Archive - Jul 2013

This week's biggest news is not the Non-Farm Payrolls, or the European Central Bank or even Portugal's government falling. No - this week's big deal is the openness with which the Federal Reserve is preparing a major margin call on the too-big-to-fail banks in the US. This has been a long time coming since the introduction of the Dodd-Frank law back in 2010 but it is a game changer. Remember all macro paradigm shifts come from policy impulses, often mistakes. Is the Fed about to given the whole banking industry a major margin call?

On the day after celebrating its independence and with likely half the nation suffering from over-consumption, we thought it appropriate to 'celebrate' another #winning rank by the US. At an average of 181.27lbs (gender-weighted!), Bloomberg finds that the US is the 'heaviest' nation on earth.

Is the global economic downturn going to accelerate as we roll into the second half of this year?  There is turmoil in the Middle East, we are seeing things happen in the bond markets that we have not seen happen in more than 30 years, and much of Europe has already plunged into a full-blown economic depression.  Sadly, most Americans will never understand what is happening until financial disaster strikes them personally.  As long as they can go to work during the day and eat frozen pizza and watch reality television at night, most of them will consider everything to be just fine. Unfortunately, the truth is that everything is not fine.

The market remains confused. The better-than-expected headline jobs data prompted USD strength (Taper-on), gold/silver weakness (Taper-on), Homebuilder stocks drop (Taper-on), Bond yields surge (Taper-on), and credit market widening (Taper-on); but the good-old trusty US equity market was not having any of that. After dumping 25 points from its post-NFP highs, S&P 500 futures gapped and jerked up to VWAP, ran stops at the highs of the day, dropped back to VWAP, then surged into the close. The Dow ended up 150 points. Treasury yields rose the most in 2 years - an impressive 22bps. Despite a late surge, high-yield bonds had their worst day in 2 weeks. Gold and silver down 2.3% and 3.5% respectively and copper dumped 3.2% (not exactly the growth-exhibiting factor that everyone suggests is driving stocks up and bonds down). Meanwhile, WTI topped $103 for its highest close in 14 months.

The mid-1970s have been a useful template for what is possible (and even probable) in a centrally-planned world. As a reminder, the underlying backdrop was also similar (major economic downturn following the housing crashes in 1974-75 and again in 2006-2007 followed by aggressive Fed policy which was ultimately too loose for too long). It is quite clear, Citi notes, that the rally in the Dow has lasted longer than the “road map” would have suggested - at least in part driven by the ongoing expansion of the Fed’s Balance sheet - but with Taper talk increasing we wonder how long before the 70s are back in vogue.

UPDATE: Egypt Clashes Leave 10 Dead, Health Ministry Says (AP)

As we feared, the initial celebratory images have turned rapidly into running skirmishes, molotov cocktails, burning cars, and now six deaths. As the night rolls on, the clashes are escalating...

As the escalation in violence between members of the pro-Mursi Muslim Brotherhood and the military-backed victors of this week's coup gets worse with at least 6 dead now according to Al Arabiya, the US Secretary of State is busy...

a) Getting debriefed and preparing for a diplomatic statement

b) In the air between point A and point B promoting US domestic and foreign interests abroad

c) Informing Warren Buffett about the aphrodisiac benefits of ketchup

d) Spending a (second consecutive) exhausting afternoon on his sailboat.

And the correct answer is...

As we head into earnings season in the US (amid hopeful margin expansion), the big picture for earnings remains bleak. Markets are back close to highs as negative guidance is piling up and as Citi notes, their global earnings revision index is at its worst since early July 2012. If the Fed is heading towards a Taper then this fundamental fear may once again become relevant - or hope-fueled multiple expansion will fill that gap.

"In this respect the Gini coefficient had apparently reached in 2006 the previous high seen in 1929, prior to the Great Depression. This is a reminder that capitalism’s natural way of dealing with excesses is via business failure and liquidation; which is why wealth distribution would have become much less extreme as a consequence of the 2008 crisis if losses had been imposed on creditors to bust financial institutions, for example owners of bank bonds, in line with capitalist principles; as opposed to the favoured ‘bailout’ approach pursued for the most part by Washington. This means, unfortunately, not that the problem has been avoided but that the ‘great reckoning’ has been deferred to another day as the speculative classes have continued to game the system by resort to carry trades actively encouraged by the Fed and other central bankers, which is why fixed income markets freak out when they see signs of an exit."

So much for Iceland's bid as the world safe haven from government (and intellectual status quo) persecution. The tiny country that was such a vocal supporter of Julian Assange, and which originally was speculated as being the final destination of Snowden upon his departure from Hong Kong, has just opined on his request for Icelandic citizenship, and the answer is a resounding no, following the country's "parliament voted not to debate it before the summer recess" Reuters reports.

The situation in Egypt has not been tenable since the Muslim Brotherhood and President Mohamed Morsi took over, post-revolution, but now that the military has stepped in, ousted Morsi and placed him in detention, foreign investors are celebrating. No one knows what’s going to happen next, but the general consensus—at least for investors—is that things couldn’t get any worse, only better. (Unless you’re Qatari, but more about that later.)

Presented with little comment aside to note that the 6 point vertical ramp in the S&P 500 (which just happened to stall perfectly at VWAP) was accompanied by no news, no other-asset-class support, and a smack-down in front-end VIX... S&P futures are back above the 50DMA once again intraday (as Discretionary names outperform and builders are battered). Did 3:30PM Ramp Capital leave for the Hamptons early?

Even as the manufacturing jobs continue to collapse, posting their fourth consecutive monthly drop in June to 11.964 million jobs, minimum wage waiters and bartenders have never been happier. In June Restaurant and Bar employees just hit a new all time high of 10,339,800 workers, increasing by a whopping 51,700 in one month. 

So it seems the full decay life of an ECB head is now 25 hours as the gloriously dovish comments from Draghi yesterday (that really said no liquidity withdrawal anytime soon) that spiked stocks up 1-4% across Europe have been battered back to unchanged by a good is bad jobs number in the US bringing the end of the Fed punchbowl ever closer. On the week, Portuguese bonds ended 68bps wider (with Spain and Italy 10bps tighter); Treasuries are underperforming Bunds by a very notable 21bps on the week. Despite stocks being generally unchanged (with Italy/Spain up around 2%), credit markets closed notably wider on the week. EURUSD is down around 200 pips on the week with the last 2 days the worst in almost 4 months.

We as a nation had an unparalleled, historic opportunity to set things right in the aftermath of the 2008 financial meltdown. Alas, we blew it. Instead of tearing down what had failed spectacularly, we chose to do more of what failed spectacularly: cartel-crony capitalism, centralized wealth and power and an expansion of our financialized debtocracy.