Archive - Jul 2013 - Story

One of the most widely accepted truisms in what passes for our financial media is that the dollar and gold are correlated: when the dollar weakens, gold rises, and when gold rises, the dollar declines... except this vaunted correlation isn't remotely visible in the charts. There is no correlation between gold and the U.S. dollar index. Not even close. The two move independently; any apparent correlation is semi-random signal noise. They are not on a simplistic see-saw, but instead their co-movements reflect the complex dynamics at work in pricing gold and the U.S. dollar independently.

There was some confusion yesterday when news hit that the SecState's wife, Theresa Heinz Kerry, was hospitalized. This came shortly after yet another fiasco involving Kerry who was caught in a rejection, then admission snafu, that while Egypt was burning he was on his yacht not one but two days in a row. We now get some clarity as to the affliction affecting the billionaire heiress:

HEINZ KERRY SAID TO HAVE BEEN HOSPITALIZED AFTER SEIZURE SIGNS
HEINZ KERRY'S DOCTORS HAVEN'T MADE EXACT DIAGNOSIS, PERSON SAYS
HEINZ KERRY'S CONDITION DISCUSSED BY PERSON CLOSE TO FAMILY

Wondering how the blow out in interest rates is impacting commercial banks, which just happen to have substantial duration exposure in the form of various Treasury and MBS securities, not to mention loans, structured products and of course, trillions in IR swap, derivatives and futures? Wonder no more: the Fed's weekly H.8 statement, and specifically the "Net unrealized gains (losses) on available-for-sale securities" of commercial banks in the US gives a glimpse into the pounding that banks are currently experiencing. In short: a bloodbath.

Just when the jawboning from Europe is reaching its climax that Portugal is fixed again, Greece is fixed, and the core is showing green shoots from the near-depression, Germany (the corest of the core) comes out with its worst exports data since 2009. While imports remained stable - suggesting domestic demand is sustained for now - YoY export growth collapsed 3.2%, the worst tumble since November 2009 "illustrating that Germany's economy still has difficulties shifting into higher gear." The details are a horror-story. Exports to the euro-zone, where 40% of Germany's exports are sent, fell by a stunning 9.6% (while exports to the rest of the world dropped 1.6%). To add to the misery for the 'things are getting better' crowd, Germany's industrial production data missed expectations are dropped back into the negative YoY following the 'hope' inspiring positive YoY print in April that signaled all-is-well. Of course, none of that matters, the DAX is up a stunning 2.4% today on the back of this dismal-is-great data. So much for those green shoots...

It seems that US investors has become so institutionalized in the new normal world of government bailouts and handouts that when the central planners make a decision that is not instantly accretive to the equity shareholders' bottom-line, the first instinct is to sue them. Following the conservatorship that was forced upon FNM/FRE in 2008, which required the companies to pay a quarterly dividend of 10% on the government's near-80% stake (and obviously implicitly benefited the tag-along bailout riders), the decision in 2012 to change the bailout terms to instead hand over most of their profits to the government (since they moved into profitability - thanks to a Fed-sponsored MBS market). This action "impaired shareholder value" according to Perry Capital - who, Reuters reports, is suing the government, noting "investors had every right to expect these rules to be followed." Indeed, just as the 'rules' have been followed in every bailout that has occurred since 2007.

For hedge funds, June was the cruelest month. 

Ambulances are running everywhere, don't know where to, cannot access what sounds like a war zone.

— Mohannad Sabry (@mmsabry) July 8, 2013

Not much in terms of economic data but lots of corporate news with the official Q2 earnings season kick off, as well as a plethora of Fed speakers which in a centrally-planned world, is all that matters.

• Greece's Economic Future 'Uncertain,' Creditors Say (WSJ)
• Secret Court's Redefinition of 'Relevant' Empowered Vast NSA Data-Gathering (WSJ)
• Thomson Reuters Halts Early Peeks At Consumer Data (WSJ)
• Larry Summers Circles as Fed Opening Looms (WSJ)
• S&P to Argue Puffery Defense in First Courtroom Test (BBG)
• Geithner joins top table of public speakers with lucrative appearances (FT)
• Losing $317 Billion Makes U.S. Debt Safer for Mizuho to HSBC (BBG)
• Pilot Error Eyed in San Francisco Plane Crash  (WSJ)
• Investment group sues U.S. over Fannie, Freddie bailout terms (Reuters)
• Egypt officials 'order closure of Islamist party HQ' (AFP)
• Heinz Kerry Transferred to Boston Hospital for Treatment (BBG) - a boating accident?

The central bank "reason" goal-seeked for today's US overnight ramp - because it sure wasn't fundamentals with both German exports (-2.4%, Exp. +0.1%) and Industrial Production (-1.0%, Exp. -0.5%) missing - was the weekend Spiegel story that despite the unanimous decision by the ECB last week to keep rates unchanged, ECB chief economist Peter Praet and Mario Draghi himself had insisted on a 25 bps rate cut. They were, however, stopped by seven council members from the northern euro states, including Weidmann, Knot and Asmussen. As a result, Draghi was steamrolled in the final vote. Yet somehow this is bullish for risk, pushing equity futures higher and peripheral debt spreads lower, even as the EURUSD has drifted higher. Of course, one can't have an even more dovish ECB as a risk on catalyst alongside a rising Euro, but who cares about news, fundamentals, or logic at this point. All that matters is that US futures are higher, which was especially needed following yet another rout in the Shanghai Composite which dropped 2.44% back under 2,000 following news that China's Finance Ministry has told central government agencies to cut expenditures by 5% this year, and a 1.4% drop in the PenNikkeiStock225 on a weaker USDJPY. Remember: all is well in the global economy (whose forecast is about to be cut by the IMF) if the US is generating a record number of part-time jobs.

Tonight out of Bloomberg: ": "China’s money-market cash squeeze is likely to reduce credit growth this year by 750 billion yuan ($122 billion), an amount equivalent to the size of Vietnam’s economy, according to a Bloomberg News survey. The number is the median estimate of 15 analysts, whose projections last week ranged from cuts of 20 billion yuan to 3 trillion yuan"... Two weeks ago from Zero Hedge: "The country is about to undergo an unprecedented deleveraging that could amount to over CNY1 trillion in order to force reallocate capital in a more efficient basis. That's right: a massive deleveraging coming dead ahead in China just in time to shock the market still reeling from the threat of the Fed's tapering." And here is the reason why.

After updating their precious metals' company cost curve, Citi's ominous warning that, "a combination of rising unit costs (15% yoy), sustained high capital budgets and a falling gold price have resulted in a fast contraction in margins - so much that no gold company under our coverage will generate Free Cash Flow at spot gold."

Just over a month ago, global earnings revisions were on the upswing (admittedly off markedly low levels); since then they have turned sharply lower to the worst levels in a year (based on Citi's Global Earnings Revision index - ERI). Critically though, as 'hope' is pinned on a steepening term structure as indicative of 'growth' and happy times ahead for stocks, the ERI has dramatically diverged from the yield curve. As Citi notes, it is evident that analysts are not at all convinced about the improvement in the growth outlook that this steeper curve has historically suggested. What is perhaps more worrisome for the "it's different this time" crowd is that the last time we saw this kind of dramatic divergence between global earnings and the US term structure was in the run-up to Lehman - and that did not end well...

Before the current turmoil began, Ben Bernanke's hope was that rising asset prices would lead to a "wealth effect" that would encourage the American consumer to start spending again, and thus help the American economy finally leave the "Great Recession" behind. However, the empirical data does not support this notion and equally the economy isn't booming sufficiently to make the reverse case that the economy drives the stock market. So what is causing the markets to boom right now? Steve Keen notes that during the period from 1890 to 1950, there was no sustained divergence between stock prices and CPI, and that almost all of the growth of share prices relative to consumer prices appeared to have occurred since 1980; and then, boom! - what must certainly be the biggest bubble in stock prices in human history took off - and it went hyper-exponential in 1995. So are stocks in a bubble? Yes - and they have been in it since 1982. It has grown so big that - without a long term perspective - it isn't even visible to us. It has almost burst on two occasions - in 2000 and 2008 - but even these declines, as precipitous as they felt at the time, reached apogees that exceeded the previous perigees in1929 and 1968.