Archive - Sep 2013 - Story

Sadly, it appears the Syria debacle is escalating once again. As The Telegraph reports, the current plan says that President Bashar al-Assad's regime will hand over a list of its chemical weapons and facilities by Saturday, and that all will be destroyed by mid-2014. However, a defiant President Assad said in an interview on Wednesday that the task would take at least a year and cost a billion dollars. Syria, which is believed to have over 1000 metric tons of toxins, submitted the letter detailing its chemical weapons to the global chemical weapons regulator but, as Bloomberg notes, officials said the information was inadequate. The Organisation for the Prohibition of Chemical Weapons (OPCW) said it was indefinitely postponing a Sunday meeting to discuss a Russia-US plan to destroy Syria's arsenal. Diplomacy, for now, is not working out so well.

When even the Fed's personal trusted scribe, the WSJ's Jon Hilsenrath, who at least on one occasion saw substantial editorial influence by the NYFed on his upcoming article (dealing with his "prize winning" investigation into Stephen Friedman), accuses the Fed of failing to communicate, one can imagine just how badly the streams of telegraphing futures step by the Marriner Eccles central planners must have gotten crossed. From Hilsy: "Federal Reserve officials created new uncertainty about how much farther they will push their easy-money policies—and new questions about how effective they are at communicating their thinking—with the decision to stand pat on the pace of their bond purchases for now.... Fed Chairman Ben Bernanke also seemed to walk away from some of the guidance he had given in June on how the bond-buying program would play out over the next year, making it even less clear when the program will end." This is ironic, because it was none other than Hilsenrath back on May 10 who wrote "Fed Maps Exit from Stimulus" in which he first laid out that "Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations." How does it feel to have been used Jon?

Wednesday's FOMC-driven epic bond and stock short-squeeze gave way to yesterday's breather. This morning's clarification by Bullard that Taper is close then gave way to a mad-ramp higher on quad-witching algo madness to the highs of the day followed immediately the cash market opened with a collapse in stocks back to their lows... gold, bonds, and the USD have followed similar patterns so far today.

Whether we want to admit it or not, we find ourselves in pre-revolutionary times at the moment. This doesn’t mean we predict violent upheavals everywhere followed by chaos and bloodshed, it means that the current paradigm is no longer sustainable because it is not longer working. More and more people now recognize this. In case you needed anymore insight into the complete and total insanity of the “elite” Central Planners driving the U.S. economy off a cliff, we have decided to highlight a couple of articles explaining the rapid reflation of two important subprime markets: Homes and Autos. Clearly the only lesson learned from the 2008 crisis was that connected oligarchs can steal all they want with total impunity. There’s only one way this ends. With a complete and total collapse and then a massive paradigm shift. We're quite hopeful our next system can be far better than this one.

There was a time when the only geographic region that made up for contracting global Caterpillar sales was Latin America, which was the only silver lining amongst an otherwise dreary year-over-year sales performance landscape. As of August, that is no longer the case, with LatAm sales for the heavy industrial equipment maker plunging from a positive 11% to -3%. This was the first Y/Y drop in LatAm sales for Cat since September of 2012, and joins virtually every other global region in posting a drop in year over year sales. It also dragged total world sales down to -10% on a year over year basis, down from -9% and -8% in July and June, and is the lowest sales "growth" since March. Just three more percentage points and Cat will have the biggest annual drop in global sales since 2010. The only good news in the report: North American sales cautiously peaked out from negative territory where they were hiding since December, and posted a measly +1% growth in August, even as every other world region was substantially in the red. The implications of this report are of course great for stocks: bad CAT, bad end demand, bad global economy, no taper, Turbo QE. Because bad news has never been gooder for the BTFATH chasers.

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72% of the poor and 71% of the middle-class believe government policies (fiscal and monetary) have done little or nothing to help them. Of course, this will be eschewed by the academics (as Santelli recently exclaimed regarding the arrogance of the intellectuals) because "the people" just don't get it. But when 69% of all Americans, according a new Pew study, say large banks and financial institutions have benefited the most from post-recession government policies; communications policies are going badly awry. Despite a surging stock market, exploding home prices, and low rates spurring all kinds of subprime auto loan exuberance, there has been little change in these perceptions since July 2010.

With Septeper an epic disappointment, some terms being casually thrown now include Octaper and Dectaper. But while the first is quite improbable, despite Bullard's attempt at a trial balloon floated on BBG TV moments ago, the prevailing consensus has now shifted to December. Which incidentally is when Bank of America, which was the only big/TBTF bank to correctly forecast a Snotaper announcement, has marked its calendar in expecting the first $10 billion reduction in the monthly $85 billion flow injection by the Fed. To wit: "In line with our out-of-consensus call, the Fed surprised most market participants and did not taper at their September meeting. Moreover, the FOMC statement, updated projections, and tone of Chairman Bernanke’s press conference all were dovish, as we had anticipated. Thus, our base case remains for a December taper. We now expect a modest-sized reduction of $10 bn, split evenly between MBS and Treasuries, followed by a gradual, data-dependent wind-down of purchases likely to end in October 2014. We also now expect the first rate hike in late 2015 at the earliest (previously we had looked for the first hike that summer), putting the target funds rate at 50 bp at the end of 2015 and 1.50% at the end of 2016."

It seems just as a plethora of Fed heads had to walk back Bernanke's last press conference hawkishness, that the uber-dovishness interpreted by the market from Wednesday's FOMC is now being tapered back. Speaking on Bloomberg TV, Fed's Bullard warns an October Taper is on the cards:

• *BULLARD SAYS ECONOMY ISN'T THAT FRAGILE
• *BULLARD SAYS $10 BILLION TAPER VERSUS NO TAPER NOT `BIG THING'
• *BULLARD SAYS NO TAPER, SMALL TAPER WAS A `BORDERLINE' CALL
• *BULLARD SAYS `SMALL TAPER' POSSIBLE BY FOMC IN OCTOBER

The market (bonds, stocks, and gold) reacted accordingly and is unwinding the exuberance in a hurry. The question now, of course, is what key data is due out that will shift them off the fence. For traders, clearly good news is now very bad news - especially over the next month.

Global central bankers really need to work on their "clear" communication skills: first, the Fed shocked everyone by not tapering on Wednesday, and now, in his first decision since taking over the reins of the Reserve Bank of India, its new head Raghuram Rajan, stunned the world even more, and all 36 analysts who predicted an unchanged decision by the central bank, with the first hike of the country's repurchase rate since 2011, by 25 bps to 7.5% in an attempt to rein in inflation. And just to keep the confusion to a maximum, the RBI also piled on the stunners by concurrently pursuing various other policies that contradicted the repo rate hike, and directly seek to inject even more liquidity into the market, thus offsetting any inflation-battling measures.

• JPMorgan Guilty Admission a Win for SEC’s Policy Shift (BBG)
• Pricing Glitch Afflicts Rollout of Online Health Exchanges (WSJ)
• This will end well: Japan LDP Considers Draft Bill to Put Government in Control of Fukushima Cleanup (WSJ)
• How a German tech giant trims its U.S. tax bill (Reuters)
• Despite Merkel's Popularity, Angst Creeps In (WSJ)
• Hank Paulson warns of regulatory conflict (FT)
• Rajan Surprises With India Rate Rise to Quell Inflation (BBG)
• Apple Begins Selling New iPhones (WSJ)
• Pope Says Church Should Stop Obsessing Over Gays, Abortion (BBG)

It has been a quiet start to Quadruple Witching Friday (expiration of stock index futures, stock index options, stock options and single stock futures) but expect that to change, as erratic price action is a recurring hallmark of Quad Witches, especially with persistent low volume and markets that tend to shut down for no reason. So far stocks have traded steady in Europe this morning, credit spreads widened and Bunds traded in positive territory as market participants positioned for the much-anticipated German elections which are to be held on Sunday, with exit polls to be made available after the close of polling stations at 6pm local time. Ahead of that, and as reported here previously, Germany’s AfD Eurosceptic party could win enough support in the general election on Sunday to gain seats in the German Bundestag, an opinion poll published for a leading newspaper has forecast for the first time. Basic materials and utilities underperformed in Europe, with RWE trading sharply lower in Germany after the company announced plans to cut its dividend by half (and with the Adidas fiasco yesterday, one wonders just how bad things in Europe really are).

The Fed's failure yesterday to announce some sort of tapering of its QE program, despite the consensus of an overwhelming percentage of economists who expected action, once again reveals the degree to which mainstream analysts have overestimated the strength of our current economy. The Fed understands, as the market seems not to, that the current "recovery" could not survive without continuation of massive monetary stimulus. Mainstream economists have mistaken the symptoms of the Fed's monetary expansion, most notably rising stock and real estate prices, as signs of real and sustainable growth. But the current asset price bubbles have nothing to do with the real economy. To the contrary, they are setting up for a painful correction that will likely be worse than the one we experienced five years ago. Following this playbook, the Fed will likely maintain the pretense that tapering is a near term possibility and that it has a credible plan on the shelf to bring an end to QE. In reality the Fed is stalling for time and hoping that the economy will inexplicably roar back to life. Unfortunately, hope is not a strategy.

The cardinal rule of investing – and life, frankly – is, according to ConvergEx's Nick Colas, "When the facts change, you have to change your point of view."  The Fed’s decision to maintain its current pace of bond buying at yesterday’s FOMC meeting is one of those fact-changing events.  Markets were primed for a reduction, and along with a host of other flashing yellow lights that was enough to make plenty of market watchers cautious.  Yes, the Fed will eventually cut the QE tow rope if/when labor markets improve, but for now, Colas notes, they seem content to keep toting the barge and lifting the bale.  That leaves markets free to head to the bar, hopefully avoiding incarceration along the way.  Remember 1999 though, he warns, when markets ripped through Q4 because so many investors had bided their time waiting for the dot-com bubble to collapse earlier in the year?  Cue the music, because this is beginning to look like the same market setup.

When it comes to discombobulated people, IceCap's Keith Dicker notes the financial World has a bunch of them. Leading the pack during the roaring 1990s was the King of Confusion himself – Alan Greenspan. His money reign at the US Federal Reserve was highlighted by bailing out Wall Street’s biggest hedge fund, which planted the seed for the dot-com bubble. Unfortunately for the market, only the combination of retirement and hindsight allowed Mr. Greenspan to become less confused when he admitted he had found a “flaw” in his economic philosophy. Next up on the baffle scale has to be the Eurozone. The decision in 1995 to create a common currency was actually brilliant. The final watered down product - not so much. For now, as markets roll into the fall, investors, politicians, and central bankers remain just as discombobulated as ever... And if you think you are confused... Try being Ben Bernanke for a day.