Archive - Jul 2013 - Story

A few hours ago, in a somewhat ironic development, Russia's most prominent opposition campaigner - whom some have likened to the US' own Edward Snowden in terms of his whistleblowing aspirations - was found guilty of embezzlement and sentenced to five years in prison, some 19 months after leading the biggest protests to challenge the Kremlin's rule since the Soviet Union's collapse. This immediately hit none other than the local "wealth effect" with RIA reporting that "Russia's stock market fell sharply on Thursday according to Moscow Exchange data, after investors took in the news that opposition blogger Alexei Navalny had been found guilty in a controversial fraud trial and sentenced to five years in jail."

As Japan's infatuation with the great nominal stock market experiment continues, the government wishes nothing more than to put the Fukushima nuclear disaster in the past, so it can restart its nuclear power plants: the critical, decisive factor if Abenomics has any chance of succeeding, as the country's economy will never recover if it has to rely on foreign sources of energy. Alas, for the time being this looks improbable and following the latest news out of Fukushima, it may be downright impossible. According to the BBC, the Fukushima nuclear power plant has been emitting steam from its destroyed reactor, confirming that while one can bury radioactive garbage under the rug, it continues to emit gamma rays and is likely to get much worse before it gets better.

• MSM always "ahead" of the curve: Fed’s Messages Raise Volatility in Threat to Profits (BBG)
• Bernanke Plays Down Link Between Jobless Rate, Fed Moves (WSJ)
• Draghi to Carney Face Test Backing Guidance on Rates (BBG)
• House Republicans Vote to Delay Obamcare Mandates (Reuters)
• China media accuses Japan PM of dangerous politics (Reuters)
• China will replace America as the leading superpower, global attitudes survey finds (SCMP)
• Nonqualified mortgages make up as much as $1.5 trillion of the $10 trillion home-loan market (BBG)
• Dell $24.4 Billion Buyout Plan Is a Nail-Biter as Vote Looms (BBG)
• Republicans could see more bruising Senate primaries (Reuters)
• GM delays Chevy Cruze debut by a year (Reuters)
• Peltz needs support for PepsiCo restructuring dealsa (FT)
• Sweaty Wall Streeters Skip Booze for Spin-Class Meetings (BBG)

Stocks in Europe recovered from a cautious start to the trading session and gradually edged back into positive territory, though the DAX index in Germany under performed following less than impressive earnings by SAP. Company’s shares fell around 3% after the company trimmed its outlook for 2013 software revenue, blaming slowing economic growth in China. Elsewhere, Akzo Nobel shares fell 5% in early trade after the company said that its Q2 net profit almost doubled from the same period last year thanks to the sale of its North American paints division and a tax gain. Going forward, market participants will get to digest the release of the weekly jobs report, Philadelphia Fed survey for the month of July and earnings report releases from Morgan Stanley, Verizon, BlackRock and Google. Finally, today is the second day of Bernanke's semi-annual testimony.

The bad news 'reality' of the Bernanke-aided Main-Street 'recovery' is that savers have missed out on a whopping $10.8 trillion in earned interest usage. The good news behind the bottom 85% of close-to-retiree status Baby Boomers that participate in the “markets” via sub $50,000 retirement money is that at some point, the voters might actually get smart and get mad at how much money has been siphoned from them.

The recent decline in gold prices and the drain from physical ETFs have been interpreted by the media as signaling the end of the gold bull market. However, our analysis of the supply and demand dynamics underlying the gold market does not support this thesis. In our view, the bullion banks’ fractional gold deposit system is testing its limits. Too much paper gold exists for the amount of physical gold available. Demand from emerging markets, who do not settle for paper gold, has perturbed the status quo. Thus, our recommendation to investors is the following: empty unallocated gold accounts and redeem your gold in physical form (while you still can).

While anti-depressant use is surging in Sweden (up 1000% since 1980), bursting in Britain (up 495% since 1991), and up an astounding 400% since 1994 in the USA (with 1 in 10 on some kind of 'prozac'), it is the poor-old Nigerians that should really be complaining. Based on seven variables, Bloomberg has scored 74 nations around the world for their "stressed-out" factor and finds the USA to be 54th (so stop whining and suck it up), Norway the least stressed-out of all and El Salvador and South Africa at the top with Nigeria (with the roiling Egyptians ranking 15th).

If Fed action was based solely on getting the economy to a desired growth level, tapering discussions may not have arisen yet. Instead, the Fed likely would have continued to ‘buy’ as much time as possible to allow the economy to ‘heal’ further; and to get better clarity on the impact of the Sequester and outcome of budget negotiations. In reality and as we have emphasized all year, Fed policy has to also weigh the costs, the risks, and the unintended consequences of buying assets at such an extraordinary pace. The bottom line is that the market can finally see the beginning of the end of QE and therefore the risk versus reward in the Treasury market is in Scotiabank's opinion still to higher yields. The question becomes just how fast rates will rise.

Several companies applied to Japan's Nuclear Regulation Authority on July 8 for permission to restart a total of 10 nuclear reactors in the country. Despite widespread apprehension in Japan about nuclear power following the Fukushima disaster in 2011 that led to the shutdown of all of the country's 54 nuclear reactors, the plan to restart the reactors may succeed for a few reasons.

For the second time in a week, a Drone has been destroyed at Tyndall Air Force Base in Florida. This morning's crash - and later self-destruction - of the unmanned QF-4 drone ( a modified F-4 Phantom apparently used for target practice) on the east-side of the base caused Highway 98 to be closed "as a precaution," for the next 24 hours due to fires resulting from the crash and a small self-destruct charge carried on board the drone. The charge is used to destroy the drone if it leaves its pre-approved flight plan. The last drone crash was last Wednesday morning when Tyndall destroyed a drone over the Gulf of Mexico south of Cape San Blas in Gulf County.

Following Barclays' fine of $453 million by FERC for manipulating electric energy prices in California (and other other Western markets), it seems the price of infamy is weighing heavy on Blythe Masters' overlords at JPMorgan in yet another derivative debacle for the "I invented CDS" queen. As we discussed in great detail here, FERC's investigations into JPMorgan's actions saw them pursuing actions against the firm and Ms. Masters. In recent weeks settlement rumors have been heard and now as the NYTimes reports, it appears - in light of last year's PR and P&L 'London Whale' disaster - the best-CEO-in-the-entire-world-so-there is preparing to settle to the tune of $500 million to keep Blythe out of jail. To settle Ms. Masters' alleged “manipulative schemes” that transformed “money-losing power plants into powerful profit centers,” and then her giving “false and misleading statements” under oath, must mean she has some serious dirt on Jamie (and his fortress balance sheet and best-in-class risk management).

You might think that we have been living in a post-bubble world since the collapse in 2006 of the biggest-ever worldwide real-estate bubble and the end of a major worldwide stock-market bubble the following year. But talk of bubbles keeps reappearing – new or continuing housing bubbles in many countries, a new global stock-market bubble, a long-term bond-market bubble in the United States and other countries, an oil-price bubble, a gold bubble, and so on. Speculative bubbles do not end like a short story, novel, or play. There is no final denouement that brings all the strands of a narrative into an impressive final conclusion. In the real world, we never know when the story is over.

The recent attempt by AT&T to expand into the smartphone leasing business company in order to encourage customers to upgrade their equipment more frequently only confirms something that most industry observers have suspected for a long time: end customers have finally had it with annual (or even biannual) cell phone updates. And now we have proof. According to the WSJ, fewer people are upgrading their smartphones: "The rates at which American cellphone users have traded in their devices for more advanced models have declined over the last few years, according to analysts at UBS. They turned negative last year, when about 68 million people upgraded their phones in the U.S., down more than 9% from a year earlier." That was the first year in the past decade in which the turnover rate was below 0%. Sadly for Apple, Samsung and their competitors, 2013 is not shaping up any better: "UBS predicts upgrades will fall again this year."

Since March 2009, the S&P 500 is up 148% - an excellent performance given the economic unreality occurring under the covers (for example the bounce and fade in real EBITDA for the S&P 500 which is up only 18% from the March 2009 lows). However, to get a sense of just what a fiasco Ben Bernanke and his merry men (and women) have created (and mis-allocated), the performance of firms that are not 'high quality' is up 250% in the same period (massively outperforming the 'excellent' companies' gains of 180%). Based on 'quality' rankings from Barry Bannister's "In Search of Excellence," the un-excellent companies have crushed their 'excellent' peers - what could possibly go wrong?

It is becoming much more apparent that, as we have seen each year for the past three, the Fed's prediction of stronger economic growth by the end of 2013 will be revised lower from the current level of 2.5%. Either Bernanke was lying back then or is he lying now? The problem is that the Fed is literally caught in a "liquidity trap" from which there is currently no escape.  If they reduce liquidity the markets tank, taking down consumer confidence and negatively impacting the economy.  If they keep the liquidity going they will inflate an asset bubble which will ultimately burst destroying the financial markets and the economy.  The choice is, ultimately, a lose-lose scenario even as the bullish case for equities persists. Of course, as Chuck Schumer stated to Bernanke at the last Humphrey-Hawkins testimony, "You are the only game in town."