Archive - May 2014

"...for those who find our work to be a constant source of irritation to be regarded with open disdain, I am retracting all of it herewith – for you alone mind you – and I leave you free to buy with both hands to whatever extent you are inclined. Not that I encourage it really – that would be bad Karma – but someone is going to have to hold equities at these prices. It would best be those who are fully aware of our concerns and prefer to reject them. So the more you dislike my work, and particularly if you are nasty about it, I have no objection to you accumulating – perhaps on margin – as much stock from other investors as possible."

Despite the constant clamor of money-on-the-sidelines (which Cliff Asness has summarily dismissed as being idiotic) and strength in US equity markets being 'the most unloved rally of all time', the following two charts suggest people are anything but unimpressed by it. Citi's Panic/Euphoria sentiment model has hovered in the clearly "euphoric" levels for a month and now the AAII Bull/Bear split is back near exuberant highs. Of course, as we noted yesterday, the real strength behind stocks is the incessant non-economic irrational and indiscriminate mystery buyer - corporate buybacks - that are creating their own mal-investment signaling exuberance in the always efficient stock 'markets'.

Anyone who buys their own groceries (as opposed to having a full-time cook handle such mundane chores) knows that the cost of basic foods keeps rising, despite the official claims that inflation is essentially near-zero. Common-sense causes include severe weather and droughts than reduce crop yields, rising demand from the increasingly wealthy global middle class and money printing, which devalues the purchasing power of income. While these factors undoubtedly influence the cost of food, it turns out that food moves in virtual lockstep with the one master commodity in an industrialized global economy: oil.

Following yesterday's tailing 2 Year bond auction, moments ago the Treasury sold another $35 billion in 5 year paper which in today's soaring bond complex was expected to show scorching demand. Curiously, while the When Issued was trading 1.509%, the actual result showed a 0.4 bps tail at 1.513%, on par with yesterday's tail. Further adding to the weakness was the Bid to Cover which dipped from last month's 2.79 to 2.73, and the lowest since January, if modestly better than the TTM average of 2.65. The internals showed a shift away from Directs, whose take down was just 10.5%, below the TTM average of 13.0%, and down from April's 18.6%. This was compensated by Indirects who ended up with a majority, ot 50.4% of the auction, leaving 39.1% to Dealers, in line with the historical average.  So overall a mixed auction, and one which will likely keep traders scratching their heads as the ongoing strength in the secondary market refuses to relent.

Earlier we reported that while the US middle class is rapidly going extinct (Piketty excel flub or not, thank you Fed) and that median incomes for everyone but the "1%" have declined since 2009 (and since the 1970s on a real basis), America's executives whose year-end reward is closely tied to the performance of their publicly traded equity and thus to the amount of stock buybacks authorized and executed, have seen their median comp soar by 50% in the past 5 years and in 2013 for the first time cracked the $10 million median pay number. So who are these titans of trickle-up economics? Below is the full list of the Top 100 best paid CEO men and women in the US in 2013.

While careful to explain that valuations overall are below dot-com bubble levels, KPCB's Mary Meeker warns that there are "certainly some valuation excesses" in the tech arena currently as she unveils her latest 164-page epic chartapalooza on Internet Trends... With internet adoption rates slowing, the question is - which are the names that are in a bubble?

One week ago we reported that while Russia was dumping a record amount of Treasurys it was buying gold, or some 900,000 ounces to be precise. Today we learn that as Russia continues to purchase gold, and is likely taking advantage of the recent rout in gold prices, it certainly won't be storing its physical metal with any of the western Central Banks. According to Reuters, shortly after Russia and China announced their historic gas deal, Vladimit Putin said at the recent International Economic Forum, that Russia need to ensure its gold and currency reserves are secure. And not just Russia: China too. Because apparently when it comes to speaking for "hard" monetary policy, Putin is now authorized to speak for both nations.

Freedom of the Press Geared Towards Protecting CRITICS of Government Corruption ... NOT Government Apologists

There can be no doubt that computer science knowledge is currently in great demand; however, we do believe that there are some signs that the boom is - so to speak - 'getting out of hand' and is beginning to reflect the effects of the technology echo bubble on Wall Street. The give-away is the size of the demand for computer science studies relative to other fields of study. The last time enrollment in computer science peaked was in the year 2000 – concurrently with the technology mania. This is obviously no coincidence. What is slightly disconcerting is that the current peak in enrollments towers vastly above that previous bubble peak.

First it was JPM, then it was, surprisingly, none other than NY Fed chief Bill Dudley - the head of the trading desk that proudly boasts trader extraordinaire Kevin Henry, then Citi, and now joining the chorus of banks and Fed presidents blaming all that is wrong in the banking system on near record low volatility resulting in a collapse in trading is none other than Goldman Sachs, whose president Gary Cohn spoke at a Sanford Bernstein conference earlier today, said that fixed income volumes - the bread and butter of Goldman's juggernaut FICC division - are under significant pressure, and blamed low interest rates and, drumroll, the Fed's QE on the drop in volatility, summarizing the current trading environment as "Abnormal." It appears increasingly more are voicing their displeasure with the New Centrally-Planned Abnormal... but only after their balance sheets are full to the brim with some $2.8 trillion in fungible reserves.

"For us (Russia and China) it is important to deposit those (gold and currency reserves) in a rational and secure way," Putin said. "And we together need to think of how to do that keeping in mind the uneasy situation in the global economy."

The plunge in yields continues and even unflappable stocks are starting to crack a little... 7Y Treasuriy yields just cracked below 2% for the first time since Nov 2013. What is perhaps most worrying for the exuberant equity market is the dramatic flattening in 2s30s today (2Y +2.5bps, 30Y -9bps on the week).  Wondering why bonds keep rallying... see below...

The West Point Military Academy Commencement address short hand: "Enjoy it now... and don't retire or get injured..." As NYTimes notes, President Obama plans to use a speech at the West Point military academy on Wednesday to lay out a foreign policy vision for his final two-and-a-half years in office, defending his approach against a wave of criticism that he has been too passive on the world stage.

Having suffered a dismal confidence-sapping defeat in last weekend's elections, Francois Hollande's French government is at the center of another embarrassing faux pas this morning. Somewhat famously, Hollande has raised income tax, VAT and corporation tax since he was elected two years ago... and government forecast EUR30bn of extra tax income. As The BBC reports, the actual amount gained... EUR16bn (leaving a EUR14bn black hole) and forcing The Court of Auditors to proclaim that "forecasts of tax revenue in 2013 were so wildly inaccurate that they cast doubt on its forecasts for this year." Mon Dieu... they lied?

Our response to a question asked by CNBC-- “Why if everybody is talking about inflation is the bond market not moving?