Archive - Oct 2013 - Story

This morning, as part of the US Treasury's report on global currencies, Secretary Lew made the following remark:

• *LEW SAYS JAPAN 'APPEARS TO BE TURNING AN ECONOMIC CORNER'

Which got us thinking... when have we heard the US Treasury say exactly the same thing... (for exactly the same "policy-based" reason)... The answer is 10 years ago!

"We see Detroit as the “coming attraction” to a significant number of municipal insolvencies in the months and years to come."

Do you remember the $700 billion bailout of the financial system in 2008? It seems these days that most investors do not. People are partying like it’s 1929… as if all the issues and challenges that plagued the banking sector just a few years ago have miraculously vanished. This thinking is absurd, and even a casual glance at the balance sheets of so many banks in the West shows objectively that the entire system is still precariously leveraged, undercapitalized, and illiquid. In the wake of the bailout, Congress created a special position to oversee how the funds were spent. Like anything else in government, they used an unnecessarily long name followed by a catchy acronym – Special Inspector General for the Troubled Asset Relief Program, or SIGTARP. SIGTARP just released its quarterly report to Congress… and it’s scatching, suggesting that “the toxic corporate culture that led up to the crisis and TARP has not sufficiently changed.”

BofAML's NacNeill Curry remains bullish gold. He notes the impulsive gains from the 1251 low of Oct-15 and break of the 2-month downtrend (confirmed on the break of 1330) imply the medium-term trend has turned bullish. We look for an ultimate break of the 1433 highs of Aug-28, with potential for a push to 1500/1533 long-term resistance. Curry suggests traders buy this dip at around 1310 - warning that this view is nagated with a break below 1251. For those awaiting, a break of 1375 (Sep-19 high and right shoulder off a multi-month Head and Shoulders Top) is additional confirmation of the trend turn.

Just a few weeks ago, President Obama (and his right hand men in the Treasury) issued what was about as explicit a "sell" signal on US equities as is possible. His goal was to 'scare' congress into action on the back of an equity market collapse... of course, the Republicans folded with no such collapse in stocks (though bonds did implode). Today, following his "Buy Obamacare" pitch yesterday, the President delivers remarks to the SelectUSA Investment Summit - we assume his message will be BTFATH...

Presented with no comment...

What is the prudent response when hefty profits beg to be booked and assets purchased with leverage/debt start declining? Sell, sell, sell. A financial sell-off doesn't even need a real crisis to spread like wildfire; it simply needs nosebleed asset valuations, excessive leverage/credit and risk priced at "the bull market is guaranteed to last essentially forever" levels. Prudence alone will ignite the conflagration.

In what is merely the latest humiliating blow to Obama, moments ago, in a 42 to 56 vote, Senate Republicans blocked President Barack Obama's nominee to oversee the FHFA - the administration in charge of mortgage finance giants Fannie Mae and Freddie Mac, which in turn are so instrumental to restoring housing as the primary source of "High Quality Collateral" (and its securitization), which in turn is critical to allow the Fed to eventually step away from QE. The defeat on a procedural vote for the nominee, Democratic Representative Mel Watt of North Carolina, came despite an aggressive White House push in the past few days to round up support. The vote against limiting debate on Watt's nomination was 56-42, four short of the needed 60 votes to move ahead in the Senate. Whether this means that Moody's ADP's Mark Zandi is back on the table as a potential nominee is unclear as of this writing.

It's official - in addition to the S&P, complacency and optimism have just hit all time highs, as absolutely nothing can ever go wrong again thanks exclusively to the stream of central bank liquidity which is rising all sinking boats. Strategas explains:

• Investors around the globe “left our team warmly wrapped in the blanket of near-universal optimism” during recent client visits in Europe, Asia, Latin America, say Strategas global asset allocation analysts Nicholas Bohnsack, Ryan Grabinski in note.
• That optimism itself could be a risk
• Investors do not see any “lurking macro squall,” they’re optimistic on near-term growth and equities generally; U.S. stocks are favored
• Investor optimism driven by threshold for Fed tapering “higher and likely delayed relative to expectations"
• China won’t have hard landing; Europe recovering; inflation moderating as oil falls

And so all is well. Indeed, why worry? Uncle Janet has your back now and forever. As for the equity bubble that everyone now admits is clear and present, who cares...

One of these things is not like the others... US equities have marched inexorably off their lows to get back to unchanged this morning but every other asset class is continuing its post-FOMC Taper-is-actually-closer-than-we-thought trends.

While in a world of its own at over 4 million words, it would appear the US Tax Code has set a rather disturbing precedent that the Fed is now following...

"As I leave, I really urge everyone to take note of, and stand against, what I and others have written about for years, but which is becoming increasingly more threatening: namely, a sustained and unprecedented attack on press freedoms and the news gathering process in the US. That same menacing climate is now manifest in the UK as well. Allowing journalism to be criminalized is in nobody's interest other than the states which are trying to achieve that. I hope everyone who believes in basic press freedoms will defend those journalistic outlets when they are under attack – all of them – regardless of how much one likes or does not like them."

Confused how to trade the second coming of the dot com bubble and a world in which irrational exuberance has hit irrationally exuberant levels? You are not alone. Here is some insight from none other than David Einhorn originating in his latest letter to investors.

Now that an October taper is out of the question, bored investors, in a world in which fundamentals no longer matter, are looking forward to the next possible FOMC meetings and potential taper announcement dates, with three specific dates sticking out: December/January, which are really one cluster, and June, as possible announcement dates. Why are these dates important: because while a September tapering announcement would have resulted in a $4 trillion final Fed balance sheet (assuming the tapering proceeded to a full QE halt) before even more QE was unleashed, any subsequent taper dates imply a nice round number to the final Fed balance sheet at the end of 2014: either $4.5 trillion, assuming a January 2014 taper, or $5 trillion if the Fed waits until June to announce a tapering. This can be seen on the following chart from Bank of America...

If US consumers were miraculously supposed to regain all their confidence when the government reopened (even if companies completely ignored said shutdown according to the epic jump in the Chicago PMI - the biggest jump in 30 years), so far that has failed to happen based on the latest weekly Bloomberg consumer comfort index, which moments ago hit -37.6 down from -36.1 a week earlier, its lowest print since October 2012. With this drop the index has extended its five-week retreat that accelerated during the federal government’s partial shutdown and has slowed – but not stopped – in the two weeks since. Today the index is 21.3 points worse than its long-term average and 6.3 points worse than this year’s average. And what is more worrisome for The Fed, they have lost "the rich" as the comfort of the highest income survey participants has fallen to its lowest in 7 months - collapsing back to its 'normalized' divide with the 'poor'.