Archive - Aug 2013 - Story

Even as the Indian capital outflows and current account exodus may be threatening to shut down the economy altogether (except for the three oil companies that received a last ditch USD infusion from the RBI yesterday), the central bank is planning and strategizing. And it appears to have come up with more of precisely the same that has led it to its current unprecedented predicament: prevent the population from converting their wealth into hard money, i.e., gold. But while the government's attempts to impose capital controls on gold purchases have been well documented, the latest foray is just a headspinner. Reuters reports that India is now considering a "radical plan to direct commercial banks to buy gold from ordinary citizens and divert it to precious metal refiners in an attempt to curb imports and take some heat off the plunging currency." Here we can safely assume that the commercial banks will pay for the gold in... Rupees which just hit an all time low?

The first public 'discussion' and not just a stream of teleprompter-driven talking points since the crisis came to a head...

Nearly 2,400 years ago, Aristotle wrote one of the defining works of political philosophy in a book entitled Politics. It’s still incredibly relevant today, particularly what he writes about tyranny. The ancient Greeks used the word ‘turannos’, which referred to an illegitimate ruler who governs without regard for the law or interests of the people, often through violent and coercive means. Aristotle attacks tyrants mercilessly in his book, and clearly spells out the criteria which make a leader tyrannical. You may recognize a few of them...

Research In Motion BlackBerry may have to rename itself again. Or Thorstein Heins will have to do a Vogue cover spread. Or the company will have to take a page from the Amazon playbook and revel in its losses (with the help of a few DE Shaw algos of course). Or, worst case, Carl iCahn will have to tweet that his breakfast plans include checking his email on a BlackBerry. Because operationally the company is set to become the functional equivalent of JCP, especially following the latest news from the WSJ that sales of the company's Hail Mary product, the keyboard-equipped Q10, have been "dismal."

Mere days after the CFO of Zurich Insurance, Pierre Wauthier, was found dead (of suspected suicide) at his home in Zurich, the WSJ reports that CEO Josef Ackerman has abrutly resigned. Just 18 months after his appointment at Zurich (after leaving Deutsche Bank's top position), Ackerman's sudden resignation appears based on his view that the late CFO's family felt he had some responsibility for the death. Following a dismal 7% drop in Q1 profits and having struggled in a low-rate environment since Ackerman took the reins, the reasons for the CFO's suicide are not apparent but a statement from Ackerman oddly commented, "I have reasons to believe the family is of the opinion that I should take my share of responsibility."

On the surface, the just printed revised Q2 GDP number was great: following a preliminary print of 1.7%, the just revised number of 2.5% (beating expectations of 2.2%), up from 1.1% in Q1, should make everyone happy (well not the market which desperately need bad news to go higher). However, as usual, the real news is underneath the surface, which is where we find that both real components of GDP growth, Personal Consumption and Fixed Investment were actually revised lower from the preliminary print. Specifically, Personal Consumption as a contributor of the 2.5% final number was revised from 1.22% to 1.21% (well below the average Personal Consumption number since 2010 of 1.58%), while Fixed Investment was revised from 0.93% to 0.90%. So where did the 0.8% upside come from? It came entire from net trade, which contributed precisely 0.8%. Imports were revised from detracting 1.51% from GDP to just -1.11%, while exports added not 0.71% as previously expected but 1.11%, thus changing the net trade contribution from -0.80% to 0.00%. The remaining two components, Inventories and Government Consumption, were a wash, with one adding 0.2% while the other subtracted 0.1% from the preliminary number.

Initial claims continues its saw-tooth shallow trend lower with a drop of 6,000 this week, very slightly beating expectations. The previous week's 'miss' and unexpected rise was due to a surge of 51,000 new claims in California. It would seem clear that firms have reached a cost-cutting maximum as claims have been in a generally tight range now between 320k and 350k for the entire year.

What is important to understand is that, despite rhetoric to the contrary, "record" earnings or profits are generally fleeting in nature.  It is at these divergences from the long term growth trends where true buying and selling opportunities exist. Are we currently in another asset "bubble?"  The answer is something that we will only know for sure in hindsight.  However, from a fundamental standpoint, with valuations and profitability on a per share basis well above long term trends it certainly does not suggest that market returns going forward will continue to be as robust as those seen from the recessionary lows.

Some took a prior report the that the "developed" nations would use Cyprus as a warplane strike base just as a leaked memo predicted in 2011, skeptically. Today we finally got official confirmation from that Britain that it is sending six RAF Typhoon jets to Cyprus "as a defensive measure amid growing tensions over Syria and talks of Western military intervention." It's defensive in case Syria launches an airborne assault of the UK we take it? And just as expected, with the US already piling up naval assets in both the Mediterranean and the Arabian Sea, Russia is responding in kind, and has dispatched a submarine and a cruiser to the Mediterranean. Finally, keeping things exciting, China reiterated that the West should stay the hell out.

• UN Insecptors to leave Syria early, by Saturday morning (Reuters)
• Yellen Plays Down Chances of Getting Fed Job (WSJ)
• JPMorgan Bribe Probe Said to Expand in Asia as Spreadsheet Is Found (BBG)
• No Section 8 for you: Wall Street’s Rental Bet Brings Quandary Housing Poor (BBG)
• Euro zone, IMF to press Greece for foreign agency to sell assets (Reuters)
• Brothels in Nevada Suffer as Web Disrupts Oldest Trade (BBG)
• U.S., U.K. Face Delays in Push to Strike Syria (WSJ); U.S., U.K. Pressure for Action on Syria Hits UN Hurdle (BBG)
• Renault Operating Chief Carlos Tavares Steps Down (WSJ)
• Vodafone in talks with Verizon to sell out of U.S. venture (Reuters)
• Dollar Seen Casting Off Euro Shackles as Fed Tapers (BBG)

Those curious if the Indian Rupee cratered once again in overnight trading will be disappointed: following the previously reported intervention by the RBI in which it would provide US dollars only to crude companies, the currency rose strongly at the open only to fade and trade rangebound before closing in the mid 67 range. In other words, much more will be needed by the central bank to stabilize the currency, the markets and the economy. The main overnight story, however, remains the Syrian conflict and market reactions to it. Stocks traded higher in Europe early today, with credit spreads tightening as market participants scaled back expectations of an imminent strike on Syria after US Defense Secretary Hagel said that the US will act on Syria only with international collaboration. Of note, the G-20 is set to take place next week where Syria is widely expected to be the hot topic for discussion among global world leaders. But while futures ramped in early trade following a spike in the USDJPY over 98, they have since retraced most of their upside, and crude is back to nearly unchanged.

Defense Secretary Chuck Hagel says that US forces are "ready to go" if the administration decides to strike against alleged Syrian chemical weapon use. As Bloomberg notes in the infographic below, US Navy guided missile destroyers in the Mediterranean Sea are within range of Syrian targets.. and the ships have a combined inventory of more than 200 cruise missiles. On the other side, the Syrian Air Defense system is very robust, and as Stratfor notes, with an estimated 54,000 personnel, Syria's air defense network is twice the size of former Libyan leader Moammar Gadhafi's air force. Here is the Syrian theater of operations...

Punishing a moral obscenity flaccidly, with token military action, would constitute a diplomatic mistake of the first order. That's Negotiations Theory 101. Once you commit yourself publicly to some action, you have to keep that commitment or risk becoming a laughing-stock. Failing to follow through disheartens your constituents and allies. And what adversary, present or future, will take you seriously the next time you want to coerce or deter? That's a reputation no political leadership should want. Savvy diplomats and elected leaders are very sparing with absolute rhetoric. Not just the enemy but allies, friends, and bystanders around the world - not to mention ordinary citizens - measure their deeds by their words. No one wants to be known as the leader who fought for justice halfheartedly. Take it from Truman and Bush.

"Banging the close," is hardly a new 'event' but the ubiquity with which it is occurring around 4pm GMT (when major FX market benchmarks known as 'WM/Reuters rates' are set) is prompting authorities to investigate potential abuse of these benchmarks by the major banks. From Libor to ISDAFix and from base-and-precious metals to energy markets, adding the largest markets in the world - foreign exchange - to the banks' pernicious manipulations does not seem like a stretch. Critically, benchmark providers base daily valuations of indexes spanning different currencies on the 4 p.m. WM/Reuters rates (which in turn drives derivative settlements and triggers). Stunningly, the same pattern - a sudden surge minutes before 4pm in London on the last trading day of the month, followed by a quick reversal - occurred 31% of the time across 14 FX pairs over 2 years, according to data compiled by Bloomberg. For the most frequently traded pairs, such as EURUSD, it happened about half the time! U.S. regulators have sanctioned firms for banging the close in other markets; we await the results of the current probe...

How do markets (US equities, Gold, Crude Oil, and the USD) react around US military conflicts...? Citi shows what happened before-and-after the Gulf War, Kosovo, Afghanistan, Iraq, and Libya... and why Syria is arguably more complex than these previous conflicts...