Archive - Aug 2013

BlackRock's fixed income CIO Rick Rieder is worried about the impact that higher rates will have on the stock market. In this brief interview with Bloomberg TV's Tom Keene, Rieder explains that while equities look 'cheap' given where rates are, this is a mis-pricing and warns (as we have repeatedly) that "people don't spend any time looking at cash-flow discounted by cost of financing, which is really where we think equity should be valued." In that case (as we have noted), a surge in financing costs will weigh heavily on stocks. While he is concerned about investors' general lack of awareness of the risk in bond funds - "the volatility in fixed income could actually be higher than the equity market," he fears the impact of higher rates on mortgages and other credit vehicles on the recovery. However, as Rieder notes they have been saying for a long time, "QE’s too big. You’ve got to taper down QE. It's created this tremendous distortion in interest rates," as he sees fair-value for the 10Y around 3.25%.

Treasury bond yields have risen for 5 of the last 6 days (with the 7Y yield up 35bps in that period) adding 5bps today but since the latest cluster of Hindenburg Omens began to appear, the S&P 500 has fallen for 9 or the last 11 days (-3.6% from the 08/02 highs) and closed below its 50DMA today (on light volume). Today saw 430 new lows (the second highest since Oct 2011) and only 15 new highs. The S&P joined the Dow and the Trannies in the red for the period post-FOMC (June); and only Healthcare, Discretionary, and Industrials remain green from that 6/19 event. The USD ended the day practically unchanged but FX markets were very volatile (AUD and JPY all over the place in the majors and INR in the locals). Commodities in general slid lower by around 0.7% or so in a relativley highly correlated way with stocks. Credit markets continue to underperform, leading stocks lower. VIX was banged back above 15% to its highest close in 7 weeks. Today was the 4th negative close in a row for the S&P - the first time this year.

SEC SAYS FALCONE CONSENTS TO BAN FROM ASSOCIATION WITH ANY BROKER, DEALER, INVESTMENT ADVISER, OTHER ENTITIES, WITH RIGHT TO REAPPLY AFTER FIVE YEARS

First They Came …

The equity rally that began in 2009 has pushed valuations higher, but has received little support from earnings. Indeed, as Morgan Stanley notes, since June 2012 the equity market rally was entirely driven by valuation and not earnings. While there have been cases when better economic conditions pushed up earnings, providing equity market support, there have also been occasions when valuation driven equity market rallies translated into weakness, as witnessed in October 1987. The equity market rally which began in 1986 and peaked in the summer of 1987 falls into this category.

In case Ben Affleck was looking for his next Oscar-winning CIA-o-mentary, the Central Intelligence Agency (which alas in a time of NSA permasnooping has become a bit of an anachronism) may have just provided the script, with the first official admission that the flipflops on the ground orchestrated at least one Iranian coup and is ostesnibly behind all other global coups (and non-coups coughegyptcough) in the past 50 years, but until they are confirmed they will remain merely "conspiracy theories."

As is well-known by now, one of the main reasons why the Fed's hands are tied when it comes to the future of QE, is the dramatic drop in the US budget deficit which cuts down on the amount of monetizable gross issuance (read Treasurys) and for which a big reason is that the GSEs have shifted from net uses of government cash to net sources. So in what may be the best news for Bernanke, and/or his successor, we learn that according to a report written by the Federal Housing Finance Agency (FHFA) inspector general and reviewed by Reuters, "Fannie Mae and Freddie Mac are masking billions of dollars losses because of the level of delinquent home loans they carry."

Presented with little comment (over our earlier detail) but just to note that around the world there are significant events occurring (even as the US equity market slumbers). So much for the gold coin ban - gold now trades at 4 month highs in Rupee terms.

Life is is a f*cking cabaret my friends...

The daily presidential-tracking poll shows that on Sunday August 18th 51% of US citizens disapprove of what President Obama is doing in the country.

In East Africa, the major water resource is the Nile river, the world’s longest, at 4,130 miles, referred to by Egypt since antiquity as the country’s heart. Instability, poor governance, lack of finances and the availability of other water sources left the issue largely dormant until the 1990s, when Nilotic governments seriously started to consider using their Nile Basin waters to generate energy and irrigate crops. But now, most African countries (expecting growth), where only about 25% of the population is connected to electricity grids, are seeking any and all electric power sources; guaranteeing an ongoing and increasingly fractious source of tension for Nilotic states. With the current political turmoil roiling Egypt, Cairo’s ability to influence upstream states is currently constrained, which until the dust settles may well provide Egypt with a number of aquatic fait accomplits. If Kampala and Addis Ababa press forward with their (Chinese-sponsored) hydroelectric projects in the interim, then they will probably eventually face some “frank and candid” diplomatic discussions with Egypt, which, after all, has a 4,000 year old history of Nile concerns.  Not a happy scenario.

The “cloud” in China is corporate nirvana: a high-growth tech sector in a high-growth country. Or was. And it’s showing up in the numbers.

Earlier today we learned that while some executives at Forever 21 were previously confused by Obamacare, subsequently they appear to have rectified their confusion... and full-time staffing levels. Of course, there would have been no confusion had Forever 21 known what it was getting with Obamacare. So for the benefit of all their executives, and for all others who may still be confused by America's new healthcare system, here, once again, is the chart that should explain everything.

For the 5th day in the last 6, US Treasuries are selling off notably. While equity volumes remain lack-luster and liquidity still thin in bonds, the weakness is most pronounced in the 7Y belly (even though selling is across the board). 10Y rates tagged 2.89% and 30Y 3.90% all pushing back to the pre-US-downgrade (debt-ceiling) levels of summer 2011. The 10Y yield has just joined the 30Y trading wider than they did when stocks hit their lows in March 2009.