Archive - May 22, 2014

The oligarchic pilfering and capital misallocating and squandering network of insiders known as "government" truly deserves a picture rather than 1000 words.

Want to know why HPQ is forced to fire so many well-paying jobs it once again makes a mockery of anyone who claims there is some economic recovery going on? The chart below, which compares the company's quarterly CapEx, declining (so no, not increasing as some clueless sellside analyst hacks claim) by 16% from last quarter to $840 million and thus leading to less growth opportunities for the company and resulting in tens of thousands of pink slips, and the soaring amount of stock buybacks, which rose by nearly 50% in Q2 from Q1 to $831 million, the most since 2011, should provide all the answers.

Another day, another melt-up on the lowest volume of the year and VIX collapse. The Dow and the Nasdaq almost made it back to unchanged for the year; The Dow almost made it back to unchanged for May; but as the S&P surged towards its record highs once again, "most shorted" stocks led the way with a massive squeeze (almost 4% in the last 2 days). VIX broke back below 12 once again trading at its lowest in 14 months. Equity markets decoupled notably once again from bonds. Treasury yields rose once again at the long-end (30Y +8bps on the week, 5Y -1bps) but the steepening trend stalled today. The USD rose today (+0.2% on the week) led JPY weakness. USDJPY was in charge of stocks with a correlation over 90% once again. Commodities all closed higher with WTI testing $104 again. HP's 'early' release of earnings appeared to take the shine off things into the close as VIX gapped higher back above 12 to close...

"This issue of participation in the labor force is a highly contentious one," notes RDG's Jon Ryding and has been extensively discussed here as some people leave the labor pool and retire after giving up on the job search (do people really want to work past age 65 given the choice? Are that many people doing what they love?) But, as Bloomberg reports, there is a growing segment of boomers who are paying for retirement with the proceeds of rallying stocks. For the select few, last year’s 30% surge in the S&P500 capped a bull market now in its sixth year (with 'wealth' trickling down to 401(k)s), but as one wealth manager warned "everyone understands that the market went crazy last year," and while 8 million people aged 65 and older are working, a 72% jump from a decade ago; there are a lucky few who are cashing out with the view that "if I need to, I can go back to work, but right now I’m going to enjoy life."

It would appear the mantra of "don't fight the Fed" is one that only applies when they are saying "buy stocks." As we have been consistently discussing, yesterday's minutes exposed some concerns: "the low level of expected volatility implied by some financial market prices might also signal an increase in risk appetite" and thus complacency and Fed's Fisher open "concern at almost no volatility in markets." So while J-Yell and her buddies see no bubbles... we thought the following chart, which is 'the sum of all volatilities' across FX, equity, and interest rate markets, might help...

At least 13 Ukrainian soldiers (and reportedly at least 20 pro-Russian supporters) were killed today as WSJ reports fighting flared across breakaway regions in the east just days before a presidential election the rebels have vowed to block. Markets have forgotten that the US-Europe-Russia-China-Ukraine tensions continue and the major event risk this weekend but the last 24 hours have seen several attacks with the highest number of casualties since the conflict began 2 months ago. Separatists near Luhansk blew up a bridge over the Siverskiy Donets river near Novodruzhesk in several hours of fighting, Interfax reported, citing witnesses. The worst fighting appeared to take place near Volnovakha, on the road from the regional capital, Donetsk, to Mariupol, where there hadn't been heavy separatist fighting before.. and the dismal episode was caught on tape.

It wasn't immediately clear what the other 33% thought, but it is safe to assume have never heard of Draghi's "political capital."

The US shale oil "miracle" has about as much believability left as Jimmy Swaggart. Just today, we learned that the EIA has placed a hefty downward revision on its estimate of the amount of recoverable oil in the #1 shale reserve in the US, the Monterey in California. As recently as yesterday, the much-publicized Monterey formation accounted for nearly two-thirds of all technically-recoverable US shale oil resources. But by this morning? The EIA now estimates these reserves to be 96% lower than it previously claimed. Yes, you read that right: 96% lower. As in only 4% of the original estimate is now thought to be technically-recoverable at today's prices.

It is common knowledge among those that prefer to see the glass of aggregate demand always half-full (in need of fiscal or monetary stimulus and thus always time to BTFD) that stocks "climb a wall of worry" and that stocks can't drop if so many people are negative. However, while we are sorry to steal the jam from their exuberant 'cash on the sidelines' donut, the truth is that eventually 'strong hand' short positions build to a point where they dominate and provide the tipping point of weakness in stocks. As Goldman Sachs highlights in the following two charts of short interest ratio (days to cover) and aggregate short interest (dollars), the last time there was this much money short was mid-2007... and that didn't end well.

The easing of the Indian import rules is bullish for gold and the gold sector. Shares of jewellery companies surged after the RBI allowed banks to provide gold loans to the sector. The moves by the RBI, is likely to increase demand for gold. Curiously, gold prices saw little gains after the announcement.

It’s shameful that the president of the United States, the chairman of the House Permanent Select Committee on Intelligence, and the leaders of the country’s surveillance agencies refuse to accept consensus reforms that will keep our country safe while upholding the Constitution. And it mocks our system of government that they worked to gut key provisions of the Freedom Act behind closed doors.

- Rep. Justin Amash of Michigan, original cosponsor of the USA Freedom Act

A simple way of grasping the precarious situation China has found itself in is with this useful diagram which summarizes the negative loop that China's economy (which essentially means housing market which as SocGen recently explained is indirectly responsible for 80% of local GDP) could fall into should the government not promptly move to address the emerging dangerous situation, i.e., resume aggressive easing.

It is not too early to ask how the present US business cycle expansion, already more than five years old, will end. The history of the last great US monetary experiment in “quantitative easing” (QE) from 1934-7 suggests that the end could be violent. Autumn 1937 featured one of the largest New York stock market crashes ever accompanied by the descent of the US economy into the notorious Roosevelt Recession. As we noted previously - it's never different this time...

These two charts depict the same index over the same time frame, but they reflect two stories and two economies.

And the endless quest...