Archive - Aug 1, 2013

Presented with little comment aside to note that 'reaching for yield' may soon having an entirely different meaning...

All in all, the Eurozone has made two steps forward and one step back.

While much is being made of the ISM smash this morning and China's 'official' PMI overnight, it seems cognitive dissonance is on the rise as China's 'other' PMI collapsed and US Construction Spending dropped precipitously. It was only a month ago that ISM was sub-50 and that housing (and construction spending) was set to lift us out of the growth-scare. Apparently not. But there is another pillar of this recovery that has been stalwart during the equity market rally - that of US auto sales... until now...

*FORD U.S. VEHICLE SALES UP 11%, EST. UP 17%
*GM JULY U.S. VEHICLE SALES RISE 16%, EST. UP 20%
*CHRYSLER JULY U.S. VEHICLE SALES UP 11%, EST. UP 16%

It seems that all that channel-stuffing, subprime-lending, term-extending has hit its peak as, despite smiles and being 'pleased', US auto companies are underperforming expectations (as Ferrari exceeds).

Edward Snowden's first taste of fresh Russian air in weeks...

Those who follow the mainstream media’s “all Federal Reserve, all the time” coverage of financial news naturally conclude that Senator Chuck Schumer neatly summarized reality last year when he declared that the Federal Reserve “is the only game in town.” This lemming-like belief in the power of the Federal Reserve generates its own psychological force field, of course; the actual power of the Fed is superseded by the belief in its power.  The widespread belief in the Fed’s omnipotence is the source of the Fed’s power to move markets. We can thus anticipate widespread disbelief at the discovery that the Fed is either irrelevant or an impediment to the non-asset-bubble parts of the economy. There is much we, as individuals, can do to ignore the Emperor's clothes (or lack thereof) and focus on how to pursue our own prosperity and happiness irrespective of the meddling of central planners. The real power is in our hands, should we choose to believe it.

Record-breaking temperatures have been searing large swaths of China, resulting in dozens of heat-related deaths and prompting authorities to issue a national alert. As CNN reports, people are packing into swimming pools or taking refuge in caves in their attempts to escape the fierce temperatures. Local governments are resorting to cloud-seeding technology to try to bring rain to millions of acres of parched farmland. The worst of the smoldering heat wave has been concentrated in the south and east of the country, with Shanghai experiencing its hottest July in at least 140 years. In Shanghai, the heat was being blamed for mounting numbers of dead fish in ponds and rivers and is likely to continue into the middle of August.

*FERRARI SAYS 1H NET INCOME RISES 20%

*PORSCHE JULY U.S. SALES UP 36%

Readers may recall that in our commentary to yesterday's Chicago PMI disappointment we had a simple prediction "What this means for the ISM is not exactly clear due to the long-running tradition of baffle with BS, but on the surface it is hardly optimistic... which likely means ISM will explode higher." Sure enough, to no surprise at all, it just did with the headline ISM manufacturing print for July exploding from 50.9, trouncing expectations of 52.0 with the biggest beat in two years, and hitting 55.4, driven mostly by a surge in production which rose from 53.4 to a ridiculous 65.0, the highest since 2004. And while virtually all of the key subindices in yesterday's Chicago PMI dipped, today it is the opposite, with New Orders (+6.4), Employment (+5.7) and Deliveries (+2.1) all posting increases. Humorously, while Chicago PMI said Prices Paid exploded, today the ISM refuted that and indicated Prices Paid dropped to lowest in a year. One just has to laugh at the Chinazation of US economic data.

Two months ago we first observed the scramble by various hedge funds, in this case Blue Mountain, to take advantage of the peak sentiment in housing, and specifically rental housing (which just hit an all time high as reported previously) by rushing to capitalize on recent investments and dump exposure to the witless public. Specifically, we envisioned the then just announced IPO of the aptly named American Homes 4 Rent (yes, with a "4" not "for"), also known as AMH, which however came at precisely the wrong time for the market: just as mortgage rates were soaring and Colony American Homes postponed its own parallel IPO. Two months later, with the market about to pass 1700 and fears about the housing market put back in the shelf despite a glaringly obvious collapse in mortgage demand, these IPOs are back and with a vengeance, although now reflecting a far more subdued, tapered if you will, view about the house leasing sector. Not surprisingly, AMH priced overnight, selling 44.1 million shares at a price at the bottom of the $16-18 range to raise a total of $706 million: a 44% discount to the $1.25 billion suggested in the prospectus filed back in June.

After spending the last two weeks in a 20 point range, the S&P 500 has finally passed the all-important 1,700 level after the Fed's directionless statement was trumped by Hilsenrath's confirmation that the Taper 'may' be delayed and the late-day collapse in stocks was trumped by a 'miracle' from China and this morning's promises from Draghi. After its initial spurt off the 6/24 un-taper lows, the S&P surged at a wonderful 200% annualized pace but the sideways oscillation of the last few days has dragged that extrapolated performance exuberance down to a mere 140% annualized. As a reminder, there is a buyer (retail) for every seller (professional); what could possibly go wrong? It seems 'on hold' is the new BTFATH (and sell bonds).

I saw your boobs!

On 6 July, a Montreal, Maine & Atlantic train carrying 72 tank cars filled with oil exploded after its brakes apparently failed, sending it rolling into the small Quebec town of Lac-Megantic, where it derailed and then exploded. In the conflagration that followed, an estimated 47 people were killed. Whether Canadians like it or not, the use of such trains has soared in recent years. Now, in a breathtaking display of chutzpah, the Canadian ambassador to the U.S. is warning President Obama if he does not approve the controversial Keystone XL pipeline, then he can expect similar oil trains and even trucks to enter the U.S..

Good news appaears (for now) to not be bad news for stocks but it is bad news for bonds as they sell-off modestly on the best beat in initial claims in 3 months and the lowest absolute (pre-revision next week) level since January 2008. The highest insured unemployment rates in the week ending July 20 were in Puerto Rico (4.9), New Jersey (3.6), Connecticut (3.5), Alaska (3.4), California (3.4), Pennsylvania (3.4), New Mexico (3.2), Nevada (2.9), Virgin Islands (2.9), Illinois (2.8), New York (2.8), Oregon (2.8), and Rhode Island (2.8). So these are pre-recessionary levels of jobless claims and extended claims continue to slide (and Challenger this morning was positive) - but how does this exuberant job situation fit with the dismal economic data? Perhaps this?

Following his decision to leave rates unchanged, the investing public can only buy-first and hold their breath for some hint at more fragmentation-beating, collateral-easing, negative-rate hinting 'promises' from the most important man in the world for today.

*DRAGHI SAYS ECB EXPECTS RATES TO STAY LOW FOR EXTENDED PERIOD
*DRAGHI SAYS EURO AREA GROWTH RISKS REMAIN 'ON THE DOWNSIDE'
*DRAGHI SAYS WEAK LOAN DYNAMICS REFLECT STAGE OF BUSINESS CYCLE
*DRAGHI SAYS ESSENTIAL FOR FRAGMENTATION TO DECLINE FURTHER
*DRAGHI SAYS COUNTRIES SHOULD STEP UP STRUCTURAL REFORM PROCESS