Archive - Jul 23, 2011 - Story

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With 23 hours left until the Asian open (or, more importantly, 19 hours until FX trading resumes) and with today's round of talks now official over after a one hour meeting in Boehner's office with congressional leaders achieved nothing, it is becoming clear that the final debt ceiling outcome will be "no change" in spending or taxing habits and a temporary hike in the debt ceiling, so that the soap opera can be repeated again every three months... and again... and again... and so forth for an "extended period of time" as "transitory solutions' become the new grand consensus. At least we now know the phrase for complete, impotent incompetence in the Hill is: "Two tiered approach" which is how Nancy Pelosi called the last minute attempt at compromise. Per The Hill: "House Minority Leader Nancy Pelosi (D-Calif.) said Saturday night that congressional leaders are considering a two-tiered approach to raising the debt ceiling and reducing the nation’s long-term budget deficit. Pelosi reiterated that she backs “a long-term extension” of the $14.3 trillion debt limit, putting her in line with the demands of President Obama and Senate Majority Leader Harry Reid (D-Nev.)." Alas this now appears to be a mirage: at best the Republicans will agree to a $200-300 billion extension to get the Treasury through for another 2 months (although at the delayed run rate, Geithner needs to issue $350 billion in debt right now just to catch up with where bond issuance should be). And then again until the general public gets so tired of this charade that they vote Obama out. Or so the republicans think. Or who the hell knows what they think. Or anyone else for that matter. It does appear however, that unless there is a definitive and consensual proposal on the table by 4 pm tomorrow when FX opens, the market will no longer be able to ignore what is happening in DC. Which brings us to the best news of the day: this whole farcical spectacle is almost over.

We won't even pretend we have come anywehere close to reading this, or have any interest in doing so. For anyone who does not share our lack of interest in what a diseased mind can drone about for 777,724 words, or 1,516 pages, knock yourself out.

One last quick comparable chart indicating the unique position of Apple in the stock market: with $76.2 billion in Cash, Short and Long-Term Investments, AAPL has more money in the bank than 38.9% of all S&P 500 (ex financials) companies, combined, or 163 companies in total. These are the companies with the least cash, ST and LT investments, starting at the bottom and going up until one gets to a cumulative number just under that of Apple. And here's the kicker. These same 163 companies have a cumulative of $412 billion in debt against their $76.1 billion in cash. Apple's total debt? $0.00.

Just a couple of quick observations on how the market is now pretty much "all Apple." Using David Kostin's previously published data, the first chart below shows that Apple alone accounts for a substantial portion of the best margin performing group in the S&P: Information Technology. Indeed, as the second chart shows while most sectors have been cutting their margin forecasts for H2, with a particular emphasis on materials, healthcare and industrials, one sector has been doing surprisingly well: InfoTech. And of this, Apple is the dominant margin leader. As Kostin says, "AAPL was a key contributor to the market’s continued margin expansion." Take away this cult company and the entire market's forecasted margin improvement collapses. Furthermore, as was pointed out previously, and confirming just how massive Apple's role is in the S&P earnings picture, is the fact that  Apple (AAPL) which posted revenues $3.9 billion (16%) above expectations and single-handedly contributed a stunning 40% ($0.23) of the $0.57 per share of aggregate EPS surprise for the S&P 500. Upward revisions to AAPL’s 2H sales and earnings expectations contributed much of the Technology sector’s positive revisions." Lastly, "AAPL currently represents 3.2% of S&P 500 EPS for 2Q 2011." Woe to the market if anyone manages to disturb the precious market ecosystem which now relies exclusively on Apple to be the dominant power pushing and pulling everyone else higher. And as more and more market making power is delegated to the cult, what happens when one day, inevitably, Apple disappoints?

Two for the price of zero: first, we present David Kostin's weekly chartology, which once again focuses on the only good thing to discuss these days: US corporate earnings which have now seen 45% of companies report (note: not European ones which as we pointed out on Friday have been abysmal so far). Here, among other things we learn that Apple now accounts for 40% ($0.23/share) of the $0.57 aggregate in EPS surprise beat for the S&P 500. Said otherwise, and the cumulative trailing "beat" for all the remaining companies in the S&P would have been 40% lower. In summary: "Three key numbers: 18% year/year EPS growth, 13% revenue growth, and 64 bp of margin expansion" Another notable observation which is in line with our prediction from mid May that staples will outperform discretionary: "Market participants will be surprised to learn that Consumer Staples growth is stronger than Consumer Discretionary growth for both sales (8% vs. 4%) and earnings (7% vs. 5%). Philip Morris International (PM) is a key contributor to growth in Consumer Staples. Actual results together with consensus expectations indicate slight margin declines in Telecom Services and Consumer Staples relative to 2Q 2010." Some may indeed be surprised, others not so much. Lastly, Kostin still sees 1450 on the S&P by the year end despite Hatzius' cut to estimates last week. Second, also included is last week's key event summary.

Credit markets continue to signal either a weakening economy or outright recession yet equities refuse to pay attention. With daily market volume dominated by intraday traders with no concern about macro data this comes as no surprise. The danger becomes that equity markets have no ability at forecasting any longer. The Great Recession saw equities peak just two months before contraction began. We may in fact be watching the same horrific forecasting ability play out if the credit markets are accurate. Below are three charts signaling trouble ahead for both the economy and the equity market. Equities have diverged from almost any correlation that existed for years. With a divergence you never know who is wrong. When countless relationships breakdown though and equities are always involved it becomes easier to say truly that "it's not you it's me."

Nomura's Bob Janjuah has released his latest Bob's World macro observations which won't come as a big surprise to most. As per the last time he forecast the future, Bob has a very bullish outlook on the short-term, where he sees the market potentially jumping into the 1400s, however turning very bearish into the longer-term: "In this risk-off phase I expect to see, as a proxy, the S&P down in the low 1000s by year-end/early 2012, and of course weaker credit spreads (Crossover over 500), weaker commodities, a stronger USD (DXY Index up at 77.5/80) and lower government bond yields/flatter curves (10 year USTs at 2.5%). In response to this risk-off move, as well as a move in the US unemployment rate to/above 10% by/around year-end, I expect to see policy responses  in the form of QE2 in the UK, QE3 in the US, and in the euro zone deep and meaningful (orderly) debt restructuring for Greece, Ireland and Portugal." As for the catalyst for the transition from the "short" to "long-term" Bob sees the following trigger: "Weak Trend Growth" - "Most policymakers and many in the market are still desperately hanging on to the view that trend growth rates in DM (and EM too) have not been impacted materially as a result of the financial crisis. To me the evidence is clearly ‘in’. The only way DM (and EM) policymakers have been able to deliver even barely acceptable trend growth has been through the use of unsustainable policies which put short-term gains first but which clearly create huge longer term risks to sovereign credit quality and which leave a deeply negative scar in the minds of the private sector, which is attempting to de-lever and which knows it is facing the mother of all tax liabilities going forward." Simply said: no more debt, no more growth: "The reality is that absent a private sector debt binge (the private sector is not that stupid) and assuming we are coming to or are at the end of the line with respect to policy, then DM trend growth over the next 3/5 years will be in the 1-1.5% range." Keep an eye out for ongoing debt trends at the private sector: according to Bob, this will be the key leading indicator for whether the trend at the DM, especially America, which has already been cut by the consensus from 4% to around 3%, is sustainable.

Following a resumption of the "failed" debt ceiling discussion at 11 am this morning, John Boehner has just released the following broad statement: “As I said last night, over this weekend Congress will forge a responsible path forward. House and Senate leaders will be working to find a bipartisan solution to significantly reduce Washington spending and preserve the full faith and credit of the United States." So much for the debt talks breaking down. And with so many "deficit-cutting" loose ends, all of which will eventually be resolved, probably by the time Asia opens tomorrow, here is Bloomberg's latest attempt at summarizing what is currently going on and why for Obama getting a solution before the market opens bidless on Monday is the most important thing right now.

I am not sure when U.S. politicians changed from being elitist, self-serving, perk enjoying, hypocrites, to teenage girls, but it has happened. Boehner sends a Dear John letter. Obama complains that phone calls aren't being returned. Reid is pulling petals from a flower repeating, 'he loves me', 'he loves me not'. We have had to listen to stories about getting homework done on time and eating our peas. I have seen this story before, actually multiple times a day, just turn on Disney network and you can watch the same story unfold over and over. We all know how those shows end, everyone agrees that the other side wasn't totally wrong, there is an awkward group hug, and everyone is happy, until the next episode.

CNTV has released the first video of the horrific crash in which two bullet trains collided and 4 train cars fell from viaducts. The full clip can be seen below.

While it is always good to hear grizzled veterans explain what we all know, namely that the US debt situation is untenable and America will eventually collapse under the weight of its obligations, we wonder: where were these same people while the debt was being accumulated and everyone was shiny and happy (there is a reason why the correlation between US GDP and debt is about as close to 1 as they come) and without a care in the world about America's long term solvency?  Yes: we do enjoy the writings of Oaktree's Howard Marks who has chosen to dissect the US debt ceiling and more specifically America's untenable deficit spending as the topic of his latest letter, although we can't help but wonder: why now? Why not a year ago? Or, better yet, a decade ago? Furthermore, as last night's explosive announcements by the president and Boehner demonstrated the debt hike story has so many moving parts that staying on top of it is virtually meaningless. Indeed, it would have been much more useful for America if financial luminaries as Marks had actually spoken up while the US Treasury was accumulating trillions in debt, instead of all the Monday Morning quarterbacking we seem to be getting each and every day from all the "fiscally prudent" ones who rode the train of America's "great moderation" runaway debt to stratospheric wealth and were all very silent then...

It was only a matter of time before China's pursuit of infrastructure perfection for the sake of merely recycling trade surplus dollars ended up in casualties. And while its now innumerable ghost cities are unlikely to hurt anyone since they are, well, vacant, the same can not be said about its infrastructure. Earlier today, China's D-Train, a first generation of its bullet train, travelling the Hangzhou to Wenzhou route derailed, with two of its carriages falling off a bridge. The precise number of casualties is as of this moment unknown, although the latest report from Reuters is of 11 killed and 89 injured. We expect the number to be far higher in the end. Just like in the US where none of the massive infrastructure spending as part of ARRA actually went to infrastructure, so China is about to realize that mixing unprecedented corruption and ultra high speeds usually results in very catastrophic consequences.