Archive - May 28, 2013 - Story

We must have discovered a new bug in excel, because when we took median new home prices (which a week ago hit an all time high) which we then divided by the average American's purchasing power expressed through real disposable income per capita, we got this chart...

Spanish economic data does not always pass the sniff test. A simple example that JPMorgan's Michael Cembalest explains is that as unemployment rose from 10% to 25% from 2008 to Q2 2012, Spanish banks reported stable non-performing loans of 3%. The latest Mad-riddle, as he calls it, has to do with corporate profits but recent headlines from PM Rajoy, explaining his approach to solving the country's devastating youth unemployment problem just beggars belief. Simply put, as Bloomberg reports, he proposes to create a mechanism to temporarily exclude tax rebates granted to companies for hiring young people from the calculation of the government budget deficit - which, his twisted logic prompts, "would enable immediate action because we’d lower contributions to the Social Security system and this would facilitate and encourage hiring. So in summary, his suggestion to boost youth employment is... to further misreport the deficit and to underfund social security even more. With Spanish data already questionable (as we discuss below), this simply exaggerates an already farcical situation.

There has been much speculation in the recent past over what the bottom-line impact of surging stock buyback activity has been on the overall S&P earnings: after all, by removing shares from circulation, the denominator in "per share" calculation gets smaller and smaller with every incremental buyback. Courtesy of JPM we finally have a definitive answer to this long-running question. Of the change in S&P TTM operating earnings between Q3 2011 and the just completed Q1 2013, a stunning 60% or $2.20, of all "gains" of $3.70 have been the result of buybacks. The remainder: a tiny $1.50 is due to actual organic growth. This means that nearly 60% of the bridge between the LTM operating earnings of $94.60 as of Q3 2011 to $98.30 at Q1 2013 has come from corporate management teams engaging in shareholder friendly activity.

Corruption thrives when good people do nothing. Societies rebound when good people do something. Isn't it time to make democratic capitalism happen. Democratic capitalism is about worthwhile production and exchange by communities of people who give a damn. It is expressly not about either crony-driven concentration of wealth or government redistribution.

What is the only thing better than Foreclosure Stuffing to provide an artificial supply-side subsidy to the housing market? How about completely clogging the foreclosure pipeline, by halting all foreclosure sales, which is just what the three TBTF megabanks: Wells Fargo, JPMorgan and Citi have done in recent weeks. Under the guise of 'ensuring late-stage foreclosure procedures were in accordance with guidelines', the LA Times reports that these three banks paused sales on May 6th and all but halted foreclosures. Perfectly organic housing recovery - as we noted earlier... and guess what states the greatest number of 'halts' are in from these banks - California, Nevada, Arizona - exactly where the surges in price have occurred.

Moments ago the US Treasury sold another $35 billion in 2 Year paper in what can only be classified as one of the weakest 2 short-end auction in the recent past. While the high yield rose notably from 0.233% to 0.283%, it is still at negligible ZIRPy levels associated with Bernanke's extended promise to keep the short-end as virtually equivalent to cash currency. With increasing rumblings that the Fed may be tapering, tightening, and otherwise pushing the short-end higher over the next two years, there was little such fear manifesting in the auction's yield which telegraphs nothing but smooth sailing for the next two years in terms of where Bernanke sees yield: perhaps a better indicator will be demand for the 3 Year auction next week which is seen on the cusip of the ZIRP time barrier.  That said, the internals were ugly, with the Bid to Cover sliding from 3.63x to 3.04x, the lowest since the 3.03x seen in February 2011. But it was the general abdication by Direct bidders, who took down a tiny 12.6% of the auction compared to a TTM average of 21.58%, and the lowest since July 2012. Same with Indirects who were left with just 21.93% of the allocation, meaning Dealers had to end with 65.47% of the auction. This was the highest Dealer take down since April 2009. Oh well: at least they will have plenty of "money good" collateral against which to rehypothecate and use the cash proceeds to buy stocks and other risk assets, at least until such time as the Fed proceeds to monetize this paper as well.

With the euphoric market once again serving as a much needed distraction from far bigger geopolitical issues, many have forgotten the plethora of scandals the Obama administration has recently found itself engulfed in. This may change shortly, following news that the head of the US Department of Justice, Eric Holder himself, is now being investigated for lying under oath. Will he too receive an extended absence of leave (with pay) after pleading the fifth, or will the circle of lies slowly but surely start to unwind? Of course, in the New Normal it is probably not only expected, but given, that the chief legal enforcer is just a little more equal when it comes to the same justice he is tasked to enforce.

Over the weekend, when discussing the latest casualty of Bernanke's disastrous monetary policy, the US corporate pension plan, we touched on a topic that has been a recurring theme on these pages: "the start of the unwind of the welfare myth, if only in the private sector for now, made worse by Ben Bernanke's endless tinkering in what was formerly a free market, should be making the guardians of the status quo very, very nervous... and certainly has the disciples of the Bismarckian welfare state delusion on their toes, because they can see very well what is coming down the road." Moments ago none other than Germany's finance minister, Schrodinger Schauble, explained just why this observation is at the core of all modern problem, going so far as using the R-word in the context of Europe (first, and then everywhere else).

With lumber prices limit-down again (and now over 28% from their March highs), we are left assuming that they are building houses with hopium, as opposed to wood, these days...

Gross: What hath Kuroda wrought? JGB yields a bigger influence on Treasuries than tapering potential.

— PIMCO (@PIMCO) May 28, 2013

When news broke a month ago that the US Mint had suspended selling one-tenth ounce gold coins, perhaps the most surprising news was that there were thousands of consumers willing to pay the exorbitant retail premium demanded by the US mint, with the resulting order deluge promptly sapping the mint's stretched inventories. Well: we have good news - as of moments ago the US mint has once again restocked on the popular denomination (with a 20,000 production limit), and without a limit per household. The even better news: the coin will set you back just $195. This means a "tiny" 40% premium to spot.

While this morning's explosion higher in Treasury bond yields (the largest in 9 months) was 'evidence' for many of the 'great rotation' as stocks rallied; it seems that now the 'crowd' is selling everything. Stocks, commodities, bonds, and credit are all offered (while the USD and precious metals are bid). The end of POMO appears to have stalled the exuberance and cracked the JPY collapse of the day (for now - since it is Tuesday). With the 10Y yield now well above the S&P 500 yield, we wonder what 'measure of cheapness' will be wheeled out next to justify buying stocks again.

Over a year ago we wrote "How The Fed's Visible Hand Is Forcing Corporate Cash Mismanagement" in which we explained that due to ZIRP, management teams are left with just two (very shareholder-friendly) capital allocation choices: stock buybacks and dividends, to the detriment of such much more long-term critical uses of funds as capital expenditures, and to a lesser extent M&A. So far, this observation has proven spot on with buybacks (most of which using leverage to arb the record low cost of debt, notably in the case of Apple) dominating cash allocation decisions. However, there is a key drawback to this strategy: corporate assets whose age has hit all time highs across the globe.  Naturally, this is a critical issue in a world in which the return on assets is now rapidly declining as seen in two years of deteriorating profit margins, and in which as much utility has been extracted as possible from an asset base which in many cases is well beyond its functional age. Logically, more and more companies will have no choice but to reasses capital deployment and in the coming months formerly very shareholder friendly companies will have no choice but to redeploy cash from dividends and buyback and to long-ignored capex once more. We bring this up because moments ago Dole Food just provided the missing piece to this capital allocation puzzle.

Just because you have to laugh (rightfully so since it seems everyone is so 'confident'), we thought a quick look under the covers of the Richmond Fed 'beat' was worthwhile. The index 'rose' from -6 to -2 (still negative), beating expectations of -4, seemingly driven by a 'surge' in Shipments (from -9 to +8). The Richmond Fed accounts for around 9.1% of the nation's GDP so it is intriguing that (drum roll please)... New order volume plunged to its lowest since January; the number of Employees swung to a negative, also its lowest since January; the average workweek cratered to -6 (its lowest since August 2012); and Wages dropped near its lowest level in a year. But apart from all that... of course, it's 'expectations' that are keeping the dream alive (despite a fading belief in higher wages). So hard data about the current situation is still collapsing but 'hope' brings us off the ledge?

The Conference Board's measure of just how awesome everyone feels just hit its highest level since February 2008 driven by an impressive surge in 'Expectations'. This should surprise nobody: as we previewed earlier today, "just to make sure that the market closes well green today, the only actual "data" will be yet another reading of consumer "confidence" this time from the Conference Board. Expect this to surge on news that it is Tuesday and stocks have nowhere to go but up, which in turn will send stocks, where else but, up." In short: reflexivity in all its glory. And to think it was just 10 days ago that the market reacted in absolutely the same way to a UMichigan confidence print that beat expectations by the most ever and to the highest since 2007. Perhaps if the US had one consumer confidence metric for every day of the week, all days would be like Tuesdays.