Archive - Mar 7, 2014

Following last week's discovery that Mohamed El-Erian was "sick of cleaning up [Bill Gross's] shit" as tensions soared at PIMCO, the "bond king" has struck back blasting to Reuters that he's "so sick of Mohamed trying to undermine me," claiming El-Erian wrote the damaging WSJ article. Furthermore, the somewhat paranoid-sounding Gross indicated that he had been monitoring El-Erian's phone calls but when questioned by Reuters for evidence of El-Erian's undermining, Gross responded "you're on his side. Great, he's got you, too, wrapped around his charming right finger." As one analyst noted, "I've never seen Bill and Pimco scrutinized like this before... a couple of high-profile stumbles and mediocre showings, coupled with some outflows clearly has some investors on edge."

One of the critical steps in President Obama's "off-ramp" de-escalation plan for the crisis in Ukraine was a so-called 'observer mission' by the Organisation for Security and Co-operation in Europe (OSCE) to ensure that all citizens were being treated fairly. That 'plan' has hit a wall this morning as PTI reports that pro-Kremlin gunmen blocked the obersver entry. Seems like another red line just got crossed.

We have long been pounding the table (certainly since mid-2012) that the US labor market has become a place where mostly older workers - those 55 and over - are hirable - something which has nothing to do with demographics, and everything to do with excess worker slack, and an employer's market to pick and chose those workers that are most qualified for a job since older workers have the same wage leverage as younger ones: none. February was merely the latest confirmation of just this.

We noted last night that Iron Ore futures prices were in free-fall as the vicious circle of China's commodity-collateral-backed shadow banking system unwind hits home amid fears of contagion from the Chaori Solar default. The first domestic Chinese corporate bond default has retail investors running scared as surprise spreads that the local government did not come to the rescue. The deleveraging is now spreading to copper prices (remember the massive cash-for-copper schemes of last year) as borrowers are forced to sell to meet cash calls which in turn drops copper prices, reducing collateral values and tightening credit conditions even more. This is the biggest copper price drop since Dec 2011...

Having heard the great and good declare this morning's "beat" on the headline NFP data as indicative of 1) the recovery is awesome; 2) the reason why stocks have been rallying; and 3) the recovery is awesome... it appears between a rising unemployment rate, tumbling average hourly earnings, and Gazprom's threat in Europe, stocks are taking this "good news" as "bad news." Confirmed by Hilsenrath that the taper is on - which is what bonds, gold, and the dollar appeared to be saying - the S&P 500 having spiked 10 points is now 13 points off its highs and in the red for the day...

As we showed moments ago, the scariest chart of today's nonfarm payroll report was the plunge in average weekly earnings. For those curious why US workers are unable to make any headway in obtaining higher wages, the following breakdown of just where the 175,000 (seasonally adjusted, because apparently now seasonal adjustments work again) February job gains were should provide some color. Unfortunately, as has been the case for the past several months, well over half the total job gains in February were in industries that pay the least.

In order to normalize for the weekly hours worked, we decided to look at the big picture which ignores hours worked, and average hourly earnings. So we looked at average weekly earnings. In February, this number was $682.65, down from $683.74 for production and nonsupervisory employees. However, the real impact of declining wages is seen nowhere better than in the annual increase in average weekly earnings. The chart below needs no explanation: when wage growth is at 1%, or half of the Fed's inflation target, you will not get any sustained economic recovery. And what if one looks at the average weekly earnings of all employees? Well, we just hit a new post-Lehman low. 5 years into the "recovery", weekly earnings growth is the lowest it has been in 5 years!

We have discussed the sword of Damocles that is hanging over the heads of the Ukrainian (and European for that matter) people for some time. The dominant role that Russia plays in providing energy is becoming critical, however, as Gazprom notes:

• *GAZPROM SAYS TODAY IS DEADLINE FOR NAFTOGAZ TO PAY FOR FEB. GAS
• *NAFTOGAZ OVERDUE PAYMENTS AT $1.89B FOR GAS SUPPLIES: GAZPROM
• *GAZPROM SAYS NAFTOGAZ ISN'T OBSERVING CONTRACT
• *GAZPROM: UKRAINE DEBTS CREATE 'RISK OF RETURN TO SITUATION AT BEGINNING OF 2009' (when Gazprom cut off Ukraine gas supplies)

Of course, the US agreed to $1b bailout yesterday - but that's not supposed to be used as a direct transfer payment to the Russians.

Will London's current property bubble play out to be one of the most costly ever and end up costing UK and foreign investors billions?

The knee-jerk reaction to a better-than-expected (and entirely noise-driven) payroll number (with a rise in the unemployment rate) is a rip higher in stocks and collapse in bonds and precious metals. The USD is surging as USDJPY instantly hit 103.50 (breaking through its 50DMA) providing all the juice stocks need to test that critical Goldman 1,900 year-end target for the S&P 500. It seems, just as we warned earlier, "whatever the number, the algos will send stocks higher - that much is given in a blow off top bubble market in which any news is an excuse to buy more."

So much for the weather. As we warned earlier today, when we said that with everyone expecting a miserable print the only possible result would be a large "beat", sure enough that's precisely what happened. Breaking it down:

February payrolls: +175K, Exp. 149K, Last revised from 113K to 129K).
Unemployment rate: 6.7%, Exp. 6.6%, Last 6.6%.
Labor participation rate: 63.0%, Last 63.0%

Today's consensus estimate for the non-farm payroll is for a 149K increase broken down as follows among some select banks:

• Bank of America 115K
• Deutsche Bank 120K
• Goldman Sachs 125K
• Citigroup 135K

Why is the expectation so low? Why cold weather of course - the same cold weather that supposedly impacted December and January data. Then again, one wonders just what is the seasonal adjustment factor for if not to adjust for the, gasp, seasons. So when one puts the February actual number in the context of its average adjustment over the past decade, what does one get? Simple - a boost of 1.5 million "jobs" which exsit nowhere in the real world but in some Arima-X-13 spreadsheet.

It appears Obama's latest "one hour" conversation with Putin has just made things downshift from bad to worse. Moments ago Russia accused the European Union of taking an "extremely unconstructive position" by freezing talks on easing visa barriers that complicate travel between Russia and the EU over Ukraine. "Russia will not accept the language of sanctions and threats" and will retaliate if sanctions are imposed, the Russian Foreign Ministry said in a statement about agreements reached at an emergency EU summit on Thursday. And assuring that the imminent Crimean referendum due in just over a week will rapidly deteriorate the current detente was overnight news that Russia's upper house of parliament will support Crimea in its bid to join the Russian Federation, the speaker of the upper house of parliament said Friday. "If the people of Crimea decide to join Russia in the referendum, we, as the upper house, will certainly support this decision," Valentina Matvienko said at a meeting with Vladimir Konstantinov, his counterpart in the Crimean parliament.

...haven't traveled to NASCO facility but this operation is legit and the technology is outrageously valuable

• Putin rebuffs Obama as Ukraine crisis escalates (Reuters)
• Behind the $100 Billion Commodity Empire That Few Know (BBG)
• Initial Public Offerings Hit Pace Not Seen in Years (WSJ)
• Russian Parliament Will Back Crimea Split From Ukraine (WSJ)
• Nakamoto Named as Bitcoin Father Denies Involvement, Flees Press (BBG)
• Chaori Can’t Make Payment in China’s First Onshore Default (BBG)
• Zombies Spreading Shows Chaori Default Just Start (BBG)
• Pimco's Gross declares El-Erian is 'trying to undermine me' (Reuters)
• U.S. Fighters Circle Baltics as Putin Fans Fear of Russia (BBG)