Archive - Dec 2013 - Story

Confirming the stocks-are-just-high-beta-FX meme, Japanese stocks in the Nikkei 225 have collapsed 800 points in the last 2 days as JPY began to strengthen against the USD (on better data bringing taper talk and potential capital outflows as hot money chases something else). Relative to the initial 4 months of Abenomics which saw a 'beta' of 2.3 NKY points per USDJPY pip; the last week's "beta" of 5 Nikkei points per 1 pip in USDJPY, the leverage is starting to get out of hand (with a correlation of 0.965).

While we are sure it is just a coincidence that hours after his nation reports record and soaring unemployment rates, French President Hollande announces a doubling of troops in Central African Republic (CAR) deciding to "intervene immediately" after the UN authorization, adding "this intervention will be quick. It has no vocation to last and I'm sure it will be a success,"

FRANCE HAS DUTY TO INTERVENE, HOLLANDE SAYS; HOLLANDE SAYS CENTRAL AFRICA MASSACRES CONTINUING; HOLLANDE SAYS SITUATION CENTRAL AFRICA `ALARMING, FRIGHTENING'

The US State Department "welcomes France's decision to reinforce its military presence," adding that, the US is "appalled by today's reports of the murder of innocent women and children outside of Bangui."

It wasn't long after three former General Electric Co. executives were convicted of rigging auctions for municipal-bond investment contracts that they received the ultimate sendoff: A 7,400-word torching in Rolling Stone magazine by Matt Taibbi, the writer who branded Goldman Sachs Group Inc. with the nickname "vampire squid." "Someday, it will go down in history as the first trial of the modern American mafia," Taibbi began his June 2012 opus about Dominick Carollo, Steven Goldberg and Peter Grimm. "Over 10 years in the making, the case allowed federal prosecutors to make public for the first time the astonishing inner workings of the reigning American crime syndicate, which now operates not out of Little Italy and Las Vegas, but out of Wall Street." Then came a surprise last week, right before Thanksgiving. A federal judge ordered the men released from prison.

Treasuries are resuming their bear trend, with 10yr yields pushing above 2.839%, the Nov-21 high and BofAML's MacNeil Curry warns "Treasuries are in trouble." They continue to target a break of 3.00% in the sessions ahead. This is the September/3m range highs. However, they are most focused on 5yr yields and TYH4 (10Y March futures). Remember, Curry cautions, with the MOVE Index turning higher, Treasuries are moving into a more volatile environment. Price action in the next week or so could be explosive. Of coursem while the trend (and consensus) is your friend in this view, given the Fed's dominant position, there is always the chance of a short squeeze.

An American hacker has found a way to hijack consumer drones for personal use and remotely control their flights. As AlJazeera reports, Samy Kamkar exposed security holes in the AR.Drone made by Parrot, one of the leading manufacturers of commercial drones.

I've released SkyJack, a RasPi drone that seeks out and hacks drones, turns them into zombie drones that you control. http://t.co/o3VVtKpLZp

— Samy Kamkar (@samykamkar) December 3, 2013

While hardly as prominent as a killed ambassador and a storming of a US consulate, things in Libya continue to disintegrate with the latest news that a 33-year old US citizen who was a teacher in an English-language school and who described himself online as "Libya's best friend", was shot and killed by gunmen in Benghazi. NYT reports that the man, who residents said had worked at the International School in Benghazi, was out jogging in the upscale Fuwayhat neighborhood when he was attacked. One person who claimed to have witnessed the shooting said the gunmen had been driving a black jeep.

The Hong Kong branch of Spink & Son, a British firm originally founded in the mid-1600s, was putting a series of Bruce Lee memorabilia under the hammer.  When the bidding for the first lot opened, the price immediately surpassed the auctioneer’s initial estimates. It was a frenzy. Now, we know that modern auctions are supposed to be a pure form of the free market– buyers from around the world meeting for the purpose ‘price discovery’, with the item eventually going to the highest bidder. Further, economists and university finance often teach that such markets are ‘efficient’, meaning that prices always reflect the most relevant information and are hence an accurate reflection of an asset’s value. But in reality, nothing could be further from the truth. The auction was an emotional frenzy. It’s not an efficient market. It’s full of fear, euphoria, and aggression. The stock market is the same way. Even though just about every rational metric suggests that many global markets (especially the US) are absurdly overvalued, emotional investors keep bidding prices up.

Bitcoin could become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money-transfer providers, BofAML notes in a report today, adding that as a medium of exchange, Bitcoin has clear potential for growth, in our view. Despite Greenspan's inability to find "value", BofAML prefers not to call the crypto currency a bubble, and assigns a maximum fair-value of $1,300, but does warn that the 100 fold increase in Bitcoin prices this year is at risk of running ahead of its fundamentals.

Where the scramble to accumulate inventory in hopes that it will be sold, profitably, sooner or later to buyers either domestic or foreign, is seen most vividly, is in the data from the past 4 quarters, or the trailing year starting in Q3 2012 and ending with the just released revised Q3 2013 number. The result is that of the $534 billion rise in nominal GDP in the past year, a whopping 56% of this is due to nothing else but inventory hoarding.

Despite a modest beat at the headline Factory Orders (-0.9% vs -1.0% expectation), this is still the largest drop in orders since July following a revision upward for last month.

*U.S. OCT. DURABLES ORDERS DROP 1.6%; NON-DURABLES FALL 0.2%

Non-defense capital goods saw a 3.4% plunge (SA) - also the largest drop since July and defense capital goods orders tumbled 15.8% (from a 19.1% rise last month). The volatility and broken seasonality (due to the government shutdown) makes this series extremely noisy but overall, despite the modest beat, the trend is down notably.

Europe's second largest economy and crucial to the core founding partnership of the euro project, France, has seen its unemployment rate rise unceasingly for 9 quarters in a row now. At 11.03%, French unemployment has not been higher since Q3 1997. Of course, President Hollande, despite falling PMIs and rising unemployment is hopeful that things are turning around as he notes, France is "now in a phase of stabilization that remains very fragile." Some optimism can be taken from the relative stability in youth unemployment for a change but the over-50s unemployment reached an all-time high of 8.2%.

Yesterday it was Seth Klarman's Baupost, today it is David Tepper's Appaloosa Managament which is set to return between $1.5 and $2 billion. As reported by II Alpha, Tepper’s firm will return up to $2 billion in an effort to keep the firm’s funds at an optimal size. However, unlike Baupost and various other hedge funds returning cash due to lack of investment opportunities or simply shutting down, "Appaloosa regularly gives back money to investors when it feels it is getting too big. This will be the third straight year Appaloosa has returned capital to investors. Over the years, Tepper has already returned about $8 billion to investors since starting the firm in 1993. The Pittsburgh native’s goal is to keep the fund size at levels he deems optimal at any given time."

The better-than-expected data in the US had the requisiste good-news-is-bad-news reaction as stocks dumped (giving back all the EURJPY-driven gains), Treasury yields jumped, and gold and silver tumbled (in a deja vu of the last time Bitcoin and gold reached parity). At the same time, Draghi cut inflation forecasts, raised downside risks, hinted at less likelihood of another LTRO and noted negative rate discussions but did nothing and that sent EUR higher and implicitly USD broke lower. European stocks are also in trouble once again (even as European sovereign bond spreads are holding steady in their illiquid way). With EURJPY pausing (on Draghi's comments), we look to USDJPY to provide the requisite lift at the cash open in the US...

If yesterday's "great" news in the form of a 200K+ ADP, which sent the market sliding, was offset by the "ugly" news of the Service ISM which sent stocks soaring, today there are only "good cops" - first it was the revised Q3 GDP number print far above most expectations, purely on the back of inventory accumulation which however will now detract materially from Q4 growth, and at the same time, feeding the taper fire, the DOL announced that claims for the week ended November 30, which tumbled to 298,000 a 23K drop from a last week's upward revised 321K, the best print since September 2013, and the biggest beat of expectations of 320K since also September 2013, which was when the DOL started upgrading various computer systems making all data unreliable. And while futures assume the number immediately means the probability of a December taper surges, the DOL quietly added that it is "not unusual for claims to be volatile in holidays."

On the surface, the first revision to the Q3 GDP print, which initially came at 2.8%, was tremendous: at 3.6% well above the 3.1% expected, nothing could be better. Unfortunately, once again reading between the lines shows that all the "growth" was completely hollow and entirely on the back of the ongoing massive inventory accumulation, which rose from 0.41% in Q2 to 0.83% in the first Q3 revision, to an epic 1.68% in the current revision, or nearly half of all the "growth" in the economy. As for the most important component of GDP - personal consumption it once again declined, and dropped from 1.24% of the GDP number in Q2 to 1.04% in the first revision, to just 0.96% in the final Q3 revision - this was the lowest consumption contribution to GDP since Q3 2009! Bottom line: the US consumer is getting ever weaker, even as retailers and producers are stocking up more and more inventory to take advantage of the lack of consumer spending power.