Archive - Oct 3, 2013 - Story

He started the ball rolling on the "Do Panic" rhetoric yesterday, and it didn't work. Jack Lew stepped up this morning with some more fearmongery and we suspect during the President's address at 1040ET this morning he will point out the Armageddon that will occur should the debt ceiling be breached - and ask why aren't equity investors selling? It seems he needs to appoint that non-bubble-blowing Fed head asap...

The President warned yesterday that "this time is different," and now the Treasury has weighed in with an even more ominous warning. In their statement, they note:

*TREASURY OFFICIAL: CONGRESS ACTION ONLY WAY TO AVOID DEFAULT
*TREASURY SEES `TENTATIVE' SIGNS IMPASSE AFFECTING MARKETS
*TREASURY SAYS BILL YIELDS MAY REFLECT `NASCENT CONCERNS'
*TREASURY: DEFAULT IMPACT COULD BE PROFOUND, LAST A GENERATION

And so it seems not only are they looking at the same indicators as the smart money in the markets but it is clear that the rhetoric will be increased until the equity market cracks and the politicians get their catalyst to act.

So much for the summer sugar rush. While last month's Non-manufacturing ISM print, and yesterday's Mfg ISM set the stage for a blowout expectation in today's September Non-Manufacturing ISM update, nobody expected a tumble from 58.6 to 54.4, resulting in the biggest miss in the index since April 2011, the lowest print since June 2013 and even the ISM's Nieves reporting that there has been "significant slowing." To be sure, this follows last month's spike to the highest print of the second Great Depression, but the drop shown below, shows this was all largely a one-time aberration. The leading Business Activity index cratered from 62.2 to 55.1 confirming the August spike was merely an a mirage, but what's worse is that the all important Employment Index (and remember: Services are far more important to the US economy than manufacturing) tumbled from 57.0 to 52.7, the lowest print since May, and biggest one month drop since March 2009!

Over a year ago, in addition to the money-laundering aspect (confirmed previously) and the REO-To-Rent scramble by PE firms and hedge funds (which is now over as PE become active sellers of apartment rental properties), we highlighted the third implicit subsidy to the housing non-recovery: Foreclosure stuffing. We explained this scheme by banks to limit the amount of available for sale inventory as follows: "since the properties not entering the foreclosure pipeline are effectively kept out of inventory, even shadow inventory, and thus the distressed end market, the monthly drop in foreclosures has acted as a form of subsidy to the housing market, as month after month less inventory than otherwise should, enters the market.... What this has resulted in is a logical increase in prices of the properties that are on the market." Today, the mainstream has finally caught on, and courtesy of RealtyTrac has come up with its own name for this subsidy: Vampire REOs.

It would appear that Warren Buffett's reassurance this morning that crossing the debt ceiling won't be so bad (trumpeted by any and all equity pitch men since) is being entirely ignored by the bond market. 1-month Treasury bill yields are soaring this morning - up 5bps at 12.5bps now (having touched 16bps - the highest yield in almost 3 years and notably higher than during the 2011 debt ceiling debacle). 1Y USA CDS are also up 3bps at 38.5bps this morning - notably inverted still. Of course, equity markets are surging back to open green for retail investors ignoring Obama's warning last night and Lew's "default has potential to be catastrophic" note this morning. In the meantime, the 1M1Y flattener trade we suggested goes from strength to strength as an indicator of market stress.

A growing number of House Republicans are voicing support for a clean CR and as Bloomberg reports with House Democrats, the 17 Republicans would have enough to votes to pass such a bill. As Politico notes, the fear appears to be that Congressional Republicans are in danger of morphing into the anti-Obamacare party rather than one devoted to fiscal conservatism and cutting out-of-control federal spending. The 'angle' appears to be, confirmed by Rep. Peter King (NY), Mario Diaz-Balart (FL), and Richard Hanna (NY), that “the CR is about spending. It’s the spending, stupid. We actually won 100 percent there," rather than obscure victory with an Obamacare focus. So far Boehner has shown no willingness to bring such a 'clean' bill to the floor.

While all other government data releases are halted, the DOL has been kind enough to keep its Initial Claims random number generator running, and this week, following several weeks of "computer system update" distortions, reported the fifth consecutive week of expectations beats with a print of 308K, below the 315K expected, but above the upward revised 307K from last week. Alas, the number is once again completely meaningless as the DOL said Federal furloughs will not show up in claims data, which means that all of the up to 800,000 newly filing government workers will remain completely under the radar, and forcing even more people to wonder just what is the utility of any government data, even when the government is generous enough to not be shut down. Equities did not move at all on the news but gold and bonds are rallying.

The electric car dream may be ending, one flaming Lithium Ion battery pack a time (no matter how Borgified the cult following of the carmaker may be), but when it comes to combustible engines, some have never had it better. Such as Mercedes. According to Reuters "Daimler's luxury brand Mercedes-Benz sold the most cars in one month in its history in September, German paper Bild reported on Thursday. The carmaker sold over 142,000 cars last month, a rise of 15.9 percent, driven by demand in China and the United States, the paper said in an advance copy of an article to be published on Thursday." So who again says the wealth effect does not trickle down... If mostly to the Mercedes-Benz and the 0.01%-ers bottom line that is.

In what can hardly be encouraging news to all the cult members holding the priced to immaculate conception Tesla stock, the unverified YouTube video clip posted yesterday showing the Tesla Model S aka "the safest car in America" (how is that kickbacks-for-awards thing at NHTSA going anyway?) engulfed in a flaming inferno, has just been authenticated by Tesla, and what's worse not only was there indeed a fire but it originated in the worst possible place: the battery pack. Where it goes from worse to worst is that once on fire (the car, not the stock) "water seemed to intensify the fire." It remains to be seen if the new and free car option: "Spontaneous Combustion" will have a similar effect on the company's stock.

• Mounting Wall Street fears of US default (FT)
• This is what the US government does when it is "shut down" - CIA ramping up covert training program for moderate Syrian rebels (WaPo)
• SEC Weighs Overhaul of Exchanges’ Self-Regulatory System (WSJ) - just let Goldman and JPM do all the policing; not like anyone cares anymore
• Reid Sets Tone for Democrats in Shutdown Fight (WSJ)
• No Movement in Shutdown Standoff (WSJ)
• Shutdown will not slow Fed nomination, says Obama (FT)
• Syrian Regime Chokes Off Food to Town That Was Gassed (WSJ)
• Tesla Says Car Fire Began in Battery (AP)
• China Services Index Increases in Sign of Sustained Rebound (BBG) or sustained data manipulation

Despite the president's tongue-in-cheek warning to Wall Street that this time it's different, and it that "it should be concerned", that same Wall Street continues to roundly mock his attempts to talk it lower on the third day of America's "shutdown", knowing very well that if things ever turn bad, Mr. Chairman, aka the S&P chief risk officer, will get to work, and rescue everyone from that pesky thing known as losses. Whether the offsetting optimism was driven by made up China non-manufacturing PMI rising from 53.9 to 55.4, the highest in six months, or just as made up non-core European PMI data which also beat expectations despite Germany Services PMI continuing to telegraph a weakness, dropping from 54.4 to 53.7, is unknown and once again not important. So while futures are modestly lower if only until such time as the daily 3:58pm VIX slam takes place just before market close, do not expect any major moves in stocks until either the GOP finally folds and lets Obama have his way, or bundles all shutdown legislation into the debt ceiling negotiation, and careens the US right into the debt ceiling deadline on October 17 without any legislation in place.