Archive - Jul 2014 - Story

"US lending to businesses is reaching record levels but banks are privately warning that the activity should not be seen as evidence of an economic recovery." And the stunner: "Much of the corporate lending is going to fund payouts to shareholders, finance acquisitions and fuel the domestic energy boom, bankers say, rather than to support companies’ organic growth."

A middle of the day co-ordinated VWAP ramp (thanks to VIX) lifted stocks briefly - aftewr the Russell neared unchanged for 2014 - but the last 2 days - the worst in 3 months - pushed small caps into negative territory post-Yellen's June Fed "all-clear". All major equity indices in the US remain notably red post-payrolls. Trannies (miraculously) recovered to unch on the day. Momo names and growth-sensitive stocks have been slammed since the exuberant payroll highs of last week. Treasury yields continues to slide. with the 10Y now 7bps lower in yield post-payrolls (and stocks caught down to that reality) FX markets saw early USD weakness then stability but AUDJPY was in charge of stocks today. Despite early USD weakness, commodities were all rammed lower around the US open - only to recover 'efficiently' back to unch on the day. VIX closes at 12.15 - 3 week highs.

Feeling stressed? Worried about the financial markets? Don't be - the Fed has an index for that. The St. Louis Fed 'financial stress index', constructed from 18 weekly data series (6 interest rates, 6 yield spreads, and 5 others) fell to a record low for the 3rd week in a row signaling all-clear... right? Just one thing, in a world entirely disintermediated by central banking largesse, just how relevant are these 'market' indications of financial stress? As Bloomberg warns, the financial stress index has now been below zero for 130 consecutive weeks, the longest period since 2008.

Remember that epic spending spree that took place in March when consumers cleaned out their savings account and which resulted in a surge in March retail spending in consumer outlays? Now we know that in addition to borrowing from their savings, consumers also "charged" it, because as we reported last month, the April consumer credit soared by an unprecedented $8.8 billion, the most since 2007, and a clear outlier in recent years. April, incidentally is precisely when the credit card statements for March purchases would come due so while impressive, the surge in revolving credit wasn't quite surprising. However, what is perhaps more notable now that the Fed just released the May consumer credit numbers, is that the month after the March spending spree, funding largely on credit, consumers hunkered down once more, and the May increase in revolving credit was a paltry $1.8 billion, much lower than the April surge, and the lowest since February. In other words, after the spending binge, came the credit card bills, and with them, the spending hangover.

This battle has been fought many times in history. "This is why you see politicians doing everything possible to kill democracy for that falls whenever socialistic/communism rises. That collapses the economy sucking in everything like a black-hole and then the pendulum swings back and you get freedom once again..."

It seems not even The Pope's private bank can make money when its only allowed to do it the legal way. As The FT reports, profits at the Vatican bank plunged last year after thousands of accounts were closed as part of an overhaul of the scandal-ridden institution. The Vatican bank, officially known as the Institute for Religious Works (IOR), now has 17,419 customers, down from 18,900 in 2012 and net profit fell from EUR86.6m in 2012 to EUR2.9m last year. So - in sum - accounts fell 8% and profits collapsed 97% - is it any wonder Pope Francis plans to replace the board and all the executives at the 'bank'.

This is not "different times", the system's low volatility will be replaced by higher volatility, the zero bound leads to bubbles by definition unless you of course believe in eternity and most importantly, mean-reversion and compounding remains the two most powerful tools in finance. It feels like an eternity since the market last traded like a real market, but make no mistake, exactly when you think more of the same is destined to be your strategy, things do change despite the feeling of infinity.

Will investing based on fundamentals eventually find favor once again with investors? The problem is that market participants no longer view the financial markets as a place to invest savings over the "long term" to ensure future purchasing power parity. Today, they view the markets as a place to "create" wealth to offset the lack of savings. This mentality has changed the market dynamic from investing to gambling. As Seth Klarman warned, "There is a growing gap between the financial markets and the real economy. Not surprisingly, lessons learned in 2008 were only learned temporarily. These are the inevitable cycles of greed and fear, of peaks and troughs." Simply put, fundamentals will matter, but only after the fact.

If there was any doubt which way the market was leaning if not in stocks, then definitely in bonds, it was promptly crushed moments ago when the US sold $27 billion in 3 Year paper. The When Issued, which was trading at just shy of 1%, or 0.998% to be precise, suggested we could have our first 1% bond auction pricing since May of 2011. That however was not meant to be the case today when as a result of surprising demand for the short end, the Treasury sold TSYs at a high yield of 0.992%, stopping through the when issued by 6 bps, even if the final yield was still the highest in over three years.

History suggests that previously sound assumptions about financial security and recession-proof sectors may not apply in the next recession.

"People who take short cuts, are political, prioritize themselves above others, take excessive risks for personal gain, don’t value capital, or are unethical are outright cancers. These types of people will not only flourish in the next crisis, but most probably they will cause it."

Following the catalysts of broken down US-sponsored peace-talks and the teenager deaths on both sides Hamas (admitting its responsibility for the first time) unleashed more than 240 rockets into Israel in the past four weeks (including 100 since yesterday), Israel has drawn the line. As Bloomberg reports, Israel struck more than 90 targets in the Hamas-controlled Gaza strip from air and sea and PM Netanyahu suggested the option of a ground incursion was on the table. This is heaviest barrage since November 2012 and is set to worsen as Defense minister Ya'alon warned, this "will not end in just a few days," adding that Israel "is prepared to expand the campaign by every means at our disposal." In preparation for escalation, Israel has called up 40,000 reservists today as news hits that Tel Aviv airport has been closed due to shelling as "Operation Protective Edge" expands.

European bank stocks are down over 6% in the last 3 days to 5 month lows - the biggest such drop in 13 months. The combination of Draghi's "no QE", Austrian bank contagion concerns, and rumors of German banks about to be 'BNP'd by US regulators has removed all the exuberant recovery chatter (confirmed by economic data itself collapsing too). Remember all those oh-so-positive PMIs? European peripheral bond spreads surged around 10bps and individual stock markets plunged (Portugal -3% today, Italy -2.5%, Spain -1.8%)

For all those upwardly mobile middle class Americans (amazing they still exist under the current central planning regime which takes from the middle class and gives to the ultra rich and uber poor) who are eager to buy a better house, and suddenly find themselves priced out due to an ongoing surge in the prices of ultra-luxury segment, here is what you need to know: blame China.