Archive - Jun 2014 - Story

As reported yesterday, in yet another humiliating blow to US foreign policy and the State Department, Al Qaeda-linked ISIS (Islamic State of Iraq and al-Sham) militants took over the key northern town of Mosul, where an unknown number of US-made Black Hawk helicopters were parked and have been captured by Al Qaeda (potentially the same forces that have been trained by the US across the border in Syria). Adding insult to injury the Al Qaeda militants also appear to have looted some $429 million from local banks.  In other words, now that it is armed with US-made weapons, this particular al-Qaeda group also happens to be the world's richest terror force!

Remember when we reported that if it wasn't for Obamacare, the US economy would have contracted not by 1% as per the revised GDP estimate but by 2%. Guess what: according to the latest spending data, the BEA massively overestimated spending on medical care services, which it had pegged at a whopping +9.7% SAAR, while according to the latest Quarterly Services Survey, the increase was actually a decrease of 5.8% SAAR! End result: one after another bank today has sprung to revise their GDP data downward, by about half a percentage point, and here is JPM, cutting its Q1 GDP from -1.1% to -1.6%, which if realized will be the worst collapse in US economic growth since the recession.

As reported earlier, and as most know by now, as if out of nowehere the al-Qaeda faction Islamic State of Iraq and al-Sham (ISIS) has, over the past 24 hours, stormed across northern Iraq, taken over key northern cities and even taken control over countless modern US weapons and military equipment including Humvees and Blackhawk helicopters. As we further reported, after looting nearly half a billion from the Mosul central bank, ISIS is also the "world's richest terror force." So weapons? Check. Money? Check. What happens next? This map, from the Institute for the Study of War explains clearly what ISIS' ambitions in the middle east are: creating a grand nation-state that basically controls virtually all of Syria and most of Iraq.

Palladium prices last traded this high in March 2001. The recent price spike has been driven by investors' concerns that a mining strike in no.2 producer South Africa could chock off supplies at the same as an over-exuberant auto manufacturing world drives demand for the car-exhaust metal. Palladium's industrial uses, and the dependence on South Africa for supplies, have helped keep the metal aloft even as other precious metals stumbled this year. Miners in South Africa went on strike in January for the second time in two years, demanding higher wages and better working conditions. As WSJ reports, the walkout has sharply reduced palladium exports from South Africa, leaving global palladium inventories have dwindled and are now sufficient to meet only 16 weeks of demand and investors exclaiming... "There is no reason to sell palladium right now," said Frank Lesh, a broker at Future Path Trading. "This thing can go to $1,000." But not everyone's so bullish.

The middle class happily accepts high risk in return for temporary gains in the asset bubble of the day, guaranteeing a steady progression of losses. The illusory safety of following the crowd feeds the wealth-destroying dynamic of taking on high risk for either zero gains or huge losses once the asset bubble du jour pops.

A stunning 64% of Americans say the country is on the wrong track as President Obama's recent actions (too numerous to list) have sent his approval rating plunging to a mere 44% - the lowest (according to a Bloomberg poll) since his Presidency began. Under the surface the picture is even more worrisome as "in the past, Obama’s likeability has stayed ahead of perceptions of job performance," as his 'charm' saved him from his apparent ineptitude, but now, "it appears he is no longer likeable enough."

Perhaps the 'disruptive' taxi company's name refers to its valuation more than its 'worth' as Uber's dramatic expansion plans to take over the world are hitting a rather large snag in Europe. As WSJ reports, taxi drivers planned to turn a handful of European city centers into giant parking lots Wednesday, protesting the mobile car-hailing service. Uber has been subjected to scrutiny elsewhere, including the U.S. and Canada. But the hurdles have been higher in Europe, where taxi drivers tend to be well organized. The industry is often more heavily regulated, and governments are more willing to actively protect sectors under threat of job losses. Across Europe, as the map below shows, Uber is facing a series of legal challenges; which makes, as NYU valuation guru Aswath Damodaran confirms means the $18 billion number "is likely wishful thinking."

With 10Y yields trading below those of US Treasuries, asking the question of Spain's rising default risk seems risible but as Bloomberg's Maxime Sbaihi notes, the longer the euro flirts with deflation, the higher the risk that the heavily indebted (and becoming more so) countries will be tempted to default. Of course, this 'concern' is entirely ignored by the 'market' as Draghi has promised enough liquidity to soak up every short-dated bond but as the European Union's so-called "1/20 rule" suggests - requiring states to reduce excessive (over 60% Debt/GDP) by 1/20th every year or face a fine of 0.2% of GDP - Spain, it appears has 5 options to escape this vicious circle... and one of those is restructuring...

It appears the PBOC is hell-bent on destroying any trend idea for carry traders to jump on. After 4 days of strengthening the CNY... and sell-side strategists already jumping on the new trend bandwagon with trade recommendations, the PBOC surprised last night and weakened the currency fixing. It is clear from this action that the PBOC is serious about stopping the hot flows... the problem is, it has consequences. Last night saw China unable to sell its entire 1 year bond offering (even at a rate of 3.32% - dramatically higher than European or US short-dated debt). Copper prices have stumbled, USDJPY is fading and US equities doing the same for now as carry unwind butterflies flapping their wings in onshore CNY can cause hurricanes in global liquidity fed capital markets.

The FOMC should (and might) accelerate the pace of QE reductions to $15 billion on Wednesday (June 18th). Furthermore, at its meeting on July 30th, the FOMC could – and should -announce a similar-sized reduction for the subsequent two months. Hence, the Fed would not have to wait until its September 17th meeting to announce the final leg. QE would then end two months earlier at the end of August rather than the end of October as markets currently expect. Such a path would generally afford the FOMC more freedoms, particularly at the September17th press conference meeting. There are of plenty of reasons to justify such a move...

• World Bank Cuts Global Growth Forecast After ‘Bumpy’ 2014 Start (BBG)
• Al-Qaeda Offshoot Threatens Iraq Oil Site After Taking Mosul (BBG)
• Fed Prepares to Keep Record Balance Sheet for Years to Come (BBG)
• EU investigates tax rulings on Apple, Starbucks, Fiat unit (Reuters)
• Cantor Loss Shocks Republicans, Dims Immigration Changes (BBG)
• More surveillance: Google to Buy Satellite-Imaging Startup for $500 Million (WSJ)
• Tea Party activist who defeated Cantor focused on budget, immigration (Reuters)
• Airbus Suffers Worst Order Loss as Emirates Deal Scrapped (BBG)
• Amazon.com plans local services marketplace this year (Reuters)
• Amazon Stops Taking Advance Orders for ‘Lego’ and Other Warner Videos (NYT)

Yesterday's market action was perfectly predictable, and as we forecast, it followed the move of the USDJPY almost to a tick, which with the help of a last minute VIX smash (just when will the CFTC finally look at the "banging the close" in the VIX by the NY Fed?) pushed the DJIA to a new record high, courtesy of the overnight USDJPY selling which in turn allowed all day buying of the key carry pair. Fast forward to today when once again we have a replica of the set up: a big overnight dump in USDJPY has sent the dollar-yen to just over 102.000. And since Nomura has a green light by the BOJ to lift every USDJPY offer south of 102.000 we expect the USDJPY to once again rebound and push what right now is a weak equity futures session (-8) well above current levels. Unless, of course, central banks finally are starting to shift their policy, realizing that they may have lost control to the upside since algos no longer care about warnings that "volatility is too low", knowing full well the same Fed will come and bail them out on even the tiniest downtick. Which begs the question: is a big Fed-mandated shakeout coming? Could the coming FOMC announcement be just the right time and place for the Fed to surprise the market out of its "complacency" and whip out an unexpected hawk out of its sleeve?

Just when one thought US foreign policy couldn't sink any deeper into the hole of its embarrassment, it takes out a shovel and starts digging. Overnight, in what AP describes as a stunning assault that exposed Iraq's eroding central authority, Al Qaida-inspired militants from ISIS, or the Islamic State of Iraq and al-Sham, overran much of Mosul on Tuesday, seizing government buildings, pushing out security forces and capturing military vehicles as thousands of residents fled the second-largest city. But the worst news by far for the US is that as a result of the takeover of Mosul by ISIS forces, an unknown number, and at least one, US ultramodern Blackhawk and Kiowa helicopters parked at the Mosul airport, are now in, you guessed it, Al Qaeda hands.

While The Tea Party had been relatively aggressive in the race, it is still quite shocking to the establishment that the second-highest House Republican just got unseated (despite outspending Brat by a ratio of 5-to-1) by a local tea-party-backed economics professor:

HOUSE MAJORITY LEADER CANTOR LOSES VIRGINIA REPUBLICAN PRIMARY
DAVID BRAT BEATS CANTOR IN VIRGINIA PRIMARY, AP REPORTS
TEA PARTY CHALLENGER BEATS SECOND-HIGHEST HOUSE REPUBLICAN: AP

Echoing Europe's dissatisfaction with the status quo, it appears the announcement of the death of the Tea Party was a little premature. Cantor was elected to Congress in 2000... looks like we have to add one to initial jobless claims this week. Meet the man who just crushed Eric Cantor...