Archive - Feb 19, 2014 - Story

In summary: non-GAAP P/E of 259x, and GAAP P/E of Div/0, as GAAP Market Cap/Sales is a "conservative" 12.4x. Good luck with that growth. You are going to need it.

With the Hryvnia at near-record lows (9.08 to the USD) and 3-month bill yields at 42%, we get a glimmer of good news from Ukraine:

• *UKRAINE PROTEST CAMP WON'T BE STORMED TONIGHT, OPPOSITION SAYS
• *UKRAINE GOVT, OPPOSITION AGREE ON TRUCE, YANUKOVYCH SAYS
• *UKRAINE TALKS AIMED AT STOPPING BLOODSHED, YANUKOVYCH SAYS

Though sadly we have seen this before...

The last week or two appeared to be dominated by hope that the transitory weakness in data was weather-related, the recovery was all good, and that the Fed would un-taper to give it a helping hand just in case... Today's FOMC minutes made it clear the latter was not the case and today's macro data made it clear this weakness is not just the weather. With US macro data at six-month lows, the last 2 days saw credit and equity protection markets well bid - even as underlying stocks surged back to unchanged on the year. However, between Fed talking-heads and the FOMC minutes, hope faded... stocks tumbled, credit widened, Treasury yields surged higher, the USD jumped, and precious metals were slammed into the red on the week. Volume - surprise surprise - was the highest in over a week.

With inventories of unsold cars at or near record highs and the Big 3 up to their old tricks of channel-stuffing (as we have vociferously exposed), it seems time has run out for the US manufacturing renaissance. The 'if we build cars, they will come and buy them' mentality has hit a literal wall as not only are dealers bloated with stock, the buyers have dried up. As the following chart shows, the average number of days it takes to sell a car in the US has surged recently after 9 months of improvement. This is the worst (slowest) pace of sales since August 2009. Not what the 'recovery' faithful wanted to hear...

Did you know that the drought in Brazil is so bad that some neighborhoods are only being allowed to get water once every three days?  At this point, 142 Brazilian cities are rationing water and there does not appear to be much hope that this crippling drought is going to end any time soon.  Unfortunately, most Americans seem to be absolutely clueless about all of this. And this horrendous drought in Brazil could potentially have a huge impact on the total global food supply.  As a recent RT article detailed, Brazil is the leading exporter in the world in a number of very important food categories…

Stocks are confused. The FOMC Minutes, which clarified that a) taper is on (no matter what almost), and b) forward guidance has been replaced by some fluffy words; have sent the USD higher, bond yields higher, and precious metals lower in 'classic' un-taper unwind mode. Stocks are holding (for now) as the USD strength (and implicit JPY weakness) is supporting US equities via the idiocy of the carry trade. VIX remains well bid and credit markets are blowing wider.

Perhaps the most important line in today's FOMC minutes:

... Several participants suggested that risks to financial stability should appear more explicitly in the list of factors that would guide decisions about the federal funds rate once the unemployment rate threshold is crossed...

What this means is that since the Fed's legacy forward guidance of a 6.5% unemployment threshold is dead and buried (and will become a non-factor as soon as next month when unemployment could fall well below this red line), what the Fed is now suggesting is that the Fed will "qualitatively" guide to more intangible factors: like "risks to financial stability" better known as the prevailing level of the S&P 500. In short, is the Fed about to admit that screw inflation and screw unemployment, it was all about the S&P 500 and making the rich richer all along?

The US is adding its $0.02 to the international condemnation of the actions under way in Ukraine - desparate to re-write Victoria Nuland's narrative of "f##k the EUR" and political manipulation. President Obama, having not learned his lesson the last time he drew a red line, has come out swinging: OBAMA:`THERE WILL BE CONSEQUENCES IF PEOPLE STEP OVER THE LINE'; OBAMA SAYS U.S. CONDEMNS UKRAINE VIOLENCE IN `STRONGEST TERMS'; OBAMA:MILITARY SHOULDN'T ACT WHERE CIVILIANS CAN RESOLVE ISSUES. Of course, it's unclear if open military action against civilians is 'crossing the line' but we await Putin's response.

With a plethora of Fed speakers playing good cop, bad cop todasy, it is hardly surprising that the FOMC minutes (as adulterated as they are) still show disagreement...

• *SEVERAL FOMC PARTICIPANTS SAID TEMPORARY FACTORS SPURRED GROWTH
• *FED TO CHANGE RATE GUIDANCE AS UNEMPLOYMENT FALLS, MINUTES SHOW
• *SOME FOMC PARTICIPANTS FAVORED `QUALITATIVE GUIDANCE'
• *SEVERAL PARTICIPANTS FAVORED $10 BILLION QE TAPER PER MEETING

The bottom-line is that the Fed is very confused and while headlines will crow of communication and forward-guidance, it is clear they are winging it now as "qualitative" guidance is the new way forward.

Bank of America expects the FOMC minutes to reveal broad support for the continuation of "measured" tapering, with general discussion around what conditions might lead the FOMC to deviate from a $10bn per month pace, but few, if any, specifics. A small number of Fed officials are likely to express worry about the costs and efficacy of QE, but the majority should see those as less important and focus on signs of continued recovery in the labor market. Forward guidance is likely to have less agreement, with a few members supporting reducing the unemployment threshold, a few favoring no change at all, and several supporting a shift toward a more qualitative approach. We expect the FOMC to drop the unemployment threshold and introduce vaguer but more robust qualitative guidance at their March meeting.

Even before Fed's Williams poured cold water on un-taper hopes, it seems new highs in US stocks were being aggressively protected in the options markets. Today the divergence between an exuberant stock market and a defensive options market (VIX) is getting extreme... With the S&P and Russell having achieved their technical goal of 'unchanged' year-to-date, it appears the BTFATH'ers have left the building for a moment.

As we observed yesterday, the market action over the past weeks can be summarized with one word: untaper. Specifically, in light of recent data, the Koolaid addicts had hoped that the crunch in the economy would be sufficient for the Fed to taper the taper, and slow down its removal of crutches, which ironically means that the media should have been focusing on the real causes of the winter swoon - i.e., the tapped out consumer and not blaming snow in the winter. Alas, for all those who had hoped that Yellen would promptly shift to Untaper mode, Fed uber dove Williams has just one present: a glass of (appropriately) ice cold water.

In the last year, China has increased the military activity and actions in the South China Sea around the so-called Nine Dash Line — China’s expansive claim into the region which is in conflict with several other international claims. As USNI reports, Capt. James Fannell, deputy chief of staff intelligence and information operations for PACFLEET, notes that while China has long trained for an amphibious invasion of Taiwan during military exercises but has expanded its training to include a similar attack on Japanese holdings in the East China Sea. He concludes, "the PLA has been given the new task to be able to conduct a short sharp war to destroy Japanese forces in the East China Sea following with what can only be expected a seizure of the Senkakus or even a southern Ryukyu [islands]."

Now that we have the full history of foreign Treasury purchases in 2013, we know the following: in December 2012 total US paper held by foreigners was $5,573.8 billion; one year later it rose to $5.794.9 billion or a $221 billion increase. So how does this look in the context of QE? In the past year, courtesy of the Fed's $1 trillion in TSY and MBS purchases, Ben Bernanke purchases some $552 billion in Treasurys, or about 150% more than all foreigners combined! Suddenly the need for MyRA is becoming all too clear...