Archive - Jun 2014 - Story

A few days ago, when we wrote our "explainer" on the need for Russia to have an alternative pathway for its gas, one which bypasses Ukraine entirely and as the current "South Stream" framework is set up, crosses the Black Sea and enters Bulgaria before passing Serbia and Hungary on the way to the Central European energy hub located in Baumgarten, Austria, we said that "one short month after Putin concluded the Holy Grail deal with Beijing, he not only managed to formalize his conquest of Europe's energy needs with yet another pipeline, one which completely bypasses Ukraine for numerous reasons but mostly one: call it a Plan B."  Today we find just what said Plan B is. As Itar-Tass reports, citing Gazprom CEO Alexei Miller, "Russia’s gas giant Gazprom does not rule out gas transit via Ukraine may be stopped completely."

Pending home sales surged by 6.1% MoM in May; this is the largest jump since April 2010 (when first-time buyers scrambled to sign contracts before tax credits expired. However, exuberant spike aside, this is the 8th month in a row of a year-over-year drop in home sales. NAR is ever-optimistic suggesting "sales should exceed an annual pace of five million homes," amid low rates, inventory and job creation (goldilocks?). The sales, unsurprisingly, are all high-end: "The flourishing stock market the last few years has propelled sales in the higher price brackets," as lower-cost home sales plunge.

here is the punchline, and proof that anything the ECB can and will try to do, will be a complete disaster: Loans to households fell by €42.8bn (its largest decline on record), having risen by €5.1bn in April. This was mainly related to lending for house purchases (which do not count towards banks' allotment in the TLTRO) and took place almost entirely in France.

Following last month's "see, the Q2 rebound is a real thing"  exuberance, Chicago PMI re-tumbled in June to 62.5, its biggest miss in 3 months. This is the biggest headline drop since March as inventories rose, order backlogs fell, and new orders fell. On the bright side (despite the fall in new orders, employment rose). It seems the hopes and dreams of Q2 are fading.

Today is the day that Paul Singer and his Elliot Capital Management team have been waiting for. Thanks to SCOTUS' decision, as Bloomberg reports, Argentina is poised to miss a bond payment today, putting the country on the brink of its second default in 13 years, after a U.S. court blocked the cash from being distributed until the government settles with creditors from the previous debt debacle. The decade-long battle between Argentina and holdout creditors from the country’s $95 billion default in 2001 is coming to a head as the judge’s decision “closes Argentina’s options to finally force it to negotiate," and "should now stop using these delay tactics and get serious." Argentina sees it a different way, the ruling "is merely a sophisticated way of of trying to bring us down to our knees before global usurpers,” according to the economy minister Axel Kicillof.

Anyone curious how real, GAAP EPS performed in the just completed quarter, should look at the chart below. It shows that GAAP EPS (helped by a record amount of corporate buybacks) in the first quarter of 2014 actually dropped 2.2% from Q1 2013 even as Non-GAAP suggested a nearly 5% increase!

The holiday shortened, and very busy, week includes the following highlights: [on Monday] US Chicago PMI; [on Tuesday] US ISM Manufacturing, Construction Spending, and Vehicle Sales, in addition to a host of PMI Manufacturing in various countries; [on Wednesday] US ADP Employment, Factory Orders; [on Thursday] US Non-farm Payrolls and Unemployment, MP Decisions by ECB and Riksbank, in addition to various Services and Composite PMIs; [on Friday] US holiday, Germany Factory Orders and Sweden IP.

• Facebook Researchers Manipulated News Feeds in 2012 Study (BBG)
• Argentina at Brink of Default as $539 Million Payment Due (BBG)
• Hedge fund correlation risk alarms investors (FT)
• As China Flexes Muscle, Obama Frets Over Rival’s Weakness (BBG)
• As caliphate declared, Iraqi troops battle for Tikrit (Reuters)
• Dubai Caps Worst Month Since 2008 as Real Estate Stocks Tumble (BBG)
• Russian Advisers Ready Iraq to Use New Combat Aircraft (BBG)
• Blackstone Readies Big-Bet Hedge Fund (WSJ) - so what was GSO?
• Pope says communists are closet Christians (Reuters)
• Thomson Reuters revising FX trading standards (Reuters)

It is the last day of not only the month but also the quarter, not to mention the halfway point of 2014, which means that window dressing by hedge funds will be rampant, as they scramble to catch up some of the ground lost to the S&P 500 so far in 2014. Most likely this means that once again the most shorted names will ramp in everyone's face and the short side of the hedgie book will soar, further pushing hedged P&L into the red, because remember: in a market in which all the risk is borne by the Fed there is no need to hedge.

For all the debate about a college education, its opportunity cost, the trade off of only having a high-school diploma, the impact of a record amount of debt on an entire generation's spending habits, and, of course, the alleged lack of inflation everywhere expect in those critical things that 99% of Americans must spend on daily, perhaps the simplest chart is the following, courtesy of the WSJ: it shows the average annual tuition - call it the "upfront investment", whether funded by debt or equity or both - for both a Bachelor's and an Associate's degrees from 1970 until 2013, as well as the average wages of those with each type of degree, once again expressed in real dollars.

"... it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally....  Never before have central banks tried to push so hard... Few are ready to curb financial booms that make everyone feel illusively richer.  Or to hold back on quick fixes for output slowdowns, even if such measures threaten to add fuel to unsustainable financial booms.... The temptation to go for shortcuts is simply too strong, even if these shortcuts lead nowhere in the end."

Hot on the heels of last week's dismal Japanese data, tonight's Industrial Production data missed rather dramatically as once again the hockey-stick'ers of hope rebound from last month's post-tax-hike plunge did not appear. USDJPY is still fading (4th day in a row), as Goldman concludes rather ominously (having folded like a lawn-chair on their J-Curve exuberance), the post-tax-hike correction is larger than the government and the market anticipated, and in view of our outlook for a slump in real wages and a resultant delayed recovery in domestic demand, we look to external demand to drive economic growth in FY2014. However, we highlight risk factors in the form of protracted weakness in China and other Asian economies and a decline in corporate Japan’s structural export capacity. Sadly for the hopers, hard data continues to miss both the production survey forecast and consensus.

Yesterday we hinted at the one 'uncertainty' that was anything but at record-lows; and it seems Goldman Sachs (who recently opined on what's at stake in the Midterms) agrees that after a period of relative calm, the US political environment looks likely to become more uncertain again. Recent developments have raised the prospect of renewed political tensions this fall. While they suggest the chance of another government shutdown is not high, the political environment has changed enough that the deadlines are likely to create real uncertainty, and an agreement may be reached only at the last minute. Crucially, if Republicans succeed in capturing the majority in the Senate following the November midterm elections, the routine around fiscal deadlines that markets have become accustomed to over the last few years may become more unpredictable (and may spill over into another debt limit debacle).

"The Japan Trade is in trouble," warns BofA's Macneil Curry (and rightly so after this week's utter collapse in Japanese data and Abe's soaring disapproval rating). Over the course of the past week both USDJPY and the Nikkei have broken key technical levels which point to further substantial downside in the weeks ahead.