Archive - Jan 2013 - Story

Yesterday, UBS' Maury Harris released a naive note titled "UofM confidence bounce after tax deal?" which we did not understand: would the bounce be on the ongoing depression, the uncertainty over the debt ceiling, the fate of the sequester and coming spending cuts, the manipulated market which just saw a $610 million reserve injection via repo to be followed by another $1.5 liquidity injection via POMO, or the fact that everyone is now paying more taxes in 2013? Turns out the confusion was irrelevant as the preliminary January UMichigan consumer confidence number just printed at 71.3, far below the December final 72.9, and the biggest miss to expectations in seven years. It was also the lowest print since November 2011. And of course, the reaction of the central bankers' soapbox formerly known as the "market" is.... up.

Sometimes people, a vast majority of people, just don’t get it and so the present tense of the world goes on for a while until reality pops up or is forced upon them. It is rather like momentum which proceeds until the fuel runs out. Sometimes it is like living on Earth; the lack of recognition that hydrogen and oxygen surrounds you does not negate the fact that these two gases are present even though you cannot see them; you are still alive and breathing afterall. What we are used to, what we look for, are bubbles that reflect one asset class or another. In the past it has been Real Estate or dot.com or high tech or equities or bonds so that the search is constantly defined by some sector. Present conditions, however, dictate something entirely different, in my opinion, which is not one asset class or another as defined by relative valuation but all of the world’s asset classes as defined by global policies set by the world’s central banks acting in collusion. We are living in a gas house bubble.

It seems that when it comes to looking at fundamentals, chartists such as DeMark and the other bottom-calling knife-catching 'value-players' who claim to have read the Apple tea-leaves are good at looking at, well, charts, and rather horrible at divining the underlying cash flow supporting a stock. Or lack thereof as is rapidly becoming the case of Apple. As Reuters notes, it appears Sharp (the manufacturer of iPad screens) has nearly halted production of the 9.7-inch screens - as demand shifts to the iPad mini. This semi-confirmation of Citi's supply chain checks from last month suggests that concerns over growth in iPad may well have been justified and the expectedly lower margin iPad mini will benefit - as Macquarie Research has estimated that iPad shipments will tumble nearly 40 percent in the current quarter to about 8 million from about 13 million in the fourth quarter, although Apple's total tablet shipments will show a much smaller decrease due to strong iPad mini sales. It is quite apparent, as the WSJ notes, that the shift in the coolness factor has taken place as Samsung's new smartphone is gathering more 'hype' as iPhone is now "the underdog" in innovation.

Yesterday Lance Armstrong admitted to the New Normal national confessional and conscience clearinghouse - Oprah - to what everyone had known for a long time, yet what he spent millions over the years suing others for "defaming" him for. Below is the resulting word liecloud of his interview. Spot the words "apologize" and "sorry." In other news, we look forward to Lance's rise to the ranks of primary dealer prop trader. He certainly has all the sociopathological prerequisites.

It seems the FX market is just a little edgy this morning. A few brief words from ECB member Benoit Coeure on the possibility of short-term LTRO repayment (if rates are cut to negative) appears to have reminded traders that LTRO does have a deadline and that several hundred billion in loans will inevitably be repaid from the LTRO1 and LTRO2 treasure chest. This reminder of implied deleveraging of the ECB's balance sheet triggered a drop from 1.34 to 1.33 overnight as the verbal intervention continues. The concerns over LTRO repayments has also triggered some serious "violent and quite extreme" snaps in EURIBOR yesterday as short-term refunding may become more difficult with a less large cash reserve standing around (waiting to be fungibly used as risk capital).

Demand for gold is likely to rise as the world heads towards a multi-currency reserve system under the impact of uncertainty about the stability of the dollar and the euro, the main official assets held by central banks and sovereign funds. This is the conclusion of a wide-ranging analysis of the world monetary system by Official Monetary and Financial Institutions Forum, (OMFIF), the global monetary think-tank, in a report commissioned by the World Gold Council, the gold industry’s market development body. The report warns of “twin shocks” to the dollar and the euro and of a “coming dollar shock” and points out how gold would be a safe haven in a dollar crisis. “Gold has a lot going for it; it correlates negatively with the greenback, and no other reserve asset seems safe from the coming dollar shock.” “The world is preparing for possible twin shocks from the parlous. position of the two main reserve currencies, the dollar and the euro... The OMFIF offers a confidential, convenient and discreet forum to a unique membership of central banks, sovereign funds, financial policy-makers and market participants who interact with them. They note that “western economies have attempted to dismantle gold's monetary role. This has failed.”

• Foreign Hostages Die in Algeria’s Battle With Terrorists (Bloomberg)
• The latest bank to soon join the currency wars: McCafferty Says BOE Must Keep Open Mind on New Policy Tools (Bloomberg)
• US debt talks complicated by timing (FT)
• BOJ eyes open-ended asset buying, agrees new inflation goal (Reuters)
• AmEx Says U.S. Card Income Fell 42% as Loss Provisions Increased (BBG)
• Call to raise age for US’s Medicare (FT)
• Obama Promise to Raise Middle Class Living Already Seen in Peril (BBG)
• China Exits Slowdown as Quarterly Growth Tops Forecasts (BBG) - actually, as new Politburo says to make it appear that way
• Britain to drift out of European Union without reforms (Reuters)
• Republicans weigh interim debt-limit hike (FT)
• Abe's aide says Japan shouldn't fret if yen falls to 100 vs dlr (Reuters) ... and it was 90 just a few days ago
• PBOC May Seek More Liquidity Operations (Dow Jones)

The most talked about story of the last week was undoubtedly the relentless chatter about that massive $18 billion in equity fund inflows as reported by Lipper (not ICI), which tracks primarily institutional and ETF flow of funds, and which, as we explained even before the Lipper data came out, was driven exclusively by a surge in bank deposits into the year end, to be recycled for risk investment purposes by the commercial banks' own prop desks. The details, however, were largely ignored by the mainstream media which took that inflow as an indication that the tide has finally turned and that the great rotation out of bonds into stocks is on. Turns out that just as we expected it was a year end calendar asset rebalancing. As Lipper reported earlier, the enthusiasm for US stocks appears to have abruptly ended, with a whopping $4.2 billion pumped out of domestic equities, offset by some $4.5 billion invested in non-domestic equities. The blended flow? Just $286 million going into equities. Now our math may be a little rusty, but $18 billion followed by $0.2 is not really indicative of an ongoing rotation out of bonds and into stocks, and is more indicative of a one-time, non-recurring event, just the opposite of all the Bank of America addbacks.

China’s monthly data dump was the main macro update overnight, which however with ongoing mockery of the Chinese data "goalseeking" and distribution methodologies, most recently by the likes of Goldman, UBS and ANZ, had purely political window dressing purposes for the new Chinese politburo. Sure enough, that all the data came precisely Goldilocks +1 was enough to put a smile on everyone's face. To wit - Q4 GDP growth came in just higher than consensus (+7.9%yoy v +7.8%). On a full year basis the economy grew by 7.8%, also a tad above expectations. Then we got industrial production, also just higher than expected (+10.3% v +10.2%) and retail sales - just higher as well (+15.2% v +15.1%). Much more important than meaningless, jiggered numbers, was the announcement from the PBOC that in light of the entire world going "open-ended" on easing, China - which now can't afford to lower rates for fears of rampant inflation together with importing everyone else's hot money - announced it will start short-term liquidity operations as additional tool for controlling liquidity, engaging in a reverse repo on a daily basis, which will have a maturity of less than 7 days. This way the central bank will be able to reacted almost instantly to any inflationary spikes across the economy, as it too has no choice but to ease although not by the conventional inflation targeting methods now used by everyone else.

Following Part 1 (History), Part 2 (Interventionism),  and Part 3 (money vs. credit), Part 4 considers another kind of credit: the Real Bill, designed to provide a bridge between service providers and supply chains. Although initially appearing inflationary, it is the restriction of counterfeit credit that keeps Real Bills in tact as they will inevitably spontaneously circulate as a clearing mechanism for transactions (thus avoiding the credit inflation). In practice, the Real Bill is nothing more than the invoice of the wholesaler on the retailer.  Opponents of Real Bills have a dilemma.  They can either oppose them by means of enacting a coercive law, or they can allow them because they will spring into existence and circulate in a free market under the gold standard.  We can hope that the principle of freedom and free markets leads everyone to the latter.

New York's apparent success as a financial and cultural center of the world (and anchor for the liquidity flood of the world's central banks via bank er bonuses) has an ugly side. The inflationary impact of the extremely wealthy is squeezing food prices to the point that many low income families simply cannot afford to eat. A dismally real picture of the situation in New York is exposed in a report by Food Bank NYC - One City, Two Realities. As The Daily News notes, many of the report’s findings are truly worrisome. For instance, between 2011 and 2012, the percentage of households with annual income below $25,000 that had trouble affording food increased a whopping 30%, with 70% of these households with kids reported difficulty affording 'needed' food. NYC's unemployment rate remains well above the nation's average and 54% of those are struggling as according to the Food Bank, “low [no] income families are making the difficult decision to reduce the nutritional quality of their meals by purchasing less expensive and unhealthy foods in order to afford the mandatory expenses that would keep a roof over their heads.” Participation in government food assistance programs continues to rise, and demand for emergency food programs continues to intensify as 54% expect to need assistance (SNAP) in the next 12 months.

A few years ago back when I used to watch an occasional bit of television, I would always have an internal debate with myself: which was more funny– Comedy Central, or CNBC? It was always a toss-up. One channel has talking puppets. The other has Steven Colbert. Both are satires of our bizarre reality. These days it seems financial media has surged ahead in this contest, rolling out one expert guest after another to beat a steady drum that economic recovery has settled on terra firma. Now, I’m an optimistic guy... and there are plenty of good news stories around the world. But just looking at the numbers, it’s clear that there is a major disconnect between sentiment and reality. On one hand, western governments and mainstream media sources tell people that their economies are recovering and moving forward. Sentiment is high, confidence is growing. Unfortunately the data show a completely different story...

With the Dell LBO potentially heralding the renaissance of re-leveraging risk transfer from equity-holders to credit-holders, Goldman's screen among investment grade and high-yield companies attempts to uncover the names most likely to engage in shareholder-friendly (or more specifically bond-holder unfriendly) events. From quantitative screens on cashflow, leverage, and cash to stock 'cheapness', industry suitablity, and management reputation, the following 47 names warrant further attention (in both CDS and equity markets).

Stock market performance during bull markets is mainly (89%) explained by the duration of the bull market (defined as an uptrendwithout any pull-backs of 20% or more). The conclusion: As long as no shock rocks the boat, the expected market return is +22% per annum. The current bull market (+117%) is a tad ahead of the expected performance. Time-dependency matters more in bull markets. In bear markets, fundamentals (or initial conditions) matter most. What does this mean for current market environment? Valuation is, depending on what you look at, either cheap (P/E ratio) or expensive (P/E 10,Tobin's Q, regression etc). Hence, all eyes have to be on the look-out for any external shocks.