Archive - Jun 27, 2014 - Story

With Petroshenko agreeing to extend today's cease-fire deadline for 3 days, the Russians, unfortunately, are not optimistic after the 'expert-level' talks in Europe. Given this, it appears Russia is preparing its retaliation for possible further sanctions that are being waved by Europe and the US. As AP reports, Russia's state-controlled gas company, Gazprom, says it could limit supplies to European customers that intend to re-sell the natural gas on to Ukraine. Whil enot naming specific countries, the Gazprom CEO explained he needed to clamp down on the so-called reverse-flow supplies the the cut-off Ukraine as they were "half-fraudulent schemes."

As Barclays Joe Abate warns, delivery fails in the Treasury market have surged recently. Whil enot at the scale of the 2008 crisis, we suspect the spike is what is paniccing the Fed to say "the market is wrong", talk up short-end rates, and implore the public to sell-sell-sell their bonds. The Fed's market domination has meant massive collateral shortages (as we have detailed previously) and now more even that during last year's taper-tantrum, the repo market is trouble. But why do I care about some archaic money-market malarkey? Simple, Without collateral to fund repo, there is no repo; without repo, there is no leveraged positioning in financial markets; without leverage and the constant hypothecation there is nothing to maintain the stock market's exuberance (as we are already seeing in JPY and bonds). Q.E.D.

With Iraq closing a last minute deal with Russia to reinforce its depleted airforce by purchasing second-hand Su fighter jets, suddenly the US found itself scrambling: the last thing it wants is to hand over control of Iraq's skies to foreign-made warplanes. Which is perhaps why as CBS just reported, a Pentagon official has officially confirmed that the US is now flying armed drones over Baghdad. "The flights, which are not round the clock, are for the protection of the embassy and are not the precursor to air strikes" according to the same source.

It was a week ago when we learned that in yet another diplomatic masterstroke, Russia's Vladimir Putin took advantage of the vacuum in relations between the US (which now wants its heretofore puppet prime minister in Iraq removed) and the Iraqi PM (who has been increasingly vocal against US allies in the region, namely Saudi Arabia, and US demands for a coalition government) and offered his "complete support" to the Iraqi leader. Today, the Iraqi leader has decided to  take Putin up on his offer and has announced he has bought used Russian jets which he will use instead of US fighter planes in his war against ISIS. "I'll be frank and say that we were deluded when we signed the contract [with the US]," Maliki said. "We should have sought to buy other jet fighters like British, French and Russian to secure the air cover for our forces; if we had air cover we would have averted what had happened," he went on.

While Poroshenko extends today's ceasefire (under threat of military action if nothing is solved by then); the phrase "hearts and minds" comes to mind as Russia unleashes its latest softly-softly headline in providing 'humanitarian aid' to the eastern regions of Ukraine. While 'asking' Ukraine to help determine the route for the aid, the press release explains this is 'aid' for the eastern regions of Donetsk and Luhansk following "numerous appeals" by the people. It appears that the "aid" does not include US-Iraq-style "special advisers."

The domestic energy boom is behind the expansion of Industrial Production. The remarkable untold story: Ex mining and oil and gas extraction, US Industrial Production has been in contraction for most of the period since Peak Oil in 2005-08.

The economy must be doing great, right? The market's at all-time highs... We suspect President Obama will 'brush off' the Q1 GDP collapse and focus his 'remarks on the US economy' on how well America is doing; how exceptional it's growth is'; and how any minute now it's going to the moon alice (and not just the Fed balance sheet). And just a reminder, the last time Obama spoke aggressively on 'fixing' inequality, stocks were not happy. Remember, the greatest irony of it all...

Pundits enjoy pointing to NYSE margin debt as an indication of overall system leverage, and how prone to margin calls and liquidations the investor class may be at any given moment. However, in the new normal, in which sophsiticated investors fund themselves via completely different mechanism - mostly involving repo and other shadow banking conduits - margin debt has become a very much irrelevant indicator of overall leverage.

With US equity markets hovering near record-er highs, we thought a quick summary of the state of the world's growing geopolitical risks would 'help' rationalize the BTFATH mentality. Here is Deutsche Bank's map of the most potentially destabilizing risks around the world...

The proof is clear. According to SWIFT, China’s renminbi is now the second most used currency in the world for global trade settlement, putting it ahead of even the euro. It’s happening. And based on the data, it’s completely obvious (as we continued to chronicle) to just about everyone but the US government. However, we were still surprised to see an article in the Financial Times’ banking intelligence subsidiary (‘The Banker’) entitled "The US’s dollar domination is coming to an end." This reality has become obvious to just about everyone... Reserve currencies come and go. So will the dollar. This is nothing new.

Following June's initial largest miss in 18 months, UMich consumer confidence 'final' print inched higher to 82.5, modestly beating expectations - but well below April's peak. In case you were confused at whether you should be exuberant (conference board confidence at highest since 2008) or dysphoric (Gallup survey at lowest in 2014), we don't blame you. What is most worrisome about the UMich data, aside from the non-confirmation of exuberance offered by the government survey, is the tumble in the "outlook' index to 3 month lows.

In Hillary Clinton's attempt to seem "one of the people", she made the public relations debacle of portraying herself as "dead broke" at the time she and Bill Clinton left the White House. Of course, the reason this attempt at populist pandering backfired is because as is well-known, even the least educated American, the bulk of wealth American president families accrue is not while in office but after, when they hit the speaking/book publishing circuit. This is just what WaPo found when it conducted a review of the Clintons’ federal financial disclosure: it found that Bill was paid $104.9 million for delivering 542 speeches around the world between January 2001 and January 2013, when Hillary left her job as secretary of state.

Most market pundits have predicted higher bond yields (for months), yet unloved global fixed income securities have traded well all year. Even after the dovish FOMC reiterated its intent to maintain a highly-accommodative stance, bonds have stayed resilient. The main cause of market jitteriness might be that investors are beginning to sense the ‘time-inconsistency’ aspects of Fed policy.

The CEOs of U.S. companies are compensated exceedingly well with the heads of the S&P 500 paid 331 times as much, on average, as production and nonsupervisory employees. As we wrote a month ago while explaining the 'mystery and completely indiscriminate' buyer of US stocks: "since a vast majority of executive compensation agreements are tied to company stock "performance"; C-suites are perversely happy if their own corporate cash is used to buy the stock near or at all time highs: after all management year end bonus will simply benefit that much more, while keeping activist investors delighted (and away from the embarrassing public spotlight)." Sure enough, as HBR explains, executive comp in recent decades comes down to four words: stock options and restricted stock (and more and more in the last few years).