Archive - Mar 2014 - Story

Two years ago, the mega law firm Dewey and LeBeouf shocked the legal world when it announced, out of the blue, it would be filing for bankruptcy following an exodus of employees as the money had run out. However, as usually happens in cases like these, it was not just gross incompetence that was at fault: one must usually add major act criminality to explain such a rapid fall from grace. Such was the case in the Dewey bankruptcy too. Moments ago former top executives from bankrupt U.S. law firm Dewey & LeBoeuf were criminally charged for "cooking the books" at the once prestigious firm and defrauding investors and lenders. So for those curious, here is how a law firm - and here we can only assume Dewey is hardly alone - can cook the books for 4 years thinking it can get away with it.

Nothing says global 'economic recovery' like a major retailer drastically missing revenue expectations, slashing earnings projections and announcing it will shutter 225 stores nationwide. Staples, the largest US office supplies retailer, hit the triple whammy and didn't blame it all on the weather as the CEO notes "our customers are using less office supplies." Or maybe there are just less office workers? Isolating Staples is a little unfair but as the largest (and most belwhether-ish), it is perhaps time to question the constant meme of escape velocity, improving fundamentals, and cleanest-dirty-shirt growth...

While the biggest strategic news of the day is that the Crimean parliament voted to join Russia with a done deal referendum to be held in a few days, as well as collapse of the anti-Russian sanction lobby with Germany and others getting cold feet against boycotting Russian goods, the tactical developments continue. Of note: earlier today the leader of the most persistent pro-Moscow protest movement in eastern Ukraine was arrested at his home in the city of Donetsk on Thursday, a Reuters journalist who was with police on the raid said. Around 10 members of the SBU security service arrested Pavel Gubarev at his apartment in a five-story Soviet-era block in the eastern city, on charges of "infringing the territorial integrity and independence of the state". He did not resist.

The following charts are a summary taken from the "Money as you Grow" presentation prepared by the President's Advisory Council on Financial Capability (created by executive order). What it highlights are "20 Things kids need to know to live financially smart lives" and is Barack Obama's personal advice to children ages 3 through 18+ on how they should spend their money. The list, which includes among it such brilliant advice as "you may have to wait before you can buy something you want", "it can be cost and dangerous to share information online" (with the NSA), "putting money in a savings account will protect and pay you interest", "the sooner you save, the faster your money can grow from compound interest", "your first paycheck may seem smaller than expected since money is taken out for taxes", "you should use a credit card only if you can pay the money owed in full each month", and of course "you need health insurance" has been pulled straight from Bizarro Day, and literally redefines New Normal humor since everything it recommends is the opposite of how the real world now works.

For the 3rd month in a row, US Factory Orders missed expectations with a major downward revision to December's data (-2%) and has fallen two months in a row. Inventories continue to rise - up nine of the last ten months to the highest level since records began. Better just hope for all that pent-up demand to flood back or we have a problem.

Though many may reckon the U.S. government (and its Deep State) are not so much incompetent as merely evil, we suggest incompetence sows the seeds of evil consequences. Why is our government so incompetent? Short answer: because incompetence has been fully institutionalized in every branch, every agency and every nook and cranny of the state.

Moments ago, Reuters blasted the following headline:

DECREE MAKING CRIMEA PART OF RUSSIA HAS COME INTO FORCE FROM MOMENT OF ADOPTION; RUSSIAN ARMED FORCES ARE ONLY LEGITIMATE FORCES IN REGION -DEPUTY PRIME MINISTER OF CRIMEA

On the surface, this would mean that the Russian annexation of the Crimea if complete (and East Ukraine is coming). Especially when one considers that earlier Crimea also said it could adopt the Russian rouble as its currency and "nationalise" state property as part of plans to join the Russian Federation, a regional official was quoted as saying on Thursday.

Promises, promises. A lack of easing, aside from a promise of "lower for longer", has driven EURUSD back above 1.38 as the market is once again disappointed by Draghi's lack of exuberance.

• *DRAGHI SAYS UNEMPLOYMENT STABILIZING, REMAINS HIGH (umm, continues to rise every month?)
• *DRAGHI SAYS UPSIDE, DOWNSIDE INFLATION RISKS REMAIN LIMITED (umm, continues to plunge every month?)
• *DRAGHI SAYS RISKS TO ECONOMIC OUTLOOK ARE ON DOWNSIDE (umm, stocks are at record highs?)
  
• *DRAGHI SAYS REAL INCOME SUPPORTED BY LOWER ENERGY PRICES (umm, so no sanctions on Russia then?)

But apart from that, Draghi is "nailing it"...

Must be the weather... Initial jobless claims swung from the worst in 2014 last week to the best in over 3 months this week, with a 323k print (well below the 336 expectation). No states estimated claims this week but even the Labor Department suggests the series' volatility is "coinciding" with winter storms. Overall claims dropped 8,000 to 2.91 million on the week but it is clear the descending trend is over for this series - which fits with ADP and ISM Services weakness.

Dismally drifting towards deflation as credit creation is a long and distant thing of the past in the European Union, this morning's decision to hold rates unchanged leaves a lot of "whatever it takes" hope left for the press conference. Whether he will ease lending standards, cut haircuts, enable more securitization, push direct lending (there's no demand!), or "promise" open-ended QE - it's all on the table but we suspect it will be more talk and "whatever" he is doing so far is working... stocks are near record highs and bond yields record lows - which must mean Europe is fixed...

While Janet Yellen fell back on the ubiquitous central banker statement that she "would do all that [she] can" it was Dallas Fed's Richard Fisher who raised the most eyebrows yesterday. In a speech in Mexico City, the central banker said he was concerned about "eye-popping levels" of some stock market metrics warning that the Fed must monitor the signs carefully to ensure bubbles were not forming. While other Fed members have paid lip-service to bubbles, Fisher explicitly discussed stocks in the context of the dot-com boom of the late '90s warning of "the ghost of 'irrational exuberance'" and worried about corporate bonds too.

Even though 14 out of the surveyed 54 economists expected a rate cut of some sort, and some were even calling for an outright QE any minute now, this time the majority of academics, or 40 of them, were right and the ECB proceeded with no changes to its various interest rates.

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.25%, 0.75% and 0.00% respectively. The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.

Maybe Draghi will announce something more actionable at his press conference at 8:30 am but at this point it appears that the ECB's hand are tied even as the continent continues to drift ever more into deflation.

• Spot the inaccuracies: Stocks rise on Ukraine diplomacy, ECB easing speculation (Reuters)
• Bank of England Extends Record-Low Rates Into a Sixth Year (BBG)
• China's Chaori Solar poised for landmark bond default (Reuters), explained here previously
• EU leaders meet in Brussels to address Ukraine crisis (FT)
• Nine-month-old baby may have been cured of HIV, U.S. scientists say (Reuters)
• China Raises Defense Spending 12.2% for 2014 (WSJ)
• China Stock Index Rises as Developers Jump on Policy Speculation (BBG)
• VTB Cancels New York Forum as U.S. Relations Sour (BBG)
• IBM workers strike in China over terms of Lenovo takeover (FT)
• College Board Redesigns SAT Exam Making Essay Portion Optional (BBG)

While the world is convinced that Putin's Tuesday press conference was an admission of blinking to the west, the reality is anything but that, and hours ago Crimea's parliament voted to join Russia on Thursday and its Moscow-backed government set a referendum within 10 days on the decision in what Reuters said is a "a dramatic escalation of the crisis over the Ukrainian Black Sea peninsula." To be sure, the Crimea - which has an ethnic Russian majority - affiliation to Moscow as opposed to Kiev is well-known, yet still the sudden acceleration of moves to bring Crimea formally under Moscow's rule came as European Union leaders gathered for an emergency summit to seek ways to pressure Russia to back down and accept mediation. And now all Putin has to do is sit back and say the people have spoken and without spilling a drop of blood has effectively split the country in two parts, with the entire east of Ukraine, where pro-Russian sentiment also runs high - sure to follow Crimea. Just as we said from the very beginning.

Following yesterday's abysmal employment and service data which led to an unchanged close it quite clear that the market has returned to a mode where it ignores all newsflow - at least the bad, which is due to the weather, the good news is due to the recovery - and instead is simply driven by such "fundamental drivers" as the momentum and position of the Yen carry trade. And overnight the USDJPY positively exploded following news that the Japan advisory committee has decided the nation's pension fund, the GPIF, does' t need a domestic bond focus. Implicitly this means that the GPIF will soon be able to purchase stocks like Facebook and Tesla, which is a guaranteed way of generated short-term gains and longer-term total losses for the Japanese pensioners. Of course, when the latter happens, nobody will have been able to foresee it and some scapegoat somewhere will be summarily fired. As for what this means for futures, the drift higher has made SPOOs rise once more and at last check was just below if not at new all time highs on an ongoing barrage of increasingly negative macro news.