Archive - Jun 2014

Corporate “inversions” have been around since the 1980s in various forms but have come back into focus recently, but as Goldman's Alec Phillips notes have recent regained popularity as world tax rates grow ever more divergent. On the back of several high profile 'proposed' deals, a certain level of hysteria has taken hold amid potential targets but the issue has drawn enough attention that politicians are once again considering intervening. As Goldman warns, however, companies considering these transactions may now hesitate in light of the possibility that the expected tax benefits will be undone (and expect broad-based tax reform to reduce, if not eliminate, any advantages).

Over 1 in 5 homes (with $674 billion of mortgages) in China stand empty... and if you think that urbanization will fix that, as WSJ reports, a 10 percentage point rise in the urbanization rate (already at 54%) would result in only a 2.6% drop in vacancy rates. China has a major over-supply issue thanks to property developers who had rushed into the market to build homes, which have been a popular investment as prices seemed bound to keep rising. But now, as Vanke recently warned, things are changing and "the golden era" of China's property market are over. The vacancy rate of sold residential homes in urban areas reached 22.4% in 2013 and as new home prices are slashed to move product, a 30% drop would leave 11.2% of Chinese homes underwater on their mortgages...

With Japan's "Misery Index" at its highest in 33 years, it is not surprising that the population of salarymen have turned to the bottle (Johnnie Walker Black) once more. As is well known, Japanese culture dictates that businessmen should not offend their superiors by refusing a drink, but many find themselves imbibing far more than they can handle. The following ten images reflect the other side of Abenomics sentiment-crushing reality - salarymen in various states of intoxication sprawled on pavements, trains and street benches...

In his first press conference since the loss last night, it is widely expected that Eric Cantor will resign as House Majority Leader (on July 31). Of course, we are sure Goldman Sachs and BlackRock are fascinated to hear how they are going to get their money back?

Overnight saw China spook its markets by weakening the CNY (and breaking the trend again) and suffering a failed bond auction and that led on to weakness across Europe as USDJPY toyed with 102 and dragged stocks and peripheral bonds down. The US opened weak, saw the usual buying spree jerked higher by JPY then as the budge deficit hit (reducing room for monetization money) stocks tumbled to the session's lows and red fo rthe week. Of course that will never do and at around 330ET, as usual, the buying panic began (though in a tiny range). US cash equity markets saw a double dump-and-pump but were unable to scramble back to the green by the close. The USD closed unchanged as EUR tested once again down to Draghi spike lows. Gold and silver closed unch (with a midday dump of $175 million notional in gold futs); oil flatlined (iraq vs world bank) and copper slid (China). Treasury yields closed 2bps lower with the belly outperforming. VIX was slammed at 330 but stocks could not hold their gaisn as The Dow had its worst day in 3 weeks.

As we showed yesterday, with the shocking departure of Eric Cantor from the political scene, perhaps no firm is more disappointed that it will not generate the hoped 77,500%+ IRR on its "investment" in the Republican politician than Goldman Sachs. Indeed, of all 435 representatives in the House, Cantor was the one person that Goldman had contributed the most cash to in 2014. But before you panic just how will Goldman survive, here is a list of all the other representatives and senators that Goldman has invested its hard stolen earned cash in just the 2014 year alone.

There is much hope that after a dismal Q1 GDP report of -1% annualized growth in the domestic economy, that Q2 will see a sharp rebound of between 3-4% according to the bulk of economists. The Federal Reserve is predicting that the U.S. economy will grow as strongly as 2.8% in real terms for the entirety of 2014. The achievement of the Fed's rather lofty goal would require a real 4% annualized growth in each of the next three quarters. The problem with this assumption is that the last time that the U.S. economy grew at 4% or more, over three consecutive quarters, was in 1983.

It appears that the European taxi driver protest has led to the one outcome which not only none of the protest participants anticipated, but had desperately hoped to avoid: a sharp surge in Uber popularity and further cannibalization of the legacy taxi customer base which disgusted by the taxi protest looked for, and found, alternative means of transportation. According to the Independent, "Uber said it experienced an 850 per cent increase new users today as London's black cabs staged a protest that brought gridlock to the city centre."

The only thing that is more shocking than yesterday's stunning defeat of Republican Eric Cantor at the hand of a completely unknown tea-party candidate, David Brat - an outcome many have called the "biggest blow to the GOP establishment in years" and one which may be reverberating in equities today as "same as it ever was" politics was dealth a major blow - is just how unknown (and underfunded) David Brat is (and was). So for all those curious to learn some more about this Cantor-slaying "David", here it is from the horse's mouth: his CV from Randolph-Macon College in Virginia.

Overnight weakness following The World Bank downgrade, China's flip-flop on CNY and failed auction, Cantor's 'compromise-shattering' loss, appeared to be stabilized by a levitating USDJPY but when the budget deficit hit (as expected) it appears the market was hoping for a bigger deficit (and thus more to monetize and moar QE). Stock are diving lower with Trannies worst along with the Russell 2000 -1%. CNBC is already discussing if this is the pullback to buy for the next leg higher in stocks as money on the sidelines floods in...

WeChat, the popular instant messaging service in China, has been the subject of a 3-month crackdown on cyber-crime by police in the Guangdong Province where Tencent (WeChat's parent) is based. Having created a CNY 10 million fund for whistleblowers, the company reports:

*WECHAT SHUTS 20M PROSTITUTION-RELATED ACCOUNTS: XINHUA

WeChat has over 600 million active users (so there's stillplenty of pr0n we suspect), but we wonder just how much carnage this will do the now hookers-and-blow dominated GDP calculations of the world's major economies.

President Obama’s recent foreign policy speech, delivered at this year’s West Point graduation ceremony, was a disappointment to anyone who hoped the president might be changing course. The failure of each US intervention thus far in the 21st century might have inspired at least a bit of reflection. However, the president made it clear that interventionism and American exceptionalism would continue to guide his administration in its final two years. The president said, “I believe in American exceptionalism with every fiber of my being,” adding the dubious claim that “because of American diplomacy and foreign assistance, as well as the sacrifices of our military -- more people live under elected governments today than at any time in human history.” There is much to disappoint in Obama’s big foreign policy speech. It represents a continuation of the policy of “do what we say and we will subsidize you, disobey us and we will bomb you.” That approach is a failure, but the neocons who back it show no sign of falling out of favor.

The reality is that what’s happening in the US today is not a cyclical recession, but a one in 100 year, secular economic shift.

Almost as if by design, moments ago today's 10 Year reopening (Cusip WJ5) priced at 2.648%, above May's 2.61%, and some 0.9 bps above the When Issued 2.639% driven by a big drop off in Indirect demand. The Bid to Cover was actually a stable 2.88 the highest since March, and well above the 2.65 average in the past year which likely was the result of the higher than expected high yield. But it was the internals where the action was with Indirect demand tumbling from 49.3% to 36.1%, the lowest since May, while Directs were relatively flat at 19.%, down from 21.6%, as Dealers had to pick up their buying and take down some 44.5% of the auction: the most also since May 2013. And with everyone paying attention to bonds, the curve was certainly not happy with the weakness in today's much watched bechmark auction, with the kneejerk reaction certainly indicating more weakness may be in store for the bond complex.

Just when the administration thought they had thrown enough people under the bus and the news cycle had moved on to Bergdahl (how did that work out?), WSJ reports:

FBI OPENS CRIMINAL PROBE OF VA SCANDAL

FBI Director James Corney says that the Phoenix office of the FBI has opened a criminal investigation into the VA scandal, adding that "We're working with the VA IG and we'll follow it wherever the facts take us." We are yet to hear what the over/under on 'pleading da fifs', but we suspect it will be high.