Archive - Nov 21, 2012 - Story

We have long been pounding the table on what in our view is the biggest detriment to any future growth for not only corporate America, but the entire US (where, sadly, government investment IRRs just happen to be negative - a fact that most won't understand until it is too late, especially not self-anointed economic wisemen whose only solution to everything is "do more of the same" yet who thought the utility of the Internet would be eclipsed by that of the fax machine): the complete lack of capital expenditures at the corporate level, and lack of (re)investment spending. It turns out that, however, that there is more to the story, and as the following chart from SocGen's Albert Edwards shows, not only are companies using up what actual free cash flows they have for such stupid stock boosting gimmicks such as harebrained M&A (just look at the recent fiasco between HP and Autonomy to see how rushed M&A always ends), and of course buybacks, but they are now levering to the hilt to do even more of this. The last time they did this? The golden days of the credit bubble.

We know it may appear unduly harsh to discuss America's self-destructive dietary "monster Id" right before the Thanksgiving day feasting, but when is it more appropriate? There are a great many disconnects between reality and what Americans believe out of convenience ("no snowflake feels responsible for the avalanche") or propaganda, but perhaps none is more visible than the disconnect between what we're collectively doing to our health with the food we consume. The Chinese have an apt saying" "Disease comes through the mouth," meaning disease comes from what we eat. There are several parts to the food-illness disconnect.

If you aren't thoroughly confused, confounded and outright disgusted by the newsflow supposed to represent the US economy, you aren't paying attention. Because two weeks after the preliminary UMich print was supposed to come at 82.2, instead soaring to 84.9, or the biggest beat of expectations in 5 years, we get the final UMich number, which missed expectations of a 84.5 read and plunged to 82.7, the biggest miss of expectations in 4 years. Of course, this makes sense: two weeks ago we had the euphoria associated with a new old president, and hope that 4 more years may fix this country. Two weeks, and the biggest market drop in one year later, enthusiasm has been doused just a tad. And adding insult to injury, 1 Year inflation expectations rose from 3.0% to 3.1% - just as the spectre of declining asset prices has reared its ugly head, yet this is well below the 2.8% expected for 5 year inflation -  as a reminder, in 5 years the Fed's balance sheet will be between $6 and 10 trillion. Boy is everyone in for a surprise...

Presented with little comment except to note that the implied volatility of the S&P 500 has collapsed back to its realized volatility - it would seem markets have become highly complacent, once again, about the short-term future.

HP said that more than $5bn of yesterday's gargantuan write-down was due to "serious accounting improprieties" but as Bloomberg's Jonathan Weil states "the numbers don't make sense". With only $3.5bn of total assets on their balance sheet as Q2 2011, a $5bn 'fraud' would seem tough to swallow - and HP has far from forthcoming on any details. Perhaps the fault lies within (as opposed to without) as Weil notes HP recorded $6.6bn of goodwill (the plug between market price and the above-market price HP paid) - which was later revised to $6.9bn; now HP is writing down that goodwill - and blaming it on financial fraud from Autonomy. "HP didn't record the goodwill because it was lied to by Autonomy. HP recorded the goodwill because it knew Autonomy's identifiable assets were worth much less than it paid." It seems to Weil (and to us) that HP's management want the 'obvious-to-the-world write-downs required for goodwill and intangibles' post such a huge 'over-pay' to appear to be someone else's fault.

No, really. The LDP, as most know by now, will take over at the December 16th elections as the next party in charge of Japan, at least until the early elections 3-6 months later, when power will shift once more, as the great Keynesian basket case experiment proves ungovernable yet again.  But in the meantime, there will be much humor, such as this...

At the beginning of World War II, the term "shell shock" was banned by the British Army, though the phrase "postconcussional syndrome" was used to describe similar traumatic conditions. Pick whichever words you like but lately it seems to me that the world’s investors are in this state of economic reaction; shell shocked. Yes, France is downgraded, no decision about Greece, no truce in Gaza, Spain joining Alice in the rabbit hole, recession in Europe, America fiddling about with no resolution in sight and “ho hum, ho hum pass the cookies if you please.” The world’s central banks have manufactured the money, we have enough sloshing about to invest it, corporate earnings are down, well, nevermind, we have to do something with the stuff so we may as well put it somewhere and the investment world lulled into lethargy by all of the shells that have flown overhead and landed nowhere. It is like the investment world is on Xanax where the sea is perceived as dead calm, regardless of the eight foot swells. It all seems very reminiscent of the blase attitude in Spring 2008 to no-doc loans and CDO-cubeds.

Yesterday's home sales data, which came far better than expected, apparently had nothing to do with Hurricane Sandy (had it been a disappointment the narrative would have been far different). What Hurricane Sandy did have an impact on for the second week in a row, is today's Initial Unemployment Claims, supposedly, which for the second week in a row printed well above 400K, and just as expected, at 410K, "down" from last week's upward (naturally) revised 451K (previously 439K). NSA claims declined from 478.5K to 397.7K, while Continuing Claims were just below expectations at 3,337K on a consensus print of 3,345K, and down from an upward revised 3,367K. Notable is that the dropping trend in those on extended claims, which recently dropped to a multi year low of around 2 million, had reverse, and 60.8K applied for EUCs.

The simple Bloomberg chart below summarizes the running insanity that is the ongoing Greek bailout. To date, the existing bailouts - already completely wasted - amount to well over 100% of Greek GDP.

An initial lower open in major European cash bourses has been pared despite concern over Greek and a lack of any progress in agreement between Eurozone officials and the IMF. Source comments early on in European trade helped provide renewed optimism that a plan for Greece is edging closer after it was reported that the German Chancellor Merkel told lawmakers Greece's financing hole through 2016 can be filled with combination of lower rates and increased EFSF. The FTSE is under-performing its European peers at the mid-point of trade today as several large cap stocks go ex-dividend, although strength has been seen following the latest Bank of England minutes which showed a less dovish than expected 8-1 vote split to hold fire on QE between the MPC meetings. Following the release of the minutes, a now reduced expectation for asset buys at the December meeting saw upside in GBP/USD in a move away from the 1.5900 handle, and Gilt under pressure, although short-sterling shrugged off the comment that the central bank is unlikely to cut bank rate in foreseeable future.

• Rough start for fiscal cliff talks (Politico)
• Europe Fails to Seal Greek Debt-Cut Deal in IMF Clash (Bloomberg)
• Japan’s Exports Reach Three-Year Low as Recession Looms (BBG)
• Beggars can be angry: Greek leaders round on aid delay (FT)
• More financial blogs launching soon: Financial Times Deutschland closing (Spiegel)
• China's backroom powerbrokers block reform candidates (Reuters)
• BOE Voted 8-1 to Halt Bond Purchases as QE Impact Questioned (Bloomberg). In the US the vote is 1-11
• UK heads for EU budget showdown (FT)
• Eurodollars - another epic scam: How gaming Libor became business as usual (Reuters)
• Clinton Shuttles in Mideast in Bid for Gaza Cease-Fire (Bloomberg)
• Fed Still Trying to Push Down Rates (Hilsenrath)

After tumbling to lows of 1.2735, and dragging the entire 100% correlated risk complex down with it, the EUR has since seen a straight line push higher despite the sad reality that for all expectations, Europe was embarrassingly simply unable to come to a resolution over Greece and has kicked the can to November 26, leaving Greece with zero cash to fund obligations to European banks, and if anything is left over, to fund domestic operations. The reason for the move up? The market, in all its wisdom, hopes  that 6 short hours after saying "9", Merkel has already softened her stance and that a deal in 5 days is inevitable. Of course, these are the same people who said a deal last night was inevitable. These are the same people who also said that Washington is this close from a reconciliation on the Fiscal cliff, despite this thing called reality (see Rough start for fiscal cliff talks from Politico). Adding to the surrealism was a French spokesman who said the country would "do everything to reach a Greek accord." Since a recently downgraded France will "do" nothing (that's Germany), but will "say" everything, it is safe to say that France is now the comic relief typically attributed to Jean-Claude Jun(c)ker. Finally, and wrapping up the bizarro surreality of central planned markets, the recent spike in Brent on Gaza re-escalations has been interpreted by those uber-complex DE Shaw algorithms as a risk on move, and pushed all risk indicators to overnight highs. With volume today set to be abysmal as trading desks will be empty around noon, expect some more absolutely insane zero volume moves in the SkyNet battleground formerly known as the "market."

Update: Israel launches massive airstrikes on Gaza after Tel Aviv bombing (RT). As expected

So much for hopes of a ceasefire as day 8 of of Operation Pillar of Defense begins. Around midday local time, an explosion took place in a bus in Tel Aviv near the military headquarters. As Jerusalem Post reports, "a total of 16 people were injured in a terror attack in central Tel Aviv on Wednesday, according to a spokesperson from the city's Ichilov Hospital. One person was severely injured, one moderately and one light to moderately. The remainder of the casualties were light or suffering shock. None were in a life threatening condition, though two were already in surgery, the hospital spokesperson said." According to witnesses a man climbed in the bus and threw a bomb on board. The explosion has sent Brent to its session highs over $111, and with Hilary Clinton briefly on location, it appears that Israel may well escalate to the next phase of the conflict which would be a land invasion.