Archive - Jul 2013 - Story

There is a very simple and elegant solution to declining defense spending, one which has been used time and again in US history when the US government needed to provide the Fed with more securities (i.e. deficit) to monetize: war. According to RT that, or rather its more politicall correct equivalent "kinetic strikes", is what may be just over the horizon. RT reports that President Barack Obama is considering using military force in Syria, and the Pentagon has prepared various scenarios for possible United States intervention.  Army Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, said the Obama administration is deliberating whether or not it should use the brute of the US military in Syria during a Thursday morning Senate hearing. Gen. Dempsey said the administration was considering using “kinetic strikes” in Syria and said "issue is under deliberation inside of our agencies of government,” the Associated Press reported from Washington.

The odds of an out-of-court settlement between Detroit's emergency manager and its creditors are "extremely slim," as the WSJ reports that the troubled city's D-Day draws ever closer to becoming the largest muni default in US history. The last straw on Detroit's camel's back of bankruptcy was following discussions last week between Kevyn Orr (Detroit's emergency manager) and the White House as any hope of a federal bailout to evert bankruptcy fizzled. Folowing Detroit's default in June - demonstrating its insolvency - and its "negotiations in full faith" with creditors set the scene for a pending day in court. The current plan (for now rejected by creditors) means a 90% loss for muni-worker retirees, 81% loss for unsecured creditors, and a 75% loss for secured creditors leaving a "free fall" bankruptcy filing - one without a clear plan or much agreement beforehand with creditors - the most  likely outcome "because there is no other way out of here if we don't reach consensus."

One of the better exchanges today, discussing a topic near and dear to Bernanke's heart - gold:

• BERNANKE SAYS GOLD `IS AN UNUSUAL ASSET'
• BERNANKE SAYS SOME SEE GOLD AS DISASTER INSURANCE
• BERNANKE SAYS `NOBODY REALLY UNDERSTANDS GOLD PRICES'
• BERNANKE: GOLD MAY BE LOWER ON LESS CONCERN OF EXTREME OUTCOMES

Or, even simpler, gold may be lower on more paper gold sellers than paper buyers. In the meantime, gold continues to be in backwardation, but that too "nobody really understands" Bernanke would likely attest.

He said what?

2007 - "The subprime mess is grave but largely contained"

 

2013 - "The amount of US Student Debt is large, but not particularly likely to cause macro-economic instability."

Oh yeah, nothing to worry about here at all (or here or here or here).

On one hand restaurants and bars have been a boon to the US economy. As first reported in June, and updated two weeks ago, America's waiters and bartenders (increasingly more of which are part-time) have made up a disproportionately large portion of job creation in the nation, rising by more than 50,000 on average each month in the last three, and hitting an all time high of 10.34 million workers in July, accounting for 9% of all private-sector payrolls. The surge was enough for Joel Naroff of Naroff Economic Advisors to conclude that "Apparently, people are eating out again like crazy." It turns out this conclusion was 100% wrong. According to this week's very weak retail sales report, Food-service sales fell 1.2% in June, the largest decline since February 2008 and the year over year change in "eating out" rose by just 3.1% - the lowest annual increase since June 2010. But at least all those empty restaurant seats have a record number of waiters catering to the non-existent clients which on the surface should mean the speediest service in history.

It would appear that as we passed new all-time highs this morning in the exuberant pre-Bernanke spurt, more than a handful on wonkish non-believers were piling into protecting their equity portfolios...

The UK's Aviation regulator has found that Honeywell's emergency locator beacon was responsible for the fire in the Ethiopian Airlines 787 at Heathrow last week. The AAIB is calling for the disabling of the ELT from all 787s and a review of the use of lithium ELTs on all other plane models. While this might, at first, seem like a negative for the stock price of Honeywell (and indeed was), given the surreality in which we live, it did not take long for the price of HON shares to not only rebound but to rally above where they were when the news hit. What could possibly go wrong?

Despite the actions and protestations of the central-planners, Chinese home prices have now risen year-over-year for the sixth month in a row and June (at +6.8%) is the fastest rate since January 2011. As Reuters reports, the incessant rise in property prices across 70 major cities hides the real bubbles in Beijing (+12.9% year-over-year) and Shanghai (+11.9%) which, as we noted in detail previously, reflects the apparently unstoppable exogenous hot money (credit) flows that the rest-of-the-world's-central-bankers are pumping into the markets. China's near four-year-old campaign to temper home prices has also been partly undone by strong demand and short supply, and by a rush of efforts by local Chinese governments to sell land to raise revenues but things could escalate as one analyst notes, "faced with the dilemma of how to lower housing prices without exacerbating the economic slowdown, the Chinese government may assess second-quarter results before introducing tougher measures."

Bernanke's prepared remarks to the Senate in the second day of the bi-annual presentation monetary policy presentation will be identical to those from yesterday. The only difference will come in the Q&A, which is not so much Q&A as political grandstanding and a calming tone from the printer-in-chief that good is good and bad is better.

Presented with little comment... aside to ask "will those pesky oil vigilantes stall this central-bank-inspired 'recovery'?"

When we reported on the Initial Claims print we said that "we will have to see the Philly Fed today, where we expect either a huge beat or huge miss to both be catalysts for fresh all time market highs." Well, we just got the all time highs, first in the DJIA for moments ago in the S&P cash as well, following news that the Philly Fed soared from 12.5 to 19.8, slamming expectations of a modest decline to 8.0, and despite a drop in New Orders from 16.6 to 10.2, and a crash in Inventories from -6.6 to -21.6, the headline print coming at the highest since March 2011.

Macro disappointments? Earnings and revenues missing? Outlooks being slashed? No worries, we have Ben... and a Dow that has risen 1000 points in 17 days to just hit a new record intraday high 15,552.70 (and the S&P 500 has risen 8.3% in 17 days to a new rdord high of 1,688.58).

As reported previously, the tech bellwethers all missed their topline revenue estimates, a trend that has so far marked the Q2 earnings season in a carbon-copy replica of what happened in Q1. This continued this morning with more misses by the likes of Verizon, Union Pacific, Baxter and Sherwin Williams: a core representative of virtually every key industry. But nothing shows the ongoing deterioration in top-line corporate generation as the following chart showing the annual change in revenues at the tech and industrial giant Intel. And while the consumer's distaste for desktop chips has been long known and duly noted, one would think that the Fed's central planning brains, Ferbus, Edo and Sigma, would need more i7-based processing power than ever to tell Bernanke with 3 significant digit accuracy just what will happen in 2022, offsetting the decline in normal end demand (as is the case with everything else surrounding central planning).

As Welt reported overnight, the ECB just announced a change to its collateral framework, changing the haircuts and acceptability rules for ABS and covered bonds in an attempt to boost moribund and stalled European lending. As part of its announcement, the ECB reduced haircuts applicable to ABS rated A- or higher to 10% from 16% and to 22% from 26%. The bank also cut the minimum rating for ABS subject to loan level reporting requirements to 2 "A" ratings from 2 "AAA" ratings as more and more credit in Europe sinks into the quicksand of NPL-ness. Draghi also announced he would tighten risk control measures for covered bonds and that all the announced changes would have an overall neutral effect on amount of collateral available. Will this latest Hail Mary attempt work to boost lending in Europe? Of course not: Europe's issue is not credit supply constraints but a deterioration in asset quality and an explosion in NPLs, which has lead to an acceleration in overall deleveraging at both the bank and consumer level, and which is unlikely to end any time soon and certainly not before more widespread liability liquidations a la Cyprus.

In a world where bad news is good, the last thing stocks needed to put a dent in the latest spin that the September taper may be moved to December, was an improvement in claims - which is what they got moments ago when the DOL reported a big claims drop from a downward revised 358K (so it does happen) to only 334K, beating consensus of a 345K print. So Taper back on right? Not so fast. The pre-spun narrative is that July data is very "liquid" with car makers and factories either laying off (or not) workers more (or less) compared to historical seasonal patters. Indeed, the unadjusted claims number rose from 383K to 409K signifying that the only improvement was in the eye of the X-12-ARIMA seasonal adjustment bemodeler. And furthering the No-Taper cause were continuing claims which soared to 3.114 million, up 91K from the prior week, the largest 1 week jump since November, and up from the 2.953 million two weeks ago: the biggest 2 week jump since February 2009. Judging by the stock market reaction, where futures have jumped on the news, the GETCO algos have shifted back into good news is good news mode. For confirmation, we will have to see the Philly Fed today, where we expect either a huge beat or huge miss to both be catalysts for fresh all time market highs.