Archive - Jul 2014

It appears the faithful are losing belief... Gallup reports that Democrats economic confidence has faded to its lowest since January (less than half the levels of confidence when President Obama unleashed his 2nd term). Despite exuberance conference board (government sponsored) surveys of confidence (and seasonally adjusted happiness in PMIs and ISMs), Gallup notes U.S. Economic Confidence Index remained flat in June having hovered at this lower level for most of the year (with no post-weather rebound). The outlook also remains dismal - hovering at its lowest since Dec 2013 with only 39% of Americans saying the economy is getting better and 56% saying it is getting worse.

It appears the faithful are losing belief... Gallup reports that Democrats economic confidence has faded to its lowest since January (less than half the levels of confidence when President Obama unleashed his 2nd term). Despite exuberance conference board (government sponsored) surveys of confidence (and seasonally adjusted happiness in PMIs and ISMs), Gallup notes U.S. Economic Confidence Index remained flat in June having hovered at this lower level for most of the year (with no post-weather rebound). The outlook also remains dismal - hovering at its lowest since Dec 2013 with only 39% of Americans saying the economy is getting better and 56% saying it is getting worse.

While the new quarter has started with a bang for the capital markets and those 1% who actually benefit from one after another record high courtesy of the Fed's "fairy dust", July 1 is an important date for another group of Americans: students. However, instead of more wealth, America's aspiring intelligentsia has something far less pleasant to look forward to, namely more debt, because today is when higher interest rates for education loans kick in. Starting July 1 all new loans for the 2013/2014 student year will increase from 3.86% to 4.66%, a 20% increase.

Having declared a caliphate, the terrorist group formerly known as ISIS (or ISIL) has decided a rebranding is in order. Since the group no longer recognizes the political distinction between Iraq and Syria, it has dropped the "Iraq" and "Levant" from its name, making it only the "Islamic State". The leader of the extremist group is looking to build his presence, as AP reports, Abu Bakr al-Baghdadi released a 19-minute tape demanding, "Muslims, rush to your state. Yes, it is your state."

The USD is unchanged; Commodities are unchanged; and Treasury yields are up only 2-3bps... but that didn;t stop July 1st from being a banner day for US equity markets (on the back of missed PMI and ISM data). The Dow, Russell 2000, and S&P closed at record highs but sadly the Dow missed out on 17,000 by a mere 1.5 points (despite the best VIX and AUDJPY manipulation $189 billion of repo liquidity free money can buy). Stocks got their start with yet another epic short squeeze at the open then ramped higher thanks to carry to record-er highs; stalling when it seemed Dow 17,000 was elusive. VIX traded with a 10-handle once again.

US auto makers just printed an annualized 16.98 million sales - dramatically beating expectations for the 2nd month in a row and the highest since July 2006. As we warned earlier, the reason is clear (massive extension of credit to the lowest credit quality sector of the market). With the government also taking major fleet sales and sponsoring the subprime purchasers, what more do you expect? We can only imagine the mal-investment boom that this unsustainable burst will create in the next few months - and right as the Fed's taper comes to an end.

As with any drug addiction, the first step is admitting you have a problem (or waking up naked in Glasgow train station). It seems HSBC - among a number of other sell-side strategists - are starting to wake up to their undying 'faith' and 'hope' that, based on the world's addiction to free money, there will be a return to the old normal status quo. As HSBC's Chief economist Steophen King notes, "there is an optimism bias, largely reflecting an attachment to pre-crisis growth trends which, post-crisis, have mostly remained out of reach," and they are finally facing up to the fact that "the world economy has succumbed to a lower structural rate of economic growth." But it is RBS that is waving the red flag as they warn of a "sense that this nervous stasis is dulling our perceptions about risk... it feels like 2007 all over again."

In yet another case of corporate malfeasance (which we are sure will see heavy jail sentences and sever punishments), the Federal Trade Commission is charging T-Mobile with making hundreds of millions of dollars by placing charges on mobile phone bills for purported "premium" SMS subscriptions that, in many cases, were bogus charges that were never authorized by its customers. Content such as flirting tips, horoscope information or celebrity gossip was charged to customers unknowingly and even when customers figured it out, T-Mobile failed to provide consumers with full refunds. Is it any wonder Telcos are doing so well?

One would think that with the economy, allegedly, growing at above-trend rates as Goldman has wagered for the second time in 4 years (the first time Hatzius was dead wrong), with jobs being added at what the BLS would have the market believe is a healthy 200K+ monthly clip, and of course with the S&P500 at record all time highs now on a daily basis, that the US business services sector would be humming along nicely, with little to no slack. One would be wrong: according to the WSJ even with all the alleged economic activity and all post-Lehman job losses having now been recovered, "employers have only reoccupied about 52% of the 142 million square feet that went vacant amid the economic downturn."

What last week’s figures tell us is there is no real recovery. Just a sham boom created by easy money. We’ve now got two months of figures for the second quarter. They tell us the same thing the first quarter’s numbers told us. Consumers aren’t spending like it was 2007. They’re spending like it was 2009... or 2010... or 2011. In other words, they’re spending as though they were reasonable people who have realized how the system works. The Fed creates a world where its friends and cronies can borrow at below the rate of consumer price inflation. The 1% gets richer. The other 99% struggles to keep up with the bills. Six years of “stimulating” the economy by giving it more of what it least needed has produced no real recovery... just more debt. It has also produced a corrupt money system in which almost every race is fixed. The 1% wins every time. The consumer is barely able to limp around the track.

The fact that the economy shrank like this, DESPITE all of the Fed’s interventions over the last five years AND the credit growth in the first quarter of 2014 is proof point blank that the Fed’s economic models are wrong.

When we reported yesterday's record reverse-repo surge, driven entirely by collateral-strapped financial entities scrambling to "window dress" their balance sheets with rented Fed-owned Treasurys for regulatory purposes, we said "Expect total reverse repo usage tomorrow to plunge by at least $150 billion as the banks will have fooled their regulator, which also happens to be the Fed, that they are safe and sound. Rinse, repeat, until the entire financial system collapses once again and people will ask "how anyone could have possibly foreseen this." Moments ago the Fed reported the daily reverse repo use. It turns out we were optimistic: it wasn't $150 billion, it was $189 billion. Following yesterday's $339 billion allottment, today this number tumbled to just $151 billion, meaing nearly $200 billion in fungible cash had to quick find a new home away from the Fed.

Despite 2014 consensus GDP now languishing at 2.2% (below its 2.9% hope in March, and gas prices near record highs for the time of year; it seems the Q1 growth scare that saw small caps, momos, biotechs, and half the Russell 2000 collapse has been all but forgotten as the favorite index of short-squeezes and algorithmic ignition has just recovered all its losses and regained its all-time record highs from March. Mission accomplished? Bear in mind that over 600 of the Russell 2000 names are still 20% below their 52-week highs.

Has Skynet become self-aware? It seems the 'robots' that run the US equity markets (HFT/algo trading dominates what little volume there is left) have decided to cut out the middle man in the market as Associated Press reports this morning that it will employ the story-writing software by start-up Automated Insights to automate the production of U.S. corporate earnings stories. To be frank, given the copy/paste nature of most mainstream media 'analysis' of earnings, we thought this had already occurred but AP notes, "We are going to use our brains and time in more enterprising ways during earnings season." Does that mean that anyone but Zero Hedge will be discussing cashflows or GAAP earnings? It seems the circle is complete, machines write the stories that machines trade on; why not just do everything in binary - it's not like humans have a chance to react anyway before the robots.

New Snowden Revelations in July