Archive - Dec 2013 - Story

Thanks to a 3.2% rise in state and local government spending - the most since 2009 - the "public" construction spending lifted the headline data to beat expectations overall. However, a small scratch below the surface an it is clear that residential construction spending is not playing ball. Having fallen for 3 of the last 4 months, residential construction spending dropped 0.5% (the most since July) and private construction spending overall (residential and non-residential) dropped 0.5% - the most since at least April.

If last week's Durable Goods miss was great news for stocks, today's latest surge in the manufacturing ISM contrary to recent diffusion indices suggestion a whipser print of about 53, may be just what the Chairwoman did not order. With a December print of 57.3, up from last month's 56.4, and well above expectations of a modest decline to 55.1, this was the highest headline Manufacturing ISM print since April of 2011, just when QE2 was about to end and the economy was said to enter the virtuous cycle. What was worse for Taper watchers is that the Employment index jumped from 53.2 to 56.5, the highest since April 2012, and indicative that the November NFP number on Friday, perhaps the most critical data point ahead of the December FOMC announcement, may surprise well to the upside. In that case, the Fed may have no choice but to finally do what it threatened it would do in September and adjust the monthly flow lower by $10-$15 billion especially since as we will show momentarily, the Fed now owns one third of all marketable 10 year equivalents!

From Morgan Stanley, which just hiked its 2014 S&P price target to, you know it, 2014: "The only thing people are worried about is that no one is worried about anything. That isn't a real worry." And scene.

The chart below showing where Europe's wealthiest earning bankers can be found should come as no surprise.

What a difference 35 years of zombie capitalism makes...

While the abundance of commercials for cars across all media this time of year is nothing new, the manufacturers (and even more so the dealers) are likely getting more desperate. As Bloomberg reports, inventory climbed to almost 3.4 million cars and light trucks entering November - at 76 days of supply, that was the highest for the month since 2005. This should come as no surprise as we previously noted GM's post-crisis highs in channel stuffing as hope remains high that the recent slowdown in sales does not continue. The question, of course, is, "will manufacturers be responsible and curb production to keep inventory in check, or are some going to resort to old, bad habits and churn it out and then throw incentives on them." We suspect we know the margin-crushing answer.

Previewing the rest of this week’s events, we have a bumper week of US data over the next five days, in part making up for two days of blackout last week for Thanksgiving. Aside from Friday’s nonfarm payroll report, the key releases to look for are manufacturing ISM and construction spending (today), unit motor vehicle sales (tomorrow), non-manufacturing ISM (Wednesday), preliminary Q3 real GDP and initial jobless claims (Thursday), as well as personal income/consumption and consumer sentiment (Friday). Wednesday’s ADP employment report will, as usual, provide a preamble for Friday’s payrolls.

• America’s Role as Consumer of Last Resort Goes Missing (BBG)
• Holiday sales sag despite blitz of deals (WSJ)
• Abe Support Falls Below 50% for First Time Amid Secrecy Drive (BBG)
• U.S. airlines give China flight plans for defense zone (Reuters), while Japan: no change to airlines' notification policy when flying in East China Sea zone (Reuters)
• Thai protesters seek to topple PM after clashes (Reuters)
• Hilton Seeks as Much as $2.4 Billion in Biggest Hotel IPO (BBG)
• Biden on delicate mission to defuse tensions in East Asia (Reuters)
• Fed eyes financial system weak link (WSJ)
• Pentagon in line of fire in US budget war (FT)
• China’s monetary squeeze collides with housing bubble (FT)

In addition to its three previously announced so far "Top Trades" for 2014 (see here, here and here), just over an hour ago Goldman revealed its fourth top recommendation to clients. To wit: Goldman is selling China equities (via the HSCWI Index), while buying copper (via Dec 2014 futs), or at least advising its flow clients to do the opposite while admitting that "for the long China equity/short commodity pair trade to “work” best, these two assets, which are usually positively correlated, will have to move in opposite directions." For that and many other reasons why betting on a divergence of two very closely correlating assets will lead to suffering, read on. Finally - do as Goldman says, or as it does? That is the eternal question, one whose answer is a tad more problematic since the author in this case is not Tom Stolper but Noah Weisberger.

Asian equities have gotten off to a rocky start to the week despite some initial optimism around the twin-Chinese PMI beats at the start of the session. That optimism has been replaced by selling in Chinese equities, particularly small-cap Chinese stocks and A-shares after the Chinese security regulator issued a reform plan for domestic IPOs over the weekend. The market is expecting the reforms to lead to a higher number of IPOs in the coming quarters, and the fear is that this will bring a wave of new supply of stock to an already-underperforming market. Indeed, the Chinese securities regulator expects about 50 firms to complete IPOs by January 2014 – and another 763 firms have already submitted their IPO applications and are currently awaiting approval. A large number of small cap stocks listed on Hong Kong’s Growth Enterprise Market were down by more than 5% this morning, while the Shanghai Composite is down by 0.9%. The Hang Seng (+0.4%), Hang Seng China Enterprises Index (+0.8%) are performing better on a relative basis, and other China-growth assets including the AUDUSD is up 0.5%. The Nikkei (-0.1%) is also a touch weaker after Japan’s Q3 capital expenditure numbers came in well below estimates (1.5% YoY vs 3.6% forecast). Elsewhere Sterling continues to forge new multi-year highs against the USD (+0.3% overnight).

"Peak Hope"...?

While the idea of the interventionist suppression of short-term 'normal' volatility leading to extreme volatility scenarios is not new, hearing it explained so transparently by a current (and practicing) central banker is still somewhat shocking. As Buba's Jens Weidmann recent speech at Harvard attests, "The idea of monetary policy safeguarding stability on multiple fronts is alluring. But by giving in to that allure, we would likely end up in a world even less stable than before."

While the fundamentals continue to deteriorate, we are sure the idea of drone-based delivery (which fits with the 7500 drones the FAA expects within the next few years) will add a few multiple points to Amazon's share price valuation. On a side note, with increasing awareness of the government's surveillance, what better way for the NSA to keep an eye on everyone up close and personal (and to get an occasional invoice by the company that has made burning cash from operations into an art form).