Archive - Apr 2014

Another company which relies on the viability of the global consumer for its profits reports, and sure enough another company that misses: namely McDonalds.  Moments ago the fast-food giant reported Q1 revenues of $6.70 billion, missing expectations of $6.72 billion (pushing the number of companies that have missed revenue estimates this earnings season once again into the majority), and also missing EPS estimates of $1.24, printing at $1.21, which however will not be a surprise to those who have been following our reporting on MCD's same store sales growth, or lack thereof, in the US. But while the collapse of the US consumer is well-known, and will hardly be an embarrassment for McDonalds management to reveal its exposure to it, what does the CEO blame the miss on? Why the weather of course.

• Ukraine Accord Nears Collapse as Biden Meets Kiev Leaders (BBG)
• Novartis reshapes business via deals with GSK and Lilly (Reuters)
• Moscow Bankers See Fees Slide 67% as Ukraine Crisis Grows (BBG)
• Why ECB's QE will be Ukraine's fault: Draghi Gauges Ukraine Effect as ECB Tackles Low Inflation (BBG)
• As Phone Subsidies Fade, Apple Could Be Hurt (WSJ)
• Amazon Sales Take a Hit in States With Online Tax (BBG)
• Ford Speeds Up Succession Plan: Mark Fields, Auto Maker's No. 2, Seen Replacing Alan Mulally as CEO Ahead of Schedule (WSJ)
• U.S. force in Afghanistan may be cut to less than 10,000 troops (Reuters)
• IBM End to Buyback Splurge Pressures CEO to Boost Revenue (BBG)

While the rest of the market has been largely quiet as earnings week unfolds, it have been the pharma companies that has stolen the spotlight in the past few days. First it was the rumor that Pfizer may, reluctantly, be courting Astra-Zeneca, then yesterday afternoon news broke that Valeant in conjunction with Bill Ackman (did he replace his "expert" retail analyst with a healthcare specialist?) would team up to buy Botox maker Allergan - an announcement which once again magically lifted the stock price of both potential buyer and seller - something which usually happens only at bubble peaks. And overnight, Swiss firm Novartis unveiled a sweeping overhaul of its product portfolio, selling two units and buying another in a series of transactions worth more than $25 billion.

Moving onto overnight markets, apart from China we are seeing broad based gains across most Asian equities. Bourses in Japan, Korea and Australia are up +0.2%, +0.2% and +0.5% respectively whereas the Hang Seng and the Shenzhen Composite indices are down -0.2% and -1.1% as we type. The gains in broader Asia Pacific followed what was another constructive session for risk assets yesterday during US trading hours. The S&P 500 (+0.38%) rose for its 5th consecutive day partly driven by better corporate earnings from the likes of GE and Morgan Stanley. Staying on the results season, we’ve had 70 of the S&P 500 companies  reporting so far and the usual trend is starting to emerge in which earnings beats are faring better than revenue beats. Indeed the beat:miss ratio for earnings has been strong at 77%:23% whereas revenue beats/misses are more balanced at 50%:50%. Looking ahead, markets should get ready for another big week of US earnings.

The charts below gives an indication as to the terrifying magnitude and speed of the recent decline in the value of the currency. Year to date, Ukraine’s national currency has collapsed by 69% against gold in less than four months. This has resulted in the cost of food, fuel and basic staples surging for ordinary people in Ukraine.

It appears, based on these extremely graphic images, that the Chinese people has a different way of dealing with corrupt officials. As Shanghaiist reports, a riot involving around 1,000 people broke out last Saturday in Cangnan county of Wenzhou city, Zhejiang province, resulting in the hospitalization of five chengguan, China's notoriously abusive and under-regulated urban enforcement officials. The alleged cause for the riots was the five's brutally killing a civilian. According to reports, the chengguan "hit the man with a hammer until he started to vomit blood, because he was trying to take pictures of their violence towards a woman, a street vendor." This man later died while being rushed to the hospital. Given the following images of civilian retribution; is it any wonder, the powers that be in China fear social unrest?

Dear Gennady, ...So you see, Gennady, we are actually quite prepared to see the stock market crash, to see all the stock markets in the world crash, and the yields on our dollar bonds rise to whatever level. We are prepared for much worse things... The inevitable economic setback may result in some political opposition within Russia itself, but in the context of an escalating confrontation with Europe it shouldn’t be too difficult to cope with.... I hope that makes things a little clearer. Yes, it is a risky strategy, but a Europe dominated by Russia, or at least detached from the United States and disunited, is a prize worth risking everything for. Beppo is worth a crash.... Think about what I’ve said – some of it may come as a shock, but in the end, I think you’ll agree that it’s actually good news that the long tense period of waiting is finally over. We can’t win a conventional or a nuclear conflict, but this plan really might succeed. If not, well, we Russians are used to overcoming adversity.. Your Friend, Sasha

It almost happened in 2008... but as this excerpt from Casey Research's Meltdown America documentary notes, it appears the US military is preparing for the potential collapse of the US dollar. As Scott Taylor warns, "...if the carrot (of credit worthiness) is fading, and the stick (of military threat) is weak, that empire is going to come down in a hurry..." which leaves a serial economic mis-manager only one option to 'secure' the empire.

So instead of one wholly integrated federal health care system, we have something like 30 disparate systems, all of them expensive, and none of them perfect. Indeed, "not perfect" is an absurd understatement, roughly equal to Oprah being "not petite." Allow me to offer my own personal example.

"Marubeni [the world's largest soybean exporter to China] is deluded in thinking that payments will come once the cargoes have sailed," is the message from an increasing number of liquidity-strapped Chinese firms, "If they take these cargoes, some could go bankrupt. That's why they choose not to honor the contracts." As we explained in great detail here, this is the transmission mechanism by which China's commodity-financing catastrophe spreads contagiously to the rest of the world. A glance at the Baltic Dry is one indication of the global nature of the problem (and Genco Shipping's $1 billion bankruptcy), but as Reuters reports, "If buyers cannot resolve the issue, they may also cancel future shipments."

If one picture can paint a thousand words, the following 33 images, from Danish writer/artist duo Mikael Wulff and Anders Morgenthaler, should shed serious light on the everyday struggles, irritations, and insights of their fellow Westerners.

We noted yesterday, Japan's decision to send an Abe cabinet official to the Yasukuni shrine (home of Class A war criminals) and Abe's sending of an offering, warning it will likely see retaliation from China. We didn't have to wait long. As BBC News reports, China has seized a Japanese cargo ship (over a pre-war debt). With President Obama due to visit in days, it seems the tensions between China and Japan may force his hand to pick sides.

Just like the hit series "House Of Cards," Wall Street earnings season has become rife with manipulation, deceit and obfuscation that could rival the dark corners of Washington, D.C. From time to time we do an analysis of the previous quarters earnings for the S&P 500 in order to reveal the "quality" of earnings rather than the "quantity" as focused on by Wall Street. One of the most interesting data points continues to the be the extremely low level of "top line" revenue growth as compared to an explosion of the bottom line earnings per share. This is something that we have dubbed "accounting magic" and is represented by the following chart which shows that since 2009 total revenue growth has grown by just 31% while profits have skyrocketed by 253%.

Too much testosterone in the room? Heard that all before. It’s the adolescent-like traders that were battling with levels of testosterone and cortisol, pounding on their chests like Tarzan swinging through the trees in the jungle of the financial markets that brought the world down too.

Another day, another downgrade in the expectations for US economic growth in Q1 (to a mere 1.5%). But have no fear, oh ye of little faith, for the hockey-stick of hope will refuel that exuberance by the year-end to an underwhelming 2.7% 2014 growth rate...