Archive - Nov 2013 - Story

It's deja vu time for Wal-Mart. Spot the trend:

• Q1: Wal-Mart Misses Revenue, Guides Below Expectations: Weather Among Factors Blamed
• Q2: Wal-Mart Misses, Guides Below Expectations; Blames Weak Consumer Spending, Payroll Tax, FX And Lack Of Inflation

Spot it yet? Good. Sure enough, in Q3 continuing the trend, moments ago Wal-Mart just missed revenues, and you got it: lowered guidance.

• Yellen to defend Fed's ultra-easy monetary policy (Reuters)
• Japan growth slows on global weakness (WSJ)
• Eurozone third-quarter growth falters (FT)
• Fed Debates Its Low-Rate Peg (Hilsenrath)
• Yellen: Economy Still Needs Fed Aid (WSJ)
• ‘Obamacare’ launch fiasco rouses sceptics (FT)
• DoubleLine's Gundlach says U.S. equities 'only game in town' (Reuters)
• Indian Inflation Exceeding Estimates Adds Rate-Rise Pressure (BBG)
• HUD Said to Fail in Bid to Sell $450 Million of Mortgages (BBG)
• Boeing machinists reject labor deal on 777X by 67 percent (Reuters)

Japan growth cut in half, Europe growth cut by more than half, but none of that matters: today it will be all about the coronation of QEeen Yellen, who testifies before the Senate Banking Committee at 10am. Not even Japanese finance minister Aso's return to outright currency intervention warnings (in addition to the BOJ's QE monetary base dilution), when he said that Japan must always be ready to send signal to markets to curb excessive and one sided FX moves and it is important that Japan has intervention as FX policy option, which sent the USDJPY back up to 100 for the first time since September 11 made much of an impact on futures trading which after surging early in the session following the release of Yellen's prepared remarks, have now "tapered" virtually all gains. Certainly, the follow up from Europe doing the same and also warning it too may engage in QE, has been lost. Which is odd considering the entire developed world is now on the verge of engaging in the most furious open monetization of virtually everything in history.

Following the second quarter 0.3% rise in Eurozone GDP, which ended a multi year European recession (and who can possibly forget all those "strong" PMI numbers that helped launch a thousand clickbait slideshows), the proclamations for an imminent European golden age came hot and heavy. This was before the imploding European inflation print was announced and certainly before the ECB had no choice but to cut rates and even hint at QE, shattering all hopes of European growth. And just over an hour ago, the latest validation that just as we expected Europe is on the verge of a triple dip recession, came out of Eurostat (which may or may not get back to the issue of Spanish data integrity eventually), which reported that just like in Japan, the sequential growth rate in Europe is once again not only stalling but was dangerously close to once again contracting in the third quarter when it printed by the smallest possible positive quantum of 0.1%.

Hunting season is off to a good start this week, and I’m not just talking about deer hunting. It seems that former Fed officials declared open season on their ex-colleagues. First, Andrew Huszar, who once ran the Fed’s mortgage buying operation, let loose in yesterday’s Wall Street Journal. Huszar apologized to all Americans for his role in the toxic QE programs. And then today, the WSJ struck again, this time with an op-ed by former FOMC Governor Kevin Warsh. Warsh is a former Morgan Stanley investment banker whose 2006 to 2011 stint on the FOMC spanned the end of the housing boom and the first few years of “unconventional” policy measures. After such a solid grounding in the ways of the Fed and Wall Street, he recently morphed into a critic of the status quo. His criticisms are welcome and we believe accurate, but they’re also oh so carefully expressed. They’re written with the polite wording and between-the-lines meanings that you might expect from such an establishment figure. He seems to be holding back. So, what does he really want to say?

Of all the screwed up, misallocated parts of the U.S. economy, the housing market continues to be one of the biggest potential train wrecks. While the extent of the insanity in residential real estate should be clear following the peak insanity yesterday, there are other potential problems just on the horizon. One of these was written about over the weekend in the LA Times. In a nutshell, the next several years will start to see principal payments added to interest only payments on a large amount of second mortgages taken out during the boom years. The estimate is that $30 billion in home equity lines will reset next year, $53 billion in 2015, and then ultimately soaring to $111 billion in 2018 - a looming “wave of disaster” because large numbers of borrowers will be unable to handle the higher payments. This will force banks to either foreclose, refinance the borrower or modify their loans.

Earlier today we reported that the Japanese cries of "more QE" have not only started but are getting progressively louder, when after a massive initial surge in the first half of the year following an epic currency dilution, the Nikkei's performance since May has largely been one big dud, which is putting not only the psychological "wealth effect" at risk, but also is tearing Abenomics apart, since perhaps the only key variable for the Prime Minister's plan of "growth" is the constant increase in the stock market, much the same as in the US. But while the market has gone nowhere fast, it is the economy that is truly starting to crack at the seams, as was confirmed hours ago when Japan reported that in the third quarter its economy grew an annualized 1.9%, following a quarter when the GDP grew at more than double that pace or 4.3%, which in turn succeeded a quarter with 3.8% growth. What's worse, in nominal terms, the actual third quarter growth was a paltry 0.4%: the lowest in all of 2013 while actual nominal consumption plunged to the lowest level since just after the start of Abenomics.

Following the FAA's warning that over 7,500 unmanned drones will be in US Airspace in the next five years, we thought news of yet another domestic drone down was noteworthy. Just a couple fo months ago we reported the crash (and self-destruction) of 2 drones in Florida, and now officials at the 174th Attack Wing suspended all Reaper drone flights in Central New York Tuesday after one of the unmanned aircraft crashed into Lake Ontario about 12 miles from the eastern shore during a routine training flight. As WNYF TV reports, the drone - one of four based at Fort Drum - was operated remotely from near Syracuse. Officials are investigating the crash but added, in some hope of reassurance, "the mission was going as advertised, up to the point where we did lose control of the airplane."

Following his inconvenient truthiness yesterday, Andrew Huszar appeared on Bloomberg TV today (having dismissed the comic-book-written discussion he faced in CNBC's Fast Money yesterday). As usual Bloomberg gave him more time to speak, listened, and challenged some of what he said, but we were struck by the man-who-ran-the-Fed's-mortgage-book's points that "we are eerily similar to 2008." Simply out, he implores, "the structure of our economy has not changed," and his apology (on behalf of the Fed), is because the Fed "helped squander an opportunity to see change in America." The fact of the matter, this was folly, "The Fed does not have the ttols to help the economy."

Just in case anyone thought the entire world's wasn't going to the tenth, centrally-planned circle of hell in a handbasket, here comes the head of the Indian FBI to disabuse everyone out of such childish sentiments, thanks to a comment that not even the PR brain trust behind #AskJPM could have conceived. To wit: "India’s top police official was under fire Wednesday for saying, “If you can’t prevent rape, you might as well enjoy it.” And scene.

The notion that the euro area crisis is over has recently been heavily propagated  by EU politicians and the mainstream media. However, it is way too early for such victory laps. Hans-Werner Sinn is perfectly correct in pointing out that the ECB's attempts to restore the 'monetary policy transmission mechanism' by suppressing interest rates in the periphery is going to perpetuate capital malinvestment,delay the necessary reforms and these interventions have actually scared private capital away, as investors require adequate compensation for the risks they are taking. Meanwhile, savers are ultimately paying for this ongoing waste of scarce capital. It is high time that central banking is recognized for the disease it is. Without central banks aiding and abetting credit expansion, this situation would never have arisen. Even a free banking system practicing fractional reserve banking could not possibly have created such a gigantic boom-bust scenario. Money needs to be fully privatized – the State cannot be trusted with it.

Tomorrow's Q&A is cancelled. Bad Idea. Back to the drawing board.

— J.P. Morgan (@jpmorgan) November 14, 2013

Financial innovation is a recurring theme in the NY Fed's review of historic crises. The 1720 South Sea Company structured the national debt in a way that was initially attractive to investors, but the scheme to finance the debt-for-equity swap ultimately proved to be noncredible and the market collapsed. Now fast-forward to 2013 and the five-year anniversary of Lehman's failure. As Fed Governor Jeremy Stein pointed out in a recent speech, a combination of factors such as financial innovation, regulation, and a change in the economic environment, contribute to an overheating of credit markets. So, the NY Fed asks - has the current reach for yield led to ever more complex, leveraged investments and the next credit market bubble? Or will the lessons from the Great Recession last at least a lifetime?

Last month’s US government shutdown – the result of a partisan standoff in congressional budget negotiations – epitomizes the polarization that prevails in modern economic-policy debates. In developed countries, many advocate a greater role for the state, in order to ensure that promised social benefits are delivered to rapidly aging populations. But relegating free-market principles to the past would simply create a new set of imbalances.

Just because very few actually understood the severity of the Cisco earnings guidance, in which the company forecast an 8-10% drop (let's call it 9%) in quarterly revenues when Wall Street was expecting a 4% increase, we have compiled and presented in chart form the historical and projected quarterly revenue data for CSCO to show today's preannouncement in all its gruesome context.