Archive - Jul 16, 2014 - Story

Since Janet Yellen started speaking yesterday, the USD has jumped most in 10 weeks to 1-month highs, Treasury yields have risen 5bps at the short-end but are unchanged at the long-end, Gold and silver are down 1%, oil up 1%, and copper -1.4%. In stock land, The Dow and Trannies are leading, S&P is unch, and Russell 2000 is not happy (-1.3%). VIX tested down to a 10-handle once again (but closed at 11.1). Credit markets remained far less excited than stocks today. Biotechs are down over 4.5% since Yellen started speaking and Social Media -1.2%. The Russell 2000 closes -0.8% for 2014.

There has been much discussion as of late about the end of the current quantitative easing program and the beginning of the Federal Reserve "normalizing" interest rates. The primary assumption is that as interest rates normalize, the financial markets will continue to rise as economic growth strengthens. While this certainly seems like a logical assumption, is it really the case?

Presenting: the Price to Equity ratio. Because stocks are cheap and stuff.

Think about the last time you got takeout or ate at a fast food restaurant. Or the last time you bought a pre-packaged food item from a store, or drank a bottle of water or soda. Chances are, plastic was involved in all those items -- plastic that will still be around up to 1,000 years from now.  Americans throw away over 30 million tons of plastic every year, of which only about 25 percent is recycled. The rest goes to landfills. Unfortunately, the largest “landfill” on Earth is actually in the North Pacific Ocean. The “Great Pacific Garbage Patch” is estimated to be anywhere from 3,100 square miles to twice the size of Texas.

Back in the summer of 2011 during the debt ceiling debacle, S&P did the unthinkable: it dared to speak the truth when it downgraded the US from its pristine AAA rating, setting off a stock market selloff and paradoxically sending bonds to record low yields. This resulted in a vindictive Tim Geithner promptly warning the Chairman of McGraw-Hill the US would retaliate (which it did), the termination of then CEO Devan Sharma (and his replacement with the all too friendly COO of Citibank), and most importantly, a still ongoing legal fight in which the DOJ sued S&P (and only S&P, not Moody's, not Fitch) allegedly for rating improprieties during the first housing bubble, but even 5 year olds knew it was just to teach S&P a lesson. Today we learn just what the cost is for anyone who dares to downgrade the US. The answer: $1,000,000,000. That is the amount that S&P has decided it will agree to pay in a settlement with the DOJ to put all this "truthiness" unpleasantness behind it.

Beige Book summary:

• "Optimistic" or "Optimism": 24
• "Pessimism": 1

Stanley Druckenmiller is no stranger to the pages of Zero Hedge as he appears immune to the herd-like status-quo-hugging nature of 99% of the financial markets lackeys that strut on TV. His comments today - lengthy, aggressive, and very worried about what the Fed has done - can be summed up in the following chart and his ominous conclusion, "when the Fed ends QE, there'll be a bear market."

One can't help but wonder just how concerned the powers that be are becoming when such an esteemed mainstream media outlet as Bloomberg News would deem fit to defend the almighty US Dollar. "There are always people who say the dollar is going to be replaced, but it hasn't happened," chides one strategist (clearly forgetting that nothing lasts forever). As growing concerns of "exorbitant privilege" spread from the usual anti-imperialist foes (Russia and China's de-dollarization) to close allies like France and now to the world's growth engine - BRICS, it seems defending what was previously unquestionable itself should be grounds for alarm...

From our fields to our forks, huge corporations have an overwhelming amount of power over our food supply every step of the way. Right now there are more than 313 million people living in the United States, and the job of feeding all of those people is almost entirely in the hands of just a few dozen monolithic companies.

It appears the Federal Reserve is in full court press mode to jawbone the rational exuberance out of the stock markets... On the heels of Yellen's largely ignored "stretched valuations" comments, Dallas Fed's Fisher exclaims:

DALLAS FED PRESIDENT FISHER SAYS 'MARKETS ARE OVERSHOOTING'; CONCERNED FED MAY 'BE STAYING TOO LOOSE TOO LONG'
FISHER: I DON'T THINK YOU SHOULD 'POP' A BUBBLE, BUT SHOULD LET SOME SPECULATIVE STEAM OUT OF MARKETS

His plan for this "letting out of steam" is to start shrinking the Fed balance sheet in October and raising rates early in 2015. Of course, what does the Fed know about bubbles? We are sure the spin will come soon that this is bullish as 'froth' will be removed and then the secular bull can go on (aside from the total and utter lack of liquidity in markets, small doors and large crowds do not make for good endings).

President Barack Obama hosted Tuesday an Iftar at the White House in celebration of the Holy Month of Ramadan. The Iftar - the sixth to be hosted by Obama since he came to power in 2008 - has become an annual tradition at the White House, gathering diplomats from the Arab and Muslim world. We are sure that was not awkward at all for Obama...

Here's a two-word summary of why the American healthcare system is fundamentally broken and cannot be fixed with policy tweaks: perverse incentives.

"Of all the economic bubbles that have been pricked, few have burst more spectacularly than the reputation of economics itself." – From The Economist, July 16, 2009.

Mainstream economists continue to dominate their profession and wield huge influence on public policies. They merely needed to close ranks after the financial crisis and wait for people to forget that their key theories and models were wholly discredited. Meanwhile, heterodox economists who stress credit market risks and financial fragilities – the Austrians, the Minskyites – remain stuck on the fringes of the field. It doesn’t much matter that the crisis validated their thinking. Nonetheless, we’ll continue to explain why we think a shake-up is overdue...“Mythbusting” the theories of mainstream economists.

Having sent shockwaves through the "Don't fight the Fed" apologists yesterday by stating that small caps (etc.) have stretched valuations, we suspect today's hearing (assuming the politicians have now read her statement and report) will focus on what the market's gurus is rapidly trying to paper over. Expect more 'uber-dovish if we need to', expect more 'vigilant' of bubbles (but there are none now)... expect more 'rates will rise - so sell your bonds (and patriotically help with the collateral shortage). Presenting Janet Yellen's Humphrey Hawkins part two... facing the Republican-led Financial Services Committee.

Presented with little comment, aside to observe the deal's ridiculous 12.6x EBITDA multiple, even higher than the record median LBO multiples we noted recently.