Archive - May 2014

And the endless quest...

The chaps at General Motors must be breathing a small sigh of relief this morning as they are not the biggest 'recaller' headline of the day. Office Depot has decided to take some pressure off them...

• *OFFICE DEPOT RECALLING ABOUT 1.4M CHAIRS ON FALL HAZARD
• *OFFICE DEPOT HAS RECEIVED 153 REPORTS OF SEAT PLATE BREAKING
• *OFFICE DEPOT RECEIVED 25 REPORTS CONTUSIONS, ABRASIONS, INJURY
• *OFFICE DEPOT SAYS INJURY REPORT INCLUDED FRACTURED BACK, HIP

The chairs were manufactured in China. The great news - for those not suffering broken backs, hips, or contusions - ODP will offer a merchandise credit of $55 (a 37.5% gain over the price of the $40 chair)... we smell a carry trade.

If there was one chart that shows best what is happening with the bifurcated US housing market, it is this NAR breakdown of sales by pricing bucket. It shows beyond a doubt that courtesy of the Fed's policies there is not one but two housing markets in the US: that for the 1%, or those who purchase mostly homes in the top price buckets ($500 and certainly above), and that for everyone else. Guess where the bulk of the activity (i.e. flipping) is, and worse for the so-called recovery, where it isn't.

The de-dollarization escalates. As Reuters reports, Chinese banks have halted dollar transactions with most Afghan commercial banks. Whether this is related to the terrorist operations in the muslim-dominated Uighur region is unclear... also unclear is whether the Chinese banks will accept transactions with Afghan banks in CNY?

After 6 months of missed expectations, last month's fragile beat of dismal expectations (even though it was the worst existing home sales SAAR in 21 months) provided just enough of a glimmer of hope to stoke more short squeezes in homebuilder stocks and strengthen the pillar of the US economic recovery. Now we are in April... the start of the key seasonal selling season... and existing home sales rose modestly MoM (but fell for the 6th month in a row YoY) and missed expectations. There is - simply put - no post-weather bounce.. and still NAR is blaming slow April sales being delayed due to Winter weather! This is the worst start to a year since 2007.

Having hit cycle highs over 57 in February (in peak cold-weather season), US Manufacturing PMI appears unable to regain the positive momentum of that peak despite weather no longer being an issue. While the 56.2 print beat expectations of 55.5, with new orders improving, the all-too-crucial employment sub-index dropped to its slowest rate of expansion in 2014. Until just a few months ago when this macro indicator started to rise, it was seen as a secondary data item but once it started reinforcing the status quo believers trend it became crucial.

While the defenders of HFT continue spouting their usual platitudes (with the latest piece of "anti-hyperbolic" fluff coming from "Mr. Quant" (but don't call him an HFTer) Cliff Asness himself who said overnight that "markets are "rigged" in favor of, not against, retail investors"... so - rigged?) the reality is that while one can debate the ethics of HFT frontrunning orderflow until one is blue in the face (or until Goldman tells the DOJ to slam the hammer on the high freaks once and for all), the biggest adverse impact from HFT continues to be the inherent instability that algo trading creates in the market. For empirical evidence of just this, we once again go to the usual source which everyone ignores until months after the fact is seen as having been right about everything, Nanex, which looks at one particular aspect of market instability, namely Limit Up, Limit Down circuit breakers and finds something very disturbing.

The Bitcoin space is heating up so quickly that not only are hundreds of millions of dollars being funneling into startups, PayPal has introduced a product that actually undercuts Bitcoin payment processors! Uh Oh Visa/Mastercard! Margin compression, here we come!

Thailand is a prosperous nation with strong banks, modern factories, flourishing tourism, a growing middle class and other typical markers of a successful democracy. Which, as Bloomberg explains, is exactly what it lacks. Thailand has had so many coups in its modern history that scholars sometimes refer to the last 82 years as its “coup season.” In between, violent political strife has been chronic. The latest round features deadly street clashes, politically tainted corruption trials and the army taking control after an election derailed by protests. In contrast to political activists almost everywhere, the ones in Thailand are demanding less democracy... and this is the timeline of events that led to the latest 'coup'. What is perhaps more troublesome for a nation desperately seeking allies, under US law, sanctions are triggered if a country receiving military aid suffers a coup.

We may have dubbed Russia's historic, and 30 years in the making until John Kerry et al accelerated it, gas deal as the "Holy Grail" of New Normal trade arrangements, and it turns out we weren't alone in evaluating the strategic implications of this epic Russian, and Chinese, pivot toward each other. Moments ago, Russian billionaire Gennady Timchenko, shareholder of Gazprom competitor Novatek, chairman of the Russian-Chinese Business Council, and former co-owner of commodities trading giant Gunvor, said that "Economically it’s the most important event of the past decade."

Having dropped to 297k last week (the first time below 300k since April 2006) as 'full' employment appears to have been reached but the 326k print this week (against expectations of 310k) was the biggest jump week-over-week since December 5th 2013. This level of initial claims is exactly in line with the average for 2014 so far at around 325k. Of course the market is not worried - as opposed to the manic buying panic last week when claims plunged, stocks shrugged off this big rise... What is perhaps more worrying for the silver-lining hunters is that this considerably disappointing print falls in the same week as the non-farm payrolls survey period (though bad news will of course be good news should that disappoint).

Update 2: Thailand's military suspends the 2007 constitution and dismisses the caretaker government.

Update: The Thai army has announced a nationwide curfew from 10 p.m. to 5 a.m. after declaring a military takeover of the government to restore order.

Two days ago, when reporting on the Thailand "non-coupy" martial law imposed by the army, which wasn't in charge, but really was or something, we summarized the situation as follows: THAI MILITARY CHANNEL 5 SAYS MARTIAL LAW `NOT A COUP'. "Ah, gotta love the New Normal: full of non-coupy martial laws." Moments ago, the New Normal regressed back to its Old Normal ways, when in a live statement on TV, the Thai army chief made the non-coupy coup coupy, and announced a military takeover of the government Thursday, saying the coup was necessary to restore stability and order after six months of political deadlock and turmoil.

• McDonald’s Workers Arrested at Protest Near Headquarters (BBG)
• U.S. Sends Troops to Chad to Hunt for Abducted Nigeria Girls (BBG)
• BofA Scrapping Market-Making Unit Amid Trading Scrutiny (BBG)
• Biggest attack in years kills 31 in China's troubled Xinjiang (Reuters)
• Intense Fighting Flares in Eastern Ukraine (WSJ)
• Fed Officials Tussle Over Labor Market Slack (Hilsenrath)
• Ikea Economics Lure Central Bankers Seeking New Tools (BBG)
• When Putin ordered up new hospitals, his associates botched the operation (Reuters)
• Norway’s $33 Billion Man Steps Up Search in Asia Real Estate Bet (BBG)

The key news overnight were global manufacturing PMIs which can be summarized as follows: Japan contraction; China contraction, but less than expected (as reported before); and most recently, Europe which expanded but dropped and missed, at 52.5, down from 53.4 and below the consensus estimate of 53.2. The weakness was fully driven by France which has moved back into a contraction phase in both manufacturing and services, which were 49.3 and 49.2, down from 51.2 and 50.4, respectively (although with the recent surge in train station remodelling, the mfg aspect may soon be boosted). The market soaked up the Chinese numbers with fervor, sending the algo-controlled USDJPY into a buying frenzy which in turn pushed up US equity futures, only to see a gradual fade of the Chinese euphoria when the European data hit.

Last week we commented that based on TIC data, while "Belgium's" unprecedented Treasury buying spree continues, one country has been dumping US bonds at an unprecedented rate, and in March alone Russia sold a record $26 billion, or 20% of its holdings. So as Russia is selling a record amount of US paper, what is it buying? For the answer we go to Goldcore which tells us that "Russia Buys 900,000 Ounces Of Gold Worth $1.17 Billion In April."