Archive - Oct 2014 - Story

"October: This is one of the particularly dangerous months to invest in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December, August and February.” - Mark Twain

Despite President Obama's assurances that the chances of Ebola spreading to America were very small (against experts' opinion that it was about a 20% probability), "it" is here; and so we look forward to hearing from The White House top experts on how well "contained" it is (despite 100 under surveillance and another case in Hawaii and in Washington) and why there's no need for widespread panic.. at least not until the entire Government's 160,000 HazMat suit order is filled...

Despite a low-volume melt-up in stocks off yesterday's European close lows, US equities closed lower on the week with small caps once again the laggards. Even as stocks closed red, the costs of protection in credit and equity markets tumbled as the last 2 days volumeless liftathon in stocks took place against the background of very modest Treasury selling - this has the stench of high-yield bond exposure being significantly reduced (and synthetic hedges being lifted) - something we saw Wednesday into the close. The USDollar rose the most in 15 months today (up for the 12th week in a row - longest streak since Bretton Woods) led by Cable and EUR weakness. Jobs data losses in bonds today were largely reversed with TSY yields ending the week down 7-9bps. Commodities were ugly with silver and oil (under $90) joined at the hip and gold closing below $1200 for first time this year. The Russell 2000 closed lower for the 5th week in a row, the worst streak since Aug 2011.

While by now everyone should know the answer, for those curious why the US unemployment rate just slid once more to a meager 5.9%, the lowest print since the summer of 2008, the answer is the same one we have shown every month since 2010: the collapse in the labor force participation rate, which in September slide from an already three decade low 62.8% to 62.7% - the lowest in over 36 years, matching the February 1978 lows. And while according to the Household Survey, 232K people found jobs, what is more disturbing is that the people not in the labor force, rose to a new record high, increasing by 315,000 to 92.6 million!

"Despite the low level of interest rates, mortgage affordability for first-time buyers remains roughly at the long-term average levels whereas the aggregate home buyer's affordability remains well below the long-term average. As the servicing of student loan debt is part of the Debt-To-Income calculation, the new regulatory (Bernanke-busting) regime compounds the already substantial challenges confronting the first-time home-buyer's access to mortgage credit. We believe the average student debtor is likely unable to secure a typical home mortgage due to their debt-to-income ratio."

Just a day after the former director of The Secret Services resigned over fence-jumper-gate, Bloomberg reports yet another SNAFU in the President's security - a man posing as a New Jersey member of Congress made it into a secure area backstage at President Obama’s appearance at a Congressional Black Caucus Foundation awards dinner in Washington Sept. 27. Rather stunningly, The Secret Service admits "this guy went through security, fully screened."

Day after day we are told of the ongoing success of the ongoing airstrikes of an ongoing coalition of allies fighting against ISIS. However, as ISW reports, on October 2, ISIS detonated three SVBIEDs in Hit, a city between Ramadi and Haditha, targeting security checkpoints at the western and eastern entrances of the city as well as the city center. Hit is one of the few remaining areas in the Thar Thar area of Anbar Province that is not under ISIS control. Local nationals report ISIS members moving freely around the city and black flags flying over government buildings. It appears Iraq is off the grid now and all Washington eyes are focused on Syria (and its Qatari pipeline). This is a problem since ISW notes, if ISIS gains control here then it sets up attacks (and control) of Baghdad.

A major coal mining company has announced another round of layoffs as declining demand for coal continues to depress the industry. The closures will put 261 people out of work. The news has a familiar refrain; more than 20,000 coal miners have lost their jobs since 2011. Compare that to the solar industry, which employs around 143,000 people, according the Solar Energy Industries Association. The fortunes of the two energy industries will only diverge further in coming years. Sadly, many political leaders in coal producing states have not planned for a future without coal. Rep. David McKinley (R-WV) and Rep. Peter Welch (D-VT) have introduced a bill in Congress to help out-of-work coal miners providing a year’s worth of benefits, including training and support for relocation.

Now where have we seen this kind of disconnect before?

It appears the government's "wait-'em-out" tactic is working (optically) as The WSJ reports, angry crowds (of pro-government gangs) descended on pro-democracy protesters in Hong Kong on Friday, causing clashes and have derailed talks with the government. After Leung's refusal to step-down ahead of the protesters' deadline, government officials called for dialog but OccupyCentral exclaimed "if the government does not immediately prevent the organized attacks on supporters of the Occupy movement, the students will call off dialogue on political reform with the government." Some protest opponents tore down banners with words calling for Mr. Leung to resign, while others removed tents set up by pro-democracy crowds to shelter themselves. The optics of Chinese police tear-gassing young Hong Kong protesters did not play well on the world stage but pro-government-gangs (a la Tahrir Square) are exercising free-well to stop the protesters' disruption... we are sure they are handsomely paid...

Amid the recent weakness in stocks and strength in the USDollar, we are constantly reassured by talking heads that major stock market declines only happen during recessions. While that may be technically correct, perhaps it is worth pondering: "Did a recession cause the correction, or did the correction cause the recession?"

Contained? CNN reports that a Washington-area hospital has admitted a patient with symptoms possibly associated with Ebola, the Howard University Hospital said Friday. The patient, who was not named, had traveled to Nigeria and upon returning was "presenting with symptoms that could be associated with Ebola," according to hospital spokeswoman Kerry-Ann Hamilton. The patient is in stable condition.

Have the S&P 500 and Dow Jones Industrial Average seen their highs for the year?  At this point in 2014, it’s probably a coin toss.  There are several factors in favor of a further rally, to be sure.  Corporate profits are still robust, revenue expectations are modest, and long term interest rates remain equity-friendly.  On the flip side of the U.S. equity market coin: long term valuations are toppy, plenty of other markets (commodities, bonds) seem to signal an impending global recession, and a host of geopolitical concerns now seem to be hitting a full boil. Also, let’s not forget that the Russell 2000 peaked in, oh, March (1209) and July (1208) and is down 8.8% from that last high. By that measure, equities are already rolling over. It is true that markets climb a wall of worry. Until it falls on them.

It has been a week since Bill Gross dropped a tape-bomb on the fixed-income market and walked away from the firm he founded decades ago. Since then the world and their pet rabbit have commented (most notably David Tepper's "who cares?"); but one man has been markedly silent... until now. In an interview on Bloomberg TV, former PIMCO Co-CEO Mohamed Al-Erian told Betty Liu that Bill Gross' "departure - the fact that it happened and how it happened - was a surprise."