Archive - Sep 17, 2013

With spending habits waning amid soaring interestrates and rising gas prices, it is perhaps useful to note the trends in the stickiest of spending habits - tobacco, alcohol, and fast food...

Volume is worst (pro rata) than yesterday in equities; AAPL is up though (but gold is down oddly). In fact US equities are on their own heading into tomorrow's angst... the USD is lower, Treasuries are flat, oil, gold, and silver are all down, VIX is staying signficantly higher and HY credit spreads are notably wider...

While the issue of whether they will or won't taper is certainly still not clear, the WSJ's John Hilsenrath notes that the other dilemma facing the Fed is whether to reduce their purchases of Treasurys, mortgage-backed securities or both. According to officials, Hilsenrath notes, there were two lines of thinking at the Fed on how to structure a pullback from the bond programs and the issue would be discussed at the meeting. Goldman's Jan Hatzius has posited that "Fed leadership probably views MBS purchases as more effective in boosting economic activity than Treasury purchases," but as Hilsenrath notes, some Fed officials prefer a simpler-to-communicate strategy of proportional cutbacks to both MBS and Treasuries. The fact that Hilsy is reporting this suggests that a Taper is somewhat inevitable - as we have noted since the Fed remains cornered. On average, the market expects a $6bn taper on Treasuries and $3 billion for MBS.

A very soon tomorrow will bring the decision of the Fed concerning tapering into focus. Ok, a kind of fuzzy, hard to see and wispy focus. The one thing that we can assure you of is that whatever is to come our way it will not be a singular event. You will hear from the imbibers of Cool Aid and other mischievous reality altering drinks that it could be a one-off event. Tomorrow a process will be started, it will probably go in fits and starts but do not blind yourself; it will be the beginning of the journey to cut back on the propping up of the markets by the Fed.

The U.S. Census Bureau announced today that in 2012, real median household income and the poverty rate were not statistically different from the previous year.  The 88-page report (found here) contains a plethora of statistical data, slicing and dicing income and poverty data by race, gender, and so on but in order to see through the haze, the following three charts sum it all up perfectly (sadly). The poverty rate in the US is stable at 15% - practically the highest since the mid 1960s and real household incomes are stagnant at 1997 levels. Spot the cyclical recovery...

The July statement from the FOMC presented the following snapshot of the economy, "Information received since the Federal Open Market Committee met in June suggests that economic activity expanded at a modest pace during the first half of the year. Labor market conditions have shown further improvement in recent months..." but as Stone McCarthy notes, tomorrow's FOMC post-meeting statement could well be less upbeat in tone, with hints of a slowing in the pace of improvements in the labor market, housing, consumer and business spending, and inflation remaining well below the 2% goal. A look at the housing and spending data certainly raises eyebrows but it is clear that the Fed remains cornered by deficits, sentiment, technicals, and international ire.

Prospective buyer traffic rose in all regions but the National Association of Homebuilders key sentiment index missed Bloomberg median expectations by the most since April. Future single-family home sales expectations dropped notably and this is the first time since April that the index has not risen. One data point does not make a trend change but given mortgage rates, mortgage apps, and home sales, and now the expectations for future sales, it will be hard for many to keep the housing recovery dream alive... even if the Fed rolls back all their Taper talk and doubles-down on QE...

The U.S. Federal Reserve is insolvent and has liabilities of over $3.2 trillion and yet has capital of just $60 billion. Therefore, it is leveraged by fifty to one, akin to a highly leveraged hedge fund. 

A snapshot of the top Bloomberg news from five years ago shows something very unusual - an entire screen of negative headlines. Of course, back then, bad news was indeed bad news... in our new normal, a smorgasbord of cataclysmic event, terrorism, and systemic risk possibilities would likely be reason to BTFATH as it guarantees the Fed will come to the rescue... (just as they did eventually last time).

Perhaps confirming the collapse in consumer confidence we saw last week - that the market shrugged off on the back of Summers - ShopperTrak, which measures store traffic in 60,000 locations world-wide expects retail sales in November and December to rise by only 2.4%. As the WSJ reports, this will be the worst holiday season since 2009 (which last Friday's dismal +0.1% ex-Autos rise in retail sales for August supports). Retailers are clearly anxious with Kmart already airing its first holiday ad - 105 days before Christmas. As ShopperTrak notes, consumers are worried about a host of issues including rising interest rates that has "got people feeling more tenuous about the holiday season."

When the half life on your stock boost from dumping your CEO is measured in days (especially when coupled with less than brilliant M&A transactions) what do you do? Why... resort to the oldest trick in the book: dividend and buyback (most likely leveraged)

*MICROSOFT SETS $40 BILLION BUYBACK, BOOSTS DIVIDEND 22%

It seems ValueAct is active already - and doing all they can to cover the FUBAR move in Nokia. But  - for all those buying on this news - this is merely extending the time-period of a prior buyback program - so just the dividend boost of 22% (23c to 28c with expectations of a shift to 26c) counts.

If the Fed was looking for any confirmation as it entered its two day meeting that its monetary machinations are boosting inflation, at least according to the BLS' hedonically, seasonally-adjusted CPI indicator, it did not get it. August CPI just printed at a measly 0.1% increase from July, below the 0.2% expected, and down from 0.2% last month. This was the lowest monthly increase in overall inflation since May, and the biggest miss to expectations in 4 months. On a Y/Y basis overall prices roses 1.5%, below the expected 1.6% and well below the 2.0% inflation in July. Core inflation excluding food and energy rose 1.8% in line with the expected number, and higher than the 1.7% a month ago. Perhaps the best news is that according to the BLS, "the index for nonalcoholic  beverages declined in August, falling 0.1 percent." It is unclear what if any hedonic adjustments were used in this particular calculation. As a reminder, the Fed has been "targeting" 2.0% inflation, and failing. So since in the Fed's eyes inflation continues to not be an issue, how long until the Fed proceeds to target NGDP, unanchors inflation expectations, and finally launches Bernanke's helicopter as we speculated recently?

With Syria now quickly fading from the headlines and Wall Street believing that Yellen is a "shoe in" for the Fed, what headwinds still remain for the markets ahead...

European recovery propaganda may be humming (for the latest proof see today's German ZEW sentiment index which soared from 42.0 to 49.0 matching the all time high in the Dax), but when it comes to the actual economy - that place where commerce is conducted and where supply and demand curves intersect, the situation has never been worse. And not only unemployment which is at a persistently record high for the Eurozone, but actual transactions, in this case in the form of car sales. As AP reports, for the first eight months of the year, passenger car sales in the European Union were off 5.2% to 7.84 million compared with the same period last year, the European Auto Manufacturers' Association said Tuesday. That's the lowest January-August figure since the group started keeping track in 1990.

• Less Tapering Becomes Tightening Credit No Matter What Fed Says (BBG)
• Yellen Is Now Top Fed Hopeful (WSJ)
• Syria - A chemical crime, a complex reaction (Reuters)
• More ECB collateral: Wrecked cruise ship Costa Concordia raised off rocks in Italy (Reuters)
• Aging Boomers Befuddle Marketers Eying $15 Trillion Prize (BBG)
• Abe Turns Pitchman, Says Japan Is Now A Buy (WSJ)
• Ex-JPMorgan Employees Indicted Over $6.2 Billion Loss (BBG)
• Barack Obama blinked first in battle for Lawrence Summers (FT)
• Berlusconi to support Italian government in video message: sources (Reuters)
• How China Lost Its Mojo: One Town's Story (WSJ)