Archive - May 2014 - Story

The core dynamic in our state-corporate system is a status Quo that suppresses competition (few other stores are allowed in town), usually by indirect means: high land leases, high fees for doing business in town, mountains of absurd regulations no small businesses can afford to meet, etc. In state-corporate capitalism, small business thus poses a threat to the monopolistic partnership of the government and dominant corporations. Small businesses that try to meet all the regulations and pay all the fees and taxes are either marginalized or driven out of business by the high overhead. Truth is the first victim of the Company Store's dominance.

• Qatar Bank: Deutsche Bank to raise $11 bln with help from Qatar (Reuters)
• AstraZeneca rejects Pfizer's take-it-or-leave-it offer (Reuters)
• China Home-Price Growth Slowdown Spreads as Sellers Discount (BBG)
• The new face of NSA: Mike Rogers (Reuters)
• Putin orders troops near Ukraine to return home (AP)
• Wall of Worry Rebuilt as Nasdaq Rout Sends Cash to High (Nasdaq)
• Bank of England's Mark Carney highlights housing market's risk to UK economy (Guardian)
• Greek Selloff Shows Rush for Exit Recalling Crisis (BBG)
• Anti-austerity Greek radicals ahead in Athens local election (AFP)

It was supposed to be a blistering Mega Merger Monday following the news of both AT&T'a purchase of DirecTV and Pfizer's 15% boosted "final" offer for AstraZeneca. Instead it is shaping up to be not only a dud but maybe a drubbing, with AstraZeneca plunging after its board rejected the latest, greatest and last offer, European peripheral bond spreads resume blowing out again, whether on concerns about the massive Deutsche Bank capital raise or further fears that "radical parties" are gaining strength in Greece ahead of local elections. But the worst news for BTFDers is that not only did the USDJPY break its long-term support line as we showed on Friday, but this morning it is taking even more technician scalps after it dropped below its 200 DMA (101.23) which means that a retest of double digit support is now just a matter of time, as is a retest of how strong Abe's diapers are now that the Nikkei has slid to just above 14,000, while China, following its own weak housing sales data, saw the Shanghai Composite briefly dip under 2000 before closing just above it. Overall, it is shaping up to be a less than stellar day with zero econ news (hence no bullish flashing red headlines of horrible data) for the algos who bought Friday's late afternoon VIX slam-driven risk blast off.

Much has been made of the "costs" imposed on Russia - by the West - thanks to the sanctions... and how this has crushed the economy, tumbled the Ruble, and created huge outflows (even as the Russian stock market outperforms the US since sanctions began). However, this 'party line' propaganda that Obama and his followers would like the world to believe about the efficacy of sanctions is simply false. As the following charts show, outflows started considerably earlier and are much more serious for the rest of the Emerging Markets... and as Constantin Gurdgiev notes, Russia has actually seen inflows recently...

Presented with no comment...

• PBOC'S PAN CONFIDENT YUAN TO BE RESERVE CURRENCY: SEC. NEWS
• JAPAN MAY DEPLOY DEFENSE TROOPS TO SOUTHWEST ISLANDS: YOMIURI

ConvergEx's monthly review of analysts' revenue expectations for the 30 companies in the Dow finds a ray of sunshine (let's call them 'sweet dreams') to counter the current humdrum market action. First, the 'good' news: analysts expect the current quarter to post some of the best top line growth in over 2 years. The 'meh' news: that’s still only a 2.5% comp to last year, and 2.9% excluding financials.  Still, that is better than the 0.3-0.5% growth of Q1 2014.  That acceleration, such as it is, continues into Q3 2014, where analysts have revenue growth pegged at 3.9%.  The 'bad' news: brokerage analysts have been spectacularly wrong in forecasting revenues of late. In Q1 2014 the Street expected 4-5% growth in May of last year, only to whittle those numbers down month after month and still prove too optimistic on earnings day. Still, things might work out this time and Q2 will actually see a rebound. At current valuation levels, the bulls better hope they do.

Given the total and utter lack of response from USDJPY, it should be clear that the exuberance that will be expounded tomorrow regarding Japan's Machine Orders 19.1% MoM jump (more than tripling expectations) should be taken with the proverbial Keynesian drag-demand-forward pinch of salt. This is the biggest monthly jump in machine orders in 18 years as non-ferrous metals manufacturing jumped an impressive 270%. Of course, as we have seen throughout Japan's checkered lost decades, this is entirely unsustainable as, while extrapolators will be quick to point out how this proves Abenomics is working (while bulls will demand moar QQE even though this impressive number should shun the BoJ for one more month at least) - as they say in porn business, what goes up, must come down and we suspect April will be an uncomfortable month for Japanese machine orders.

They say that gold is a geopolitical metal. Gold is real money with no counterparty risk and, furthermore, an excellent wealth preserver in time and space. Like fiat currencies (dollar, euro, yen, Yuan etc.), gold’s price is also influenced by political events, especially those having an international impact. Alan Greenspan, ex-chairman of the Federal Reserve, said that gold is money “in extremis”. This is why gold is part of most central banks’ reserves. It is the only reserve that is not debt and that cannot be devalued by inflation, contrary to fiat currencies.

As we entered Q1 2014, hope was high that this was it - this was the quarter when, with stocks at record higs, employment data improving and a confident Fed tapering, the US economy would reach escape velocity and back we could all go to "believing" in the futures once again. The 2.6% growth expected at the start of Q1 quickly evaporated into a -0.5% contraction in the economy due to "cold" weather in the winter. Of course, the Keynesian-hockey-stick believers have marked up their "been-down-so-long-it's-gotta-bounce-back" Q2 expectations to 3.3% growth... so what could go wrong. One glimpse at the following chart will explain it all - and it's the weather that will be blamed once again...(with 48% of the nation now in drought conditions).

The most succinct statement about how governments get their people to support war came from Hermann Goering at the Nuremberg trials after World War II: "Naturally, the common people don’t want war; neither in Russia, nor in England, nor for that matter in Germany. That is understood. But, after all, it is the leaders of the country who determine the policy and it is always a simple matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship. Voice or no voice, the people can always be brought to the bidding of the leaders. All you have to do is tell them they are being attacked, and denounce the peacemakers for lack of patriotism and exposing the country to danger. It works the same in any country." It is rather frightening that a convicted Nazi war criminal latched onto an eternal truth!

As we have discussed numerous times, the dash-for-trash in US equities has been insatiable as any and every consequence of screwing up is slowly removed from capitalism (and capital markets). As Goldman's David Kostin notes, companies with weak balance sheets have outperformed peers with strong balance sheets by 49 percentage points during the past two years (89% vs. 40%) with realized volatility of just 7%. Although the trend is daunting - to say the least - Goldman believes it will continue for three reasons...

In what is setting up to be a scorching merger Monday, moments ago we got confirmation of news that had been leaked days in advance, namely that both the boards of AT&T and DirecTV had agreed to a transaction whereby AT&T would buy DirecTV in the latest chapter of what we dubbed several months ago the "M&A bubble", for $95/share in a $67.1 billion transaction including debt, consisting of $95/share in stock, $28.50/share in cash. According to the public announcement, the DirecTV purchase represents a 7.7x multiple of its 2014E EBITDA.  Additionally, as the press release states, "AT&T expects the deal to be accretive on a free cash flow per share and adjusted EPS basis within the first 12 months after closing." In other news, almost concurrently with the AT&T announcement, Pfizer also did what many expected it to do, when it announced that as part of its "final offer" it would boost its proposed purchase price for AstraZeneca by 15%.

We have previously profiled the "holy grail" gas deal between Russia and China on several occasions, and noted last week how it is expected to be signed this week - pending some final price negotiations. It appears that was spot on as Reuters reports, Russian state-run Gazprom said it was still "one digit" away from finalising a 30-year gas supply deal with Beijing which is expected to crown Russian President Vladimir Putin's visit to China next week. On the heels of Russia's de-dollarization meetings, the coming week appears a crucial one for the history books of the US Dollar as reserve currency (or will China leverage Russia's need to diversify from Europe and stall the deal once again?)