Archive - Aug 2014

US equities have retraced all the losses suffered from the moment headlines hit yesterday suggesting Iraq airstrikes were possible. They remain lower from the "NATO Russia threat" levels earlier in the day. US Treasury yields remains 8bps lower...

"If this is the beginning of a more important, intermediate term, correction; how large could it be?" There is one important truth that is indisputable, irrefutable, and absolutely undeniable: "mean reversions" are the only constant in the financial markets over time. The problem is that the next "mean reverting" event will remove most, if not all, of the gains investors have made over the last five years. Hopefully, this won't be you.

GDP-weighted average sovereign risk for European nations has risen 14% in the last 2 weeks - the most since Nov 2012. European peripheral bond spreads finally started to 'adjust' for real risk this week with a dramatic 30-40bps decompression from the early week's tights to the closing wides. Portugal was worst (+23bps on the week) followed by Italy and Spain. Stocks were hammered - EuroStoxx 600 2-week drop is the biggest since May 2012 and Germany's DAX 2-week drop is largest since Nov 2011.

Now that the the fourth dead cat bounce in US housing since the Lehman crisis is rapidly fading, and laundered Chinese "hot money" transfers into US luxury real estate no longer provides a firm base to the ultra-luxury segment, the US government is scrambling to find ways to boost that all important - and missing - aspect of any US recovery: the housing market. This is further amplified by the recent admission by the Fed that it is in fact encouraging asset bubbles, not only in stocks but certainly in all assets, such as houses. Well, the government may have just stumbled on the solution to kick the can yet again and force yet another credit-driven housing bubble, a solution so simple we are shocked some bureaucrat didn't think of it earlier: changing the definition of the all important FICO score, the most important number at the base of every mortgage application.

The Federal Aviation Administration just issued a notice-to-airmen (NOTAM) restricting all US operators from flying in the airspace above Iraq due to the hazardous situation created by the armed conflict.

We've largely ignored geo-political risks, ignored a slowdown in European growth, ignored the fact that Germany is deteriorating fast while increasing the amount of risk we take. That's the view of Saxo Bank's Steen Jakobsen who exclaims in this brief clip that "the market is so one sided and complacent," he feels a need to scream. Steen is urging traders and investors to take a serious reality check, pointing out that this decline is illustrated perfectly well on fixed income markets.

While most have greeted Obama's latest military incursion into Iraq with a healthy dose of skepticism - because after all Obama is merely the fourth president in a row to bomb Iraq - Obama's ideological brother, French socialist president Hollande, had some strong words of encouragement:

*HOLLANDE SAYS FRANCE IS READY TO DO ITS PART IN IRAQ

Surrender?

Update: and the reason why stocks just surged:

• 2Q GDP Tracking Est. Cut to 3.9% From 4.2% at Goldman Sachs
• 2Q GDP Tracking Est. Cut to 3.9% From 4.2% at JPMorgan Chase
• 2Q GDP Tracking Est. Cut to 4.1% From 4.3% at Barclays

Despite the concreteness of a tweet 'proving' Putin was ready to fold, US equities are giving up hope and are now red on the day (led by Nasdaq). US Treasury yields have remained notably lower all night and are fading lower once again. Gold and silver and rebounding and oil's modest early slip has stabilized. DAX futures have broken back below 9,000 and 2Y Bund yields touched -0.5bps early on.

Against expectations of a further rise in inventory build of 0.7%, wholesale inventories rose only 0.3% in June (the same pace as in May) missing by the most since February 2013. With GDP now basically an exercise in inventory expansion and contraction (Q2 inventory estimate amounte to 40% of GDP), this 'miss' offers little hope for the initial Q2 rebound to hold its exuberance. In addition, wholesale sales also missed (up only 0.2% against expectations of a 0.7% rise) with growth slowing for the 3rd month in a row.

Investing in oneself and enterprises one actively controls may now be the only legitimate deployment of capital that qualifies as an investment in the traditional sense - that is, capital isn't being risked in rigged gambling halls and Ponzi schemes.

Pentagon Press Secretary Admiral John Kirby confirms:

US military aircraft conduct strike on ISIL artillery. Artillery was used against Kurdish forces defending Erbil, near US personnel.

2 F-18A Aircraft dropped 500lb bombs. We anxiously await ISIS' response which - as the State Department warns "could leave Mosul under 100 feet of water."

While Ukraine has long since ceased being a customer of Gazprom (for the simple reason being that it can't afford to pay for historical gas purchases let alone future ones, and with a long cold winter just 3 months ahead, Kiev is praying that its brand new Western "allies" will give it the loans it needs to buy Europe-sourced gas), the bulk of Russia-sourced gas into Europe still transits through Ukraine. Not surprisingly, Ukraine correctly understands this is the last trump card it has in any negotiation with the west, or the east. It is this trump card that went into play moments ago when Ukraine's Prime Minister who recently resigned and whose resignation was not accepted, said that Ukraine is considering banning the transit of all Russian "energy resources", i.e. European gas.

On expectations of a 1.0% rise, US unit labor costs rose a disappointing 0.6% (missing for the 3rd of last 4 quarters). This should come as no surprise as despite the constant barrage of bullshit from the mainstream media's talking heads about wage growth around the corner, July saw the first annual decline in real wages since 2012. What is most worrisome for the serial extyrapolators about today's unit labor costs data is the massive revision to Q1 dats - up from a 5.7% rise to an almost record-breaking 11.8% rise. This is clearly a one-off and means wage growth (which was never really growing) is now fading rapidly.

CDC Director Frieden's worst nightmare is coming true - Nigeria, of which he was "deeply concerned" due to the population density in Lagos for instance, has admitted 139 patients are now being monitored for Ebola (up from 8 mere days ago). This, along with "the outbreak moving faster than we can control it," drive the World Health Organization (WHO) to declare West Africa's Ebola epidemic, an "extraordinary event" and now constitutes an international health risk. As Reuters reports, the agency said that, all states with Ebola transmission - so far Guinea, Liberia, Nigeria and Sierra Leone - should declare a national emergency, as former WHO official warned "governments appear to not have been engaged as necessary."

There is endless propaganda... and then there are McDonalds sales.