Archive - 2013

We are back to that phase in market euphoria where no news is good news, good news is better, and bad news is best. While there was little news over the weekend, and overnight, what news there was uniformly negative: northern China drowning in smog, the Apple fad bubble bursting, European Industrial production printing below expectations (-0.3%, exp.-0.2%, down from revised -1.0%), and ever louder rumors that the debt ceiling debate may metastasize into an actual government shutdown for at least a few days, which means the first technical default in US history. Yet nothing seems able to faze the risk on mood, still driven by a relentless surge in the EURUSD which touched on 1.34 overnight before retracing, and the EURCHF, which too has soared by over a 100 pips in recent trading action, which according to some is a result of Swatch buying the Harry Winston watch and jewelry brand for $1 billion, and an aggressively selling of CHF into USD by the company. Eventwise, today will be a quiet day in the US, although the action will pick up tomorrow as more companies report earnings as well as the all important retail sales report will put to rest all debate over just how good or bad this holiday shopping season (pre and post seasonal adjustments) truly was.

AAPL stock is currently trading at or just under the $500 "generational bottom" in the premarket session, or nearly a one year low, following news first from Japan's Nikkei that Apple has slashed orders for iPhone 5 components, and then from the WSJ, that demand for the flagship phone was far less than expected, resulting in a cut in orders in the supply chain. Per the WSJ: "Apple's orders for iPhone 5 screens for the January-March quarter, for example, have dropped to roughly half of what the company had previously planned to order, the people said.  The Cupertino, Calif., company has also cut orders for components other than screens, according to one of the people.  Apple notified the suppliers of the order cut last month, the people said."

The underlying trends seen this year have continued, but after strong follow through in Asia, a more subdued tone has been seen in Europe. The US dollar is generally softer, except against the yen and sterling. Japanese markets were closed for holiday, but the MSCI Asia-Pacific Index rose almost 0.3%, lifted by more than a 3% rally in China on speculation that there may be a sharp increase in the cap on foreign investors' ability to invest in Chinese equities. In Europe, the Dow Jones Stoxx 600 is hp about 0.4%, led by a rise in financials. Spanish stock market is at its highest level in almost a year (Feb 2012) and Italy's market is at its best August 2011, though their bond markets are seeing some profit-taking today. With a light economic calendar in North America today, Bernanke's speech in Michigan after the markets close may be the highlight. We identify six key factors shaping the investment climate.

In a world in which the NSA has access to everything, including - soon - one's bank accounts, because "the government is there to protect you", it was only a matter of time before the logical extension of abdicating all privacy was enforced in the city that never sleeps, and which ended up with 24/7 vigilant "alarm clocks" in the form of unmanned aerial vehicles, aka drones, "for the sake of security." From RT: "The head of the New York City Police Department announced this week that the largest local law enforcement agency in the United States might soon rely on spy drones for conducting surveillance. During an open conversation held Thursday between Reuters editor-in-chief Stephen Adler and NYPD Commissioner Ray Kelly, the chief of police confirmed that New York’s boys in blue aren’t entirely opposed to acquiring an unmanned aerial vehicle for the sake of security. “We’re looking into it," Kelly reportedly told an audience at the 92nd Street Y Thursday evening. “Anything that helps us.”

As China's major trading partners try to control rising public pension and health care costs, they may not realize they also have an important stake in China's ongoing struggle to fashion a safety net for its own rapidly aging population. Many observers assume China has no pensions or healthcare insurance for the 185 million people over the age of 60 (13.7% of population), the highest official retirement age for most workers. They may well believe this explains why Chinese families save so much–more than 30% of household income–and therefore spend less on consumer goods, including imports from trading partners.

Are German industrialists getting cold feet?

It is possible that we will get a technical default for a few days, but more likely that Congress will give in, vote the debt ceiling up temporarily, and let the automatic sequesters kick in. Mounting risk of a technical default was USD positive in 2011 because it led to cutting of long-risk positions and the USD/Treasury market remained safe havens.  However, it also occurred in an environment of slowing EM growth and intensifying euro zone sovereign risk pressure, so the USD support came from external forces as well. Given that investors are now somewhat long risk again, the position cutting is again likely to be USD positive, however, unattractive US assets were. As was the case in 2011, it is very unlikely that the Treasury will not pay its bills, although even a technical default could have very unforeseen consequences, given the multiple functions that Treasuries play in global financial markets.

By now most are aware of the various metrics exposing the unsustainability of US debt (which at 103% of GDP, it is well above the Reinhart-Rogoff "viability" threshold of 80%; and where a return to just 5% in blended interest means total debt/GDP would double in under a decade all else equal simply thanks to the "magic" of compounding), although there is one that captures perhaps best of all the sad predicament the US self-funding state (where debt is used to fund nearly half of total US spending) finds itself in. It comes from Zhang Monan, researcher at the China Macroeconomic Research Platform: "The US government is now trying to repay old debt by borrowing more; in 2010, average annual debt creation (including debt refinance) moved above $4 trillion, or almost one-quarter of GDP, compared to the pre-crisis average of 8.7% of GDP."

That China openly manipulates its economic data, especially around key political phase shifts, such as one communist regime taking over for another, is no secret. That China is also the marginal economic power (creating trillions in new loans and deposits each year) in a stagflating world, and as such must be represented by the media as growing at key inflection points (such as Q4 when Europe officially entered a double dip recession, and the US will report its first sub 1% GDP in years) as mysteriously reporting growth even without open monetary stimulus (something we have said the PBOC will not engage in due to fears of importing US, European and now Japanese inflation) is critical for preserving hope and faith in the future of the stock market, is also very well known. Which is why recent market optimism driven by "hope" from Alcoa that China is recovering and will avoid yet another hard landing, and Chinese reports of a surge in Exports last week, are very much suspect. But no longer is it just the blogosphere that is openly taking Chinese data to task - as Bloomberg reports, even the major banks: Goldman, UBS and ANZ - are now openly questioning the validity and credibility of the goalseek function resulting from C:\China\central_planning\economic_model.xls.

From there to Timbuktoo...

Just because there was not enough encroachment by the government into virtually every corner of private life, here is another "collaboration" that will further enmesh big brother into every aspect of private life, in this case private financial life, because as the WaPo reports, "major U.S. banks have turned to the National Security Agency for help protecting their computer systems after a barrage of assaults that have disrupted their Web sites, according to industry officials... The NSA, the world’s largest electronic spying agency, has been asked to provide technical assistance to help banks further assess their systems and to better understand the attackers’ tactics." And while we salute the great diversionary pretext that "Iranian hackers" pose a greater risk to the stability of the US financial system than, say, the ongoing monetization of US debt at a pace of $85 billion per month, which has made the Fed's DV01 rise to a mindboggling $2.75 billion, or idiot pundits who claim all American problems can be resolved with one coin, we can't help but wonder what happens when the most intrusive of US spy agencies, one which as reported last year is free "to intercept, decipher, analyze, and store" virtually every electronic communication in the entire world, now has full explicit access to all bank data, and, incidentally, every American's financial snapshot at any given moment?

If the Republicans want to shut down the government, they have a much better issue to do it over than the Debt Limit. 

The absence of meaningful negative market responses to debt ceiling dramas, Japanese inflation targeting, trillion dollar coins, and other odd and dubious politically-oriented market meddling seems to be sending reflexive signals back to capitals: all clear, continue self-destructing. The markets seem not to care, knowing that central banks have their back. Money creation can suspend nominal economic contraction and ensure rising financial markets until something, (anything!), might stir the public’s imagination again and animal spirits. But while money can suspend animation, it is not and cannot replace real economic functioning. In fact, ongoing money creation is locking-in negative real economic growth and real returns in most financial assets. We think the best strategy for discretionary investors is to stay focused on the growing monetary mountain across the valley, and to not look down. This piece seeks to place the current investment environment in economic, political and social perspective.

The question many of us had going into today was whether the no follow-through allowed rule would be implemented yet again by The Gold Cartel for the zillionth time in a row.

Whether it is to serve as a diversion from the ongoing deterioration in the French economy (purchases of French sovereign bonds by the SNB implying "all is well" notwithstanding), to distract public attention from the recent humiliation (and backfire) of the socialist government's "tax the rich" campaign or for whatever other reason, is unclear for now, but what is clear is that over the past two days France has launched a major airstrike and military campaign against Islamist rebels in northern Mali, the pretext being that control of northern Mali by the rebels posed a security threat to Europe. What is also clear is that even as France is protecting "European interests" deep in the heart of African darkness, elsewhere in Africa, the socialist country, whose military "expertise" is best known for building impassable fortifications all around perfectly crossable forests, suffered yet another offensive humiliation when not only was a hostage held by Somalian insurgents, al Shabaab, killed during an attempted rescue operation, but a commando from the "rescuing" team was allegedly left behind during the bungled operation. The cherry on top in president Hollande's first major foreign policy excursion is that the same insurgents subsequently released a statement that the hostage was perfectly safe, even as a French pilot was killed in the Mali airstrikes early on in the campaign, all of which probably makes France wish it had just stayed home.