Archive - Apr 2014 - Story

• Ukraine forces kill up to five rebels, Putin warns of consequences (Reuters)
• Obama to Russia: More sanctions are 'teed up' (AP)
• Vienna Banks Bemoan Russia Sanctions Testing Cold War Neutrality (BBG)
• GE’s $57 Billion Cash Overseas Said to Fuel Alstom Deal (BBG)
• GM posts lower first-quarter profit after recall costs (Reuters)
• Apple Stock Split Removes Obstacle to Inclusion in Dow (BBG)
• U.S. regulators to propose new net neutrality rules in May (Reuters)

As expected, Russia has responded to the latest "anti-terrorist" escalation in Ukraine both diplomatically and militarily.

While events in Ukraine have once again broken out into lethal fighting, and in a surprise development the Chinese Yuan crossed the 6.25 line for the first time in two years threatening to accelerate the unwind of carry trades which have a 6.25-6.30 point of max pain, futures remain completely focused solely on the strong after-hours results from Apple and Facebook which have helped push Spoos overnight to near record levels once again. The biggest push was given to NASDAQ futures which are back up 1% with optimism for US tech returning with the material earnings beats from both Apple ($11.62 EPS vs Est $10.17 EPS) and Facebook ($0.34 Adj EPS vs $0.24 forecast). Shares in both companies rose in afterhours trading with Facebook up +5% and Apple up more than +7% (supported further by the announcement that the company was expanding its share buyback plan to $90bn from $60bn). Not even the Nikkei being down 1%, the SHCOMP down 0.5% and the USDJPY once again treading water could put a dent in the tech-driven euphoria, which somehow also managed to slam gold and silver to month lows.

The "developed world" has finally come full circle.

A day after the acting government in Kiev announced the Geneva agreement is void and that it would once again send special forces to deal with "terrorists" in east Ukraine, it had made good on its promise and over the past few hours, Ukrainian tanks, APCs and other special forces troops took control of a checkpoint north of Slavyansk on Thursday, following what numerous reports confirm was an exchange of gunfire.

This doesn't happen very often. Marketwatch reports that Jim Bianco points out in a recent market comment that the 67 economists taking part in a regular Bloomberg survey have a unanimous forecast regarding treasury bond yields: they will be higher 6 months from now... and a separate poll of economists recently showed that exactly zero expect the economy to contract. This is an astonishing degree of consensus thinking, but it perfectly mirrors the complacency we see in stock market sentiment and positioning data. The probability that such a unanimous view will turn out to be correct is traditionally extremely low. The economy is likely resting on a much weaker foundation than is generally believed. This is not least the result of massive monetary pumping and deficit spending, both of which tend to severely weaken the economy on a structural level, even though they can create a temporary illusion of 'growth'.

As we noted earlier, The Federal Open Market Committee (FOMC) has continuously been overly optimistic regarding its expectations for economic growth in the United States. A major reason for the FOMC’s overly optimistic forecast for economic growth and its incorrect view of the effectiveness of quantitative easing is the reliance on the so-called 'wealth effect'. However, "There may not be a wealth effect at all. If there is a wealth effect, it is very difficult to pin down..." Since the FOMC began quantitative easing in 2009, its balance sheet has increased more than $3 trillion. This increase may have boosted wealth, but the U.S. economy received no meaningful benefit. Furthermore, the FOMC has no idea what the ultimate outcome of such an increase will be or what a return to a ‘normal’ balance sheet might entail. Given all of this, we do not see any evidence for economic growth as robust at the FOMC predicts. Without a wealth effect, the stock market is not the “key player” in the economy, and no “virtuous circle” runs through the stock market.

This 42 year economist from French academe has written a hot new book which, as one review puts it, "exposed capitalism’s fatal flaw." One can see why the White House likes Piketty. He supports their narrative that government is the cure for inequality when in reality government has been the principal cause of growing inequality. The White House and IMF also love Piketty’s proposal, not only for high income taxes, but also for substantial wealth taxes. The IMF in particular has been beating a drum for wealth taxes as a way to restore government finances around the world and also reduce economic inequality. Expect to hear more and more about wealth taxes. Expect to hear that they will be a “one time” event that won’t be repeated, but that will actually help economic growth by reducing economic inequality. If the Obama White House, the IMF, and people like Piketty would just let the economy alone, it could recover. As it is, they keep inventing new ways to destroy it.

Forget bank-runs, the water run has begun in China. Residents of the western city of Lanzhou rushed to buy mineral water earlier this month after local tap water was found to contain excessive levels of the toxic chemical benzene. But that is the tip of what is a massive problem facing the Chinese people. Not only do they suffer choking smog day after day, but, as The Business Times reports, sixty per cent of underground water in China which is officially monitored is too polluted to drink directly, state media have reported, underlining the country's grave environmental problems.

For most of Canada's existence, it has been regarded as the weak neighbor to the north by most Americans.  Well, that has changed dramatically over the past decade or so.  Back in the year 2000, middle class Canadians were earning much less than middle class Americans, but since then there has been a dramatic shift.  At this point, middle class Canadians are actually earning more than middle class Americans are.  The Canadian economy has been booming thanks to a rapidly growing oil industry, and meanwhile the U.S. middle class has been steadily shrinking.  If current trends continue, a whole bunch of other countries are going to start passing us too.  The era of the "great U.S. middle class" is rapidly coming to a bitter end.

It seems every bubble is coming back. 5 Years after Zimbabwe abandoned the Zim Dollar (in favor of the US Dollar) after inflation surged to 500 billion percent the year before (according to the IMF), Bloomberg reports that Robert Mugabe's ruling party is considering reintroducing the local currency as it struggles to meet its monthly wage bill. "If they bring back the [Zim] dollar it will quickly deteriorate to worse than then, we’ll have nothing," warns one businessman as the appeal of reviving the Zimbabwe Dollar - allowing the government to print money to meet its needs - is surely outweighed by the lessons of the past. "We'll just die - we can't go back to 2008," but it seems governments never learn and memories are short. Get long wheel-barrows.

By the magic of pure accounting gimmickry, one-off tom-foolery, non-GAAP shenanigans, and the sterling work of its now-retiring CFO; Facebook has 'managed' to produce twice as much non-GAAP net income as GAAP net income in the last 2 years...

Republicans, Democrats, and environmentalists all have favorite energy myths. Even Peak Oil believers have favorite energy myths. The following are a few common mis-beliefs, coming from a variety of energy perspectives. From to "The fact that oil producers are talking about wanting to export crude oil means that the US has more than enough crude oil for its own needs" to "the unlimited supply of renewables", the following 'facts' may just be a little too much for some to bear

Until now, the terrible trail of dead bankers has been only among US and European financial executives. However, as Caixin reports, the increasing pressures on the Chinese banking system appear to have take their first toll. Li Jianhua, director of China's Banking Regulatory Commission (CBRC), died this morning due to a "sudden heart attack" - he was less than 49 years old. Li was among the main drafters on new "caveat emptor" market-based rules on China's shadowy banking system and recently said in an interview that "now is not only a time to control risk, but to transform the trust industry.. if it's too loose, it's a big problem." Li was found by his wife.

Despite the considerable risks created by the situation in eastern Europe, most western stock, bond and property markets, fed on massive central bank fiat liquidity, continue to flirt with new highs. This strikes me as an exercise in whistling past the graveyard. In the short term, investors may continue to profit from risk-taking in financial markets. In the larger picture, much of the geopolitical balance of power that has been in place for much of the past 25 years will be tested on the banks of the Black Sea. Investors should take a few minutes from their daily technical chart analysis to consider these major developments.