Archive - Feb 3, 2014 - Story

UPDATE: Nikkei 225 Futures back under 14,000 - down 15% from Dec 31st high; USDJPY back under 101.00

Despite the hope-driven exuberance exhibited immediately post the Abe/Kuroda show, the USDJPY-pumping stock-momentum fest has ended - abruptly. Japan's Nikkei 225 has lost all its gains and is now trading below US day-session lows (3-month lows) but it is the broader TOPIX index (more akin to the S&P 500) that is collapsing. Down almost 5% on the day (its biggest drop since the May collapse), the TOPIX is at 4-month lows. The TOPIX Real Estate index just hit a bear-market - down 20% from Dec 31st highs. Japanese sell-side shops are in full panic desparation mode as "suggestions" that a sub-14,000 Nikkei will prompt an acceleration of Japan's QQE money-printing idiocy. This is getting ugly fast.

While the Northeast is blanketed by another winter storm, California has its own, quite inverse, climatic problems in the form of a historic drought. Unfortunately for our California readers, it is going to get worse before it gets better because mountain snowpack is about 12 percent of normal for this time of year. The following picture of California from January and a year ago shows just this dramatic difference, which confirms that there is little hope for the parched state.

“There is a low level of strategic trust between the United States and China, which could make bilateral relations more turbulent,” warned a recent report. Although it would be preferable if the two countries trusted one another, this is an unrealistic goal. The U.S. and China are right to distrust one another and this won’t change anytime soon. Therefore, the goal should be to find ways to manage the bilateral relationship without strategic trust. Thus, at most states can trust other states to pursue their own interests (even this is not advisable since it assumes both sides are able to correctly identify that state’s interests). And this is preciously why the U.S. and China do not trust each other and aren’t likely to start anytime soon– namely because they largely have opposing interests in the Western Pacific. America’s interest is in preserving the current status-quo, which is a regional order built around the United States. China’s interest is in rebuilding the regional status-quo that existed before the arrival of the Europeans. That is, Beijing seeks a Sino-centric order.

Europe has an odd definition of recovery: we already knew that in Greece "recovery" means record high unemployment, an entire generation unable to find work, the return of neo-nazism, no ink with which to print tax forms, and even instances where people infect themselves with HIV to get medical benefits. That, and of course, soaring suicides. Now it is Spain's turn. While the Iberian nation is furiously scrambling to catch up to Greece in terms of sheer economic collapse, even if the government has changed the definition of GDP so many times, somehow Spain dares to look people in the eye and claim its GDP is growing with 26% total, and 54% youth unemployment, one statistic Spain can't change is that the suicide rate has soared and is now the highest in eight years.

Afghanistan’s insurgents have endured hard times before, but nothing quite like this. At first glance the war might seem to be turning in their favor. Hundreds of Taliban foot soldiers - the heart and soul of the armed struggle against the U.S.-backed Kabul government - are running out of food, money and ammunition. As Vocative reports, their plight is unlikely to improve anytime soon - people familiar with the Taliban’s finances say the organization’s main sources of revenue have dried up. Wealthy Arab donors, Afghan businessmen and even Pakistan’s powerful and secretive spy agency have all reduced or stopped funding, each for their own reasons. “Anytime I’m out there, I could be martyred,” he says. “And God does not forgive anyone—even a martyr—who dies without paying his just debts.”

With Japanese stocks down 13.6% from their 12/31 highs, the big guns just hit the tape to try to save the day:

• *ABE:BOJ WILL MAKE APPROPRIATE DECISION ON EXIT STRATEGY
• *ABE: NOT EASY TO CHANGE 'DEFLATIONARY MIND'
• *KURODA: BOJ CAN CONDUCT APPROPRIATE EXIT POLICY AS NEEDED
• *KURODA: BOJ EASING HAS HAD INTENDED IMPACT SO FAR

Following Amari's earlier "markets are over-reacting" jawboning, so far this is having little to no effect. USDJPY is actually fading back lower and perhaps stunningly Japanese 20Y bond yields and stocks are back at the same levels seen in May 2013 (1 month after the BoJ unveiled QQE). Time for some Depends Mr. Abe.

In the years since the Financial Crisis, major Central Banks have been engaged in incredible easing programs that included the injection of massive amounts of liquidity into the financial system. That liquidity, Citi notes, had to go somewhere, and in a search for yield, much of it went indiscriminately into Local Markets. So far, the exodus of money from Local Markets has been “tame” compared to previous EM crises and it has also been selective since countries with weaker economies and foreign reserves have been the ones taking the largest hits. However, as Citi warns, our bias is that this is just the beginning.

Would you like to buy a house for one dollar? If someone came up to you on the street and asked you that question, you would probably respond by saying that it sounds too good to be true. But this is actually happening in economically-depressed cities all over America. Of course there are a number of reasons why you might want to think twice before buying any of these homes...

Goldman's Global Leading Indicator's January reading and the latest revisions to previous months paint a significantly softer picture of global growth placing the global industrial cycle clearly in the ‘Slowdown’ phase. They add, rather ominously, While the initial shift into ‘Slowdown’ (which we first noted in October) had a fairly idiosyncratic flavor, the recent growth deceleration now looks more serious than in previous months. Of course, as we noted yesterday, Jan Hatzius us rapidly bringing his optimistic forecasts back to this slowdown reality.

Say what you will about Mike "sugary drinks are illegal" Bloomberg, but at least the trains ran on time. And so did the snowplow. Sadly for his replacement, the same can not be said as was revealed following just one of the first modest snow storms in Bill de Blasio's career as mayor. In his own words (via AP): "Mayor Bill de Blasio says the snow has been falling faster than New York City workers can plow it." So New York gets 8 inches of snow and suddenly it is a snow panic? What happens in case of a blizzard: de Blasio request assistance from the Soc Intern, or perhaps the only solution is to tax the "wealthy" an arbitrary, but "fair", amount more?

The BBC caption-machine discusses the Chinese new year (the year of the horse)... but goes a little too phonetic. Are they wrong?

Equities have the worst day of the year and really no exchange around the globe was left out. Now every one on our screen is down YTD. For US markets, today was the worst day since last June. Overall, while today was active, it was still an orderly session. We did have some interest to buy topside options... Serious pain in risk assets lent a bid to US treasuries as yields continue to retreat from their New Years’ day highs.

Curious why Michael Dell was so eager to take the company he founded private? So he could do stuff like this without attracting too much attention. According to the Channel Register, the recently LBOed company is "starting the expected huge layoff program this week, claiming numbers will be north of 15,000." Of course, with a private sponsor in charge of the recently public company, the only thing that matters now is maximizing cash flows in an environment of falling PC sales, a commoditisation of the server market and a perceived need to better serve enterprises with their ever-increasing mobile and cloud-focused IT requirements - things that do not bode well for Dell's EBITDA - and the result is perhaps the largest axing round in the company's history. But at least the shareholders cashed out while they could.

While the Fed remains convinced (and they would know) that there is no bubble in asset markets - in the face of record issuance of covenant-lite loans, record high stock prices in the face of declining fundamentals, and record low spreads in credit markets as leverage rises - as we noted yesterday, investors "are stretching to find reasons not to cut" their allocations. The bursting of the bubble was dismissed by many late last year as "bubble" talk reached highs - providing psychological non-confirmation that a market drop is unlikely when bubble talk is so high. It seems, in the last few weeks that has shifted as bubble chatter has dropped rather notably. Does that free up investor psychology to sell? Being "greedy when others are fearful" has an equal and opposite trading meme - cover when no one is worried.

Reality will reassert itself in 2014, with lemmings, flippers, and hedgies getting slaughtered as the housing market comes back to earth with a thud. The continued tapering by the Fed will remove the marginal dollars used by Wall Street to fund this housing Ponzi. The Wall Street lemmings all follow the same MBA created financial models. They will all attempt to exit the market simultaneously when their models all say sell. If the economy improves, interest rates will rise and kill the housing market. If the economy tanks, the stock market will plunge, creating fear and killing the housing market. Once it becomes clear that prices have begun to fall, the flippers will panic and start dumping, exacerbating the price declines. This scenario never grows old.