Archive - May 4, 2015

While the ECB is representing that it has no limitations on total monthly volume purchases, it is suddenly finding itself forced to buy increasingly more bonds on the short end. Which brings up the question: is this due to the specific shift in the purchasing strategy of the ECB, or has the ECB simply run out of bond sellers on the long end and as a result is forced to buy ever shorter-maturity paper?

Yesterday, around 7 pm, dozens of people were at a contest hosted by New York-based American freedom Defense Initiative at the Curtis Culwell Center in Garland, Texas when police said two men pulled up in a vehicle and shot a Garland Independent School District Security guard in the ankle at about 7 p.m. The men were then shot and killed by Garland police. While the FBI did not have any immediate comments or speculation on the reason behind the attac, according to the Site intel group, overnight it was Islamic State supporters who took "credit" for the bungled shooting attack.

Nowhere is the new normal more evident than the frenzied hording of so-called "trophy homes" by the world's 1800 billionaires. As Bloomberg reports, the ultra-luxury housing market is scaling new heights as a record number of properties around the world command prices topping $100 million. Demand is growing among affluent Americans and Europeans; billionaires from unstable economies, such as Russia and Middle Eastern countries; and buyers from mainland China, who were barred from investing overseas before 2012. Why - simple (to them?)... "They’re a scarce commodity. And they’re better than gold because you can boast about it."

Turkey is currently trying to decide which of the two similar though competing projects - the Eurasian or the European Energy Union - would be more beneficial for the country. Russia’s attempts to build an ever closer relationship with Turkey - and the latter’s openness to such gestures - will complicate regional energy geopolitics further. Thus, Brussels and Ankara are likely to disagree on strategically important energy security issues over the coming years unless Turkey and the EU can achieve tighter cooperation under the framework of the European Energy Union. But if Turkey instead starts to pursue a more independent policy, particularly one at odds with the European Union, the Eurasian region will experience ever more unstable and competitive energy geopolitics.

Considering:

1) governments are unable to eliminate deficits
2) global government debt is increasing exponentially
3) 0% interest rates are allowing governments to borrow more to pay off old loans and fund deficits
4) Global growth is declining despite money printing and bailouts And, we've saved the latest and greatest fact for last: as stunning as 0% interest rates sound, the mathematically-challenged-fantasyland called Europe has just one upped everyone by introducing NEGATIVE INTEREST RATES.

"They're buying the yield and they think 'Oh, bonds are going to go up,' but when they start coming down, there's going to be a great run to the exits and at least in 2008 you had a bit of a safety net with the prop desks at banks, but now with the Volcker rule you can't even depend on that."

"We can understand that Mr. Bernanke doesn’t like being tagged with any responsibility for poor economic results. He absolved himself for any mistakes before the financial crisis too. But sooner or later he and the Fed have to stop using the financial crisis as the all-purpose excuse for slow growth. Even President Obama has stopped blaming George W. Bush for everything. Maybe Mr. Bernanke should stop blaming everyone else too."

After 6 months of MoM drops (something not seen outside of a recession),  February saw a modest 0.2% rise in Factory orders which has spurred economists to extrapolate a 2.0% expectation for March. However, while Factory Orders rose 2.1% in March, Feb was revised lower (to a -0.1% drop) leaving US Manufacturing Orders down 4.0% YoY. The series of YoY drops continues (now at 5 consecutive months) to indicate a recessionary environment. The ratio of inventories-to-shipments remains stuck at extremely elevated levels.

"We are sellers this morning of the Russell and we are buyers of the S&P, for the chart of the former is ominously bearish while the chart of the latter is interestingly bullish."

Several months ago we showed that in the aftermath of its brush with vocal activists such as Dan Loeb and Nelson Peltz, Dow Chemical did everything it could to push its stock price as high as it possibly could go. It did this in the simplest of ways: by buying back its own stock. In fact, over the past year, DOW bought back over $4 billion in DOW shares after barely doing any stock repurchases in prior years.  Still, without an organic growth in the company, and with increasing compensation for C-suite execs, and with just financial engineering to make the company appear prettier than it is, someone had to foot the bill. Moments ago we found out who:  "1,500 to 1,750 positions across a number of businesses and functions."

It's that time again...

Morgan Stanley breaks down the buyback-equity rally relationship while WSJ flags "big borrowing" by both corporations and investors. In short: corporate debt issuance is at record levels and so are buybacks, stock prices, and margin accounts. When the cycle finally turns, look out below. 

10Y German bond yields hit 42.5bps today (almost a 10x move off their 4.9bps lows on April 17th - before Bill Gross and Jeff Gundlach unleashed their bearish theses). While Draghi keeps buying, the move over the last week is 'almost' unprecedented in bond market history. We says 'almost' because we have seen this before - a sovereign issuer with an extremely low yielding bond suddenly see their bond market collapse... Japan 2003 (when Greenspan cut rates less than expected).

Quickly looking at the potential market moving events this week, US payrolls on Friday will be the clear focus. In terms of expectations, our US colleagues are expecting a +225k print which matches the current Bloomberg consensus, while they expect the unemployment rate to drop one-tenth to 5.4%. Elsewhere, Thursday’s UK Election will be closely followed while Greece will once again be front and center.

Unfortuantely, until three things change dramatically, there will never be a capex boom, corporate revenues will keep declining, and companies will continue artificially inflating their stock prices by diverting every last profitable dollar into instant gratification for "activist" shareholders (and option-compensated management) instead of investing into long-term growth.