Archive - Jun 2014 - Story

No matter what, SocGen sees US equity performance over the next 10 years as modest at best. They note that US equities face three headwinds: cyclically-adjusted valuations (CAPE, starting date 1881) have returned to very expensive territory, corporate margins stand at historically high levels, and after already five years of growth from the 2009 trough, we estimate that the probability of another recession kicking in is close to 100% within the forecast timeframe (the longest cycle ever was 120 months, or 10 years). While their central case is 'moderate growth and inflation', they project a possible high growth surge to 4000 for the S&P 500 and a deflation scenario which would put the S&P 500 at 500 (-12% per annum).

As the world waits with bated breath over the magic time-transporting baby unicorn that Jeff Bezos is teasing us with, we can't help but think the following commercial looks like the product is a magnifying lens and the testers just discovered their wedding-tackle... on the serious side, as long as this new "thing" is cashflow negative then it should be good for another 10-20% in AMZN stock - here's to hoping...

For everyone (and on this site we hope this is everyone) who has read the Road to Serfdom before, feel free to "reread" it for the pictures. For everyone else: read it now. Feel free to stop when it becomes familiar.

In his recent note “Treacherous Market Conditions,” Scotiabank's Guy Haselmann attempted to outline the precarious position the FOMC has put itself in. The Fed’s depleted ammunition applies greater pressure on its attempts to ensure a strong recovery; yet, as Haselmann hinted, the Fed is in a race against time, because risks to financial stability aggregate with each passing day, while economic benefits approach zero. Despite differences as to the extent and degree of financial risks, FOMC members have (finally) become aware that they have arisen. Draghi seems to share concerns about bubble conditions... and now the BIS fears that a "persistently aggressive monetary policy risks exacerbating collateral damage."

The initial exuberance over Draghi's actions (and promises) faded quickly with Treasury yields falling and the EUR surging back higher (to close at 10-day highs)... but thanks to sterling work by AUDJPY and some well chosen 'I'm not scared anymore' comments from David Tepper, US equities soared in a world of their own (as VIX dropped). Volume was also heavy (but the siz came on the downswing after the initial jerk higher from the ECB). The Russell 2000 soared ~2% (best day in 3 months), Treasury yields closed lower, the USD closed lower (as EUR surged) and unchanged on the week, and gold and silver jumped. VIX also helped to support stocks at it dropped modestly (but remains notably disconnected from the equity exuberance). NFP tomorrow... time to sell vol for sure!!

As we reported yesterday, the third largest Chinese port of Qingdao is being investigated for after a source at a local warehouse said that "it appears there is a discrepancy in metal that should be there and metal that is actually there... We hear the discrepancy is 80,000 tonnes of aluminium and 20,000 tonnes of copper... It's either missing or it was never there - there have been triple issuing of documentation." This has resulted in a prompt and acute selloff of copper and other commodities as we further documents, but the problems may only now be starting and the banks. As Reuters reports, worries over a probe into commodity stockpile financing at China's Qingdao port appeared to deepen on Wednesday as Standard Bank Group and a part-owned unit of Louis Dreyfus Corp warned of potential losses and copper prices fell further."

"It's a record!" No not the S&P 500 - the total and utter lack of fear in the marketplace... Adding up Bearish AAII professionals, those who believe a Correction is coming, and the VIX; we have never (ever) been more complacent about stocks. Seems like the Fed's communications policy (about complacency being a concern) is not working...

Just as the cyber-spat is off the headlines for a day... and no one from Treasury has discussed the need for the Renminbi to strengthen... The White House drops another well-timed China shot, calling on Chinese authorities to account for those killed, detained or missing in connection with the military assault on pro-democracy demonstrators at Beijing’s Tiananmen Square 25 years ago. Diplomatically, this could be a little awkward as China forbids public acknowledgment of the anniversary in the state-run media and censors the Internet to wipe away both direct and indirect references to the crackdown.

Another quarter, and another confirmation that in the New Normal only the rich get richer, pardon: richest.

On the eve of Obama and Putin coming face-to-face on the beaches in Normandy, tensions appear to be re-escalating in the south and east of Ukraine. As Ukrainian forces continue their "anti-terrorist" operations, newly 'elected' President Poroshsenko is steppung up the protection of his sovereignty:

*UKRAINE CLOSES 8 BORDER CROSSINGS WITH RUSSIA
*POROSHENKO: 'TERRORISTS' BEING SENT INTO UKRAINE TO SOW CHAOS

There is a great deal of chatter about Russian troop movements into Ukraine with " major accusations today that small units of well-armed militants, some of whom are traveling in armored vehicles, are crossing the Russian border and engaging in firefights with Ukrainian border guards." As if that was not enough, there are now reports that the Chief of Poroshenko's presidential campaign administration has died after an assassination attack in Nemirov city.

Every now and again the apparatchiks who dutifully tend Washington’s statistical sausage factories accidently let loose a damning picture of what actually goes on inside. In that vein the BLS has just published the equivalent of a smoking gun. Namely, a study showing that in 2013—the year of 32% stock returns—the business sector of the US economy generated no more labor hours than it did way back in Bill Clinton’s blue dress period (1998) yet purportedly produced 42% more output in real terms... Stated different, the truth about the Fed’s dangerously misguided ZIRP policy is that it generates a ZIRP economy.

As if this morning's Draghi moves were not enough to show that there are no markets - just manipulated prices from central planners - Japan's Shinzo Abe just dropped another 'random US session' tape bomb:

*JAPAN’S ABE ASKS PENSION FUND TO RAISE STOCK INVESTMENT: NIKKEI

USDJPY and the Nikkei 225 futures are popping in this news - which is not so much news as he has been pushing for this risk-seeking behavior from the nation's pension fund for months. His efforts this time are for health and welfare minister Tamura to announce the move in September (before the original year-end deadline). Of course, with Abe's ratings in lockstep with the stock market, it's no surprise...

Committees, investigations, concerns... but no actions. The SEC's Mary White spoke about market micro-structure this morning but mereley asked a lot of questions - as opposed to answered any. Two things she did mention of note: increased transpraceny for dark pools and internalizers; and forcing more high-frequency traders (and prop shops) to register as broker-dealers (and thus come under closer regulatory scrutiny). However, by the time any of this becomes 'law', we suspect the lobbyists will have created loopholes the size of Draghi's ego for HFTs to walk through. As WSJ reports, the SEC's enforcement division is investigating whether some high-speed traders are using order types - commands exchanges provide that determine how traders' buy and sell orders will be handled - in ways that can give them an advantage over less-savvy investors. We apologize for not seeing this 'investigation' as a positive but we've been here before with every other regulator... vested interests remain strong.

Between Eurostat's lengthy forecasts, the press release, and Draghi's droning on... it's easy to get lost in what was delivered, what was promised, and what it means... here is the ultimate ECb announcement cheat sheet. Simply put, Draghi does not have many options left.