Archive - Apr 2014 - Story

Companies will have to increase profit margins to all-time records in order to meet estimates, is the message of utter hope embedded in the forward expectations for earnings and sales growth. As Bloomberg reports, Oppenheimer's Andrew Burkly warns this is "a scenario we view with ongoing skepticism." As the chart below shows, the gap between growth in sales (top-line) and earnings (bottom-line) is set to explode in the next few quarters as even the most exuberant analsyst struggle to upgrade their GDP-riddled sales forecasts and are thus forced to make up whatever margins they need to reflect extrapolated buy-and-hold targets for their stocks.

It was about 5 years ago, roughly the same time we launched our crusade against HFT, that we also first made the accusation that as a result of QE and the Fed's central planning, the forward-looking, discounting mechanism formerly known as the "market" no longer exists, and instead has been replaced with a policy vehicle designed to create a "wealth effect" if only for those already wealthy. In other words, while HFT may have rigged the market, it was the Fed that has openly broken it. Today, none other than the WSJ is the latest to confirm this.

From a revised 332k last week, initial claims collapsed 32k to 300k (smashing expectations of 320k) and dropping to the lowest of the recovery. This is the lowest initial claims print since May 2007. Rather stunningly, given the real employment situation in America, this claims data is nearing the best levels since 2000 (and certainly does nothing for the un-taper case so many are hoping for). This is the biggest weekly drop since January 2006. Continuing claims also dropped to new cycle lows back to Jan 2008 lows. Mission Accomplished?

In the interests of transparency and on the heels of Mary Barra's suggestion that some of those involved in the ignition switch problem are still employed at the firm, she has decided to place 2 employees on paid leave...

• *GM BARRA CONFIRMED 2 ENGINEERS PLACED ON PAID LEAVE
• *GM SAID TO PLACE DEGIORGIO, ALTMAN ON PAID LEAVE
• *GM CREATES SPEAK UP FOR SAFETY PROGRAM FOR EMPLOYEES

To distract from the main headlines, GM has created a "speak up for safety" spy-on-your-neighbor plan as part of her safety-first strategy.

"Fear Of Missing Out" - that is the only way one can explain the irrational idiocy with which asset "managers" are scrambling to allocate other people's money into today's "historic" Greek (where unemployment just printed at 26.7%) return to the bond market, and which according to Greek PM Venizelos was eight times oversubscribed, or far more demand than for the Facebook IPO. Ironically, while we joked earlier this week, when the Greek 5Y was trading in the 6% range that the new bond would issue at 3%, we were not too far off on the final terms which were largely expected in the mid-5% range. Instead, Greece shocked everyone when it announced that the avalanche of lemmings had made it possible for Greece to issue debt at a sub-5% yield, and a 4.75% cash coupon! Here is the final term sheet.

• J.P. Morgan's Dimon Describes Year of Pain (WSJ)
• SAC Faces a Final Reckoning for 14 Years of Insider Scam (BBG)
• New Standards for $693 Trillion Swaps Market Increase Risk of Blowup (BBG)
• China says no major stimulus planned; March trade weak (Reuters)
• As we said in 2012 would happen: Record Europe Dividends Keep $3 Trillion From Factories (BBG)
• Blame it on the algo: Deutsche Bank Said to Find Improper Communication in FX Case (BBG)
• Coke Sticks to Its Strategy While Soda Sales Slide (WSJ)
• Ukraine’s Rust Belt Faces Ruin as Putin Threatens Imports (BBG)
• RBC Joins Goldman in Suing Clients After Singapore Crash  (BBG)
• U.S. House panel to look at aluminum prices, warehousing (Reuters)
• Brooklyn Apartment Rents Jump to a Record as Leases Surge (BBG)

The main overnight event, which we commented on previously, was China's trade data which was a disaster. March numbers turned out to be well below market consensus with exports falling 6.6% YoY (vs +4.8% expected) and imports falling 11.3% YoY (vs +3.9% expected). The underperformance of imports caused the trade balance to spike to $7.7bn (vs -$23bn in Feb). Pricing on the Greek 5-year syndicated bond is due later today, with the final size of the bond boosted to EUR 3bln from EUR 2.5bln as order books exceed EUR 20bln (equating to a rough bid/cover ratio of over 6) as the final yield is set at 4.75% (well below the 5.3% finance ministry target and well above our "the world is a bunch of idiots managing other people's money" 3% target). Ireland sold EUR 1bln in 10y bonds, marking the third successful return to the bond market since the bailout. Also of note, this morning saw the release of lower than expected French CPI data, underpinning fears of potential deflation in the Eurozone.

This is Carey Wedler (the one with the Obama shirt) approximately six years ago, when she was, in her own words, a fervent "Obama girl" who believed the myth about "hope and change."... And this is Carey Wedler now, grown up, who has finally "googled the news", and having seen through the lies, realizes that Obama has "become exactly like the George Bush" that she "used to so vitriolically hate." 

"Mr. Obama - you are the biggest fraud that has ever been perpetrated on the American people and it's been a long time since I bought into it so I think it's about time to burn your shirt."

You’d think a guy like Rogers who aggressively lobs untrue accusations against a journalist trying to inform the American public about government criminality would have a squeaky clean background himself. After all, he was a former FBI agent. You’d think that, but you’d be wrong. Incredibly, Dick Morris points out that until recently Mike Rogers’ wife was the president and the CEO of the company that was contracted by the State Department to provide intelligence-based and physical security services. While this sort of crony capitalism is seen as “business as usual” in the cesspool that is D.C., the really crazy part of this story is that as Chairman of the House Intelligence Committee, Rogers is charged with investigating the adequacy of security at the Benghazi compound prior to the September 11, 2012 terrorist attack. You can’t find a bigger conflict of interest than that...

All the gains that Japan's Nikkei 225 futures had achieved in the post-FOMC-Minutes exuberance have been lost as first Japan (huge miss in machine orders) and then China (huge miss in imports and exports) hit the market with a disappointing data double whammy. US futures are relatively untouched for now (even as USDJPY tumbles back below 102). Asian equity markets are mixed (China/India down notably and Japan fading fast) as another Chinese bank has "delayed payment" on a bond. Copper prices have also reverted and given up post-FOMC gains (despite rumors of PBOC bailout buying).

"The message for strivers is that if you want to be very, very rich, start out very rich," is the wondrous conclusion Bloomberg BusinessWeek's Peter Coy has from delving into the details of the latest data on income growth in America. The richest 0.1 percent of the American population has rebuilt its share of wealth back to where it was in the Roaring Twenties. And the richest 0.01 percent’s share has grown even more rapidly, quadrupling since the eve of the Reagan Revolution.

Apparently doing away with diplomatic pleasantries, the Chinese have been directly clear with Chuck Hagel as he lays the groundwork for President Obama's Asia trip later this month (scheduled to visit Japan, Malaysia, and the Philippines - all in direct territorial conflicts with China). As Reuters reports, "Obama needs to pay serious consideration to this issue when he comes to Asia... China has already put this message across during the meetings with Hagel," said Ruan Zongze, a former diplomat with the China Institute of International Studies in Beijing, a think tank linked to the Foreign Ministry. "The United States is moving in a direction we don't want to see, taking sides with Japan and the Philippines, and China is extremely unhappy about this."

Echoing Charlie Munger, Oaktree's Howard Marks warns today's institutional and retail investors that "everything that’s important in investing is counterintuitive, and everything that’s obvious is wrong." These words seem critically important at a time when the world and his pet rabbit is a self-proclaimed stock-picking export. Be "uncomfortably idiosyncratic," Marks advises, noting thaty most great investments begin in discomfort as "non-conformists don’t enjoy the warmth that comes with being at the center of the herd." Dare to be different is his message, "dare to be wrong," or as Charlie Munger told him, "it’s not supposed to be easy. Anyone who finds it easy is stupid." While Marks philosophically adds that "being too far ahead of your time is indistinguishable from being wrong," he warns the lulled masses that "you can’t take the same actions as everyone else and expect to outperform."

In this day and age, it is imperative that we all learn how to think for ourselves.  The foundations of our society are crumbling, our economic system is failing and the blind are leading the blind.  If we do not learn to make our own decisions, we are just going to follow the rest of the herd into oblivion. In addition, we all need to start taking a long-term view of things.  Just because the economic collapse is not going to happen this month does not mean that it is not going to happen.  When you step back and take a broader view of what is happening, it becomes exceedingly clear where we are heading. Sadly, most Americans will never do that.

Having warned just 6 weeks ago that high-yield credit and small high-tech firms may be in a bubble, Fed Governor Tarullo, ironically speaking at the Hyman Minsky Financial Instability Conference, suggested that the recuction in share of national income for "workers" (i.e. income inequality) is troubling. Furthermore, he added, "changes reflect serious challenges not only to the functioning of the American economy over the coming decades, but also to some of the ideals that undergird the nation's democratic heritage." His speech, below, adds that since there has been only slow growth so far, expectations for a growth spurt are misplaced and that the Fed-policy-driven recovery has "benefited high-earners disproportionately."