Archive - Jan 8, 2014

We are quietly confident that the gentleman selling the 'radiation-free' snow will be inundated with offers from Japanese winter sports enthusiasts (or perhaps even Sochi-ites)...

Just out from Macy's, which first said the following: "The 2013 holiday season was successful for Macy’s and Bloomingdale’s as we offered fresh and distinctive merchandise, delivered great value to the customer and provided a robust omnichannel shopping experience... Even in a questionable macroeconomic environment with challenging weather in multiple states, the positive response from our customers during the holiday season is yet another vote of confidence that our well-established strategies continue to work for us." What well-established strategies one may ask? Why the following of course, which was also just disclosed in a separate news release "outlining cost reduction initiatives to support continued profitable sales growth": "Approximately 2,500 employees are expected to be laid off and are eligible for severance as a result of these organizational changes. Other associates are being reassigned with new duties or transferred; some open positions will not be filled."

Credit markets had been nervous for the last 48 hours heading into today's Fed minutes and reflective of the FOMC's worries over small-cap forward multiple and covenant-lite loan issuance (both of which we have discussed in great detail as excessive) sparked weakness in the Russell and credit spreads. Yesterday's bounce gave way to selling after the minutes (and on a "good" data day). But a late-day no-JPY-supported melt-up saved the day but stocks are still down after first 5 days of the year - still worst since 2008. Treasury yields leaked higher into the minutes then flattened dramatically with 10s and 30s rallying and 5s and below weakening. 5s30s dropped 7bps on the day - biggest flattening since Taper. 10y did not close above 3%. Gold and silver slipped lower after 2pm then recovered into the close, but WTI crude slid all day - holding losses after the Fed ($92.50). The USD limped lower after the Fed with EURUSD unch on the week before tomorrow's ECB statement.

With December's "fat finger" in US Treasury Futures proved as nothing but an HFT algo gone wild, Nanex has turned its deep-thought to the recent halt in gold futures markets. Their conclusion, this was not the result of a fat finger, but rather the work of a high frequency trading algorithm that would pause, and (probably) test the market before continuing. A fat finger would not have had such distinguishing features.

The evidence here is clear. QE does not generate jobs in the broad economy.

The “Ig Nobel Prize” is parody of the Noble Prize that is awarded every year for the most trivial scientific achievement. For example, the 2007 recipient for the ‘Ig Nobel Peace Prize’ went to the United States Air Force Wright Lab in Ohio, for proposing the development of a ‘gay bomb’ that could be dropped in hostile territory and make enemy troops sexually attracted to each other. Make love, not war? So when we opened my email yesterday and saw the subject line: “Central Bank Governor of the Year”, we immediately presumed it was a similar satire. It wasn’t...

Putting it all into perspective, of the total $178 billion in consumer credit expansion in the past 12 months, a tiny $9 billion, or just 5% of total, was to fund credit card purchases. The rest went - you guessed it - into purchases of cars and paying for tuition, for which GM and strateospheric college tuitions are most grateful. And that is the New Normal economy in a nutshell.

Presented with no comment...

Broadly speaking, markets shrugged at the Fed minutes but as te last 30 minutes evolved, the relative hawkishness (though remember tapering is not tightening) QE message - and fears over excessive risk-taking - have sparked weakness in several asset classes (except stocks for now)...

"Participants also reviewed indicators of financial vulnerabilities that could pose risks to financial stability and the broader economy. These indicators generally suggested that such risks were moderate, in part because of the reduction in leverage and maturity transformation that has occurred in the financial sector since the onset of the financial crisis. In their discussion of potential risks, several participants commented on the rise in forward price-to-earnings ratios for some smallcap stocks, the increased level of equity repurchases, or the rise in margin credit. One pointed to the increase in issuance of leveraged loans this year and the apparent decline in the average quality of such loans." - FOMC

You can make this stuff up, but why bother when they do it for you...

As one might have expected the tension during the most recent FOMC meeting was palpable in the minutes as opposing dovish and hawkish less dovish views on the costs and benefits (and non-comprehension of the machinations) of QE were evident.

• *FED OFFICIALS SAW WANING BENEFITS FROM MONTHLY BOND PURCHASES
• *MANY FOMC MEMBERS FAVORED QE TAPERING IN `MEASURED STEPS'
• *MOST FOMC PARTICIPANTS WERE MORE CONFIDENT IN JOB MARKET GAINS
• *FOMC PARTICIPANTS `MOST CONCERNED' ABOUT QE RISKS TO STABILITY

The likely path of tapering seems clear (and mention of extending the reverse repo facility is notable) but how forward guidance will be implemented remains the hottest topics and Eurodollar prices suggest the latter even more so than the former.

Pre-FOMC Minutes: S&P Futs 1832.0, Gold $1225.5, 10Y 2.995%, EURUSD 1.3570, USDJPY 104.95

As the world prepares to comprehend, in their own recency-biased manner, the minutes of the most recent FOMC meeting, we thought it worth a reminder of just how Fed communications have ballooned in the past 20 years. The first statement, issued on Feb. 4, 1994, was a mere 99 words. December's 'most important FOMC statement ever' was a stunning (record) 867 words - and even so Jon Hilsenrath managed to interpret and write on it in 3 minutes. As we noted earlier, the minutes tend to be a platform for even greater 'communication' - and notably are not the actual minutes of the meeting but a prepared annotation of what the Fed wants the public to know about the meeting. Transparency and communications, it would appear, has been transformed from clarifying to endless caveat-ing.

The US may be blanketed in freezing cold, but the UK is already preparing for what should be a hot, dry summer. Either that, or the request of London mayor Boris Johnson to distribute water cannon on the street of the capital may be an indication that at least some major municipal centers are preparing for a jump in civil disobedience and are looking for appropriate, "non-lethal" means to contain it. SkyNews reports that "the London Mayor says the weapons will be used only in "the most extreme circumstances", however, there are fears the cannon could be deployed to break up small-scale legitimate protests. Mr Johnson says the water cannon are necessary in case there is a repeat of the summer riots of 2011." So "just in case."