Archive - Apr 22, 2013 - Story

For those who haven’t already lost interest in the spirited debate over a 2% calculation discrepancy in an historical average, we attempt to clear up the handful of fallacies that have taken hold in the media and blogosphere, while also throwing in some editorial comments and “scores” on each of the parties involved. The three Massachusetts authors – Thomas Herndon, Michael Ash and Robert Pollin, now known on the Internet as “HAP” – argued that a heavily cited 2010 paper by Carmen Reinhart and Kenneth Rogoff (RR) contained fatal errors. In response, RR acknowledged the calculation error but defended their data set and weighting methods. This is more than an obscure academic debate only because RR’s conclusions are well-known in both academic and political circles - suggesting that economic growth tends to slow after government debt rises above 90% of GDP. In the meantime, pundits with a predisposition toward loose fiscal policy have launched a character assassination of remarkable force; but the most amazing thing about the past week may be how many people became instant experts on exactly how RR described their research to policymakers all over the world. One thing remains clear - It’s always politics. Never personal.

With 33% of the S&P 500 market cap having reported, earnings season has had mixed results thus far. Earnings are pacing 4.1% ahead of expectations - 2.8% excluding financials; company guidance was generally negative leading into earnings season, and thus companies are beating lowered estimates and "clearing low hurdles." Early revenue results have been weaker than bottom-line numbers with revenues missing already lowered expectations by 0.3%. However, As Morgan Stanley's Adam Parker notes, three things stand out: negative guidance persists with negative-to-positive guidance surging to a multi-year high of 4.7; Margin expansion expectations remain at multi-year highs; and the consensus EPS for the S&P 500 is being marked down slowly by 0.6% and 1.1% for 2013 and 2014 respectively. With Apple set to report, and its huge relative weighting in many of the indices still, these 'expectations' could shift dramatically.

The charges against Dzhokhar may have been filed under seal but it took minutes to find the full 11 page affidavit by FBI agent Daniel Genck, against the alleged bomber. And while there have been many discrepancies in various official versions of the narrative leading to the capture of the younger Tsarnaev, this is the final, final draft, which means any changes to the story from now on will be greeted by substantial popular skepticism.

The world remains transfixed in the belief that the Federal Reserve can 'prime' the economic pump one more time via monetizing trillion-dollar deficits ad nauseum, inflate its balance sheet to unprecedented levels, and still successfully exit from this largesse leaving behind a 'better' place for mankind. Judging by crescendo of cognitive dysfunction, the nominal price level of US equities can dismiss current weakness since we just have to wait a little longer (and print a little moar) and the old normal growth will rise phoenix-like from the ashes of our post-debt-super-cycle world. The truth is far simpler - US equity markets are not valued on earnings (LTM, current, or forward); they are not priced off discounted dividends; there is no discounting of macro upturns; or great rotations. Since the crisis began, there is only one thing that matters, as Gluskin Sheff's David Rosenberg notes from this stunning chart, "the NYSE Market Cap, this cycle, actually went up dollar for dollar with the expansion of the Fed's pregnant balance sheet."

Dzhokar Tsarnaev charged with conspiring to use weapon of mass destruction against persons and property in U.S. resulting in death

— U.S. Attorney MA (@DMAnews1) April 22, 2013

Still chasing US equities up and down each day? Buying-and-holding large caps for their 'safety'? Reassured that money-on-the-sidelines will take us higher? Waiting for the Great Rotation? Perhaps the following post-mortem from Nanex on today's flash crash in the stock not of some microcap but of nearly $300 billion market cap behemoth Google, will reduce just a little of the fervor over what so many call the stock 'market' and its 'free' and 'efficient' nature.

By now everyone and their kitchen sink has speculated on what caused the great precious waterfall which started on April 12 and continued for the next four days. The factual reason for the biggest gold down days in history will likely remain unknown. In fact, in a sea of unfounded opinions, the only thing missing so far has been an informed opinion on what is really happening in some market - be it the paper of physical, especially in the aftermath of the unprecedented scramble to buy physical, not paper, gold and silver. So to avoid further speculation, and focusing on fact, here is what the CEO of Texas Precious Metals has to say about the state of the actual physical market, not the one where one can create "gold" and "silver" out of thin air. The bottom line? "The physical silver market is, in a word, ugly" and more importantly, "Last week, we turned away business in excess of 100,000 ozs of silver because of stock depletion." Botton line: please keep selling your paper metals - the demand in the physical space has never been greater, and is absorbing all the available inventory at current prices.

Between an 87-year-old Italian, a bearded American, two Japanese sociopaths, and a world in desperate search of 'yield', the yields on Spanish 10Y debt have collapsed in recent days to 4.50% - its lowest since November 2010 (and Italy at around 3.54% also close to 29 month lows). With the backdrop that no harm can ever come to another government, corporate, or high-yield bond ever again, the $660 billion in excess Fed and BoJ liquidity needs to be invested and why not grab the riskiest stuff there is. European stocks ended mixed with Italy and Spain soaring and the rest in the red or unch. Corporate credit rallied, outperforming stocks, but Swiss 2Y rates remained at 3-month lows. Europe, market indications aside, remains very unfixed; but given the leadership's insistence that the market knows best, we assume we should not expect more austerity or belt-tightening as 'investors' are willing to take the bankers' promises as gospel. Just as a reminder - we saw this kind of 'confidence' before in 2011, did not end so well...

As we noted last week, all around the world the demand for physical precious metals has soared in the days following paper gold's price collapse. As the FT reports, from Shanghai and Hong Kong to India, one dealer noted, "Older members who have been in the business for 50 years haven’t seen such a thing." The feverish buying has left many of Hong Kong's banks, jewelers, and even its gold exchange without enough gold to meet demand. Record volumes on Shanghai's exchange, lines outside Beijing jewelry stores, and the proximity of Hindu festivals drove "Indian physical demand and premiums," higher as the worlds two largest gold buying nations prompted one exchange CEO to note that we hadn't, "seen this kind of gold rush in over 20 years." It would seem the concerted effort to collapse paper prices in London and New York has provided the rest of the world a multi-decade buying opportunity.

Curious how hedge funds are faring against each other and against the market (not too hot)? Then this HSBC hedge fund performance update through mid-April is for you.

Overnight a number of media types discussed the inevitability of the 100JPY Maginot Line being crossed (the same way they predicted the inevitable breach of USDJPY 100 two weeks ago). It appears a combination of over-size positioning, options barriers, and economic reality has reduced demand for the JPY cross as a carry trade this morning and after testing 99.98 overnight, JPY is crashing higher since the open of the US equity market. It seems while the G-20 closed its eyes and held its nose, the 'market' is not quite so willing. Why should you care about JPY? Because in this 'market' it's all that matters...

The trajectory of self-employment from 1970 to the mid-2000s tracked general economic growth, which was weak in the 1970s but began a 30-year boom in the early 1980s. Things changed in the recession, as the self-employed ranks have lost 1.6 million from the peak in 2007. The number of self-employed has fallen to early 1980s levels. Small business is the incubator of employment. As it declines, so too do opportunities for first jobs, second chances and economic independence.

In the last few weeks, US macro data has missed expectant extrapolated hope expectations time after time. The deterioration has been very rapid, starting around the third week of March, and has plunged to the worst levels since the ubiquitous equity rally began in November 2012. Combined with dismal micro- performance (and outlooks) from the likes of IBM, GE, and CAT, is there any doubt that this 'market' is disconnected not just from current reality but that 'priced-in' hopes for a hockey-stick-recovery seem improbable at best and exuberant at worst?

The liquidity tsunami that started in September of 2012 in the Marriner Eccles building and continued with the BOJ's own epic QEasing expansion three weeks ago, has so far provided the impetus for Europe to kick the can of its inevitable dissolution for a few more months, yet slowly but surely the market is starting to read through the artificial levels implied by Italian and Spanish bonds, driven by recycled ECB funding via bank and repo conduits and of course Japanese carry cash, and rumblings of a return to crisis conditions are back. And as always happens, once the crisis talk is back, so is discussion of a fiscal union. Sure enough, earlier today Germany's Angela Merkel once again reminded everyone just what the stakes are in order to achieve a truly stable, and sustainable European union: nothing short of ceding sovereignty to Germany. And with that we are back to square one, because that has always been the trade off - want a unified, fiscally and monetarily, Europe? You can get it: just bow down to Merkel.

The week ahead brings key leading indicators of global activity. The flash PMI's in China and Euro area will be published on Tuesday. Bloomberg consensus expects the China flash to be slightly lower than the previous reading and that the Euro area flash releases for manufacturing and service activity will rise slightly. In addition, Korean 20-day export data for April will provide a good guide to both the external sector in Korea and the likely momentum of Asian exports more broadly. For the same reasons, Taiwan export orders are worth a look as well.  The week ahead also provides Q1 GDP prints in US, UK, and Korea. Goldman expects US GDP to rise by 3.2%. The Australia CPI print may open the door to an RBA rate cut as soon as May and Japanese CPI is likely to underscore why the BoJ policy has shifted aggressively. Friday also brings an update of the BoJ's outlook, along with the next BoJ meeting (unchanged policy expected).