Archive - Jan 16, 2014 - Story

While victory was declared yesterday, today was a let-down for the exuberant. High beta (NASDAQ and Russell) pushed on but the S&P, Dow, and Trannies slid leaving the NASDAQ YTD best performer (+1%) and the S&P back into the red for 2014. Financials underperformed, Utilities outperformed. Treasuries rallied all day - with the long-end underperforming and a notable flattening across the curve (30Y -2bps on the week, 5Y +2bps). The USD had a quiet day as JPY strengthened modestly (hence the weakness in the S&P) as overnight AUD weakness (poor jobs data) left that carry pair alone in the dark. VIX and credit markets have been notable underperformers relative to stocks in the last 2 days. Commodities were quiet all day with some early downside pressure in the precious metals unwound (leaving then down 0.5% on the week). Of course, it wouldn't be the US equity market without the ubiquitous VIX slam attempt to ignite momentum and get the S&P green - it failed for once!

There is a reason why activism was the best performing hedge fund "strategy" of 2013: as we wrote and predicted back in November 2012 in "Where The Levered Corporate "Cash On The Sidelines" Is Truly Going", US corporations - susceptible to soothing and not so soothing (ahem Icahn) suggestions by major shareholders - would lever to the hilt with cheap debt and use it all not for CapEx and growth, but for short-term shareholder gratification such as buybacks and dividends. A year later we found just how accurate this prediction would be when as we reported ten days ago US corporations invested a whopping half a trillion in buying back their stock, incidentally at all time high prices. Putting aside the stupidity of this action for corporate IRRs, if not for activist hedge fund P&Ls, another finding has emerged, one that was also predicted back in 2012. Because in addition to still soaring mountains of cash, corporations have quietly amassed even greater mountains... of debt. In fact, as SocGen reveals, net debt, or total debt less cash, has risen to a new all time high, and is now 15% higher than it was at its prior peak just before the financial crisis!

Argentina is not Venezuela... yet. Following Maduro's comments yesterday capping Venezuelan profit margins and making black-market FX transactions practically punishable by death (our exaggeration), the Argentine Peso is collapsing...

*ARGENTINE PESO FALLS 2.9% IN BLACK MARKET TO RECORD 11.55/USD (Spot is 6.77 - implying a 41% devaluation!

Of course, this is great news for stocks and the MERVAL is surging once again towards all-time record highs (+130% from the beginning of 2013). No news on toilet paper shortages (yet) in Argentina.

While economists are raising their forecasts for 2014, there seems to be little change in the real underlying fundamentals. Much has been made of the modest uptick in NFIB optimism last month, but small businesshope remains 6 points below pre-recession average levels; and as Bill Dunkleberg notes so succinctly: "The President thinks the way to address the malaise in the economy is to give another $26 billion to the long-term unemployed, shown to produce new jobs by 'independent economists' (we know who that is) according to the President. If you borrow $26 billion from China and give it to consumers, it probably does have a positive impact, but does nothing to fix the economy or encourage labor force participation or improve the labor force." It is quite apparent from both individuals and businesses that the government is the real issue that is impeding economic progress.  Maybe it's time that the current Administration did a little less talking and did a little more listening to what the real drivers of the economy are saying.

While funding custom-fit condoms was stretching the government's buck just a little too far for some, the following 5 stunning expenses, earmarks, and pork spending that Bloomberg uncovered are mind-blowing. From over $500,000 on pet shampoo to what to eat on planet Mars; none of these compare with the back-pay for no work paid to Federal employees during the shutdown. Watch this 72 seconds of gluttony without throwing something at your monitor...

After the Chinese news/rumors that pummeled NU Skin the last 2 days, the company has finally been forced to make a statement...

*NU SKIN AWARE CHINESE REGS INITIATED INVESTIGATIONS
*NU SKIN SAYS LIKELY NEGATIVE EFFECT ON CHINA REV
*NU SKIN HAS STARTED OWN PROVINCE-BY-PROVINCE BUSINESS REVIEW

After being halted on news pending, NUS was re-halted upon re-opening, plunged further, and is now re-halted down $45 (39%. Herbalife (down 12%) and USANA (down 12%) are also tumbling on this news.

"The "common sense" justifications for these dramatic moves are now well documented. The Federal Reserve (Fed) model, which compares earnings yields on the S&P 500 Index (the inverse of price/earnings) with the Treasury yield, clearly signals to load up on stocks. Common sense also tells us that profit margins are at an all-time high, so clearly it's a good time to be buying stocks. Yellen's dovish background, common sense tells us, is yet further reason to expect continued loose monetary policy and accommodation. And, finally, common sense dictates that recent upward gross domestic product (GOP) revisions, lower unemployment numbers, and a successful holiday retail season, means that of course it's time to load up on stocks. Here's the problem: We don't buy the common sense. And so, like the philosopher boy above, we choose to ignore it. We suggest you do the same, but for good reason."

We have long held that Africa is a crucial region of the world in the near future because there is no more incremental debt capacity at any level: sovereign, household, financial or corporate - in any other region.  As tensions between China and Japan multiply, there is an increasing battle for influence in other states. While China and Japan may look like they’re competing in Africa, the two countries are actually playing different games. Whereas Abe seems content to have Japanese businesses make profits, China is actively pursuing soft power on the continent.

Curious where the Fed's trillions in excess reserves have "gone"? Then look no further.

While the "economy in general" and "jobs" remain a close second (with the latter rising rapidly despite a plunging - and entirely useless - unemployment rate), Americans polled by Gallup still see the number 1 problem facing the US is "dissatisfation with government; poor leadership and abuse of power." Compared with a year ago, mentions of government are up slightly; but mentions of healthcare, on the other hand, have quadrupled -- from 4% in January 2013 to 16% today!

There are many hopes and dreams surrounding the massive multiple expansion of 2013 (that Goldman has warned is entirely unsustainable). Top-line growth is already disappointing in the current results season. The bottom-line is going nowhere but faith remains that we are not near 'peak margins'. While financial engineering (e.g. buybacks) remain possible (though harder in a Fed tapering, rising rate, credit saturated environment) the following chart from Philly Fed data indicates that a 'belief' in the margin story is over - as the spread between prices paid and prices received plunges to its lowest since April 2009 (and in line with previous recessionary periods).

Autarky is more than a ten-dollar word for self-sufficiency, as it implies a number of questions that “self-sufficiency” alone might not. The ability to survive without trade or aid from other nations, for example, is not the same as the ability to reap enormous profits or grow one’s economy without trade with other nations. In other words, 'self-sufficiency' in terms of survival does not necessarily imply prosperity, but it does imply freedom of action without dependency on foreign approval, capital, resources, and expertise. 

In what will likely be the current Federal Reserve chairman's "exit interview", Ben Bernanke will be speaking at the Brookings Institution on "The Fed Yesterday, Today, and Tomorrow." We are sure there are plenty of messages our readers would like to leave for outgoing chair who Senator Bob Corker described as "the biggest dove since World War II," proclaiming his "degrading effects on our society." Of course, Bernanke will leave knowing he started to exit (and all is well - so what happens next is not his fault) though the following chart may be useful when he, we are sure, reminds the world of his inflation record...

On the surface, the January Philly Fed was a beat, printing at 9.4 on expectations of a 8.7 number and up from a downward revised 6.4. However, the internals were hardly as pretty with the most notable, New Orders, plunging from 12.9 to 5.1, the lowest print since May 2013, and also the biggest three month drop since August 2011. Additionally, while unfilled orders posted a modest increase from -6.6 to -1.0, Inventories were crushed sliding from 16.0 to -19.6, on what one can assume were wholesale liquidations, and judging by the retailers abysmal numbers, at hardly profitable levels. Furthermore, the optimism of the diffusion index respondents seems to be waning as the 6 Months forecast slide from 44.8 to 34.4 after hitting a recent near all time high of just shy of 60. Also bad news for margins, as Prices Paid increased by 2.3 points to 18.7, while Prices Received decline from 10.8 to 5.1 - a delta, in the wrong direction, of 13.6. The only good news in the report was the increase in number of employees from 4.4 to 10.0, however offset by the average employee workweek which dropped from 4.8 to -5.3. So more workers, doing less: so much for wage inflation pressures.

NAHB's confidence indicator dropped modestly, missing expectations (for the 4th time in the last 5 months) by the most since October as prospective buyer traffic tumbled. While the "hope" of realtors remains notably disconnected from the reality of sales (for the 3rd time in 20 years, the 4-month slide in prospective buyer traffic is the largest since Spetember 2010 and has dropped to its weakest since May 2013.