Archive - Jun 2013 - Story

Bill Gross, of PIMCO and serious bond duration pain, finally comes clean: the man who has been criticizing the Fed for years for one after another misguided policy (all of which ultimately culminate with the New York Fed's markets desk going "wave it in" this or that) to the point where he began sounding like a Zero Hedge broken record, opines on the taper. And it is here that Bill's colors truly shine through: "We agree that QE must end. It has distorted incentives and inflated asset prices to artificial levels. But we think the Fed’s plan may be too hasty." In other words, please let me have my Fed and central-planning criticizing cake (but don't actually enact my free market suggestions) and let me eat my management fees too (and no monthly redemptions please). And there you have it: populist critic by day, pandering P&L defender by night.

With the nation's short-term funding markets in crisis mode - no matter how much they are jawboned about temporary seasonal factors - it seems yet another indicator of stress is flashing the red warning signal. China's sovereign CDS has spiked by the most since Lehman in the last 3 days - up 55% to 140bps. This is the highest spread (risk) in 18 months and looks eerily similar to the period around the US liquidity market freeze. Hedging individual Chinese bank counterparty risk is hard (given illiquidty) and so it would seem traders are proxying general risk of failure via the nation's sovereign risk (and stocks which also languish at post-Lehman lows). On a related note, Aussie banks have seen there credit risk rise 50% in the last month as they suffer domestically and from the China contagion.

Bulls make money, bears make money, feral hogs gets slaughtered (by Fed faux hawks)

While mass layoffs are hardly the stuff of dream recoveries, the following chart from Stone McCarthy may just clarify the un-recovery hopes this year a little more. Non-withheld individual income taxes were up sharply year-over-year in the last few months reflecting moves by taxpayers to accelerate income into 2012, in anticipation of tax hikes in 2013. However, now we have passed the prior year's tax liabilities deadline, and payments in June are just for the current year, there is a problem. Individuals make estimated payments if they expect they won't satisfy their current year tax obligation through withholding and as the chart below shows, non-withheld tax payments were down 3.0% versus the comparable period last year - hardly the stuff of consumer-spending-driven recoveries as clearly individuals are not expecting incomes to rise at all this year in aggregate. With every analyst and strategist pointing to H2 2013 as the hope-and-change driven recovery that satisfies a market's extrapolation way beyond current data, we suspect this tax-based deterioration signals more disappointment for the dreamers.

The market deals extremely poorly with paradigm shifts or cycle changes. One reason for this is that there has been no need for any strategy except for the just-buy-the-dip mantra. This may have ended and that could be the best signal to the markets since the global financial crisis started. Sorry to be the messenger, but the only way for investors to understand risk and leverage is by having them lose money. Essentially then, the balance of this year could be an exercise in re-educating the market to long-lost concepts such as loss, risk, inter-market correlations and price discovery. We even predict that high-frequency trading systems will suffer, as will momentum-based trading and, most interestingly, long-only funds. Why? Because, at the end of the day, they are all built on the same premise: predictable policy actions, financial oppression and no true price discovery. We could be in for a summer of discontent as policy measures and markets return to try to search out a new paradigm. This will be good news for all us.

With the spigot about to be turned down there will be a marked effect on earnings and profits in American corporations as borrowing costs rise and as all of the gains that could be taken were utilized from our very low interest rate environment. Much of the corporate earnings gains during the last two years did not result from growth but from financial management which was to be anticipated and expected. Those schemes, however, have been brought to an end by the rise in interest rates. In the meantime the Fed, in every manner possible, will try to downplay what Mr. Bernanke has done. The Governors will make speeches. Tidbit swill be handed to the Press. Calming remarks will come from every corner of the great machine and every stock guru on the planet will focus on the Bernanke's remark that the overall economy is improving. Fortunately I have seen this game before exorcised by every Fed during the last forty years. The correct response is, "Bah Humbug" and the correct viewpoint is to watch what they do and not what they say. They will say what suits them. What they do will be a different story.

There are a number of factors behind the widening canyon of economic inequality, but the primary driver is financialization. Financialization has given those with capital and access to financier expertise ways to skim great wealth from the system without creating any value whatsoever. The hidden toxin in financialization is the resulting concentration of wealth can buy concentrations of political power. Financialization is thus self-perpetuating: once the skimming operations generate billions of dollars in profit, it only takes a relatively small piece of these profits to buy/influence the political class. Once the politicos are in your pocket, the regulators and judiciary fall into line or are marginalized by new statutes or gutted budgets. Financialization is the disease eating away the heart of the economy and what's left of democracy.

Given the earlier rumors of PBOC bailing out the funding markets (followed rapidly by their actual denial/explanation of what is going on which is much less supportive than an exuberantly bouncing market implies), it is perhaps ironic that the nation's government mouthpiece - The People's Daily - explains that help is not coming:

A bailout of the stock market is not beneficial to the development of a sound capital market, although some analysts are suggesting the China Securities Regulatory Commission and the People's Bank of China should intervene

Indeed; it seems the Communist party did learn something about the failures of the US' version of Capitalism and the snowballing impacts of bailout-based unintended consequences.

It's been quite a morning. Beats across the board at the macro headline level. Housing (prices and sales), check; Durable Goods, check; Confidence, check; Richmond Fed, check. So why are stocks not surging?

With Case-Shiller breaking records and even the typically less sanguine Bob Shiller noting (looking in the rear-view mirror) that things are not terrible in the housing market, it appears it is time to play 'flip that house' in these exuberant cities. While not as ready to pop as Yuma, AZ, these are the fastest year-over-year gains for the most 'bubbly' cities in 7 years. What could go wrong? Though, we note, you better have lots of cash because the mortgage market has effectively been slammed shut...

Everyone knows Europe is insolvent; the only question is "when" will Europe be forced to finally admit this truism. The long overdue house of cards may start toppling in as little as 6 months, as The Telegraph reports, Mediobanca's 'index of solvency risk' suggests "time is running out fast" for Italy. With the breakdown in Eurozone talks on a banking union and the Fed's shift in policy, Europe "has become a dangerous place," warns RBS. Unless Italy can count on low borrowing costs and a broad recovery, it will "inevitably end up in an EU bailout." The current situation is as bad as when the country was blown out of the ERM in 1992 as "the Italian macro situation has not improved...rather the contrary; with 160 large corporates in Italy now in special crisis administration." If the ECB doesn’t act, one analyst warns (pleads) it could see all the gains of the past nine months vanish in two weeks. Mediobanca said the trigger for a blow-up in Italy could be a bail-out crisis for Slovenia or an ugly turn of events in Argentina, which has close links to Italian business. "Argentina in particular worries us, as a new default seems likely."

While John Kerry has only been in his role a few months and Russia seemingly happy to hold Edward Snowden for a while longer, it seems he has the hang of international diplomacy...

• *KERRY SAYS U.S. NOT LOOKING FOR 'CONFRONTATION' ON SNOWDEN CASE
• *KERRY SAYS RUSSIA SHOULD RESPECT RULE OF LAW ON SNOWDEN

So there we have it, add another 'threat' to the already brewing war-by-proxy in Syria; in one corner we have Vietnam war "veteran" (always ready to act 'swiftly'), in the other a Former KGB superspy who wrestles bears. Guess who wins.

The May Durable Goods data released moments ago (which like in previous instances will almost certainly be revised downward subsequently but is enough to trigger kneejerk momentum response algos) was better across the board, printing at a 3.6% increase in May on expectations of a 3.0% rise, down from an upward revised 3.6% in April. Virtually all of the pick up in new orders was due to a surge in Boeing orders, which recorded 232 new plane orders, of which however half were orders (funded by still cheap credit) for planes still in the design phase. Stripping away volatile orders for transports (of which non-defense aircraft and parts exploded by 51% in May), the remaining durable goods orders posted a far more modest 0.7% increase, which too beat expectations of an unchanged print. Will today be the day when good economic news are finally bad market news? Stay tuned.

Nothing says economic recovery like one of the most profitable and prestigious law firms in the nation announcing mass layoffs for the first time in 82 years.  Yep, four years after the so-called “recovery” began, things are so good that Weil, Gotshal & Manges has decided to cut 7% of its associates and slash annual compensation for 10% of its partners by hundreds of thousands of dollars. Good luck with that taper Bernank.

If Obama thought dealing with Putin was next to impossible when Snowden was merely hiding in the no man's land of the Sheremetyevo transit zone (see "U.S. steps up pressure on Russia as Snowden stays free") he is about to really lose his grip now that the former KGB spy appears set to "debrief" the very much current NSA whistleblower, and in the process learn as much as possible about US secret spy operations on whose receiving end, for countless years, has been none other than Putin's Russia. As Interfax reports: "Russian law enforcement authorities may detain former CIA employee Edward Snowden to establish the circumstances of his arrival in Russia, including passport details." In other words, Russia is now willing and eager to "force" Snowden to make a faux pas just so it has every reason to end up with the 30 year old in a dark, sound proof room. And just like that Obama's headaches are set to become much, much worse.