Archive - Jun 2013 - Story

While the market itself has exhibited the exuberance we have all seen before (and never seem capable of learning from), BNP has quantified this love-panic relationship (and the news is not great for the bulls). When in 'love' mode, the average drop in stocks has been 12% in the next six months. The biggest drivers of this "love" have been investor confidence, CoT positioning, short-interest, relative trading volumes, and sectoral outperformance with fund-flows shifting away from "love" suggesting the short-term top is in. The index itself peaked a week or two back at levels of "love' not seen since pre-Lehman; not a good sign.

He knows.

• Whale of a Trade Revealed at Biggest U.S. Bank With Best Control (BBG)
• ECB backs away from use of ‘big bazooka’ to boost credit (FT)
• Turkish unions join fierce protests in which two have died (Reuters)
• Europe Floods Wreak Havoc (WSJ)
• Beheadings by Syrian Rebels Add to Atrocities, UN Says (BBG)
• RBA Sees Further Rate-Cut Scope as Aussie Remains High (BBG)
• China’s ‘great power’ call to the US could stir friction (FT)
• J.C. Penney Continuing Ron Johnson’s Vision on the Cheap (BBG)

All traders walking in today, have just one question in their minds: "will today be lucky 21?" or the 21st consecutive Tuesday in which the Dow Jones has closed green.

All else is irrelevant.

On practically every day of the past four years, we have said that it was the Fed's own policies that are causing the ever-deeper systemic weakness in the US (and now global with all central banks going "all in") economy, which in turn forces the Fed to intervene even more aggressively in an attempt to counteract, in turn generating ever more economic weakness, leading to even more intervention, which is why every incremental episode of QE is larger and longer, and why the economic baseline is ever lower in the most perverse feedback loop of the New Normal. Now, it is once again Bill Gross to catch up to Zero Hedge and conclude just this in his latest monthly letter: "It’s been five years Mr. Chairman and the real economy has not once over a 12-month period of time grown faster than 2.5%. Perhaps, in addition to a fiscally confused Washington, it’s your policies that may be now part of the problem rather than the solution. Perhaps the beating heart is pumping anemic, even destructively leukemic blood through the system. Perhaps zero-bound interest rates and quantitative easing programs are becoming as much of the problem as the solution." Which is why there simply is no way out as long as Bernanke stays in.

Now that the BOJ's "interventionalism" in the capital markets is increasingly losing steam, as the soaring realized volatility in equity and bond markets squarely puts into question its credibility and its ability to enforce its core mandate (which, according to the Bank of Japan Act "states that the Bank's monetary policy should be aimed at achieving price stability, thereby contributing to the sound development of the national economy) Japan is left with one wildcard: the Government Pension Investment Fund (GPIF), which as of December 31 held some ¥111.9 trillion in assets, of which ¥67.3 trillion, or 60.1% in Japanese Government Bonds. Perhaps more importantly, the GPIF also held "just" ¥14.5 trillion in domestic stocks, or 12.9% of total, far less than the minimum allocation to bonds (current floor of 59%).  It is this massive potential buying dry powder that has led to numerous hints in the press (first in Bloomberg in February, then in Reuters last week, and then in the Japanese Nikkei this morning all of which have been intended to serve as a - brief - risk-on catalyst) that a capital reallocation in the GPIF is imminent to allow for much more domestic equity buying, now that the threat of the BOJ's open-ended QE is barely sufficient to avoid a bear market crash in the Nikkei in under two weeks.

There are some problems, however.

Between Fairholme's back-up-the-truck in GSE Preferreds (demanding his fair share of the dividend), the crazy oscillations in the common stock of FNMA, and the ongoing debacle of what to with the government's implicit ownership of the US mortgage business, tonight's news from Bloomberg - that a bipartisan group of U.S. senators is putting the final touches on a plan to liquidate Fannie Mae and Freddie Mac (FMCC) and replace them with a government reinsurer of mortgage securities behind private capital - is hardly surprising. Details are few and far between except to note that the proposed legislation, which could be introduced this month, would require private financiers to take a first-loss position. The new entity, to be named the Federal Mortgage Insurance Corp (or FEDMAGIC), would seek private financing to continue existing efforts to help small lenders issue securities. The 'old entity' - where existing equity and debtholders would seemingly reside would contain the existing MBS portfolio and be put in run-down mode. The following from BofAML provides a possible primer and pitfalls (we think the endgame is very unlikely to be positive for holders of the capital structure below subordinated debt) of this approach.

The Bank of Japan has embarked on one of the most inflationary policies ever undertaken. Pledging to inject $1.4 trillion dollars into the economy over the next two years, the policy is aimed at generating price inflation of 2% and further depreciating the Yen. The idea is to fight “deflation” and increase exports. Mises’ key insight was in looking at the long-term effects of such a policy, and in the process he examined the logic behind the short-term results as well. The ineffectiveness of the policy in the long run is apparent when one understands how prices – both domestic and foreign – interact to determine exchange rates. Exports will be promoted in the short run, though the effect will be cancelled in the long run once prices adjust. If the policy is ineffective in the long run, Mises demonstrated that the short-run gains are illusory. The same monetary policy aimed at depreciating the currency to promote international trade will reap domestic chaos.

May was Iraq’s deadliest month in nearly five years, with more than 1,000 dead – both civilians and security personnel -- in a rash of bombings, shootings and other violence. As we read each day of new horrors in Iraq, it becomes more obvious that the US invasion delivered none of the promised peace or stability that proponents of the attack promised. We must learn the appropriate lessons from the disaster of Iraq. We cannot continue to invade countries, install puppet governments, build new nations, create centrally-planned economies, engage in social engineering, and force democracy at the barrel of a gun. The rest of the world is tired of US interventionism and the US taxpayer is tired of footing the bill for US interventionism.

Following the State's takeover of Detroit's finances in March, it seems the end is growing 'nigh'er for the troubled city. According to the WSJ, Kevyn Orr, Detroit's emergency manager, plans to call unions and creditors to a meeting in mid-June to lay the groundwork for a bankruptcy within a matter of months. The meeting is designed to restructure the long-struggling city's liabilities of over $17bn and is an attempt to "have a mature and sober discussion" of repayment terms following its delayed payment in April of $226 million on pensions and other obligations. Several unions said they are willing to come to the table, but believe "it's a scare tactic." Up to now, Gov. Snyder and Detroit elected officials have said they want to avoid using bankruptcy (Detroit would be the biggest muni filing ever) to clean up the city's mess. But in recent days, their positions have softened, adding that, "I don't want to go to bankruptcy, but I do know that it is a strong possibility." Mr. Orr's office confirmed it was evaluating the potential sale of prized assets such as the artwork at the Detroit Institute of Art, a collection potentially worth billions.

Whether the Japanese government guessed that the 150% annualized surge in the nominal price of their stocks, or 30% devaluation was unsustainable is questionable, but it seems that 'Plan B' is being created. As The Diplomat notes, finding itself in an increasingly complex and hostile security environment, Japan has taken the first steps towards developing a pre-emptive first-strike capability. This is a controversial move in a region that remains wary of a potential return to Japanese militarism.

With the story du jour of electric car wunderkind Tesla so far only just that, a story (inasmuch as the gorgeous Fisker Karma was also just that at least until the day it transformed into a bankruptcy filing), if one that has cost shorts dearly including their shirts, slowly the company's fundamentals are coming into view. And just as importantly, the question of how it all clicks together. To assist with that, Reuters Breakingviews has compiled an interactive forecast that models how many cars luxury (for now) car maker would needs to sell (hopefully not all at the EBT-ineligible $100K price point) in order to grow into Elon Musk's target market cap of $43 billion, or roughly where GM is right now. The answer: a base-case assuming a 15x P/E multiple in 2022, a 12% pretax margin, and a 25%/25%/50% split between the Model S ($100K), Model X ($75K) and the still to be disclosed "Bluestar" lower-priced car ($40K) , results in a mindblowing 537,815 cars that will have to be sold in 2022, implying a 35.5% annualized sales growth from the 35,000 cars projected to be sold in 2013 (even if today's numbers did not quite validate this runrate), a cumulative total over the next decade of just under 2,000,000 Teslas.

Why did the E-Mini just dump by 6 points on no news following the 6pm resumption of trading? Why not. Maybe someone hacked the vacuum tubes' calendar file and instead of Tuesday has pegged tomorrow as a Wednesday which takes away any "fundamental" reason to ramp futures and stocks (or perhaps someone leaked that after Tuesday we get a Wednesday when nothing levitationally magical happens, which however makes no sense: after all someone could just as easily refute that rumor with another rumor that yet another Tuesday will follow a week from tomorrow, offsetting the Wednesday rumor). That, or your run of the mill fat finger. Or, worst case, someone actually, gulp, selling with premeditated intent (which in the new normal is at least a 2nd degree felony, somewhere up there alongside marketslaughter).

Fractional reserve banking is unlike most other businesses. It's not just because its product is money. It's because banks can manufacture their product out of thin air. Under the bygone rules of free market capitalism, only one thing kept banks from creating an infinite amount of money, and that was fear of failure. Periodic bank failures remind depositors of the connection between risk and reward. What is not widely appreciated is that the ensuing government bailouts allowed an underlying shadow banking system to not only survive but grow even larger. To the frustration of Keynesians, and despite an unprecedented Quantitative Easing (QE) by the Federal Reserve, conventional commercial banks have broken with custom and have amassed almost $2 trillion in excess reserves they are reluctant to lend as they scramble to digest all the bad loans still on their books. So most of the money manufactured today is actually being created by the shadow banks. But shadow banks do not generally make commercial loans. Rather, they use the money they manufacture to fund proprietary trading operations in repos and derivatives. No one knows when the bubble will pop, but when it does a donnybrook is going to break out over that thin wedge of collateral whose ownership is spread across counterparties around the world, each looking for relief from their own judges, politicians, bureaucrats, and taxpayers.

With the biggest drop in Turkish stocks in a decade and the biggest jump in Turkish bond yields on record, the troubled nation finally made some mainstream media screens today. As we have noted here and here most recently, the social unrest is escalating rapidly, as Stratfor notes, the protests grew rapidly over the weekend and spread quickly to other major regions and cities in the nation. The largest protests, in Istanbul and Izmir, brought out predominantly young protesters in the tens of thousands. These protests will be highly significant if they grow to the hundreds of thousands, include a wider demographic and geographically extend to areas with traditionally strong support for the ruling party.