Archive - Sep 2013

In what is unbelievable hypocrisy and re-writing of history based on 20/20 hindsight, Bullard, in responding to a question of asset bubbles, explained that while all Fed members are "concerned about asset bubbles," they do not see one now. His reasoning is so cognitively dissonant as to be almost comedic:

• *BULLARD SAYS TECH BUBBLE, HOUSING BUBBLE WERE BOTH `NO SECRET'
  
• "Bubbles Of The Past Were Gigantic And Obvious... Not Now"
  

So there it is - because the St. Louis Monday-Morning-Quarterbacker can now so clearly see the previous epic bubbles (which the Fed did not see and merely pumped even higher) were obvious and one is not obvious now (unless you actually take a minute or two to consider forward earnings growth and margin expectations in light of lower deficits, unemployment, and global growth; high-yield credit spreads; primary issuance levels; and the fact that corporate leverage is at record highs).

It would appear, as uncomfortable as it may be for the mainstream, that the Fed's Bullard has been reading Zero Hedge and realizes the error of his (and his academic friends') ways. In his speech today he noted: "Many of my friends in academia and in financial markets argue that changes in the pace of purchases should not have an important effect in financial markets (and hence would have no eventual effect on the real economy either). However, the empirical evidence from these two episodes provides striking confirmation that changes in the expected pace of purchases act just like conventional monetary policy." In other words, as we said when QE3 was announced, "it's the flow not the stock that matters" and implicitly - as Bullard confirms - tapering asset purchases has the same effect as hiking rates.

... It appears to us that many market participants are quite dissonant regarding how they should be positioned, wrestling with the competing sentiments: "I can’t afford to miss a rally, but I sure can’t afford to get killed if things go in the other direction because none of this is real."

We explained yesterday how Bernanke's actions had left the Fed's "credibility in tatters," and further the double-bind that they are stuck with. Following Bullard's comments earlier that a Taper decision is close, Esther George (admittedly a hawk) has come out fighting. Warning that the Fed "risks confusing the message on when it will taper versus end QE3," she cites lower unemployment and "sufficiently positive data" to warrant a reduced pace of QE. But here concluding remarks are key:

• GEORGE: FED WILL NEED CREDIBILITY, CLEAR COMMUNICATIONS TO ASK MARKETS TO TRUST ITS FORWARD GUIDANCE
• GEORGE: FED CREATED CONFUSION, DISCONNECT WITH MARKET EXPECTATIONS ON QE
• FED'S GEORGE: 'COSTLY STEPS' WERE TAKEN, INCLUDING FED COMMUNICATIONS, TO PREPARE MARKETS FOR CHANGE TO QE3

Crucially though, and perhaps explaining why they decided not to taper, she explains that "sometimes the markets get it wrong; FOMC cannot let markets dictate policy." So there it is - the Fed decided the consensus was too large and decided to 'spank' investors by smashing stocks higher.

Earlier this week, we followed up the CBO’s publication of its 2013 Long-Term Budget Outlook with a chart that we believe should have been included. But what would Rick Santelli say? Only Rick would think to mix our debt projections with cheeseburgers and a magnifying glass. Here’s his entertaining "I will gladly pay you Tuesday for a cheeseburger today" take on our chart...

Still Laundering Terrorism and Drug Money ...

Ben Bernanke Capital LLC and his risk-managed S&P 500 continue to crush it (if not so much the Fed's $2.75BN DV01 balance sheet which is nursing over $200 billion in unbooked losses on the surge in rates YTD). This comes at the expense of all those other levered-beta chasers formerly known as hedge funds (whose short-books continue to destroy their performance, and careers, left and right, and which inverse strategy - going long the most shorted names - is the best performing alpha-generating strat in the past year), who as the following summary table summarizing the performance of the most prominent hedge funds are fighting tooth and nail to generate meager mid- to high-single digit returns. And since this relative underperformance in a world in which there is no risk left continues for the fifth year in a row, one can't help but wonder: just how viable is the hedge fund model at a time when Ben Bernanke is the taxpayer funded, uber-risk manager for everyone?

A thousand long-only asset-managers just cried out - "we need moar un-taper"...

EU confidence rose to its highest since Q3 2011 but missed expectations by the most in 17 months and remains notably divergent from the near-all-time-highs in EU stocks. Of course, that doesn't matter, or in fact only juices moar money into the EU - even as FX movements drive EU corporates to suffer (see Adidas). Spanish and Italian equity indices rose the most on the week but a look at the charts shows the entire gain was instantaneous on the Bernanke news with selling into and after that squeeze. EU Sovereign spreads leaked lower all week with a blip higher post-Bernanke quickly dissolving back. Italian spreads end -26bps - because all is so calm there... EURUSD is holding around 1.3550 (+250 pips on the week), the strongest weekly close since February.

As expected, the House Republicans just passed a vote to defund Obamacare with 230 Yeas and 189 Nays. And now the vote deadends as it will go no further in the Senate, and Obama will obviously veto it. Luckily, since the person in charge of the US economy is not on the Hill but in the Marriner Eccles building, this entire theater is irrelevant.

While stocks initially oscillated before testing the day's lows, precious metal losses have accelerated since Fed's Bullard walked back some of the market's perceived uber-dovishness of Bernanke's press conference:

*SILVER FUTURES FALL AS MUCH AS 6.3% ON COMEX IN NEW YORK (biggest drop since July)
*GOLD FUTURES DROP AS MUCH AS 2.4%, EXTENDING DECLINES ON COMEX (biggest drop since June)

Levels remain above pre-FOMC but the drop is accelerating as the USD is pushing higher. So it would seem the 'market' is expecting good macro data to justify the taper?

As we noted earlier this week, the German election is still very uncertain (with regard the fragile coalition that Merkel will have). What is perhaps worrisome for the glass-half-fulls is the rapid rise in the Anti-Euro Party:

*GERMAN ANTI-EURO AFD PARTY UP 1 POINT TO 4.5% IN FORSA POLL

This is critically close to the 5% required to enter parliament and it seems the most-likely-to-be-hurt by any less-than-generous reaction post-election is Greece and Greek stocks are tanking on this news...

The U.S. House is now in one hour of debate and then will vote on a temporary funding bill to keep the federal government running after September 30. The continuing resolution would fund the federal government at current sequester levels of $986.3 billion through December 15 and defund the Affordable Care Act. As CSPAN notes, following Speaker Boehner's proposal (to vote on this CR and whether to raise the debt ceiling next next week), Minority leader Nancy Pelosi issued a statement claiming that the House GOP was "prepared to shut down the government" to block President Obama's signature health law. At a press briefing on Thursday, Senate Majority Leader Harry Reid (D-NV) told reporters, "Any House bill that defunds Obamacare is dead." Let the fireworks begin...

Even if they could've hit their revenue targets (whcih they couldn't) or matched Android's tech innovations (which they didn't) they would've been eaten alive by margin compression. Ask Apple, Samsung, Nokia and HTC!

Sadly, it appears the Syria debacle is escalating once again. As The Telegraph reports, the current plan says that President Bashar al-Assad's regime will hand over a list of its chemical weapons and facilities by Saturday, and that all will be destroyed by mid-2014. However, a defiant President Assad said in an interview on Wednesday that the task would take at least a year and cost a billion dollars. Syria, which is believed to have over 1000 metric tons of toxins, submitted the letter detailing its chemical weapons to the global chemical weapons regulator but, as Bloomberg notes, officials said the information was inadequate. The Organisation for the Prohibition of Chemical Weapons (OPCW) said it was indefinitely postponing a Sunday meeting to discuss a Russia-US plan to destroy Syria's arsenal. Diplomacy, for now, is not working out so well.