Archive - Dec 2014

After 4 months of missed expectations, US Construction Spending rose 1.1% in October, beating the 0.6% expectations, and the highest MoM since May 2014. Great news... the recovery is back, right? Scratch barely below the surface of this algo-loving headline though and the unsustainable reality peaks out. US Government construction spending spiked 19.3% in October, the most since 2006... seems like we need to dig some holes and fill them in again...

In a surprise development involving the leader of the Islamic State, Abu Bakr al-Baghdadi, earlier today security officials announced that the Lebanese army had captured the wife and daughter of Islamic State leader Abu Bakr al-Baghdadi as they crossed from Syria nine days ago. According to Reuters, the woman was identified as Saja al-Dulaimi, an Iraqi, by a Lebanese security official and a senior political source. The Lebanese newspaper As-Safir reported she had been detained in coordination with "foreign intelligence." The official spin is clear: in Reuters' words, "the arrest is a blow to Baghdadi and could be used as a bargaining chip against his group, which has captured many foreign, Iraqi and Syrian prisoners and declared a caliphate in territory it has seized in Syria and Iraq." Unless, of course, it isn't, and it merely sets off the ISIS leader even more. 

Add the title of "loan shark to Dictatorships" to Goldman Sachs many varied roles around the world. As Venezuela teeters on the brink of tearings its utopian social fabric apart (by which we mean paying its soldiers while impoverishing its people to in order to maintain 'peace') crushed by plunging oil revenues, everyone's favorite American bank 'generously' offered to buy (from Venezuela) $4bn worth of oil debt owed by the Dominican Republic for 41% of its value, according to El Nuevo Herald. Doing god's work indeed. "This is a tremendous bargain for Goldman," said one source, as Venezuela is "liquidating the few assets they have, trying to find the cash flow, cash, they do not have."

It seemed almost too obvious. The European Central Bank was imposing negative interest rates and devising new quantitative easing schemes to combat the growing threat of deflation; the SNB was buying foreign currencies in "unlimited quantities" to cap the value of the Franc; the Bank of Japan was madly printing Yen in a desperate frenzy to finally stir up domestic demand; and then the Bank of China responded with its own rate cuts. All this, while the Federal Reserve was quietly ending its quantitative easing policies and even hinting at forthcoming (2015) rate hikes. The long dollar trade, and all it's various expressions, soon became one of the most crowded trades of 2014.

Despite yesterday's big bounce back in the price of oil, this morning's weakness across the crude complex has rekindled selling pressure on the Russian Ruble as it crashes back to yesterday's record lows against the USD. At around 54 Ruble to the USD, yesterday saw 'alleged' intervention by the Russian Central Bank with a dramatic reversal back to around 50 intraday... it appears the market wants to test the Central Bank's free-float commitment once again. Yesterday saw notable Treasury selling as the Ruble was rescued/intervened, one wonders if the move higher in yields for 30Y bonds in the last few minutes signal Russian central bank intervention coming soon.

Prepare to hear much more of the "retail spending slowed down because the economy is just too strong" excuses today, used most hilariously by the NRF on Sunday to explain the unprecedented 11% collapse in the 2014 4-day holiday weekend spend, when pundits "justify" why Cyber Monday sales were only the latest proof the US consumer - that 70% driver of US GDP - is being crushed day after day, pardon, basking in the warm glow of America's centrally-planned golden age. Here are the facts: Internet holiday shopping rose only 8.1% on Cyber Monday yesterday, usually the busiest day for Web shopping as people return to their desks after the U.S. Thanksgiving holiday weekend. This was a big miss to expectations, and is less than half then growth posted just last year, when online sales grew at 17.5%, according to IBM.

• DAX’s ‘Brilliant’ Run Sends Red Flag as German Index Tops Record (BBG)
• U.S. military warned of possible Islamic State attacks at home: report (Reuters)
• Russia Faces First Recession Since 2009 as Banks Add to Oil Pain (BBG)
• Dodgy Home Appraisals Are Making a Comeback (WSJ)
• U.S. Corporate Bond Sales Pass $1.5 Trillion for Annual Record (BBG)
• Basic Costs Squeeze Families (WSJ)
• China Orders Stricter Checks on Local Debt as Sales Surge (BBG)
• Draghi Powerless on ECB Path Toward QE Without Reforms (BBG)

A few days of near-record crude volatility (which the CME is scrambling to reduce following 2 crude margin hikes in the past week) is giving way to the New Normal default thinking: that central banks will soon take care of everything. And sure enough, just an hour earlier, US equity futures had jumped 8 points on virtually zero volume, wiping out all of yesterday's losses, driven higher by that new "old favorite", the USDJPY, which has once again resumed its climb higher, briefly rising above 119.00 once again and sending the Nikkei and the Topix to fresh 7 year highs, perfectly oblivious to both yesterday's Moody's downgrade and now open warnings from both Eisuke Sakakibara and Goldman Sachs that further declines in the Yen will accelerate the collapse of the Japanese economy. And, since there is also zero liquidity in the market, that entire gain was also just as promptly wiped out with futures now practically unchanged from yesterday's close.

"Many reasonable analysts understand that there is a widening gap between the global ambitions of the US Administration and the country’s real potential. The world is changing and, as has always happened in history, at some point somebody’s influence and power reach their peak and then somebody begins to develop still faster and more effectively. One should study history and proceed from realities. The seven developing economies headed by BRICS already have a bigger GDP than the Western G7. One should proceed from the facts of life, and not from a misconceived sense of one’s own grandeur."

Yep that should do it...

"This is a golden time window to acquire more strategic oil at lower costs," notes one Hong-Kong based analyst, as Bloomberg confirms what we have noted here and here, that China is emerging as the winner from OPEC’s battle with rival oil producers as the world’s biggest energy consumer stockpiles crude.

Once again the cyclical patterns in US macro data are re-emerging as extrapolated hopes fade into mean-reverting credit-impulse-hangover-driven realities. Despite all the hopes and dreams of escape velocity, cleanest-dirty-shirt-wearing economic enthusiasts, year-to-date performance of Citi's US Macro Surprise index is at its lowest level since 2008. Whether this is absolute weakness or relative weakness (versus yet more over-enthusiastic expectations) is unclear though, the Midterm election results and NFR Black Friday spending data may be a hint.

Over four centuries ago, the Dutch East India Company made history as the world’s first IPO. Known as VOC in the Netherlands, the company was one of the most successful ventures in the last several hundred years. When adjusted for inflation, its highest market capitalization would be worth over $7 TRILLION today (i.e. ten times the size of Apple).

You will note something quite interesting: up until October 2011, commodities and equities had an awfully strong positive correlation.