Archive - Jan 21, 2014 - Story

Said Dr. El-Erian: “I have been extremely honored and fortunate to work alongside Bill Gross, who is one of the very best investors in the world. His talents are truly exceptional, as is his dedication. I have also been amazingly privileged to work with the most talented group of professionals in the investment management industry. Their commitment and tireless work on behalf of our clients have been a consistent inspiration for me since I first joined PIMCO back in 1999.  I wish them continued great success.”

"The latest review shows how the seeds of the current divergence were already sown in the early years of the euro, as unbalanced growth in some Member States, based on accumulating debt fuelled by low interest rates and strong capital inflows, was often associated with disappointing productivity developments and competitiveness issues. In the absence of the currency devaluation option, euro area countries attempting to regain cost competitiveness have to rely on internal devaluation (wage and price containment). This policy, however, has its limitations and downsides not least in terms of increased unemployment and social hardship, and its effectiveness depends on many factors such as the openness of the economy, the strength of external demand, and the presence of policies and investments enhancing non-cost competitiveness." - European Commission

"It looks like this year’s economic horse will pull up lame," warns Bloomberg's Richard Yamarone, adding that the Bloomberg Orange Book Sentiment Index – a proxy for the overall state of economic affairs in the U.S. – has been running below 50 for 49 consecutive weeks, which implies a stagnant growth rate in GDP in the 2-to-2.5% range. The driving theme behind this subpar, sluggish recovery, Yamarone points out, is the lack of desirable growth in real disposable personal incomes, which grew at just 0.6% during the 12 months ending in November.

"I am a former employee of Sears Holdings/K-Mart. I live in Streator, Illinois and our store was “liquidated” in early 2013. There are a lot of “ironies” affiliated with our particular store closure that I would like to make you aware of...

As for Eddie Lampert, I hope he enjoys his exclusive island mansion and all of the perks that he’s afforded off the backs of people like me. I just hope I can find another job soon because I’m clearly one of the “little people” in his world that would just like to know my light bill will get paid."

A number of readers have recently suggested there must be collusion between America and China over the transfer of physical gold from Western capital markets. They assume that governments know what they are doing, so there is a bigger game afoot of which we are unaware.

The truth is that China and Western capital markets view gold very differently and with very different philosophies about gold.

"Treasuries have turned medium term bullish," writes Macneil Curry in his latest reports, advising traders to "get ready to buy a dip," in bonds. At a minimum, he notes, BofAML expects yields to test the 2.691% area, but the most likely outcome is for a push to the multi-month range lows between 2.544% and 2.459%. Curry adds that he expected 5s30s to flatten to around 201bps and while they remain equity bulls he warns, "watchout" as seasonals turn much less constructive once February rolls around and the ratio of 3m-to-1m implied volatility is fast approaching the 1.20 level that traditionally coincides with complacency and market corrections.

The world may or may not have closure on the IRS' targeting of Conservative groups (it doesn't), but by the time the media is finished with Chris Christie, he will be too. Case in point: today's report from the Hill that as a result of Bridgegate, the New Jersey Govenor has seen his popularity plummet in a head-to-head match-up against Hillary Clinton, based on a new Quinnipiac poll. "Christie dropped 9 percentage points in the poll, and now trails Clinton 46 percent to 38 percent in a potential general election matchup. That reverses a December poll that showed Christie leading Clinton 42 percent to 41 percent."

All this boils down to one simple question: can the top 10% (roughly 11 million households) support the billions of square feet of retail space that were added in the 2000s? If the answer is no, as it clearly is, then the retail CRE sector is doomed to implode. Let's try a second simple question: what's holding the retail CRE sector up? Answer: leases that will soon expire or be voided by insolvency, bankruptcy, etc. as retailers close stores and shutter their businesses. One last question: who's holding all the immense debt that's piled on top of this soon-to-collapse sector? The domino of retail CRE will not fall in isolation; it will topple the domino of debt next to it, and that will topple the lenders who are bankrupted by the implosion of retail-CRE debt. And once that domino falls, it will take what's left of the nation's illusory financial stability down with it.

Having been un-shunned and then re-shunned by the UN and US over the Syria peace conference, an Iranian news agency has confirmed that for the first time in history, Iran's navy has dispatched warships on a mission to the Atlantic Ocean. No specific military mission or targets were announced but previous statements had discussed the move to protect the country's cargo ships and oil tankers against pirate attacks. Iran's Rear Admiral had a message of peace and friendship for the rest of the world and said the nation only sought to display its defensive capabilities (just like China, then?).

Having been outspoken over capitalism and the rise of income inequality; for the first time, an address from the leader of the world's 1.2 billion Catholics was read to the political and business elites at the World Economic Forum in Davos. Pope Francis pulled no punches as he implored attendees to remember that "humanity is served by wealth and not ruled by it," and called for "decisions, mechanisms and processes directed to a better distribution of wealth." The guilt-ridden tone was heavy as The Holy See admonished, "I wish to emphasize the importance that the various political and economic sectors have in promoting an inclusive approach which takes into consideration the dignity of every human person and the common good. I am referring to a concern that ought to shape every political and economic decision, but which at times seems to be little more than an after-thought."

"A mysterious new technology emerges, seemingly out of nowhere, but actually the result of two decades of intense research and development by nearly anonymous researchers. Political idealists project visions of liberation and revolution onto it; establishment elites heap contempt and scorn on it. On the other hand, technologists — nerds — are transfixed by it. They see within it enormous potential and spend their nights and weekends tinkering with it. Eventually mainstream products, companies, and industries emerge to commercialize it; its effects become profound; and later, many people wonder why its powerful promise wasn’t more obvious from the start. What technology am I talking about? Personal computers in 1975, the Internet in 1993, and — I believe — Bitcoin in 2014."

Ten days ago, the few carbon-based habitual gamblers left in the market stopped and read Goldman's report which, as we said, may have 'just killed the music' with its slam of the market saying the "S&P500 is now overvalued by almost any measure." Recall: "The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings." Since then, many of Goldman's client must have been displeased that David Kostin refuses to drink from the punchbowl anymore, and sent in their complaints. However, Goldman has refused to budge and issued a follow up defense to its thesis that stocks are overvalued more than at any other time except the tech bubble with "Valuation fact vs. fiction part 2: Responding to common questions about S&P 500 valuation."

Starting at 11:06, S&P futures began to slide, picked up at 11:09, then at ~11:11:11, someone decided to dump 6,800 e-mini contracts in one second all at once in a nice fiduciary-duty-worthy trade as Europe begins to close and POMO ends: the kind of idiotic dumping through the bid stack that is not only allowed, but encouraged in gold and silver. That is around $625 million notional in a second. Volume overall was huge in the last few minutes (as the chart below shows). VIX jerked 0.4 vols higs to 13.4%; JPY banged higher against the USD (but stocks still well below JPY expectations); and bonds quickly bid 1-2bps. This dump in the S&P drops it back to one-week lows.

Let's see: do massive sinkholes next to the headquarters of other massive sinkholes, located in a bankrupt city that may soon become a massive sinkhole, qualify for Federal bailouts?

"It is wrong to link [the Turkish Lira's] fall to the corruption probe," blasted Turkey's Prime Minister Erdogan, explaining that the Lira's fall "is linked to the Federal Reserve's actions." Since the taper was announced the Lira has collapsed over 12%, trading at 2.269 to the USD, a record low for the troubled nation's currency. Of course, the timing is useful for the PM to explain his nation's demise (as it is also proving a good excuse for Thailand - with massive outflows amid its riots; and Ukraine) but it seems the problems on the streets of Turkey are anything but going away. Today's drop in the Lira (the 7th in a row) follows a somewhat surprising "disastrous for their credibility" decision by the Turkish Central Bank to leave rates unchanged (and still warn of inflation).