Archive - Mar 2013 - Story

Following yesterday's Beige Book extravaganza of mediocrity, ConvergEx's Nick Colas decided to do what the kids today call a “Mashup” – mixing different sources to create a new experience. Instead of mixing popular songs, he compared the Beige Book with Google “Trend” analysis for a variety of search phrases.  Take, for example, the message from the Fed that the housing market is recovering. Google searches for “Get a mortgage” are, in fact, very near record highs and over 100% higher than 2007.  On the Fed’s claim that leisure travel is picking up, the Google data is less supportive. On auto demand – an important factor in this recovery – the Google “Buy a car” trend data does look solidly higher.  Finally, the job picture is still mixed.  Google says that if you are unemployed in Chicago, drive to Dallas.  The Fed’s Beige Book seems to concur. The question is not whether the Fed could engineer this nascent recovery.  The question is “Can it last?”  For that, we’ll need some new songs.  And some fresh data in the coming months.

The last three recessions have all had mediocre recoveries of both output and employment. In this noteworthy clip, UCLA's Ed Leamer explains that changes in the manufacturing sector have changed the pattern of layoffs, recalls and hiring during recessions and recoveries. His point is that fiscal and monetary policy will not solve this problem as technological change has meant it is all output gains (productivity) with no input gains (hours worked or wages earned). Any task that is mundane, codifiable, or quantifiable, will be replaced by faraway foreigners, robots, or microprocessors with the implication that we need a workforce suited to the reality of the 21st century - an educational system that doesn't produce the human-equivalent of robots but creative problem-solving analytical thinkers. He concludes, "for those who do not directly compete with microprocessors, the standard of living has improved; for those relatively-unskilled, they're terribly struggling, with very few prospects." It's a sad situation.

The free-money party never ends; but perhaps this 55 seconds of animated reality, created by The Daily Reckoning, will remind some of the after-effects of rising food prices, "pay nothing" savings accounts, and higher taxes.

ECRI's Lakshman Achuthan holds firm to his belief that "a recession started around the middle of last year" and even as he notes consensus expectations for payrolls tomorrow at 160-170k, "year-over-year payroll jobs growth will go to a 16-month low." In this Bloomberg TV interview, the embattled prognosticator explains how "the entire West is in the Yo-Yo years. They have all been having growth stair-stepping down. It is very weak growth with higher cycle-volatility which will give you more frequent recessions." Critically he notes, "Economies do not hang out at 0.5% or 1%. They do not get this low growth steady state muddle through recession-free kind of growth at 1%, which everybody seems to think might be possible. It is not possible. Free markets have economic cycles. they accelerate and they decelerate. if you are doing it at a very low growth rate, the odds of a slowdown going into recession are very high." Some excess truthiness in this brief clip.

North Korean leader Kim Jong-un may be colorful, but he isn’t crazy. There is logic behind the intensified war rhetoric, and while it may be convenient for the American public to believe that they are about to be attacked unprovoked by the unhinged dictator of an eerily isolated country, the truth of the matter is that the US and its allies have been doing some offensive posturing that has Pyongyang very much on edge. Sending NBA hero Denis Rodman to Pyongyang to entertain Kim Jong-un - a die-hard basketball fan - was said to be a goodwill gesture from Washington. Clearly, Washington’s policy decisions are nearly as colorful as Pyongyang’s. Denis Rodman, oddly enough, is a tool (in the instrumental sense of the word). This is where it gets interesting.

It's an odd question, we know - especially ahead of today's Stress Tests, but given today's testimony on assessing the bank secrecy act, apparent trouble-maker Elizabeth Warren pokes and prods (correctly we would add) at the surreality that exists between the Department of Justice, The Treasury, and the financial system. David Cohen, Tom Curry, and Jerome Powell dodged bullets and blame, "does that mean essentially we have a prosecution-free zone for large banks in America?" But Warren wasn't going to be fobbed off with useless banter as she pointed out, "if you're caught with an ounce of cocaine, the chances are good you're going to go to jail... for the rest of your life. But evidently, if you launder nearly a billion dollars for drug cartels and violate our international sanctions, your company pays a fine and you go home and sleep in your own bed at night - I think that's fundamentally wrong." Indeed Ms. Warren.

Four years from the lows and with US risk assets melting up, BAML notes that at this rate the S&P 500 will end 2013 above 2013! The low growth, high liquidity environment has, however, only benefitted some asset classes. As the following table shows, there are a few markets that have a long way to go still...

Icahn wasted exactly zero time to take advantage of Herbalife's board expansion last week which gave him permission to build up his HLF stake to 25%. Moments ago the billionaire corporate raider just announced the purchase of another 2 million shares of HLF stock, taking his total to 16 million shares, or 15.5% of the company, up from 13.6% previously. Scarier for the shorts is that unlike before, Icahn is no longer pussyfooting with costless collars and is buying the shares outright at a blended cost somewhere in the upper $40/share range. The end game here is now very clear: build up a sufficient stake in the company to where the the shorts outstanding are greater than the open float, at which point the stock borrow is pulled creating an epic squeeze, just as we predicted would happen back in December.

The chart below summarizes the "unprecedented" balance sheet and income statement "stress" that the Fed envisions would occur in its draconian "Adverse Case." Ok, we give up: we seriously don't get the joke here. Can someone please explain?

In a stunning headline-making moment of clarity, it appears that all the major financials that the Fed monitors (except GMAC Ally) will survive a cataclysmic, Lehman-like moment based on their self-determined analytics of their deeply illiquid off-balance-sheet assets (and a comprehensive understanding of the co-dependence of all those assets). As Bloomberg notes,

*FED SAYS 18 BANKS PROJECTED LOSSES WOULD BE $462B UNDER TEST
*FED SEES 17 BANKS' TIER 1 COMMON RATIO ABOVE 5% IN WORST CASE
*GMAC ALLY ONLY STRESS-TESTED BANK SEEN WITH TIER 1 COMMON BELOW 5%
*TESTS SCENARIO ASSUMES EQUITY PRICES DROP MORE THAN 50%, HOUSING PRICES DECLINE MORE THAN 20%

Is it any wonder that Government Motors wanted to IPO its GMAC/Ally business recently - with a 1.5% stressed Tier 1 ratio.

Low volume, check. VWAP-reversion-algo, check. Equities higher, check. Dow Theory confirmation that was so convincing when Dow Transports were rising? Umm, no. Trannies lost 0.6% today, underperforming the Industrials by 50bps in March now. Breadth was not confirming the gains either. Financials were the best performers - remember we warned yesterday what happened ahead of last year's CCAR. Treasuries had a poor day with yields popping 5bps but 10Y holding below 2.00% into the close. Silver and Oil recoupled on the week now both +1% as EUR strength was enough to offset JPY weakness and pull the USD lower and supportive of risk. VIX remains dislocated from stocks but fell 0.5 vols today ending the day just above 13%.

Minutes ago the January Consumer Credit report was released. It was expected to post an increase of $14.7 billion. Instead it rose by $16.2 billion. On the surface this would be great: consumers are spending more, levering up confident in the future, etc, etc. Alas, as always in the New Normal, the story was below the surface. Specifically, of the $16.2 billion rise, a tiny $106 million was due to revolving, or discretionary spending credit card, debt. The balance, or 99% of the total, was non-revolving debt, best known as student loans, and less known as GM NINJA car loans. And here is the scary math: in the past 12 months, of the $153 billion in total consumer credit increase, just $6.4 billion was in revolving credit. The balance: student and car loans.

When it comes to assets, there are two kinds: hard, tangible assets such as real estate, equipment and durable goods, and then there are financial assets, or "things" that only have an actual worth in the context of a capital market and a smoothly functioning financial system allowing for value-for-value exchanges and mark-to-market: among these are corporate equities, mutual and pension fund shares and reserves, credit instruments and equity in non-corporate businesses. We bring this up because today, as it does every quarter, the Fed released its Z.1, Flow of Funds report, which shows total US household assets and liabilities. Not surprisingly, with the ongoing surge in the stock market courtesy of the Fed's open-ended QE ticking time bomb, and the second housing bubble courtesy of the banking subsidy known as foreclosure stuffing, in the quarter ended December 31, 2012, at least according to the Fed, the US household's total net worth rose by another $1.2 trillion, taking it to $66.1 trillion. However, one thing was particularly notable in this latest update, and as implied by the above paragraphs, is that as of Q4, 2012, total US household financial assets hit an all time high of $54.4 trillion, well over the previous peak of $52.8 trillion in Q3 2007, and nearly $1 trillion higher compared to the past quarter. In other words, as of Q4 2012, the US household's net worth has never been more reliant on the stock market, which by implication means: Ben Bernanke and his centrally printing colleagues around the world.

Earlier we noted the relative un-cheapness of the US equity market and its elevated expectations that seem just a little excessively hope-driven relative to any historical precedent. However, the decision still remains, do you buy moar here at the highs (as it's different this time) or cover/protect? The following chart, from Morgan Stanley, offers some insight into just how broadly 'expensive' this market is. Each time more than 45% of stocks have reached these valuation levels in the past 13 years, the market has decided enough is enough and shaken loose. But as we keep being told, it is different this time.