Archive - Jan 17, 2014

With the market more bullishly positioned, more euphoric, and more levered than almost any time in history, it is perhaps worth "pondering" what some of the risks to this optimism could be...

JPY crosses were in charge of stocks again today - and not in a good way - as a sideways market gave way to weakness late on as Goldman released part two of their market-bashing research. With the dramatic help of AXP and V (78 of the Dow's 41 points!), the Dow was the only index green today and managed to close just green on the week. Since the taper, Homebuilders have tumbled from heroes to almost zeroes (+1.5% from +6.5% at year-end in spite of the big drop in TSY yields in recent weeks) with Healthcare outperforming (+5.5%). Away from stocks, things were also escalating rapidly this afternoon. Treasury yields limped lower all day then dropped notably starting around 1445ET with 30Y -5bps on the week (and 5s30s at 212bps - the flattest term structure in 4 months). The USD rose on the day (up 0.75% on the week) led by EUR weakness (JPY was relatively stable). Despite the USD strength, gold and silver closed green on the week (+0.25% and+0.7% respectively) but WTI crude led the way up 1.5% on the week at $94.10. Despite valiant efforts to VIX-slam the market higher into the close, the S&P closed red and VIX +0.6vols higher on the week at 12.7%

"US profits are growing, companies have underinvested and have no choice but to spend more on CapEx, and corporations have much less debt than they did during the crisis thanks to a massive cash build up."

These are the generic go to explanations by soundbity talking heads for why the US recovery is gaining traction with US corporations, if not so much Joe Sixpack, and why companies are still cheap. There is one problem: they are all wrong. As SocGen's Andrew Lapthorne shows conclusively, "US profits are not growing, companies are over not underinvesting (they may in fact have overinvested), and corporates are carrying more (not less) net debt than they were in 2009. It would appear that many believe the opposite to be true, yet corporate report and accounts data seems to say otherwise.""

As we begin 2014, it is important to recognize the levels of INSANITY currently existent in the world  enabling us to understand the apocryphal nature of the times we live in and prepare ourselves to meet the challenges it represents.  The world is leveraged to an extent that has never before seen in history! Debt now masquerades as NOMINAL growth and REAL growth has ceased.  Headline economic reports are now nothing more than POLITICALLY CORRECT HOAXES to FOOL the public at large and mask the betrayal of the public by the leaders who hold the reins of power.  ECONOMIC Stagnation emerged after the 2008 Global financial crisis and in real terms has NEVER ENDED!
 

$1 Trillion worth of central banking money printing around the world just does not seem to go as far as it used to... behold, the death cross of faith in monetary policy.

Visa and American Express are up over 4.5% each today (the latter more earlier) to new record highs (on a day when Facebook, Google, and Apple are plumbing the day's lows). The combined effect of the Visa and American Express gains are over 67 Dow points... the Dow is up 65.8 points on the day...

The major disconnect between the rising of Brent Oil prices with global production outpacing demand on a weekly, monthly and annual basis is just an interesting feat in and of itself.

US equity investors have not been this "euphoric" since the peak of the US equity market in 2000. As Citi's Tobias Levkovich notes, while he is longer-term a believer is the secular bull, one has to remember that there can be a secular run with substantive bumps along the way. No one questions the 1982-2000 equity bull market but there were some awful moments in that 18-year period including the stock market crash of 1987 and the sharp pullback in 1990 as well as in 1998. With Citi's proprietary Panic/Euphoria model at levels that imply an 80% probability of a negative return in the next 12-months, Levkovich warns chasing the tape simply on the basis of momentum may not be a good strategy since expecting another 25%-30% appreciation in 2014 seems rather excessive.

Why is hiring important? Because that is the actual process by which those without a job end up with a job. And as we just learned today after the latest JOLTS release, which showed that there were over 4 million job openings (4,001 to be precisely) for the first time since 2008, a far more important number is the update on Hires which at 4.5 million barely changed from last month, but more importantly, is barely a fraction of where it should be based on the number of job gains reported by the BLS monthly. The chart below confirms this stunning discrepancy: a surge in jobs with barely half the pre-recession hiring?

It's just not Whitney Tilson's year/decade... the "money-manager" and co-founder of the invaluable Value Investor Insight newsletter has decided, with the exit of yet another partner - John Heins - that it is time to sell. In an email from the ex-financial-media-darling, Tilson explains "the business is a beautiful, high-margin cash cow," is looking for a partner to buy the business.

The housing recovery is ultimately a story of the "real" employment situation. With roughly a quarter of the home buying cohort unemployed and living at home with their parents the option to buy simply is not available. The rest of that group are employed but at the lower end of the pay scale which pushes them to rent due to budgetary considerations and an inability to qualify for a mortgage. The optimism over the housing recovery has gotten well ahead of the underlying fundamentals. While the belief was that the Government, and Fed's, interventions would ignite the housing market creating a self-perpetuating recovery in the economy - it did not turn out that way. Instead, it led to a speculative rush into buying rental properties creating a temporary, and artificial, inventory suppression. While there are many hopes pinned on the housing recovery as a "driver" of economic growth in 2014 - the lack of recovery in the home ownership data suggests otherwise.

Often “a picture paints a thousand words” and the seven key gold charts below should make gold bears nervous. As the charts show, such sentiment, price action and oversold conditions tend to coincide with major lows in gold and silver prices and multi month price gains.  

Gold and silver are rising notably this morning with little specific news aside from the Bafin precious metals manipulation furore. Silver bounced off $20 and is now over $20.40 and Gold is back over $1250. What is perhaps more notable is that the USD is higher once again which supports the fact that the relationship between precious metals and the US Dollar is at its weakest since October (as opposed to its more normal negatively correlated relationship). As Dean Popplewell notes, "we are seeing a short-term phenomenon of physical demand supporting gold and helping to negate the strength in the dollar," as sales of American Eagles coins in January have topped the previous month. However, the tumble in correlation on a longer-term scale suggests gold has more upside to go in the short-term.

While all eyes are transfixed on US equities - do we buy the dip now... or now? The rest of the world has been a little less exuberant. From China's 6 month lows to Argentina currency collapse, it's not been pretty but Erdogan and his ongoing totalitarianisation of Turkey has seen capital flight accelerate and plunge the Lira by 10% since the Fed announced its Taper in mid-December. The Turkish Lira has tumbled 27% in the last year - Abe and Kuroda would be proud - but for Turkey this is bad 'capital flight' news.

*TURKISH LIRA WEAKENS TO RECORD AGAINST DOLLAR AT 2.2242

Will the trend continue? It's unclear as little looks to stabilize the political situation but BofAML's Macneil Curry has just cut his long (having reached profit target) and that may slow the momentum. External funding requirements remain extremely high for Turkey and as MS notes, the political outlook looks hazy.