Archive - 2013

Banzai7 Keyboard Egg Nog Warning in Effect...

The rich continue to grow richer, and as David McWilliams (of Punk Economics) so eloquently explains in this brief clip, this has pushed the Fed into a corner. As the Federal Reserve gets a new chair and decides what to do next, whether to print $85 billion a month more or not, McWilliams examines the heist that is the new normal financialized economy - who gets all the loot and why today's kidnappers wear Prada. "Wake up," he blasts, explaining the uncomfortable reality of what happens when financial kidnappers dress up as loyal patriots and extort money in the name of the common good.

The anxiety is palpable (despite the constant reassurance that it's all priced in) as markets are getting jittery. Stocks are sliding back to unchanged (on the heels of AUDJPY weakness); VIX is flat at 2-month highs; bonds are notably weaker (not helped by the dismal 5Y auction); and gold and silver are oscillating (on the rise in the last few minutes).

87-year-old Lew Manchester has just returned from a 3-week trip touring Buddhist temples in Laos and cruising the Mekong Delta in Vietnam. His 61-year-old daughter Lee lives year-round in the basement of her friend’s Cape Cod cottage, venturing into the winter cold to get to the bathroom. As Bloomberg reports, Lew is making the most of his old age. Lee is paring back and lightening her load as she looks ahead to her later years. Both worked all their lives, both saved what they could. “Timing is everything and my dad’s timing with jobs, real estate and retirement benefits was better,” said Lee. A rising tide of graying baby boomers is less secure financially and has a lower standard of living than their aged parents.

Residents of this city woke on Wednesday to a third day of thick gray smog which has disrupted dozens of flights and train services and caused a rash of health complaints. As Reuters reports, the toxic levels of pollution, fuelled by industrial growth a surge in the numbers of vehicles crowding their roads, are more than 7x what the nation deems safe and what the US EPA calls "hazardous". But it's not in China...

If Yesterday's 2 Year auction was strong to quite strong, with a soaring Bid to Cover and a yield stopping through the When Issued, today's 5 Year auction of $35 billion in 5 Year paper was ugly to very ugly. With a When Issued trading at 1.578% at 1 pm, there appears to have been an air pocket at the time of pricing, which concluded at a high yield of 1.600%, a rather massive 2.2 bps tail, and a surprising outcome for auctions on this side of the belly. Additionally, this yield was just shy of the 2013 auction highs which hit 1.624% at the peak of Taper Tantrum mania in August. Furthermore, while Bids to Cover in the short end of the spectrum have been steadily rising in recent months, today's auction saw a pronounced drop in the BTC from 2.61 to 2.42, the lowest since August, and well below the TTM average of 2.67. But the real story was in the internals, where Directs took down 11.8%, just shy of the 14.6% TTM average, but it was the Plunge in Indirects from 50% to half that number, or 25.8% that was the true surprise, as it was the lowest Indirect take down since December of 2008!

Despite yesterday's exuberant spike in optimism from the NAHB sentiment index to 8 year highs, the delusion from reality appears to growing ever wider. This morning's "if we build them, they will buy'em" false headline spike in housing starts (seasonally-adjusted) is yet another delusional divergence as the mortgage applications index collapses (down 60% from 2013 highs) to a new 13-year low.

Q. "How does it feel to be back in the "New Normal" USSR?"

A. "Horosho"

All I can say with certainty is that stocks are in a dangerous position. They’ve been in one for a while now and the higher they go the more dangerous it becomes.

Last Friday we reported of a freak near-incident in the South China Sea, when a US warship nearly collided with a Chinese navy vessel, operating in close proximity to China's only aircraft carrier, the Liaoning, although details were scarce. Today, with the usual several day delay, China reported what was already widely know, admitting that "an incident between a Chinese naval vessel and a U.S. warship in the South China Sea, after Washington said a U.S. guided missile cruiser had avoided a collision with a Chinese warship maneuvering nearby." According to experts this was the most significant U.S.-China maritime incident in the disputed South China Sea since 2009. Which naturally warranted the question: whose actions nearly provoked a potential military escalation between the world's two superpowers. Not surprisingly, China's version is that it was all the US' fault.

Today is the big day. Investors are on the edges of their seats, waiting to find out what the Fed will do. Taper? No taper? Or maybe it will taper on the tapering off? Investors don't seem worried... Most of the reports we read tell us the economy is improving. Unemployment is going down. Meanwhile, manufacturing levels are rising. Compared to Europe, the US is a powerhouse of growth and innovation, they say. Compared to emerging markets, it is a paragon of stability and confidence. But wait... What if all these things were delusions... statistical folderol... or outright lies? What if the true measures of the economy were feeble and disappointing? What if the US economy was only barely stumbling and staggering along? As Rick Santelli so uncomfortably asked, "What is Bernanke afraid of?"

Today's key economic data point, aside from the FOMC announcement of course, was the monthly Housing Starts and Permits report. And with November starts printing at 1091K, a massive 202K unit surge compared to the revised 889K in October, this was the highest monthly print since early 2008 and biggest monthly jump since... January 1990! Supposedly builders just can't get enough. Well, maybe. Until one again looks below the headlines, where one finds that a substantial portion of the jump is once again due to the builders' bet that rental housing demand will continue growing, as multi-family unit starts soared from 281K to 354K - just shy of the highest print since 2008 as well. Additionally, the single-family print barely rose from 49.2 to just 51.9, well below the highs seen in the summer of 2013, when unadjusted single-family starts were higher than the November print from March until August! In fact, at 51.9K, single unit homes are back to mid-2011 levels. Thank you seasonal adjustments. But nowhere was the seasonal adjustment in today's data more evident than in the Housing Permits number. What happens when one looks at the non-seasonally adjusted number? It cratered from 90.3 to 70.9K - this was the lowest print since February and the biggest absolute monthly drop in 5 years since November 2008!

It’s like a futuristic film with hoards of evil masses of people, poverty-stricken, living off the land, while the rich and wealthy continue to lord it, served to their hearts content and just raking it in, while the others hardly get enough to eat and drink.

Spanish loan delinquencies as a percentage of the total have risen for the 8th straight month to a new record high of 13.00% (even as sovereign bond spreads continue to plunge to multi-year lows signaling all is well). With unemployment rates stuck stubbornly high, however, reality is starting to dawn in the Spanish banking system as mortgage defaults are rising following the Bank of Spain's order for lenders to review their portfolios. As Bloomberg reports, the default rate for Banco Santander alone jumped to 7% (from 3.1%) following its "reclassification" of loans that it had refinanced (never expecting to be repaid) and with home prices still falling, "there is an urgency to come clean" as regulators see the need for banks to cover a further EUR5 billion shortfall in provisions.

There is a saying: "don't buy the hand that feeds you" but there is nothing in popular aphorism literature about suing the hand that bails you out. Which is precisely what JPM did overnight when it sued the Federal Deposit Insurance Company, claiming the agency was responsible for over $1 billion in liabilities assumed by the bank as part of its takeover of Washington Mutual in 2008. Of course, having been the subject of a relentless battery of lawsuits by every US agency imaginable, many were wondering when JPM would strike back, or rather if it would have the temerity to sue the same government that bailed it out with billions of direct injections and even more billions in FDIC-subsidized bond issuance. The answer is yes, and as JPMorgan alleged in the complaint, the FDIC agreed to shield it from liability from lawsuits claiming failures by Washington Mutual. JPMorgan said it took on only limited liabilities in its purchase of the Seattle-based bank’s assets. What next: Jamie Dimon sues the Fed for forcing it to acquire Bear Stearns' assets at the firesale price of $2 $10 per share, in which the bank assumed Bear's assets if not so much its liabilities - after all there was a government to bail it out for that.