Archive - Nov 13, 2014 - Story

"We are still amazed by the chart [below], but it summarises the problem for those seeking to short stocks with fundamental weaknesses. In the last three years, the MSCI World Index has risen by 38% (11% per annum) whilst reported profits have risen by just 3% (that’s just 1% per annum!). As the events of last month attest, central bank actions–not profits–are driving equities forward." - SocGen

WTI Crude plunged another 3.75% to as low as $74.06 today - the lowest since Sept 2010 and dropping at the fastest rate of collapse since Lehman. Airlines popped and Energy stocks dropped 2.7% (now worst sector of the year) but Small Caps were the worst performing major index of the day (turning first around 1030ET and dropping most in over 3 weeks). The S&P tested back into the red for the week but was VWAP-rescued twice. AAPL once again bid saved the Nasdaq. Treasury yields slid lower all day (down 2-3bps across the complex) but remain up 4-5bps on the week. The USD weakened very marginally (still up 0.25% on the week) led by EUR strength. Gold and silver were flat but copper tumbled back below $300 - its lowest close in a month (near lowest close since Jul 2010). HY Credit diverged bearishly this afternoon as stocks ramped to VWAP. VIX rose for the 3rd day in a row, back over 14. Dow record close, Russell biggest drop in 3 weeks.

Throughout history there have always been major shifts in the global financial system. Reserve currencies change. The way people engage in commerce changes. The rules of the game change. This time is no different. And we’re currently experiencing the early stages of yet another historic shift.

"Given such evidence, to believe that the Fed is targeting anything but another bubble in stock prices at this point would be an enormous leap of faith. How could one rationally conclude otherwise? Six years of easy money has unquestionably inflated asset prices but failed to have a proportionate effect on the real economy. If maintaining 0% interest rates was really about wage and economic growth, wouldn’t we have seen it by now after six years?"

Following al-Baghdadi's threats this morning, and General Dempsey's warnings, it appears things are escalating once again in The Middle East:

• *ISIS, AL-QAEDA AFFILIATE AGREE TO FIGHT TOGETHER IN SYRIA: AP

As AP reports, the deal could be a heavy blow to Washington's strategy against the Islamic State group, relying on arming moderate rebel factions to push back extremists in Syria. It appears The West is "gonna need a bigger coalition."

Despite President Obama's "promise" that there would be no combat troop boots-on-the-ground in the fight against ISIS in Iraq (and his doubling of 'military advisor' troop levels last week), The Guardian reports that General Martin Dempsey, the chairman of the joint chiefs of staff, indicated to the House of Representatives armed services committee that the strength of ISIS relative to the Iraqi army may be such that he would recommend abandoning Obama’s oft-repeated pledge against returning US ground troops to combat in Iraq. Dempsey added, rather uncomfortably, that "we're going to need about 80,000 competent Iraqi security forces to recapture territory lost, and eventually the city of Mosul, to restore the border." The irony of this is that the 'not-dead' leader of ISIS al-Baghdadi spoke today and exclaimed that the US will be soon compelled to come on the ground to fight his group.

Simply put, the dollar's rise could destabilize the entire global financial system. To understand why this is so, we have to start with the source of the risk: the world's central banks.

If yesterday's slightly tailing 10 Year auction was a non-event, today's $16 billion 30 Year refunding was one of the uglier long-end auctions in a while, which perhaps is to be expected in a world in which the Fed is, for the time being, no longer monetizing Treasurys and Dealers no longer have the option to turn around and flip the paper back to the Fed on a whim, and with guaranteed profit.

The "compromise" refrain from last week's devastating, for the democrats, midterm election result lasted about one week. Because according to the NYT, here comes Obama with a package of executive actions which will assure Congress full of furious Republicans, which will result in a broad overhaul of the nation’s immigration enforcement system but more importantly, will result in up to five million potential democrat voter illegal immigrants "from the threat of deportation and provide many of them with work permits, according to administration officials who have direct knowledge of the plan."

Today is a 'beautiful day' for U2's front-man Bono as a 'miracle' saved him from what could easily have become 'Wednesday bloody Wednesday' for him and his friends as they flew from Dublin to Berlin. As NBC News reports, Bono had a mid-air scare on Wednesday when the rear door of his private jet plummeted at least 15,000 feet to the ground. The pilots said they noticed a rumble similar to turbulence during a right-hand turn on approach, but that they felt no major change in how the plane was flying even as luggage and door fell to earth... The search for the missing door continues but investigators were overheard saying they 'still hadn't found what they're looking for'.

WTI has now dropped over $2 today with December futures trading below $75 for the first time in over 4 years... "unequivocally good news" right?

Suddenly it is not just the shale companies that are starting to look impaired as a result of tumbling energy prices. According to a Deutsche Bank analysis looking at what the "tipping point" for highly levered companies is in "oil price terms", things start to get really ugly should crude drop another $15 or so per barrell. Its conclusion: "we would expect to see 1/3rd of US energy Bs/CCCs to restructure, which would imply a 15% default rate for overall US HY energy, and a 2.5% contribution to the broad US HY default rate.... A shock of that magnitude could be sufficient to trigger a  broader HY market default cycle, if materialized. "

As Europe gets hungrier and hungrier for a feel-good story, as Brussels longs more and more for a poster child for its 'crisis management' efforts of 2008-2013, as Dublin politicians get closer and closer to facing the crisis-hit electorate, the sunshine being lavished by politicians and the media onto Ireland's economy is likely to get only brighter. It might not feel much warmer, though, on the ground. Nor will it stave off the onset of winter.

While investors are told day after day that low oil prices are "unequivocally" good for America's economy (pick your number $20, $30, $40 billion tax cut for consumers), it appears they are not buying this big lie (that appears to forget the other side of the equation of capex, jobs, and spending from the Shale Oil miracle). As oil prices push to levels where the majority of US Shale plays become non-economic on a half-cycle basis, markets are voting withtheir money and shale-based stocks are pressing to new lows (down 50-70% in the last few months).