Archive - Nov 2014

The recent mid-term elections sent a very clear message to Washington, D.C., which was simply "the economy sucks."  While statistical economic data suggests that the economy is rapidly healing, it has only been so for a very small percentage of the players. For most American's they have only watched the "rich" prosper as the Federal Reserve put Wall Street before Main Street. Stock buybacks, dividends and acquisitions are great for those that have money invested in the financial markets, however, for the rest of America it is only a spectator sport. The risk to the markets currently is that the wave of deflationary pressures engulfing the globe have only begun to wash back on the domestic economy. The drag on exports, combined with the potential for extremely cold winter weather, puts both economic and earnings growth rate projections at risk. With the markets in extremely overvalued territory, the risks to investors clearly outweigh the rewards over the long-term.

Presented with no comment...

Still think fundamentals matter? Still believe your analysis of Free-Cash-Flow, energy policy, or P/E multiples will payoff? Think again... according to our Gavekal Capital's Factor Scoring Model, the US dollar has been the most highly correlated factor (out of 30) with the MSCI World Index over the past year (which is why we have been focusing so much of our attention on it over the past few months). It has had a 0.98 correlation with the MSCI World Index.

Today we see actions by many groups calling or demanding wage increases; especially when it comes to the minimum wage. Yet, isn’t the real underlying issue more in line with what was once an “entry-level” position filled by teenagers has now turned into the only positions available for the now “entry-level, unskilled, first time employed, degree bearing” 26 year old’s and older?

Having exposed the arrogance and self-admitted deception that was used to get the healthcare law past the "stupidity of American voters," it seems ObamaCare architect Jonathan Gruber regrets his comments... As The Daily Caller reports, during an interview with MSNBC, Gruber explained he "was speaking off the cuff and basically spoke inappropriately," adding, "I regret having made those comments." We suspect what he means is "I regret being caught saying those comments."

"Geithner: I remember coming to the dinner and I’m looking at my Blackberry. It was a fucking disaster in Europe. French bank stocks were down 7 or 8 per cent. That was a big deal. For me it was like, you know, you were having a classic complete carnage because of people [who] were saying: crisis in Greece, who’s exposed to Greece?"

When you absolutely, completely, undoubtedly need the Dow and S&P 500 to close green at new record closing highs... unleash the last second VIX smasher algo...

As one would expect with half the market away, US equity volumes were terrible (but fiunnily enough not much worse than yesterday) with most major indices trading in a very tight range around unchanged. Overnight strength in stocks on the back of USDJPY's momo ignition after Reuters headlines on Japan tax delays. Trannies, however, surged out of the gate, stalled into the European close, tumbled on oil weakness, then rallied back in the last hour - amid now news. Treasury futures were very quiet and went nowhere. The real story of the day was in the FX markets, which saw notable USD weakness led by EUR and AUD strength, and a late day rally in JPY (USDJPY tagged 116.00 stops then faded... that's 8 handles in 9 days). The USD weakness - which started around the European close - sparked a rally in copper, gold, and silver (and gold miners surged). Oil prices tested cycle lows before also bouncing back in a v-shaped recovery to close higher. Despite early intraday record highs in Dow and S&P futures, they ended practically unchanged as VIX was notably divergent. Late-day panic-buying lifted the Dow (+0.007%), S&P, and Russell 2000 green.

Game over, man: the Fed won.

"Overseas views on the BOJ’s surprise easing announcement can be broken down into two camps: the reflationists, who commend the BOJ for its bold actions, and those critical of the policy, who say it is a symptom of the final stages of Japan’s economic decline. The critics can further be divided into two groups: those who believe that continuing the current policy of “Banzainomics” will lead to a collapse of the Japanese economy and government finance triggered by a crash in the JGB market, and those who worry that the ongoing devaluation of the yen under this policy will hurt their own countries’ industries.... The first group’s scenario, in which the BOJ’s reckless attempts to achieve a 2% inflation target trigger a bond market crash and an eventual collapse of the Japanese economy, is of greater concern. After all, it is the same scenario the world’s QE pioneers—the US and the UK—are desperately trying to avert at this very moment."

At the end of the day, it is overwhelming clear that the headline jobs number is thoroughly and dangerously misleading because there has been a systematic and relentless deterioration in the quality and value added of the jobs mix beneath the headline. It has no value whatsoever as an index of labor market conditions, labor market slack or even implied GDP growth. The truth is, in an open global economy the quantity of labor utilized by the US economy is a function of its price - not the level of interest rates or the S&P 500. Currently, wage rates on the margin are too high, but the Fed’s ZIRP and money printing campaigns only compound the problem. They permit the government to fund with ultra low-cost bonds and notes a massive transfer payment system that keeps potential productive labor out of the economy, and thereby props up bloated wages rates; and it enables households to carry more debt than would be feasible with honest interest rates and competitively priced wage rates, thereby further inhibiting the labor market adjustments that would be required to actually achieve full employment and sustainable growth.

While we understand the Fed's desire to pass the monetization baton seamlessly from the end of QE3 in the US, to the expansion of QE in Japan first, and then the launch of public QE by the ECB, things may not be quite as smooth as desired . Because a quick glance at the latest Fed H.4.1 statement reveals something unexpected: in the past 4 weeks, the level of total reserves with Fed banks (i.e., excess reserves created by QE), have seen their biggest plunge since the launch of QE in March of 2009. As of November 5, the total amount of outstanding reserves tumbled to $2.561 trillion, down a whopping $188 billion in the past 4 week, well below the $2.8 trillion recorded in August, and at a level last seen in February 2014.

While no US Federal Agency sees fit to monitor ocean radioactivity in coastal waters, the Woods Hole Oceanographic Institute (WHOI) has taken on the task of keeping the information flowing in a world of 'promises' that everything will be ok. As WHOI reports this week, scientists have detected the presence of small amounts of radioactivity from the 2011 Fukushima Dai-ichi Nuclear Power Plant accident 100 miles (150 km) due west of Eureka, California.

Gold and crude oil have been in a slow motion free fall of late, even as U.S. equities rally but ConvergEx's Nick Colas looks at the value of each asset class relative to the other two and assess their historical relationship.  For example, you currently need 1.72 ounces of gold at $1178 to “Buy” one S&P 500 index at 2032.  That is cheap to the 30-year average of a 1.86x ratio, putting fair value on U.S. stocks 8% higher. Separately, it currently takes 25.1 barrels of crude to buy the S&P 500, versus the 30-year average of 27.8, making stocks look cheap by 11%.  Closing out this analytical triangle: you need 14.5 barrels of oil to buy an ounce of gold, but the 30-year average is 16.6.  Bottom line using these long-term ranges: U.S. stocks look mildly cheap to oil and gold, but drops in those commodities would erase the difference just as easily as a further rally in stocks.  Gold looks cheap relative to oil and should be $170 higher, or oil should trade closer to $71.

Enjoy the sensuous downy smoothness of the currency everyone loves to hate.