Archive - Jul 26, 2012 - Story

There are many channels through which changes in the monetary policy stance are transmitted to the real economy. Recent statements by Draghi and Noyer (and a dropped word by Nowotny) suggest that the ECB is concerned about the uneven transmission of its July interest rate cut to bank lending rates across the Euro area. Goldman finds this empirically true, noting that the influence of official ECB rates on retail interest rates in Italy and Spain has diminished, while it has increased in Germany and France and in fact there is a ‘reversal of policy transmission’ in Spain and Italy, whereby ECB rate cuts are now associated with an increase, rather than a fall, in retail rates (as the rapid deterioration in peripheral banking systems has more than offset any impact of lower rates). This 'failure' of standard monetary policy to ease conditions has led to the non-standard measures being discussed now. We see three points from this: rate cuts are less likely than the market believes; while SMP is now being priced in, it doesn't specifically address the transmission-mechanism; and just as Draghi hinted at in his last conference, we suspect he will reiterate his reduced collateral standards and increased eligibility to private-sector loans directly (an LTRO 2.5) - which, however, will necessarily encumber bank balance sheets even more (if Zee Germans will even agree to it).

Somewhat stunned by the market's exuberant reaction to Mario Draghi's 'Believe Me' speech this morning, Charles Biderman, CEO of TrimTabs, sees the slow-motion train-wreck that is the European crisis speeding up and rapidly running out of track. Charles sees the European crisis as "not a solvable problem the way the world works today." Neither Draghi nor any of the bankers even bothers to talk about the real problem of not enough regional income and too much government spending. Draghi's only solution is some form of money printing. "Printing money to pay bills maybe will work over the short term. But long term, it cannot"; if money printing works in the real world why not print and give every one a billion Dollars, Euros or Yen? While governments will do anything to maintain the status quo (and avoid the tough times ahead), Charles succinctly reminds that, "the road to hell is paved with good intentions."

Angering Spain by seizing and nationalizing a majority of Repsol’s shares in YPF and ramping up the rhetoric over the Falkland Islands as exploration deals promise to make the territory a major oil player overnight, Argentina is making few friends in the fossil fuels industry these days. Sam Logan, owner of the Latin America-focused private intelligence boutique, Southern Pulse, speaks to Oilprice.com about the politics of populism behind Argentina’s energy aggression.

In a week which has seen the Fed telegraphing further QEasing by its favorite mouthpiece, and the ECB promising, but never delivering, both that the ESM would get a banking license, which prevented the EURUSD from tumbling below 1.20 yesterday yet which has been totally forgotten today, and that we should "beeleeve" Mario Draghi that unlike before he will not let the EUR fail, the cherry on top and the one event which removes any doubt that the coordinated events of this whole have had the sole purposes of masking that US corporate success has finally plateaued and it is 'only downhill from here', comes courtesy of the CME which moments ago cut the margin requirements on the bulk of its equity indices by 20-25%.

Will the Fed then just keep printing forever and ever? As an aside, financial markets are already trained to adjust their expectations regarding central bank policy according to their perceptions about economic conditions. There is a feedback loop between central bank policy and market behavior. This can easily be seen in the behavior of the US stock market: recent evidence of economic conditions worsening at a fairly fast pace has not led to a big decline in stock prices, as people already speculate on the next 'QE' type bailout. This strategy is of course self-defeating, as it is politically difficult for the Fed to justify more money printing while the stock market remains at a lofty level. Of course the stock market's level is officially not part of the Fed's mandate, but the central bank clearly keeps a close eye on market conditions. Besides, the 'success' of 'QE2' according to Ben Bernanke was inter alia proved by a big rally in stocks. But what does printing money do? And how does the self-defeating idea of perpetual QE fit with the Credit Cycle relative to Government Directed Inflation (or inability to direct inflation where they want it in the case of the ECB and BoE)?

Yesterday we showed how out of a universe 21 'analysts', just one ended up being correct on ZNGA. The trick part of the question was that the 'analyst' in question was actually a computer quant model. Today, we look at FB whose price has just tumbled to a new all time post-IPO low with a $23 handle. And just like with ZNGA today, where BTIG's Richard Greenfield ended up apologizing for his horrible call, something tells us tomorrow we will get quite a few more apologies too, not least from Greenfield again whose Neutral call will hardly be "good enough" for a stock that has now lost over a third of its value since its market cap.

Both earnings and revenues for 2012 have been cut dramatically in the last three months, rejuvenating a sliding consensus trend for 2012 that began in the middle of last year, and now Q3 expectations are negative YoY for the first time since Q3 2009. However, as we are told again and again, the economy must be doing fine because the market is up so much in that period. In fact, what is even more fun to hear is that the market is cheap (never mind the incredulous hockey-stick expectations for Q4 this year). In fact, the market is not cheap at all. The correlation between the S&P 500 in the last two years and the P/E multiple shows that performance has been driven almost entirely by multiple-expansion alone. Forward P/E is now getting close to recent peaks suggesting the market is far from cheap and on a longer-term view (based on both an as-reported and operating basis), the S&P 500 appears expensive - and perhaps these charts will re-anchor whatever cognitive bias that seems to pervade the long-only manager's herding mentality.

Amazon's AH stock price may be up or down, or sideways, but here are the three charts that make us scratch our heads as we valiantly try to explain how a company which just said it will have 'Operating income (loss) inbetween $(350) million and $(50) million" and currently has a 263x P/E, is worth anywhere close to where it is trading.

UPDATE: FB -17%, AMZN -0.5%, SBUX -5.3%

A quick run-down of this evening's catastrophe among the sweetheart hope stocks. From Facebook, Amazon, and Starbucks - not pretty. Top line misses, earnings misses, and outlook guides down... FB -13%, AMZN -2% (was -6%), SBUX (-6%). Via Bloomberg...

• *FACEBOOK 2Q COSTS/EXPENSES $1.93B MOSTLY ON SHR BASED COMP
• *FACEBOOK 2Q ADJ. EPS 12C, GAAP LOSS 8C-SHR
• *AMAZON.COM 2Q EPS 1C, EST. 3C
• *AMAZON.COM 2Q SALES $12.83B, EST. $12.90B 
• *AMZN SEES 3Q NET SALES $12.9B-$14.3B, EST. $14.11B
• *STARBUCKS 3Q EPS 43C, EST. 45C; FORECAST CUT, SHARES FALL
• *STARBUCKS TARGETS FY13 EPS $2.04-$2.14, EST. $2.28 
• *STARBUCKS SEES 4Q EPS 44C-45C, SAW 46C-48C, EST. 48C

But have no fear - Draghi and Bernanke have our backs... so why are all the CEOs cutting outlooks? Don't they 'believe'?

CRAAPL taketh and Draghi giveth it all back. The question remains - given all the front-running anticipatory moves on the back of jawbone after jawbone, will ECB/Fed action have anything but a brief romance with higher prices when/if it occurs? The S&P 500 pushed up to fill its Monday opening gap-down on a reasonable volume day (heading into T-3 from month-end shenanigans) but the participation is absolutely not what one would expect if this was belief with S&P 500 e-mini futures seeing their lowest average trade size of the year. Gold was a winner again as the USD was sold against everything. Treasuries gave back some of their gains - yields leaking higher by around 3-5bps at the mid- to long-end. Credit and equity stayed largely in sync but the former was quiet and likely being reracked more than traded as it gapped at the open and stayed there. Stocks took off from their broad-risk-asset peers from the day-session open, retested VWAP, then pushed back to highs into the close - ending well above risk-assets' view of the world as correlations fell modestly. VIX ended the day down 2 vols at 17.5% but was unable to close the gap to Friday's close like stocks - which closed (rather coincidentally, given month-end, at June's closing price)

Another epic retail disappointment:

• AMAZON.COM 2Q EPS 1C, EST. 3C
• AMAZON.COM 2Q SALES $12.83B, EST. $12.90B

And the kicker, proving that the company has finally gone "inverese" profit:

• AMZN SEES 3Q OPER LOSS $50M-$350M, EST. PROFIT $119.6M - yes, negative
  
• AMZN SEES 3Q NET SALES $12.9B-$14.3B, EST. $14.11

Mario Draghi promises that whatever AMZN loses in profit, it will make up in volume: "beleeeeve me." In other news, the US consumer is fine.

While Dos Equis has its most-interesting-man, we think we have found the 'most hypocritical'. Until today we thought Sandy Weill was the undisputed champion in this category, but after seeing this clip we think he has strong competition. At around 40 seconds into this lengthy diatribe, everyone's favorite Libertarian Las Vegan utters the most two-faced hypocritical words that he could possible have uttered: "I think we should audit the Federal Reserve". Between Harry Reid's recent vehement anti-Paul behavior and the whip-order that Democrats received on Ron Paul's bill yesterday, this is stunning. While the sell-out nature of this kind of politician does not surprise us, we thought it prudent for all US citizens to understand the true nature of the political class that decides an increasing amount of our day to day lives.

On one hand we have Mario Draghi promising he has a magic wand (not a printer - remember the keys to that are now held by Angela Merkel who is on vacation) and to "believe him" that the EUR will survive. On the other we have Greece which is a poster child of everything that is wrong in Europe. And that we summarize as follows: i) an epic and now relentless deposit outflow from Greek banks which continues as all trust in the local banking system is now gone, as €7 billion in deposits or the second biggest amount ever, is pulled and 20% of the entire corporate and household deposit base has vaporized in the past year, and ii) an economy in which it is every man for himself and where nobody pays any taxes any more, period. Good luck Super Mario.

There is no point in recapping the ongoing vendetta between former SIGTARP Neil Barofsky and former head of the NY Fed, and current Treasury secretary and resident TurboTax expert Tim Geithner. One need but follow the former on Twitter for a quick and concise sampling of the sentiments harbored vis-a-vis the latter. However, in the following interview Barfosky does touch on some points which in the context of the recent Liborgate, should be brought front and center, especially since the increasingly apathetic US audience seems to not care about one bit (as opposed to their distant cousins across the Atlantic for whom Lieborgate has become a daily distraction). Namely, what Barofsky says is that Geithner and other regulators who allowed Lieborgate to proceed should not only lose their job but we should "see [Geithner] in handcuffs."  Sadly that will never happen as it would actually be a deterrent to future crime among the highest echelons of America: something which is just not allowed to happen in a system whose very survival is increasingly reliant on rampant criminality.