Archive - Jan 2013 - Story

With the world and his mum applauding day-after-day as the nominal price of the major equity indices push to either i) all-time highs, or ii) post-crisis highs; and any and every measure of 'fear' (e.g. volatility and credit spreads) is repressed to limit-zero; there is an annoying glitch in the new market-based reality that has become our barometer of how we feel. Since the 2009 lows, every new market high has been confirmed by the Nasdaq - until now that is - as the divergence between the tech-dominated 'new normal' index and the rampacious Dow Transports or Industrials (dominated by one or two names each and every day) has grown significantly. The worrying chart below, perhaps suggests that the broad Nasdaq index is about to begin the down leg of a major head-and-shoulders pattern - helped by none other than 'most-held' Apple. Are non-Nasdaq indices being driven by the hedge unwinds against this mega-holding?

If there was any debate whether the Fed's policies have helped the economy or just the market (and specifically the Bernanke-targeted Russell 2000), the following two charts will end any and all debate. As the following chart from the St Louis Fed shows, as of the just completed quarter, US GDP "growth" since the "recovery" is now the worst in US history, having just dipped below the heretofore lowest on record.

The present is a time when things are in great confusion. We are creating money from nothing and yet enjoying the fruits of their labors. The economies in Europe and in Japan and America are worsening and yet yields for their sovereign debt are barely off all-time lows. The stock markets of the world, following the 2008/2009 financial crisis, are back at new highs. All of this has taken place because the world’s central banks, acting in concert, have pumped enough small pieces of paper into the fire to keep it burning long into the night and so all of the markets on the planet have been stoked with fuel. When the fundamentals of the markets are out of line with their performance then history teaches us that at some point rational behavior will cause a correction. It was just five years ago when the world learned a rather harsh lesson. It was a lesson that cost Americans 36% of their wealth.

While it is unclear how many states' data the BLS had to estimate today, the weekly initial claims print was impressive, sliding even lower than last week, when it came at 335K, and refuting expectations of a rise to 355K, instead reversing and printing the lowest weekly number since January 2008: 330K. What is impressive is that the NSA number dropped by a whopping 120K in the past week, making one wonder how much of the ongoing moves are simply a seasonal adjustments mismatch (a question even Goldman asked last night). Perhaps just as curious is that a whopping 365,641 people dropped off Extended Claims in the first week of January, unclear if this had anything to do with the Fiscal Cliff can kicking: certainly a third of a million Americans suddenly stopped receiving weekly jobless claims benefits from Uncle Sam. The biggest news from this is that with so many people dropping out of the labor force, the January unemployment rate will truly plunge, which is precisely the red flag observed by traders, and is the reason why the market is not taking this news in stride. Remember - all it takes for the end of endless QE is a stable improvement in the labor pool. Could this be it? Of course not, but doubts are starting to emerge.

Just because AAPL longs needed some more salt rubbed in their wounds, here comes Apple's cartooniest analyst  who heretofore had the highest price target on AAPL some 140% higher than where it is now, and working at a firm named for a town in Kansas, cutting his fruitish $1,111 price target down to $888.

• TOPEKA CAPITAL CUTS PRICE TARGET TO $888 FROM $1111; RATING BUY

So was $666 taken? And does Topeka Capital think having your number key stuck when determining a price target imputes credibility to one's worthless research?

“Everyone should keep gold in their portfolios” as the precious metal will be able to offer value to investors even in a worst-case scenario, said Marc Faber, the publisher of the Gloom, Boom & Doom report. "In the worst case scenario, in the systemic failure that I expect, it would still have some value,” Faber, who is also the founder and managing director of Marc Faber Ltd., said today at an event hosted by Evli Bank Oyj in Helsinki. Faber said his outlook was so bleak that he is “hyper bearish”. He joked that “sometimes I’m so concerned about the world I want to jump out of the window.”.. In response to a question from Yale University’s Robert Shiller querying the recommendation to hold gold, Faber said: “I’m prepared to make a bet, you keep your U.S. dollars and I’ll keep my gold, we’ll see which one goes to zero first.” Shiller, who is the co-creator of the S&P/Case-Shiller index of property values, responded "I'm inclined to think gold prices after this crisis might return to a lower level. Given the low yields of the alternatives [ie, bonds], the valuation of the stock market doesn't look so bad." Faber, whose advice has protected millions of investors in recent years, warned of a global systemic crisis possibly due to massive size of the global derivatives market which is now worth over an incredible $700 trillion. He warned “when the system goes down,” and only plastic credit cards are left, “maybe then people will realize and go back to some gold-based system.”

• When the cash runs out: Nokia to Omit Dividend for First Time in 143 Years (BBG)
• Passing Debt Bill, GOP Pledges End to Deficits (WSJ)
• Japan logs record trade gap in 2012 as exports struggle (Reuters)
• so naturally... Yen at 100 Per Dollar Endorsed by Japan Government’s Nishimura (BBG)
• Japan rejects currency war fears (FT)
• In Amenas attack brings global jihad home to Algeria (Reuters)
• Investors grow cagey as Italy election nears (Reuters)
• Mafia Victim’s Son Holds Key to Bersani Winning Key Region (BBG)
• Bernanke Seen Pressing On With Stimulus Amid Debate on QE (BBG)
• U.S. to lift ban on women in front-line combat jobs (Reuters)
• Red flags revealed in filings of firm linked to Caterpillar fraud (Reuters)
• Apple Sales Gain Slowest Since ’09 as Competition Climbs (BBG)
• Spanish Jobless Rate Hits Record After Rajoy’s First Year (BBG)
• North Korea Threatens Nuclear Test to Derail U.S. Policies (BBG)

While the main topic of conversation overnight was the Apple implosion after earnings (which was mercifully spared inbound calls from repo desk margin clerks who had all gone home by the time the stock hit $460), there was some macro data to muddle up the picture, which, like everything else in this baffle with BS new normal came in "good/bad cop" pairs. In early trading, all eyes were focused on Japan, whose trade and especially exports imploded when the country posted a record trade gap of 6.93 trillion yen ($78.27 billion) in 2012 and the seventh consecutive monthly drop in exports which showed that improved sentiment has yet to translate into hard economic data. Finance ministry data on Thursday showed that exports fell 5.8 percent in the year to December, more than economists' consensus forecast of a 4.2 percent drop. Trade with China was hit particularly hard following the ongoing island fiasco, which means that all the ongoing Yen destruction has largely been for nothing as organic growth markets simply shut off Japan. This ugly news was marginally offset by a tiny beat in the HSBC China manufacturing PMI which came slighly above consensus at 51.9 vs exp. 51.7, the highest print in 24 months, but as with everything else coming out of China one really shouldn't believe this or any other number in a country that will not allow even one corporate default to prevent the credit-driven illusion from popping.

As you probably know, in 2010 the US government passed one of the most arrogant, destructive, poorly conceived pieces of legislation in history, now known as the Foreign Account Tax Compliance Act (FATCA). FATCA heaps all sorts of reporting requirements on US taxpayers with foreign financial accounts - in a mind numbing 544 pages... Here’s the bright side of all this nonsense: now that the rules are finally settled, it’s now going to be much, much easier for US taxpayers to open foreign bank accounts. Over the past three years, the opacity of FATCA was too risky for banks. Today, while the final rules are cumbersome, they’re at least settled. So the banks know how to operate. I’m hearing from a number of overseas banker contacts, from Singapore to Panama to Malta, that they’re once again opening their doors to US customers.

Some time ago when we looked at the the performance of the world's largest and best returning hedge fund, Ray Dalio's Bridgewater, it had some $138 billion in assets. This number subsequently rose by $4 billion to $142 billion a week ago, however one thing remained the same: on a dollar for dollar basis, it is still the best performing and largest hedge fund of the past 20 years, and one which also has a remarkably low standard deviation of returns to boast. This is known to most people. What is less known, however, is that the two funds that comprise the entity known as "Bridgewater" serve two distinct purposes: while the Pure Alpha fund is, as its name implies, a chaser of alpha, or the 'tactical', active return component of an investment, the All Weather fund has a simple "beta isolate and capture" premise, and seeks to generate a modestly better return than the market using a mixture of equity and bonds investments and leverage. Ironically, as we foretold back in 2009, in the age of ZIRP, virtually every "actively managed" hedge fund would soon become not more than a massively levered beta chaser however charging an "alpha" fund's 2 and 20 fee structure. At least Ray Dalio is honest about where the return comes from without hiding behind meaningless concepts and lugubrious econospeak drollery. Courtesy of "The All Weather Story: How Bridgewater created the All Weather investment strategy, the foundation of the "risk parity" movement" everyone else can learn that answer too.

The reliable data which policymakers and the public need if effective solutions are to be found is not available. As Tullett Prebon's Tim Morgan notes, economic data has been subjected to incremental distortion; Data distortion can be divided into two categories. Economic data has been undermined by decades of methodological change which have distorted the statistics to the point where no really accurate data is available for the critical metrics of inflation, growth, output, unemployment or debt. Fiscal data, meanwhile, obscures the true scale of government obligations. While he does not believe that the debauching of US official data is the result of any grand conspiracy to mislead the American people; he does see it as an incremental process which has taken place over more than four decades. From 'owner equivalent rent" to 'hedonics', few series have been distorted more than published numbers for inflation, and few if any economic measures are of comparable importance; and the ramifications of understated inflation are huge.

We all have inner maps that assign awareness, priority and importance to geographic features. For those who work inside the Beltway, Washington D.C. dominates their mental map of the world. Residents of Manhattan famously regard it as the center of the financial, art, fashion, etc. world. In the hipster techie mental map, Washington D.C. doesn't exist, and New York has a small tech innovation footprint. In this world view, politics, finance and fashion are not what changes the world for the better; only tech does that.

In today’s climate of cell phone contacts, Facebook and LinkedIn, business cards may be becoming a thing of the past. Then again, they can still say a lot about you. Whether boilerplate or highly designed, staid or comical, FlavorWire has gathered twenty business cards of fascinating and famous people from Abraham Lincoln to Lady Gaga, Einstein to Lady Gaga, and from Houdini's triangular card to Marc Zuckerberg's "I'm CEO, Bitch!"

From a valuation perspective, Chinese equities do not, at first glance, look to be a likely candidate for trouble. The PE ratios are either 12 or 15 times on MSCI China, depending on whether you include financials or not, and do not scream 'bubble'. And yet, China has been a source of worry for GMO over the past three years and continues to be one. China scares them because it looks like a bubble economy. Understanding these kinds of bubbles is important because they represent a situation in which standard valuation methodologies may fail. Just as financial stocks gave a false signal of cheapness before the GFC because the credit bubble pushed their earnings well above sustainable levels and masked the risks they were taking, so some valuation models may fail in the face of the credit, real estate, and general fixed asset investment boom in China, since it has gone on long enough to warp the models' estimation of what "normal" is. Of course, every credit bubble involves a widening divergence between perception and reality. China's case is not fundamentally different. In GMO's extensive discussion below, they have documented rapid credit growth against the background of a nationwide property bubble, the worst of Asian crony lending practices, and the appearance of a voracious and unstable shadow banking system. "Bad" credit booms generally end in banking crises and are followed by periods of lackluster economic growth. China appears to be heading in this direction.