Archive - Feb 2013 - Story

A month ago, when we reported that Abe's reflation effort was "succeeding" if maybe a little too much by sending gasoline prices through the roof, the Nikkei's conclusion was that  "Households are beginning to feel pinched by the weaker Japanese currency." Today they are pinched that much more as we find that the effectiveness of the plunging Yen has just forced luxury titan LVMH to hike prices in Japan by the most ever. From Bloomberg: "LVMH Moet Hennessy Louis Vuitton SA raised some prices by an average 12 percent at its flagship brand in Japan, the unit’s biggest price hike, to offset the impact of the yen’s slide on sales. The Louis Vuitton brand raised prices Feb. 15, spokeswoman Kaori Fuse said. Retailers such as LVMH, the world’s biggest luxury goods maker, are confronting a plunge in the yen that undercuts the value of sales in Japan, the second-biggest market for personal luxury goods." And where ultraluxury goes, everyone else is sure to follow.

Freight shipment volumes are rather obviously seasonal, but as Bloomberg Brief notes, the Cass Freight index shows shipment volumes have slumped for four consecutive months and are back to their worst levels in two years. This is the first year-over-year contraction since the 2007-2009 Great Recession - and places the reality of the dismal Q4 GDP print in context. If that wasn't enough good news about the real economy, the cyclicality of the shipments are losing momentum (i.e. each seasonal rebound in the last three years has been weaker - just as we saw in the lead up to 2008) and freight expenditures fell in January leading to a 1.6% drop over the last year - compared to a 27.2% rise in January 2011, and 22.2% rise in January 2012. As Cass noted, these volumes will not be enough to "have a significant impact on the unemployment numbers."

The financial world, at the moment, is a scary place. The signs of this are all about us and yet the consensus view is to worry about nothing. This has been caused by one singular action which is the orchestrated input of cash into the financial system by every major central bank on Earth. Money will go somewhere as it is created and so it has which is exactly why the markets are at or close to all-time highs while economic conditions have crumbled precipitously. It is not this market or that market which is in a bubble but all of them and it is systemic by its very creation. Politics, economics and the debauchery of the truth. There are consequences; there are always consequences. The world has subsisted on fantasies for four years but I think this spring will bring on the vengeance of the Fates for the demagoguery that has transpired.

The Chinese New Year celebration is now over, the Year of the Snake is here, and those following the Shanghai Composite have lots to hiss about, as two out of two trading days have printed in the red. But a far bigger concern to not only those long the SHCOMP, but the "Great Reflation Trade - ver. 2013", is that just as two years ago, China appears set to pull out first, as once again inflation rears its ugly head. And where the PBOC goes, everyone else grudgingly has to follow: after all without China there is no marginal growth driver to the world economy. End result: China's reverse repos, or liquidity providing operations, have ended after month of daily injections, and the first outright repo, or liquidity draining operation, just took place after eight months of dormancy. From the WSJ: "Chinese authorities took a step to ease potential inflationary pressures Tuesday by using a key mechanism for the first time in eight months. The move by the central bank to withdraw cash from the banking system is a reversal after months of pumping cash in. That cash flood was meant to reduce borrowing costs for businesses as the economy slowed last year—but recent data has shown growth picking up, along with the main determinants of inflation: housing and food prices."

The pound took a fresh beating yesterday as concerns of currency wars and debasement of sterling led to another sell-off and experts said the currency was at risk of a "large-scale devaluation". Sterling trails only Japan's yen as the worst performer against a basket of international currencies this year as a 4.5 per cent decline fuels import prices and pushes up the cost of food, insurance and other necessities for hundreds of thousands of households.  As central banks tolerate higher levels of inflation, the pound is set to weaken further across the board particularly against safe haven gold. UBS warned that the pound seems clearly at risk of following the yen and "suffering the next large-scale devaluation." Dealers also noted weekend comments from Bank of England rate-setter Martin Weale, who warned the pound was still too high to help the UK economy rebalance effectively. The continued pressure on the currency comes after its biggest weekly loss since June last year amid gloom over weak growth prospects.  The Bank of England has signalled it is willing to tolerate higher inflation for longer, while the pound's safe-haven appeal has also waned as the European Central Bank makes explicit commitments to prop up Eurozone strugglers and preserve the single currency.

• Here comes the replay of 2011 as China starts the counter-reflation moves: China Central Bank Reverses Cash Pump (WSJ)
• Security group suspects Chinese military is behind hacking attacks (Reuters)
• Iceland Foreshadows Death of Currencies Lost in Crisis (BBG)
• China Allows More Firms to Sell Mutual Funds to Bolster Market (BBG)
• Uncertainty looms for Italians (FT)
• Forget the big comeback; Detroit focuses on what can be saved (Reuters)
• SAC’s Cohen May Face SEC Suit as Deposition Hurts Case (BBG)
• Hollande wrestles with austerity demands (FT)
• Obama Golf With Woods in Florida Risks Muddling Messsage (BBG)
• Simpson and Bowles to Offer Up Deficit (WSJ)
• Aso Says Japanese Government Not Planning Foreign Bond Buys (BBG) - ... until it changes its tune once more
• Abe to Decide on Bank of Japan Governor Nomination Next Week (BBG)

Europe's double dipping economy may be continuing to implode, but at least confidence abounds. And while the conifidence game was the purvey of career politicians and ex-Goldman central bankers in January, it has now shifted to Europe's equivalent of the reflexive UMichigan consumer confidence, after Germany's ZEW investor confidence soared to 48.2 vs expectations of a modest 35.0 print, leaving January's 31.5 print in the dust, and the highest since April 2010. And all of the surge was based on the hope, with none attributed to reality, or current conditions. From SocGen: "The positive mood in both the equity and bond markets since the beginning of the year has led to a strong surge in expectations (economic sentiment) in the ZEW survey, a survey completed among German investors. This surge was entirely driven by expectations while current activity remains muted. Expectations in most surveys have recently been rising more strongly than expected, but at one point we expect some moderation. We consider that Germany and the euro area are in a situation of readjusting expectations and activity from the weakness at end-2012. The recovery in expectations may already have overshoot if hard data disappoint in the coming weeks." And while Europe is starry-eyed with hope about the future, as it is in the beginning of every year, it blithely ignored the fact that new car registrations collapsed in January by 14.2% to a new record low, while construction output in the Euroarea declined for a second month in December, tumbling by 4.8% led by slumping activity in, wait for it, Germany. But this time the future will be different.

In April of 2010, Zero Hedge first brought up the topic of the Fed's DV01, or the implicit duration risk borne by the Fed's burgeoning balance sheet which at last check will approach 25% of US GDP by the end of 2013 (tangentially, back in 2010 the Fed's DV01 was $1 billion - it is nearly $3 billion now and rising fast). Recently, we have noticed that the mainstream media has, with its usual 2 year delay, picked up on just this topic of the implicit and explicit risk borne by Bernanke's grand (and final) monetary experiment. And slowly but surely they are coming to the inevitable conclusion (which our readers knew two years ago), that the Fed has no way out? Why? Ray Stone of Stone McCarthy explains so simply, a Nobel prize winning economist can get it.

This video has been going around for a few days, but wow.  Very powerful and could be effective in knocking some sense into more sheeple if it gets spread widely enough. It’s an absolute joke that these people being questioned by Senator Elizabeth Warren are supposed hold the banks to task. She also makes the key point how ordinary citizens are constantly harassed by the “authorities” for what are in many cases petty and victimless crimes, while the bankers who have unleashed more destruction than anyone else, get slaps on the wrist.  Every single American should watch this short clip.

First it was Ireland, then the entire UK, then Germany, and gradually it spread to all of Europe (except for France of course, where it was always a delicacy). But it was only once its finally crossed the Alps and made its way to the Swiss factories of Nestle, the world's largest food maker, did the horsemeat scandal truly go global. The FT reports that "the escalating horsemeat scandal has ensnared two of the biggest names in the food industry, Nestlé, the world’s number-one food maker, and JBS, the largest beef producer by sales. Switzerland-based Nestlé on Monday removed pasta meals from shelves in Italy and Spain and suspended deliveries of all processed products containing meat from German supplier, H.J. Schypke, after tests revealed traces of horse DNA above 1 per cent. Nestlé said it had informed the authorities....Nestlé withdrew two chilled pasta products, Buitoni Beef Ravioli and Beef Tortellini from sale in Italy and Spain. Lasagnes à la Bolognaise Gourmandes, a frozen meat product for catering businesses produced in France, will also be withdrawn."

Day after day we are inundated with the apparent 'idiocy' of investors putting their hard earned money into Treasury bonds when they only earn 2% yields. Hour after hour, we hear why investors should buy stocks, 'get paid to wait', and bonds are in a bubble. So why is it that day after day, an entire generation appears to have found a new mantra of investing, preferring less risk to more, satisfied with less return as opposed to more. The simple answer comes down to two words - often misunderstood - risk and drawdown. While most consider the former to be some quantifiable measure of uncertainty (more is better because think of the upside potential); it is the latter that ends careers, crushes retirement hopes, and scars pysches for life - and is often ignored. As we discussed here previously - must read, comparing (risky uncertain cashflow stream) equity dividend yields to (risk-free certain cashflow stream) Treasuries is like comparing apples to unicorns, but more importantly as Boomers retire en masse, this chart explains why there is a third leg to the investment decision - risk, reward, and regret; and equity drawdowns are the real 'risk'. Oaktree Capital's Howard Marks explains...

Warren Buffett’s aphorism: "price is what you pay; value is what you get" has been rightly celebrated. But to be a true value investor, it helps to have values. Courtesy of near-zero interest rates and global competitive currency debauchery, it is increasingly difficult to assess the value of anything, as denominated in units of anything else. The business of investing rationally becomes problematic when market participants are pursuing maximum nominal returns without a second thought as to the real (inflation-adjusted) value of those returns. In a global deleveraging that is likely to persist for some years, the heavily indebted countries will desperately need to attract foreign capital to help service their heavy debt loads. And in order to do so, they will likely devalue their currencies. There is an increasingly disorderly currency war going on out there, and the advantage of gold is clear – they can’t print it, they can’t default on it, and there will always be demand for it. Simply put, in the global currency wars, owning gold is like abandoning the battlefield altogether.

We have discussed various incarnations of market-reality separation from underlying-reality but none had quite the unbelievability of the following chart of earnings-growth expectations currently foreseen by the consensus of linear-extrapolaters and hockey-stickers known as the sell-side. Behold - hope, defined...

The S&P 500 represents the broad US equity market. It is the bogey for countless herding asset managers and is seen as the professional's index as opposed to retail's Dow. But, a scratch under the surface of the magnificent 500 company index shows it to be extremely top-heavy. From Intel to Apple, the following 10 companies represent over 20% of the 500 name index - and these 20 stocks account for 42% of all S&P 500 margin.