Archive - Jul 7, 2014 - Story

Whocouldanode? Treasury yields continue to push lower (now below Thursday's lows) having not looked back since the jobs report. Stocks - having exuberantly spurted to record highs to ensure American consumer comfort over the long weekend - have now collapsed back and given up all their post-"great-jobs-report" gains... CNBC is puzzled...

It appears the hopes and dreams of a resurgence in US GDP in Q2 will have to be extended-and-pretended another quarter. As Gallup notes, Americans' self-reports of daily spending fell back in June, averaging $91 for the month - down notably from a six-year high of $98 in May - and flat to the $90 average found in June 2013. Not exactly the pent-up demand 'surge' so many economists (and Fed PhDs) have been calling for... Even more concerning, Gallup notes, the drop in daily spending among all Americans can largely be attributed to upper-income Americans spending less in June. Even the 1% are cutting back?

We warned Thursday that there was something wrong with the picture of the equity market's exuberance but it seems the July-4th-week-effect has run its course and equity markets - having read the jobs report over the weekend - have realized it is anything but strong. The Dow just lost 17,000 (however briefly) and equities are catching down to Treasury yield's drop as USDJPY loses 102.00.

The jobs report has little value if we don't peer beneath the glossy veneer.

It was only two weeks ago when Bed Bath and Beyond reported earnings that missed across the top and bottom line. And while the company has little control over contracting revenues, one reason it may have missed on the EPS (at $0.93 vs $0.95) was the "contraction" in buybacks. A contraction, incidentally, which we use loosely, because it followed a February quarter repurchase amount that blew out all historical buybacks out of the water at over half a billion as shown in the chart below.  The bigger problem is that with just $861 million left under its existing buyback authorization, this most popular pathway for New Normal "growth" would have been promptly shut for the company at the current pace of buying up its own stock as soon as two more quarters. So what does Bed Bath and Beyond Buybacks do? Why it promptly authorized just the thing the central-planning doctor ordered: an authorization to buy even more shares back, some $2 billion worth to be precise.

Be careful what you wish for. As the Fed imbibes a sense of confidence in its ability to manage any bumps in the road on its perpetual bubble-blowing mission through the use of macro-prudential policies (big words that truly mean nothing) as stock valuations surge and the repo market is experiencing severe problems; it can always point to VIX as an indicator that all is well in the world and no real risk exists. The problem is - the world is beginning to wake up to the 'odd' micro-structure of the US equity markets and how 'dark pools' are beginning to dominate trading volume. As Barclays faces major legal problems over its alleged dark pool lies, lies, and more lies, the Fed must be growing concerned... as the following chart shows JPMorgan indicates there is evidence of an inverse relationship between equity volatility and the share of off-exchange trading.

With GM recalling virtually every car it has made since emerging from bankruptcy, another maker of flaming paperweights has quietly managed to slip through the cracks of public attention. So it was perhaps well-timed, if only for GM, that over the weekend we not only learned, but saw footage, of what happens when a Tesla is involved in a Police chase that results in a lamp post crash. Nothing short of complete obliteration. “There were fires after that that broke out,” Eric Martinez said. “I saw the firefighters — like 25 firefighters – standing around the white car with the Jaws of Life.” Martinez added that at one point, explosions could be heard. “We originally thought it was fireworks. Everybody thought it was fireworks that were just exploding,” he said.

• Bond Anxiety in $1.6 Trillion Repo Market as Failures Soar (BBG), as reported first by Zero Hedge
• As Food Prices Rise, Fed Keeps a Watchful Eye (WSJ)
• Yellen’s Economy Echoes Arthur Burns More Than Greenspan (BBG)
• Draghi’s $1.4 Trillion Shot: Silver Bullet or Misfire? (BBG)
• Israel's Netanyahu phones father of murdered Palestinian teen (Reuters)
• Ukraine says forces will press forward after taking rebel stronghold (Reuters)
• Goldman Sachs Brings Forward Rate Forecast as Treasuries Drop (BBG)... you mean rise?
• Super typhoon takes aim at Japan (Reuters)
• Kidnapped Nigerian girls 'escape from Boko Haram abductors' (Independent)
• Merkel says U.S. spying allegations are serious (Reuters)

Risk assets have started the week off on a slightly softer footing but overall volumes are fairly low given the quiet Friday session last week and with the lack of any major weekend headlines. Equity bourses are down between 25-50bp on the day paced by the Nikkei (-0.4%). In China, a number of railway construction stocks are up 3-4% after reports that China Railway Corp will buy around 300 sets of high speed trains and may potentially launch 14 news railway construction projects soon as part of national investment plans.