosing to ignore the belwether names that have missed and guided down. Data are thrown around left and right to support the argument that stocks are cheap to forward-earnings, that growth is around the corner, and that all is well in the real economy supporting the lofty exuberance among US equity markets. However, if one so chooses, the chart below should give you a glimpse behind the facade of the Q2 2013 EPS 'beat'. There is one source of the elixir of life, one provider of the mother's milk of stocks; S&P aggregate Q2 EPS is tracking $0.38 above the season start levels (around 0.8% beat) and financials account for an astounding $0.63 of that!

While the choking pollution in China, that we have discussed time and again - most recently here and here, has previously been linked with health concerns, academic studies released this week have now shown a direct link between higher cancer-rates in Central China and the level of pollution. The study published on June 25th is the first to scientifically prove the correlation between water pollution and cancer mortality in an area of China that is home to more than 160 million people. Despite government efforts to clean the water, it remains well below safety standards but local villagers continue to have no choice but to use it: "The river was black, poisonous fumes, and dead fish everywhere... the well water was also contaminated.. and during this period many died of cancer." Despite spending millions to try and prevent pollution, as one local villager exclaimed "we should re-consider the country's industrialization." What cost a 7% GDP growth print?

If our leaders could have recognized the signs ahead of time, do you think that they could have prevented the financial crisis of 2008?  That is a very timely question, because so many of the warning signs that we saw just before and during the last financial crisis are popping up again.  Many of the things that are happening right now in the stock market, the bond market, the real estate market and in the overall economic data are eerily similar to what we witnessed back in 2008 and 2009. It is almost as if we are being forced to watch some kind of a perverse replay of previous events, only this time our economy and our financial system are much weaker than they were the last time around. We have been living so far above our means for so long that most of us actually think that our current economic situation is "normal."

When is the last time you got a stock tip from a cab driver or chatty not-in-the-business neighbor?  It’s probably been the better part of a decade, if not longer.  Yes, that’s probably the most bullish argument for owning stocks just now, but, as ConvergEx's Nick Colas notes, it also raises a question.  What investments are retail investors considering, exactly?  Various online tools and resources provide some answers.  From Yahoo! Finance’s analysis of number of requested price quotes last week: AAPL, BAC, TSLA, INTC and CALL.  From Google Trends: AAPL, GOOG, and YHOO.  And from one very popular online brokerage for today’s volume: AAPL, F, BRCM, BAC, and NUGT.  Whether this interest indicates a top or a crowded momentum trade is in the eye of the beholder, of course.  But in a light volume period like summer, Nick notes, tracking individual investor attention can be an important piece of the day-to-day trading puzzle.

Despite the Government's Best Efforts to Prop Up the Nuclear Market through Socialism ... It's Declining

When Standard & Poors is not engaged in "Puffery" (a defense which admits "our entire business model is worthless") it pretends to analyze credits and assign ratings, usually with both humorous and systematically catastrophic results. Just as it has done in the chart below. In the aftermath of the Detroit filing, one may be interested to see just how the rating agency, which had Greece rated at "A" months before the Eurozone's bananaest-republic member had its first bailout, evaluated America's various states since the start of the 21st century through 2012. Among the best: Florida. Worst: California. Michigan, whose main city just went bankrupt: AA-. And with countless cross-default provisions and collateral waterfalls upon a multi-notch downgrade, one can be certain that as reality finally comes to the muni space with roughly a 3 years delay, that this too will have a happy ending.

The optimism over the housing recovery has gotten well ahead of the underlying fundamentals.  While the belief was that the Government, and Fed's, interventions would ignite the housing market creating an self-perpetuating recovery in the economy - it did not turn out that way.  Instead it led to a speculative rush into buying rental properties creating a temporary, and artificial, inventory suppression.  The risks to the housing story remains high due to the impact of higher taxes, stagnant wage growth, re-defaults of the 6-million modifications and workouts and a slowdown of speculative investment due to reduced profit margins.  While there are many hopes pinned on the housing recovery as a "driver" of economic growth in 2013 and beyond - the data suggests that it might be quite a bit of wishful thinking.

Succinctly summarizing the positive and negative news, data, and market events of the week...

It seems there was only one thing on the minds of the machines today - get us green (on the day and the week). Following ugliness in Asia overnight, US equity markets were sliding into the open and so cash markets opened gap down. Good-is-bad confidence data legged us down one more time leaving the Dow down over 140 points but as Europe closed things started to pick up (apart from volume). By the close, equity markets had managed an almost perfectly linear liftathon back to unchanged leaving the Dow also unchanged on the week. As we tweeted:

The US consumer isn't allowed to enter the weekend with a market closing red.

— zerohedge (@zerohedge) July 26, 2013

Do you believe in miracles? Away from stocks, Bonds ended the week notably higher in yield (10Y +8bps), JPY signficantly higher on the week (+2.5%), USD down 1.2%, Gold and Silver up 2.8% on the week, and WTI down 3% (ending under $105).

After weeks of emptying of their Gold vaults and making headlines in recent days over their oligolopolization of commodity warehousing, it seems the threat of a probe has excited Blythe and her colleagues to dump while the dumping is good:

• JP. MORGAN TO EXPLORE STRATEGIC ALTERNATIVES FOR ITS PHYSICAL COMMODITIES BUSINESS

Options include sale, spin-off, or strategic partnership as they re-confirm that they are "fully committed to traditional banking activities," as they look to drop the holdings of commodities assets and the physical trading business. We can only assume that "physical commodities" include the company's extensive inventories of tungsten (as well as the vault housing it), and not so extensive stores of gold and silver. That said, we are confident that the collapse in represented (but not warranted) JPM Comex gold vault holdings to a record low, and this news is completely unrelated.

Anyone who believes that housing is back in a big way needs to take a look at homebuilder stocks.

When people get divorced, a major determinant of the division of marital property depends upon the state they live/file in. Nine states (AZ, CA, ID, LO, NV, NM, TX, WA, WI) use a community property approach, which usually results in an equal distribution of property acquired and income earned during the marriage (but excluding gifts, inheritances, and property owned before the marriage). The other 41 states use equitable distribution, although,  in many, there is a legal presumption of 50-50 unless the facts and circumstances suggest something else. In any case, as JPMorgan's CIO Michael Cembalest notes, “equitable” is not always interpreted to mean “equal”, given judicial discretion based on each state’s statutory factors considered when dividing marital property.