Archive - Jan 2014

Nearly a month after American authorities arrested India’s deputy consul general in New York, Devyani Khobragade, outside her children’s school and charged her with paying her Indian domestic worker a salary below the minimum wage, bilateral relations remain tense. India’s government has reacted with fury to the mistreatment of an official enjoying diplomatic immunity, and public indignation has been widespread and nearly unanimous. So, has an era of steadily improving ties between the two countries come to an end? Until the US displays appropriate deference to the sensitivities, pride, and honor of other peoples and cultures, it will continue to be resented around the world.

With record high unemployment at 12.3%, a banking system on life support, and a teetering-on-the-brink-of-recession GDP print; it only makes sense that on the heels of this morning's trip to the capital markets by Ireland, the other peripheral bond markets in Europe are well bid. But in context, at 99.6bps, Italian 2Y yields are now at all-time record lows - is everyone in the world front-running an ECB QE? EURUSD is back under 1.3600 and even Turkish 2Y notes tumble to a mere 10.02%.

The latest example of French labor relations has ended after two days with police rescuing the two executives from Goodyear Tire from the French factory...

• *GOODYEAR MANAGERS FREED UNDER FRENCH POLICE PROTECTION: AP
• *GOODYEAR MANAGERS FREED AFTER 2 DAYS CAPTIVITY BY WORKERS:AP
• *GOODYEAR MANAGERS HAD BEEN HELD HOSTAGE BY UNION
• *GOODYEAR MANAGERS' LIBERATION CONFIRMED BY LOCAL OFFICIALS

We are sure management will be much more open-minded and flexible after this fracas. We await Maurice Taylor's next exortation on the "stupidity" of hiring in France.

Unintended consequences may have developed from QE policies that are not fully understood.  They may materialize more clearly during the withdrawal process.  Any of a number of obstacles could push the Fed ‘off course’ from the smooth landing that its baseline scenario suggests: 

• Certainly, expanding the balance sheet by over $3 trillion has had a significant impact on valuations, market functioning, and asset allocation, so those effects could cause some market turbulence as they revert back to normal.
• Emerging markets, which benefited heavily in the early years of QE, have recently shown some disruptions, such as, slowing economic growth, weakening currencies, and capital outflows.
• Political and social concerns about income and wealth inequalities have grown due to the use of asset prices as a policy tool.
• Structural unemployment from long-term joblessness and technological advancement cannot be addressed through easy money.
• Politics is still polarizing, which in turn creates on-going economic headwinds.

Despite the surge in prices for NatGas (and record time-of-year prices for gasoline),  WTI crude oil prices are stumbling back to $93.50 this morning. Copper is also sliding but the real action - once again - is in Gold and Silver. Following yesterday's flash crash in gold, silver is having a conniption this morning as the 8amET period once again brings volatility. The selling coincided with the smaller-than-expected trade deficit - perhaps indicating indirectly less room for Fed QE? But in this new normal market, do they really need a reason to smack them down. Stocks are not moving as this occurs but bonds and the USD are modestly bid.

It's Winter, so it's cold; but even relative to the worst year in recent records, this is extreme. Demand for heat is seemingly surging as the price for delivery of Natural Gas in New York City and New Jersey has soared to a record high. Uber would be proud of the surge as prices for Northeast Transco Zone 6 gas reached almost 9 times its seasonal average and other East Coast hubs reached 10-year highs.

Following October's disappointing bounce in the US trade deficit, it was only expected that the November data would come leaps and bounds ahead of the expected $40 billion print, instead sliding 12.9% to $34.3 billion from October's revised $39.3 billion - this was the lowest monthly trade deficit since October 2009. The delta was the result of a modest boost in exports, up $1.7 billion, to a record high of $194.9 billion, compounded by a more pronounced slide in imports, which were $3.4 billion less than October's $232.5 billion. Some other highlights: exports to China climbed to a record high (we certainly expect "matching" Chinese exports to the US to also rise to a record when reported next), while the US petroleum deficit was the lowest since May 2009 thanks to shale.

In yet another indication that the US consumer is tapped out and rolling over, a report from the "Vice Index" reporting firm SouthBay Research which tracks spending on gambling, liquor sales and prostitution, says that "spending on vices wasn’t very strong in December, a sign that overall consumer spending was weak, according to the latest reading of the Vice Index from SouthBay Research’s Andrew Zatlin" as the WSJ reports. "The Vice Index for December points to stable but subdued consumer spending," according to SouthBay's head Andrew Zatlin further predicting that retail sales slipped 0.1% in December from November.  And while the split between "the 1%" and "everyone else" was evident in the faster decline in beer sales compared to wine sales, as well as gambling where the low-end contracted while the high end expanded, nothing says a recovery for the 1% like the following sentence: "High-end escorts successfully raised prices,” Zatlin wrote in the report. “Lower-end escorts did not.”

The St. Joseph Lighthouse on North Pier, Lake Michigan, on Jan. 6, 2014; Photographer: HotSpot/Landov

• Yellen’s Record-Low Senate Support Reflects Fed’s Politicization (BBG)
• Euro-Zone Inflation Rate Falls in December, even further below ECB's target (WSJ)
• Zambia politician charged for calling president a potato (AFP)
• Blame gold: India Savings Deposit Scam Collapse Leaves Thousands Penniless (BBG)
• Hedge Funds Raise Gold Wagers as Yamada Sees $1,000 (BBG)
• George Osborne limits cuts options with pensions promise (FT)
• Vietnam Raises Foreign Bank Ownership Caps to Aid System (BBG)
• But they said buy a year ago... Goldman to JPMorgan Say Sell Emerging Markets After Slide (BBG)
• SAC Trial Seen by Probe Convict as Latest Abusive Tactic (BBG)

The flash crash had the hallmarks of price manipulation. In order to protect investors and the integrity of markets, regulators internationally should again investigate the gold futures market where such manipulation appears to be taking place nearly on a weekly basis now. 

Heading into the North American open, stocks in Europe are seen broadly higher, with peripheral EU stock indices outperforming after Ireland successfully returned to capital markets with its 10y syndication that attracted over EUR 10bln. Financials benefited the most from the consequent credit and bond yield spreads tightening, with smaller Italian and Spanish banks gaining around 4%. Following the successful placement, IR/GE 10y bond yield spread was seen at its tightest level since April 2010, while PO/GE 10y spread also tightened in reaction to premarket reports by Diario Economico citing sources that Portuguese govt and debt agency IGCP consider that the current level of yields already allows Portugal to go ahead with a bond sale. Looking elsewhere, the release of better than expected macroeconomic data from Germany, together with an in line Eurozone CPI, supported EUR which gradually moved into positive territory. In addition to that, smaller MRO allotment by the ECB resulted in bear steepening of the Euribor curve and also buoyed EONIA 1y1y rates. The Spanish and Italian markets are the best-performing larger bourses, Swedish the worst. The euro is stronger against the dollar. Japanese 10yr bond yields fall; Spanish yields decline. Commodities gain, with wheat, silver underperforming and Brent crude outperforming. U.S. trade balance data released later.

Below is a recent correspondence from our friend Lars Schall, an independent financial journalist, and the German Central Bank, the Deutsche Bundesbank, regarding the exact whereabouts and specifications of Germany’s national gold reserve.

Recently, Facebook got into hot water with investors when it was revealed that as many of its 1.18 billion active users 14.1 million (and likely orders of magnitude more) were fraudulent. Things are even worse at Twitter, where Italian security researchers Andrea Stroppa and Carlo De Micheli found that of the social network's 232 million monthly active users about 20 million are fake and for sale, while Jason Ding of Barracuda Labs said 10% of more of all Twitter accounts are fake. Welcome to the world of click farms, where nothing is what it seems, and where social networking participants spend millions of dollars to appear more important, followed, prestigious, cool, or generally "liked" than they really are... The bottom line is simple "The illusion of a massive following is often just that," said Tony Harris, who does social media marketing for major Hollywood movie firms, said he would love to be able to give his clients massive numbers of Twitter followers and Facebook fans, but buying them from random strangers is not very effective or ethical.

There is no quicker route to success in the USSA than to go into “public service” regulating a massive industry and then flip back over to engage in M&A in the exact industry you were in charge of regulating.