Archive - Apr 23, 2014

This doesn't happen very often. Marketwatch reports that Jim Bianco points out in a recent market comment that the 67 economists taking part in a regular Bloomberg survey have a unanimous forecast regarding treasury bond yields: they will be higher 6 months from now... and a separate poll of economists recently showed that exactly zero expect the economy to contract. This is an astonishing degree of consensus thinking, but it perfectly mirrors the complacency we see in stock market sentiment and positioning data. The probability that such a unanimous view will turn out to be correct is traditionally extremely low. The economy is likely resting on a much weaker foundation than is generally believed. This is not least the result of massive monetary pumping and deficit spending, both of which tend to severely weaken the economy on a structural level, even though they can create a temporary illusion of 'growth'.

Evidently, the people have not forgotten...

As we noted earlier, The Federal Open Market Committee (FOMC) has continuously been overly optimistic regarding its expectations for economic growth in the United States. A major reason for the FOMC’s overly optimistic forecast for economic growth and its incorrect view of the effectiveness of quantitative easing is the reliance on the so-called 'wealth effect'. However, "There may not be a wealth effect at all. If there is a wealth effect, it is very difficult to pin down..." Since the FOMC began quantitative easing in 2009, its balance sheet has increased more than $3 trillion. This increase may have boosted wealth, but the U.S. economy received no meaningful benefit. Furthermore, the FOMC has no idea what the ultimate outcome of such an increase will be or what a return to a ‘normal’ balance sheet might entail. Given all of this, we do not see any evidence for economic growth as robust at the FOMC predicts. Without a wealth effect, the stock market is not the “key player” in the economy, and no “virtuous circle” runs through the stock market.

This 42 year economist from French academe has written a hot new book which, as one review puts it, "exposed capitalism’s fatal flaw." One can see why the White House likes Piketty. He supports their narrative that government is the cure for inequality when in reality government has been the principal cause of growing inequality. The White House and IMF also love Piketty’s proposal, not only for high income taxes, but also for substantial wealth taxes. The IMF in particular has been beating a drum for wealth taxes as a way to restore government finances around the world and also reduce economic inequality. Expect to hear more and more about wealth taxes. Expect to hear that they will be a “one time” event that won’t be repeated, but that will actually help economic growth by reducing economic inequality. If the Obama White House, the IMF, and people like Piketty would just let the economy alone, it could recover. As it is, they keep inventing new ways to destroy it.

Forget bank-runs, the water run has begun in China. Residents of the western city of Lanzhou rushed to buy mineral water earlier this month after local tap water was found to contain excessive levels of the toxic chemical benzene. But that is the tip of what is a massive problem facing the Chinese people. Not only do they suffer choking smog day after day, but, as The Business Times reports, sixty per cent of underground water in China which is officially monitored is too polluted to drink directly, state media have reported, underlining the country's grave environmental problems.

For most of Canada's existence, it has been regarded as the weak neighbor to the north by most Americans.  Well, that has changed dramatically over the past decade or so.  Back in the year 2000, middle class Canadians were earning much less than middle class Americans, but since then there has been a dramatic shift.  At this point, middle class Canadians are actually earning more than middle class Americans are.  The Canadian economy has been booming thanks to a rapidly growing oil industry, and meanwhile the U.S. middle class has been steadily shrinking.  If current trends continue, a whole bunch of other countries are going to start passing us too.  The era of the "great U.S. middle class" is rapidly coming to a bitter end.

It seems every bubble is coming back. 5 Years after Zimbabwe abandoned the Zim Dollar (in favor of the US Dollar) after inflation surged to 500 billion percent the year before (according to the IMF), Bloomberg reports that Robert Mugabe's ruling party is considering reintroducing the local currency as it struggles to meet its monthly wage bill. "If they bring back the [Zim] dollar it will quickly deteriorate to worse than then, we’ll have nothing," warns one businessman as the appeal of reviving the Zimbabwe Dollar - allowing the government to print money to meet its needs - is surely outweighed by the lessons of the past. "We'll just die - we can't go back to 2008," but it seems governments never learn and memories are short. Get long wheel-barrows.

By the magic of pure accounting gimmickry, one-off tom-foolery, non-GAAP shenanigans, and the sterling work of its now-retiring CFO; Facebook has 'managed' to produce twice as much non-GAAP net income as GAAP net income in the last 2 years...

Republicans, Democrats, and environmentalists all have favorite energy myths. Even Peak Oil believers have favorite energy myths. The following are a few common mis-beliefs, coming from a variety of energy perspectives. From to "The fact that oil producers are talking about wanting to export crude oil means that the US has more than enough crude oil for its own needs" to "the unlimited supply of renewables", the following 'facts' may just be a little too much for some to bear

Until now, the terrible trail of dead bankers has been only among US and European financial executives. However, as Caixin reports, the increasing pressures on the Chinese banking system appear to have take their first toll. Li Jianhua, director of China's Banking Regulatory Commission (CBRC), died this morning due to a "sudden heart attack" - he was less than 49 years old. Li was among the main drafters on new "caveat emptor" market-based rules on China's shadowy banking system and recently said in an interview that "now is not only a time to control risk, but to transform the trust industry.. if it's too loose, it's a big problem." Li was found by his wife.

Despite the considerable risks created by the situation in eastern Europe, most western stock, bond and property markets, fed on massive central bank fiat liquidity, continue to flirt with new highs. This strikes me as an exercise in whistling past the graveyard. In the short term, investors may continue to profit from risk-taking in financial markets. In the larger picture, much of the geopolitical balance of power that has been in place for much of the past 25 years will be tested on the banks of the Black Sea. Investors should take a few minutes from their daily technical chart analysis to consider these major developments.

The most important chart from AAPL's earnings release is the one showing Apple's total cash and cash equivalents, for the simple reason that for the first time since before the Lehman collapse, Apple actually burned through cash, or $8.2 billion to be precise, which brought the company's cash hoard to just over $150 billion.

In the aftermath of Facebook's "blockbuster" Q1 report, the one thing everyone is talking about is the explosive, 15% growth, in Monthly Active Users to 1.28 billion. There is one problem: where said user growth is taking place.

• Q1 revenue $2.5 billion, beats expectations of $2.36 billion
• Q1 revenue from advertising $2.27 billion
• Q1 EPS $0.34, beat expectations of $0.24
• Free cash flow - Free cash flow for the first quarter of 2014 was $922 million.
• Capital expenditures - Capital expenditures for the first quarter of 2014 were $363 million.
• Cash and marketable securities - Cash and marketable securities were $12.63 billion at the end of the first quarter of 2014.
• Monthly active users (MAUs) were 1.28 billion as of March 31, 2014, an increase of 15% year-over-year. Unclear how many of these are bots originating out of Egypt and India.

It seems yesterday's decoupling (stocks up, and everything else risk-off) has unwound today as equity markets were broadly weaker. The Dow and S&P traded in a very narrow range on the day closing slightly negative and breaking the 6-day winning streak. Nasdaq and Russell underperformed notably as "most shorted" stocks appeared to gain some momentum to the downside once again (ahead of tonight's AAPL/FB results) as high-beta caught down to low-beta today. Away from the oddly decoupled equity markets, Gold, silver and copper all closed unch to modestly higher as WTI crude prces dropped further (to $101.50). The USD rallied off European open weakness to end unchanged for the week (with notable AUD weakness overnight). Treasuries rallied with 30Y outperforming once again and the yield curve flattening to fresh 5 year lows. Credit markets continues to push wider and are not sustaining any of the exuberance remaining in the S&P.