Archive - Feb 2013 - Story

The equity markets, despite a verey modest drop so far today, continue to hang in despite slowing profits growth. David Rosenberg notes that while many tout the +6% YoY earnings growth, once adjusted for special factors, the growth rate in earnings is a meager 40bps! So, he notes, it appears not to be about earnings but about what investors are willing to pay for the earnings stream and lays out four reasons for the market's 'comfort'. However, while Mr. Market is catching on to the Fed's overt attempt to reflate the economy by reflating asset values, he warns, we have seen in the past how these cycles turn out - and whether you are a trend-follower or contrarian, take note of the overwhelming consensus across almost every asset class right now. Dow Theory advocates have been doing high-fives all year long as the S&P Industrials and Dow Transports make new highs, reinforcing the notion (mirage is more like it) of economic escape velocity, but Rosenberg has more than a few (EIGHT)  'anomalies' that show things are actually stagnating (or contracting) and don't pass his smell test.

Five full years on from the financial crisis, stock markets have regained lost ground and are within striking distance of new record highs. Yet, it’s only now, after all the gains from the bottom have been made, that the investing crowd is starting to put money back into stocks. Curious. When stocks were cheap, nobody wanted them. Now that they’ve breached record nominal highs again (Dow 14,000++), investors are piling back in. It’s almost a cliche, but to make money investing, you generally have to buy something when nobody else wants it, and sell when everyone wants to buy. As a group, gold stocks are down between 20% and 30% over the past year. Yet in that same timeframe, the price of the gold has risen. As a result, sentiment toward gold stocks is pitiful. Even diehard gold bugs are tired of losing money in gold stocks and have been dumping their shares in disgust. There are 4 main reasons I can think of why gold stocks might be so cheap...

Just as it was all tropical storm Sandy's fault for somehow impacting the national economy from California, to Florida, to Oregon and all the way to Vermont, but more importantly - giving economists a scapegoat on which to blame the acute weakness in economic data in the November timeframe, so tomorrow's "historic" blizzard will be the inevitable reason for which the economy will once again perform "below expectations." It will have nothing to do with the ongoing reign of authoritarian terror conducted by the residents of the Marriner Eccles building, which has made a baseline growth rate of 1% in the artificial economy an optimistic outcome. Because, as everyone knows, in a centrally-planned, priced to absolute perfection economy, no exogenous variables, such as snow storms in the middle of winter, can possibly be allowed or certainly factored for. Which is why expect to hear a whole lot more in the next 24 hours about Blizzard Nemo: after all propaganda patterning demands that everyone has a clear image of the perpetrator when the time comes to cast all blame on one single event and to distract from the real cause of now structural underlying economic weakness.

Thanks to Draghi's jawboning the correlated risk-off rampage that occurred into and through the open of the US day-session (as EUR plunged 200 pips) sent S&P futures back well below 1500 on serious volume. Of course, that was unacceptable and once Europe closed and POMO was done, S&P futures began their VIX-coupled liftathon. By the close, S&P cash ended just in the red for the week again - within a 3pt range of closes (1511, 1512, 1509) in the last 3 days. Risk-assets in general were more correlated early on in the dip and then de-correlated (surprise) as stocks lifted. ETFs across rates, stocks, vol, and credit held together; but the underlying markets did not play along as the USD flatlined and Treasury yields only rose modestly as stocks surged this afternoon. Gold and silver ended the day down (after a flurry of dips and rips as Draghi spoke). A late-day, well-timed AAPL press release provided some impetus, pushing Tech almost into the green on the week (as only Staples are so far). European stocks, bonds, and credit are all red for the year; US credit is red for the year; US macro is red for the year; and US stocks continue to believe (SPX +6%) - even as the USD (+0.5% YTD) has the biggest 4-day jump in 7 months!

We urge readers to read the bolded section below, which comes straight from this quariter's Treasury Borrowing Advisory Committee (i.e., Primary Dealers) presentation to the Treasury Department, and explain, with a straight face, just how the Fed will ever be able to not only stop monetizing debt and injecting $85 billion of flow into the stock market, but actually sell any holdings.

"Apple's management team and Board of Directors have been in active discussions about returning additional cash to shareholders. As part of our review, we will thoroughly evaluate Greenlight Capital's current proposal to issue some form of preferred stock. We welcome Greenlight's views and the views of all of our shareholders."

If anyone was hoping that in the peak holiday month of December the US consumer would finally open up the purse strings and "charge" everything, we have bad news: in the last month of 2012 revolving consumer credit dipped by some $3.6 billion, a reversion of the modest increases seen in November and October, and the biggest decline in credit card debt since July of 2012. Yet overall consumer credit rose by some $14.6 billion and beat expectations of a $14 billion increase. Why? Because as we have been warning for quite a while, everyone is now piling into student debt (and NINJA Uncle Sam subprime car loans). Sure enough, non-revolving credit soared by $18.2 billion in December - a monthly record for this time series since its revision several months back - and shows that when it comes to levering up, few are using their credit cards, as increasingly more opt to rotate proceeds from their "student loans" into everyday purchases.

In a surprise announcement, BoJ Governor Shirakawa announced that he will step down on 3/19 (a month ahead of schedule) and while Barclays notes that there had been talk at one point that Mr Shirakawa might step down in a bid to protect the BoJ’s independence in response to Mr Abe’s threats to revise the BoJ Act; the decision, however, appears to have been motivated by policy considerations (the desire to have the governor and deputies start together). At a time when Japan’s stockmarkets are celebrating JPY weakness, Mr Shirakawa’s move provided yet more bounce as the new BoJ leader is expected to be even more dovish. Abe's push for a new governor, however, is meeting resistance from his own cabinet and financial bureaucrats, who fear extreme measures from the central bank may trigger a damaging rise in bond yields. The tussle, which Reuters notes, is testing Abe's resolve, but lies between a slightly less dovish bureaucrat in Toshiro Muto (favored by the opposition) and a banker, Haruhiko Kuroda, who is a front-runner in Abe's camp. With Draghi's comments today, we suspect Abe will err on the side of uber-dovish to fight the currency wars alongside him.

Jeremy Grantham: "I like the analogy of the Fed beating a donkey (the 1% growing economy) for not being a horse (his 3% growing economy). I assume he keeps beating it until it either turns into a horse or drops dead from too much beating!"

The insanity that has gripped policymakers all over the world really is a sight to see. There was a time when central bankers were extremely careful not to do anything that might endanger the currency's value too much – in other words, they were intent on boiling the frog slowly. And why wouldn't they? After all, the amount by which the citizenry is plucked via depreciation of the currency every year is compounding, so that the men behind the curtain extract more than enough over time. The latest example for the growing chutzpa of these snake-oil sellers is provided by Lord Adair Turner in the UK (as it faces its triple-dip recession) - who sees the current policy is evidently failing, so he naturally concludes that there should not only be more of it, but it should become more brazen by veering off into the 'Weimaresque'.

The infamous Bob Rubin appeared on CNBC this morning - extolling the "nobody could have seen this crisis coming" meme - and Rick Santelli went after the hypocrisy of these so-called elites and what they did and didn't know. The glaring hypocrisy of claiming that S&P knew that everything they rated was a P.O.S. and yet no-one else could have seen the crisis coming. The crony capitalism of Geithner's proximity to Rubin's Citi during the dark days - especially considering the increasing evidence in book after book - prompts Santelli to suggest we "draw our own conclusions." From saving the GSEs to Maxine Waters ignorance and Barney Frank's slamming of any pessimists, Santelli covers a lot of ground fast but notes, with venom, that none of these 'elites' ever want to be the naysayer (due to the implications) and they will never "take away the punchbowl," and while he proclaims that if S&P goes down then everyone should suffer clawbacks, he reminds us all, "you can't fight City Hall."

Back in December 2011 the US government first lied, then grudgingly had to admit that Iran had seized one of its RQ-170 Sentinel drones, which crash-landed in the middle of the country, after Iran released a video showing its scientists attempting to reverse engineer the contents of the drone. Naturally, the US politely asked for its drone back, and just as naturally, Iran politely refused to comply. So what was Iran doing in the intervening 14 months? Hacking the drone of course, which it finally succeeded last night when it released a short clip of what it had supposedly extracted from the remains of the Sentinel. The full clip is below, and while it does not provide any incremental informational benefits to Iran, or any further humiliation to whoever created the US drone fleet without a self-destruct option, it certainly will boost Iranian morale on the ground for hacking the Great Satan.

From Fed's Stein: "The insurance company might approach a broker-dealer and engage in what is effectively a two-way repo transaction, whereby it gives the dealer its junk bonds as collateral, borrows the Treasury securities, and agrees to unwind the transaction at some point in the future. Now the insurance company can go ahead and pledge the borrowed Treasury securities as collateral for its derivatives trade." Thanks to the magic of FAS 140 banks can literally transform worthless garbage into supersafe Treasurys, then use that newly transformed collateral via further repo as cash to fund simple stock purchases, and at the end of the day nobody knows where the exposure came from, who the counterparty is, and what the ultimate liability is!

EuroStoxx (Europe's Dow) closed today -1% for 2013. France, Germany, and Spain are all lower on the year now. Italy, following ENI's CEO fraud, collapsed almost 3% from the US day-session open, leaving it up less than 1% for the year. Just as we argued, credit markets have been warning that all is not well and today's afternoon free-fall begins the catch-down. European sovereign bonds are no better with Belgian spreads the worst +13bps on the year. Italian bond yields are the highest in seven weeks (with spreads back above 300bps again today) as both Italy and Spain approach unchanged for the year. Europe's VIX closed at its highest in almost 3 months (aside from the 12/28 spike) as Swiss 2Y rates edge ever closer to negative once again. EURUSD broke back below 1.3400, its lowest in 10 days. Cue 'Cleanest Dirty Shirt' talk from US managers in 3...2...1...

The list of public/private institutions that desperately need structural reform is long: the Pentagon, healthcare (a.k.a. sickcare), Social Security, the complex mish-mash of programs that make up the Welfare State, the 73,000 page tax code, public pensions and the financial sector, to name just the top few. Regardless of the need for reform, it isn't going to happen for these structural reasons.