Archive - Oct 2012 - Story

Since the release of the most recent BLS Employment Situation Report, which showed an astounding drop in the unemployment rate, we have spent a good bit of time dissecting the release and discussing why the real unemployment rate is really between 17% and 22% depending on how you calculate it.  (See Here and Here)  However, today's release of the September NFIB Small Business Survey shows the extent to which the current BLS employment calculation method may have detached from reality. No matter how you look at the data there is a clear disconnect between the BLS report and economic realities.  From the NFIB's point view it is "economic uncertainty" that weighs on business owners and keeps them on the defensive.  The actions by the Federal Reserve to buy bonds and inject liquidity into the financial system does not solve the problem of "poor sales", reduce regulations that strangle growth or solve the "fiscal cliff" issues that threaten business profitability by the end of the year.  

You saw the original, then you saw the mock version, now from BadLipReading, comes the.... well... farce of the original farce? Considering that Big Bird is now the marginal figure in "the most important presidential election ever" it is only fitting that the entire presidential election process is nothing but one big joke.

CMI is down over 7% after-hours as it seems the 16% cut in Aluminum demand that Alcoa just announced can no longer be ignored. Reality is that Cummins is slashing guidance and cutting jobs in "response to the weakening global economy."

• *CUMMINS TO CUT UP TO 1500 JOBS, LOWERS YEAR REV, EBIT FORECASTS
• *CUMMINS SEES YEAR EBIT ABOUT 13.5%, SAW 14.25%-14.75%  :CMI US
• *CUMMINS PRELIM 3Q REV. ABOUT $4.1B, EST. $4.425B       :CMI US
• *CUMMINS SEES 2012 REV. $17B, SAW $18B, EST. $18.11B    :CMI US

"We continued to see weak economic data in a number of regions during the third quarter increasing the level of uncertainty regarding the direction of the global economy.... Demand in China has weakened in most end markets"

Two words - Priced In?

The other day the Huffington Post ran an article by a Bonnie Kavoussi called “11 Lies About the Federal Reserve.” And you’ll never guess: these aren’t lies or myths spread in the financial press by Fed apologists. These are “lies” being told by you and me, opponents of the Fed. Bonnie Kavoussi calls us “Fed-haters.” So she, a Fed-lover, is at pains to correct these alleged misconceptions. She must stop us stupid ingrates from poisoning our countrymen’s minds against this benevolent array of experts innocently pursuing economic stability. Here are the 11 so-called lies (she calls them “myths” in the actual rendering), and Tom Woods and Bob Murphy's responses.

You've heard the CEO's oracular outlook; you've read the press-release; you've seen Maria Bartiromo flush and the algos stymied in after-hours trading. Now here are the facts: Free Cash Flow: Q3 -$39MM; Adjusted EBITDA: Q3 $282mm, down 45% from Q2; Adjusted EBITDA: Q3 2011: $821 MM; Q2 2012: $ 517 MM; Q3 2013: $282 MM; Adjusted EBITDA Margin Changes: Q1 2012: 12.8%;  Q2 2012: 8.7%; Q3 2012 4.8%. Total debt: $9,524; Net debt: $8,092; LTM EBITDA $1,875 million; Total Leverage: 5.1x; Net Leverage: 4.3x

and here is the correlation...

UPDATE: AA earnings beat, missed, won, lost, with forecasts up and down... facts below!

From the close after the Fed's QEternity announcement, it may surprise some that the Russell 2000, Nasdaq, and Dow Transports are all down 4%. S&P futures have retraced all of last week's gains, dropping the most in over week amid significant volume. AAPL dumped to its 100DMA, bounced, failed to break yesterday's VWAP close, then tumbled back to today's VWAP for another down day. VIX popped the most in 2 weeks (up over 1.2 vols) to end at 16.2%. From the 9/14 peak in stocks, only Healthcare is in the green, with Energy/Tech/Materials down around 5%. Oil jumped higher (up 3% on the week) in the face of USD strength that weighed a little on the rest of the commodity sector.

Nothing materially new here from David Rosenberg's latest letter, but it is useful to keep being reminded over and over how central planning has totally destroyed the primary function of capital markets: discounting, and replaced it with a dumb terminal which only responds to red flashing headlines reporting of neverending liquidity. "If the Fed really had its way, the economy would be booming. But it is sputtering. For all the talk of one month's employment report — look at the entire quarter for crying out loud. Looking at total labour input, aggregate hours worked, it eked out a tepid 0.8% annualized gain in Q3....That the stock market is up 16% this year (on track for the best year since 2009) with earnings contracting underscores the major success of Fed policy in 2012 — managing to deflect investor attention away from negative profit trends and towards its pregnant balance sheet. So welcome to the new normal: the Fed has managed to negotiate a divorce between the economy and equity market behaviour.

Couldn't happen to a nicer crony capitalist's favorite stock:

• U.S. FILES CIVIL MORTGAGE FRAUD SUIT AGAINST WELLS FARGO
• U.S. CLAIMS WELLS FARGO FALSELY CERTIFIED FHA LOANS
• GOVERNMENT SEEKS DAMAGES AND PENALTIES FOR RECKLESS LOANS
• FHA FORCED TO PAY `HUNDREDS OF MILLIONS' FOR DEFAULTED LOANS

Well, Charlie: "Suck it in" (even more than just the recent epic collapse of BYD of course). As for Wells, sorry Warren, but just like gold, you can't really fondle that stock certificate, held by DTCC in proxy, either.

A few days after the Fed launched QEternity we posted a roadmap for the post-QE track that Oil prices have mysteriously followed. We are now T+20 days from QEternity which corresponds to the post-QE trough based on the average of QE1 and QE2. What is fascinating about the following chart is just how closely the price of WTI crude has tracked the average path post-QE that we laid out three weeks ago. Is this the short-term lows? Who knows, but it seems that the divergence between WTI and Brent is narrowing with WTI playing catch up...

One of the most successful con jobs in the history of the world has been the concept of unbacked paper currency… or fiat money. Over the last 100-years or so, governments have been able to convince people that their pieces of paper, backed by nothing but promises, actually have ‘value’. This seems truly bizarre when you think about it. Governments tend to be untrusted, serial failures. Yet people readily accept their guarantees the world over. As such, it’s high time for creative, thinking people to consider their options and start trading their pieces of paper for something of value.

Gallup just announced the results of their latest poll and find Romney has overtaken Obama 49% to 47% among 'Likely Voters'. Obama still holds the lead among 'Registered voters' but this headline was enough to cause a dramatic crash (back under 60%) in Obama's odds on Intrade's market. Critically, the entire post-QEternity bump that Obama-believers had bought, has now been retraced as it seems the old adage "As Goes AAPL, So Goes Obama" is proving true...

The fallout in the aftermath of last week's infamous tweet by Jack Welch in which he dares to accuse the BLS of manipulating labor data (the same BLS which has already been purposefully caught leaking data, but never actually caught red handed manipulating it: after all things like these don't happen, Liborgate notwithstanding), something which it did (although the one thing that nobody dares to say is "why" because if suddenly it becomes clear that if this most critical of economic indicators is fudged, then every other one must be) has begun. Moments ago, in response to perceived political badgering by Fortune and Reuters, Jack Welch, the CEO of Chairman of GE from 1981 to 2001, just after the company's stock peaked at $593 billion, the outspoken critic of Obama has decided to sever ties with both the CNN-controlled publication and with the Thomson Reuters organization, and instead going forward will use the WSJ as a platform. What drove Welch over the edge is the now traditional media response of attacking the person instead of the argument whenever the status quo is threatened, in this case predicated by articles by both Fortune and Reuters.

Recession drives contingent liabilities into present liabilities quickly and with force and the cattle are now out of control and the stampede has begun. For those of you perhaps wishing for and certainly waiting for some type of “Lehman Moment” to flee; you may find it soon. The danger has always been that Europe will believe its own stuff and then make judgments based upon it and if this turns out to be the case then the decisions will be wrong and the consequences horrific.

While hardly a crash, today's AAPL driven market swoon is certainly not the stuff centrally-planned market confidence is built on (not to mention yet another day of various abnormal stock trading patterns in some of the more retail-heavy held stocks which will hardly break the pattern of domestic capital flowing out of equities and into bonds). And as we have seen in the past two weeks, when even green days have resulted in the infamous "market conditions" clause being triggered for companies attempting to sell equity or raise debt, today's red day, assuming of course, the fat pipe between Citadel and the FRBNY is not unclogged for the last hour of trading ramp, may mean that a surge of "market conditional" excuses by companies and underwriters is imminent. The reason: as the WSJ reports there are no less than 10 IPOs in the next 3 days. Should today's market tone persist into the close, we would be very surprised if even half of these price in a market in which the primary market bid disappears on even a -0.01% close.

Many times what "should" happen does not happen. For example, global stock markets "should" decline as the global economy free-falls into recession, as global recession is not exactly an ideal scenario for rising corporate sales and profits or demand for commodities. Yet global markets are by and large rising significantly. Sometimes what "should" happen is simply being delayed. In other cases, some other dynamic is at work. Stock market bulls, for example, say the "other dynamic" is global money-printing by central banks, and this "easing" will power stocks higher even as sales and profits sag. Analysts who believe fundamentals eventually over-ride monetary manipulation believe the stock market decline has only been delayed, not banished. A similar tug-of-war is playing out between those who feel the U.S. dollar "should" decline in the years ahead and those who see the dollar strengthening significantly.