Archive - May 2014 - Story

At least 13 Ukrainian soldiers (and reportedly at least 20 pro-Russian supporters) were killed today as WSJ reports fighting flared across breakaway regions in the east just days before a presidential election the rebels have vowed to block. Markets have forgotten that the US-Europe-Russia-China-Ukraine tensions continue and the major event risk this weekend but the last 24 hours have seen several attacks with the highest number of casualties since the conflict began 2 months ago. Separatists near Luhansk blew up a bridge over the Siverskiy Donets river near Novodruzhesk in several hours of fighting, Interfax reported, citing witnesses. The worst fighting appeared to take place near Volnovakha, on the road from the regional capital, Donetsk, to Mariupol, where there hadn't been heavy separatist fighting before.. and the dismal episode was caught on tape.

It wasn't immediately clear what the other 33% thought, but it is safe to assume have never heard of Draghi's "political capital."

The US shale oil "miracle" has about as much believability left as Jimmy Swaggart. Just today, we learned that the EIA has placed a hefty downward revision on its estimate of the amount of recoverable oil in the #1 shale reserve in the US, the Monterey in California. As recently as yesterday, the much-publicized Monterey formation accounted for nearly two-thirds of all technically-recoverable US shale oil resources. But by this morning? The EIA now estimates these reserves to be 96% lower than it previously claimed. Yes, you read that right: 96% lower. As in only 4% of the original estimate is now thought to be technically-recoverable at today's prices.

It is common knowledge among those that prefer to see the glass of aggregate demand always half-full (in need of fiscal or monetary stimulus and thus always time to BTFD) that stocks "climb a wall of worry" and that stocks can't drop if so many people are negative. However, while we are sorry to steal the jam from their exuberant 'cash on the sidelines' donut, the truth is that eventually 'strong hand' short positions build to a point where they dominate and provide the tipping point of weakness in stocks. As Goldman Sachs highlights in the following two charts of short interest ratio (days to cover) and aggregate short interest (dollars), the last time there was this much money short was mid-2007... and that didn't end well.

It’s shameful that the president of the United States, the chairman of the House Permanent Select Committee on Intelligence, and the leaders of the country’s surveillance agencies refuse to accept consensus reforms that will keep our country safe while upholding the Constitution. And it mocks our system of government that they worked to gut key provisions of the Freedom Act behind closed doors.

- Rep. Justin Amash of Michigan, original cosponsor of the USA Freedom Act

A simple way of grasping the precarious situation China has found itself in is with this useful diagram which summarizes the negative loop that China's economy (which essentially means housing market which as SocGen recently explained is indirectly responsible for 80% of local GDP) could fall into should the government not promptly move to address the emerging dangerous situation, i.e., resume aggressive easing.

It is not too early to ask how the present US business cycle expansion, already more than five years old, will end. The history of the last great US monetary experiment in “quantitative easing” (QE) from 1934-7 suggests that the end could be violent. Autumn 1937 featured one of the largest New York stock market crashes ever accompanied by the descent of the US economy into the notorious Roosevelt Recession. As we noted previously - it's never different this time...

These two charts depict the same index over the same time frame, but they reflect two stories and two economies.

The chaps at General Motors must be breathing a small sigh of relief this morning as they are not the biggest 'recaller' headline of the day. Office Depot has decided to take some pressure off them...

• *OFFICE DEPOT RECALLING ABOUT 1.4M CHAIRS ON FALL HAZARD
• *OFFICE DEPOT HAS RECEIVED 153 REPORTS OF SEAT PLATE BREAKING
• *OFFICE DEPOT RECEIVED 25 REPORTS CONTUSIONS, ABRASIONS, INJURY
• *OFFICE DEPOT SAYS INJURY REPORT INCLUDED FRACTURED BACK, HIP

The chairs were manufactured in China. The great news - for those not suffering broken backs, hips, or contusions - ODP will offer a merchandise credit of $55 (a 37.5% gain over the price of the $40 chair)... we smell a carry trade.

If there was one chart that shows best what is happening with the bifurcated US housing market, it is this NAR breakdown of sales by pricing bucket. It shows beyond a doubt that courtesy of the Fed's policies there is not one but two housing markets in the US: that for the 1%, or those who purchase mostly homes in the top price buckets ($500 and certainly above), and that for everyone else. Guess where the bulk of the activity (i.e. flipping) is, and worse for the so-called recovery, where it isn't.

The de-dollarization escalates. As Reuters reports, Chinese banks have halted dollar transactions with most Afghan commercial banks. Whether this is related to the terrorist operations in the muslim-dominated Uighur region is unclear... also unclear is whether the Chinese banks will accept transactions with Afghan banks in CNY?

After 6 months of missed expectations, last month's fragile beat of dismal expectations (even though it was the worst existing home sales SAAR in 21 months) provided just enough of a glimmer of hope to stoke more short squeezes in homebuilder stocks and strengthen the pillar of the US economic recovery. Now we are in April... the start of the key seasonal selling season... and existing home sales rose modestly MoM (but fell for the 6th month in a row YoY) and missed expectations. There is - simply put - no post-weather bounce.. and still NAR is blaming slow April sales being delayed due to Winter weather! This is the worst start to a year since 2007.

Having hit cycle highs over 57 in February (in peak cold-weather season), US Manufacturing PMI appears unable to regain the positive momentum of that peak despite weather no longer being an issue. While the 56.2 print beat expectations of 55.5, with new orders improving, the all-too-crucial employment sub-index dropped to its slowest rate of expansion in 2014. Until just a few months ago when this macro indicator started to rise, it was seen as a secondary data item but once it started reinforcing the status quo believers trend it became crucial.

While the defenders of HFT continue spouting their usual platitudes (with the latest piece of "anti-hyperbolic" fluff coming from "Mr. Quant" (but don't call him an HFTer) Cliff Asness himself who said overnight that "markets are "rigged" in favor of, not against, retail investors"... so - rigged?) the reality is that while one can debate the ethics of HFT frontrunning orderflow until one is blue in the face (or until Goldman tells the DOJ to slam the hammer on the high freaks once and for all), the biggest adverse impact from HFT continues to be the inherent instability that algo trading creates in the market. For empirical evidence of just this, we once again go to the usual source which everyone ignores until months after the fact is seen as having been right about everything, Nanex, which looks at one particular aspect of market instability, namely Limit Up, Limit Down circuit breakers and finds something very disturbing.

Thailand is a prosperous nation with strong banks, modern factories, flourishing tourism, a growing middle class and other typical markers of a successful democracy. Which, as Bloomberg explains, is exactly what it lacks. Thailand has had so many coups in its modern history that scholars sometimes refer to the last 82 years as its “coup season.” In between, violent political strife has been chronic. The latest round features deadly street clashes, politically tainted corruption trials and the army taking control after an election derailed by protests. In contrast to political activists almost everywhere, the ones in Thailand are demanding less democracy... and this is the timeline of events that led to the latest 'coup'. What is perhaps more troublesome for a nation desperately seeking allies, under US law, sanctions are triggered if a country receiving military aid suffers a coup.