Archive - May 28, 2014 - Story

"Traditionally we’ve been a financially conservative company," explains one fracking company, warning that "we’ve become more leveraged than we historically have been and we’ve become uncomfortable with that." This is the growing message from a shale boom that, as Bloomberg reports, is facing a shakeout as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground. As everyone chases the dream, well counts have soared and production per well has tumbled. "The list of companies that are financially stressed is considerable," warns one analyst as shale debt has almost doubled over the last four years while revenue has gained just 5.6% "not everyone is going to survive. We’ve seen it before."

Hurricane season is nearly upon us, and every time a hurricane strikes, television and radio commentators and would-be economists are quick to proclaim the growth-boosting consequences of the vicissitudes of nature. Of course, if this were true, why wait for the next calamity? Let’s create one by bulldozing New York City and marvel at the growth-boosting activity engendered. Destroying homes, buildings, and capital equipment will undoubtedly help parts of the construction industry and possibly regional economies, but it is a mistake to conclude it will boost overall growth.

As we noted yesterday, President Obama is saying he is contemplating arming and training Syrian rebels (just the 'moderates' which will be identified by their smiles). However, as the following PBS Frontline documentary exposes, the Syrian rebels themselves say they are already armed and trained by US in the use of sophisticated weapons and fighting techniques, including, one rebel said, "how to finish off soldiers still alive after an ambush." The interviews are the latest evidence that after more than three years of warfare, the United States has stepped up the provision of lethal aid to the rebels, as PBS notes "it appears the Obama administration is allowing select groups of rebels to receive US-made anti-tank missiles." So who is lying? Obama (again) or the Syrian rebels (who show US-made supplies in the following clips).

Wednesday is not Tuesday (except for Trannies). Some early weakness in stocks was bid mindlessly back to its highs even as 10Y bond yields kept tumbling to 11-month lows and oil and copper rolled over. VIX ended the day higher (again) ignoring the exuberance in the light volume equity market. 10Y yields dropped to 2.43% - its best day in 5 months (breaking last October's key support). The yield curve flattened dramatically with 2s30s at its tightest in a year. The USD was bid (led by GBP weakness) buy JPY's volatility is what ran the stock show today. Gold and silver fell further as did WTI crude (back under $103). The S&P 500 is now around 60 points rich to 10Y bond yields (and the world is still short bonds); credit spreads are well off their tights and VIX isn't falling; breadth is weakening and so is volume... but apart from that... BTFATH. A late-day selling frenzy took the shine off the CNBC headlines with stocks closing red.

The IMF has lied (about 'not' proposing a 71% income tax) and has been shown as a serial over-optimistic forecaster (world growth disappointments and hockey sticks) but the simply incredible hope that Christine Lagarde's PhDs created in their growth expectations for Ukraine make their Greece "Oops" moment look like nothing. As CFR rebukes, we see the IMF’s growth forecasts for Ukraine and Greece not as forecasts at all, but rather as assumptions necessary to justify the IMF’s interventions. Credibility -> 0.

Bizarro market got you paralyzed with inaction (and unwilling to generate trading commissions for Goldman) as you try to make sense of an insane world in which first rising (but not too much) bond yields were desperately spun as positive for the economy and thus stocks because it means inflation is finally on the way, only for the same spinners to turn around and now allege that plunging bond yields are great for the Equity Risk Premium so you must, you guessed it, buy stocks? Fear not: you are not alone: according to the following note from FBN, what JPM, Citi and Goldman are lamenting, this era of a new permanently high equity plateau, and a permanently low vol and yield ravine, is driving pretty much everyone insane.

Western strategists and talking heads, we are sure, will know better and continue to pitch China as the renewed engine of growth in the world and that everything will be fine... but when the country's largest property developer says, the "golden era" for China’s property market has passed, adding that "The period in which everybody makes money out of property is gone," perhaps it is time to listen? Of course, we are sure there will be an orderly exit (just as there was in CNY last night which crumbled to 19-month lows) but as China Vanke Co's Yu Liang warns, "the phase where 'whoever buys makes money' is gone." Property sepculators are frustrated that the government won't bail them out "are they tryng to kill us?" as one analyst notes "this downturn is more serious than 2008."

"...for those who find our work to be a constant source of irritation to be regarded with open disdain, I am retracting all of it herewith – for you alone mind you – and I leave you free to buy with both hands to whatever extent you are inclined. Not that I encourage it really – that would be bad Karma – but someone is going to have to hold equities at these prices. It would best be those who are fully aware of our concerns and prefer to reject them. So the more you dislike my work, and particularly if you are nasty about it, I have no objection to you accumulating – perhaps on margin – as much stock from other investors as possible."

Despite the constant clamor of money-on-the-sidelines (which Cliff Asness has summarily dismissed as being idiotic) and strength in US equity markets being 'the most unloved rally of all time', the following two charts suggest people are anything but unimpressed by it. Citi's Panic/Euphoria sentiment model has hovered in the clearly "euphoric" levels for a month and now the AAII Bull/Bear split is back near exuberant highs. Of course, as we noted yesterday, the real strength behind stocks is the incessant non-economic irrational and indiscriminate mystery buyer - corporate buybacks - that are creating their own mal-investment signaling exuberance in the always efficient stock 'markets'.

Anyone who buys their own groceries (as opposed to having a full-time cook handle such mundane chores) knows that the cost of basic foods keeps rising, despite the official claims that inflation is essentially near-zero. Common-sense causes include severe weather and droughts than reduce crop yields, rising demand from the increasingly wealthy global middle class and money printing, which devalues the purchasing power of income. While these factors undoubtedly influence the cost of food, it turns out that food moves in virtual lockstep with the one master commodity in an industrialized global economy: oil.

Following yesterday's tailing 2 Year bond auction, moments ago the Treasury sold another $35 billion in 5 year paper which in today's soaring bond complex was expected to show scorching demand. Curiously, while the When Issued was trading 1.509%, the actual result showed a 0.4 bps tail at 1.513%, on par with yesterday's tail. Further adding to the weakness was the Bid to Cover which dipped from last month's 2.79 to 2.73, and the lowest since January, if modestly better than the TTM average of 2.65. The internals showed a shift away from Directs, whose take down was just 10.5%, below the TTM average of 13.0%, and down from April's 18.6%. This was compensated by Indirects who ended up with a majority, ot 50.4% of the auction, leaving 39.1% to Dealers, in line with the historical average.  So overall a mixed auction, and one which will likely keep traders scratching their heads as the ongoing strength in the secondary market refuses to relent.

Earlier we reported that while the US middle class is rapidly going extinct (Piketty excel flub or not, thank you Fed) and that median incomes for everyone but the "1%" have declined since 2009 (and since the 1970s on a real basis), America's executives whose year-end reward is closely tied to the performance of their publicly traded equity and thus to the amount of stock buybacks authorized and executed, have seen their median comp soar by 50% in the past 5 years and in 2013 for the first time cracked the $10 million median pay number. So who are these titans of trickle-up economics? Below is the full list of the Top 100 best paid CEO men and women in the US in 2013.

While careful to explain that valuations overall are below dot-com bubble levels, KPCB's Mary Meeker warns that there are "certainly some valuation excesses" in the tech arena currently as she unveils her latest 164-page epic chartapalooza on Internet Trends... With internet adoption rates slowing, the question is - which are the names that are in a bubble?

One week ago we reported that while Russia was dumping a record amount of Treasurys it was buying gold, or some 900,000 ounces to be precise. Today we learn that as Russia continues to purchase gold, and is likely taking advantage of the recent rout in gold prices, it certainly won't be storing its physical metal with any of the western Central Banks. According to Reuters, shortly after Russia and China announced their historic gas deal, Vladimit Putin said at the recent International Economic Forum, that Russia need to ensure its gold and currency reserves are secure. And not just Russia: China too. Because apparently when it comes to speaking for "hard" monetary policy, Putin is now authorized to speak for both nations.

There can be no doubt that computer science knowledge is currently in great demand; however, we do believe that there are some signs that the boom is - so to speak - 'getting out of hand' and is beginning to reflect the effects of the technology echo bubble on Wall Street. The give-away is the size of the demand for computer science studies relative to other fields of study. The last time enrollment in computer science peaked was in the year 2000 – concurrently with the technology mania. This is obviously no coincidence. What is slightly disconcerting is that the current peak in enrollments towers vastly above that previous bubble peak.