Archive - Jul 2015

With a central bank following an asset inflation policy the flows are following performance. The Fed has unknowingly created winners and losers in the asset management business on a massive scale. The asset inflation environment also creates a volatility vacuum. Volatility is necessary to keep markets honest and provide long term stability. An investor must truly believe in their investment and must have performed significant due diligence to have the confidence to ride out the volatility. The market that is not kept honest is the one where reckless behavior proliferates, because it works and is profitable. The most prominent example is the massive carry trading that occurred during the last tightening cycle.

When it comes to corporate earnings announcements, some two-thirds of the time companies beat consensus expectations. This happens both during good quarters and bad (such as this one). How is this possible? The following chart form Deutsche Bank explains it once and for all.

It appears The IMF is willing to shake the boat of status quo, everything-is-awesome, once again. After proclaiming Greece is screwed and needs a haircut no matter what, the bank to save the world has unleashed a new report on Japan...

*IMF SAYS JAPAN NEEDS DEEPER CUTS TO CURB ‘UNSUSTAINABLE’ DEBT,  RISKS SURGE TO TRIPLE GDP WITHOUT CHANGE, IMF SAYS
*IMF: YEN MODERATELY WEAKER THAN IS CONSISTENT WITH FUNDAMENTALS

We assume Abe and Kuroda will disagree strongly, argue that they just need a little more devaluation and everything will be perfect. The slide in JPY suggests some more capital leaving their shores. It appears The IMF has read some of Kyle Bass' work.

Time for a rate hike?

We’ve spent the past few days in this space noting the recent thinning of the stock market advance. That is, despite the major averages continuing to hover near their 52-week highs, the internals are becoming uglier by the day. The main takeaway from this trend is that, should the relatively few areas of the market that are keeping it afloat begin to weaken, there will be precious little support left to prevent a significant correction. Indeed, we are beginning to see signs of deterioration now even among the stronger areas of the market.

• In Asia/Pacific, the sales decline was primarily due to lower sales in China and Japan.
• Decreases in Latin America were primarily due to continued weak construction activity
• Sales declined in EAME primarily due to the unfavorable impact of currency, as sales in euros translated into fewer U.S. dollars.
• Sales declined in North America as weakness in oil and gas-related construction was largely offset by stronger activity in residential and nonresidential building construction.

On Wednesday evening, Greece took another step toward transforming itself into a vassal state of Brussels when lawmakers passed a second set of prior actions ahead of formal discussions around a third program. As Deutsche Bank noted earlier this week, there’s something quite absurd about the adoption of the new bailout terms being left to a government whose leader openly opposes the deal. And Deutsche Bank isn’t alone in their skepticism. JP Morgan has more on why no one "should put the odds of Greece staying in the euro above 50%".

• Greek PM keeps lid on party rebellion to pass bailout vote (Reuters)
• Greek Prime Minister Alexis Tsipras Remains Popular Despite Tough Bailout Deal (WSJ)
• Beijing's stock rescue has $800 billion bark, small market bite (Reuters)
• Capital exodus from China reaches $800bn as crisis deepens (Telegraph)
• Why Investors Shy Away From China’s $6.4 Trillion Bond Market (WSJ)
• Oil Rigs Left Idling Turn Caribbean Into Expensive Parking Lot (BBG)
• Bank of America replaces CFO in management shake-up (Reuters)
• The Financial Buzz? Pearson to sell Financial Times (Reuters)

A slow week devoid of virtually any macro news - last night the biggest weekly geopolitical event concluded as expected, when Greece voted to pass the bailout bill which "the government does not believe in" just so the ECB's ELA support for Greek depositors can continue - is slowly coming to a close, as is the busiest week of the second quarter earnings season which so far has been largely disappointing despite aggressive consensus estimate cuts, especially for some of the marquee names, and unlike Q1 when a quarterly drop in EPS was avoided in the last minute, this time we won't be so lucky, and the only question is on what side of -3.5% Y/Y change in EPS will the quarter end.

The manipulative smash on the gold price on Sunday night has once again led to a surge of buying of gold coins and bars across the globe. Both the Wall Street Journal and Reuters report on how bullion dealers are seeing a spike in demand for gold coins and bars in  India and China and indeed Europe, Australia and the U.S.

What do El Paso, New York, and Chicago have in common? They are among the top 20 cities from which Americans are fleeing in droves...

The forward curve currently points towards a recovery in prices that is far worse than in 1986. As there was no sharp downturn in the ~15 years before that, the current downturn could be the worst of the last 45+ years. If this were to be the case, there would be nothing in our experience that would be a guide to the next phases of this cycle, especially over the relatively near term. In fact, there may be nothing in analysable history.

Just when you think that the depravity of the United States cannot possibly get any worse, something else comes along to surprise us.

Who could have possibly seen this coming? Almost three years we first detailed how America has become an entitlement nation where "work is punished." It appears President Obama is about to discover this first hand as his populist 'raise the minimum wage' strategy is showing yet another major unintended consequence. On the same day as New York acts to mandate a $15 minimum wage for fast food workers, Seattle's $15 minimum wage law - which is supposed to lift workers out of poverty and off public assistance - has hit a snag. As Fox News reports, evidence is surfacing that some workers are asking their bosses for fewer hours as their wages rise – in a bid to keep overall income down so they don’t lose public subsidies for things like food, child care and rent. So not only is work 'punished' it is now 'disinentivized by mandate' as part-time America toils amid ever-rising costs of living.

As expected, the Greek parliament has approved a second set of prior measures, clearing the way for formal discussions on a third bailout program for the debt-stricken country. 36 Syriza lawmakers did not support the bill.