Archive - Aug 5, 2014 - Story

Did Rupert Murdoch just save the market from his top-ticking acquisition track record (or sentence it to death):

*21ST CENTURY FOX WITHDRAWS PROPOSAL TO BUY TIME WARNER
*FOXA SEES BUYBACK OF ADDED $6B SHRS COMPLETED IN NEXT 12 MONTHS

Time Warner is down over 13% after-hours.

Here is the bottom line: since Lehman, or starting in 2009, the Birth/Death adjustment alone has added over 3.5 million jobs. Or rather "jobs", because these are not actual jobs - these are BLS estimates for how many jobs newly-formed businesses have created based purely on statistical estimations and hypotheses that the US economy in 2014 is as it was in 1960. Which means that the traditional dynamics used behind the Birth and Death adjustment are now merely Dead, and US employment is overestimated by as much as three and a half million jobs!

We noted last week the coincidental surge in China's currency and stock market (bettering US equities for 2014) after they quietly unveiled QE-lite, but, as Bloomberg reports, Tom DeMark says "selling into strength is now recommended," with losses expected over the next six months. This follows his prediction from June that China's Shanghai Composite was due for a recovery, presaging a 16% rise. With last night's hint of China's credit impulse fading and CNY now recoupled with its fixing, perhaps he is right that the short-term catalysts for gains are exhausted. As DeMark concludes, "the trend is your friend until the trend is about to end."

Paying for unproductive friction with borrowed money has generated the illusion that free to me is actually free - it isn't. We all understand how friction slows our progress: flatten the tires on a bicycle and it becomes much harder to maintain speed. If a brake pad is rubbing against one wheel, it gets even harder. If we pile on additional sources of friction, eventually forward motion stops. In systemic terms, the system freezes up and collapses. We see the same systemic friction in the U.S. economy.

Yesterday, the S&P and Nasdaq bounced hard off the pre-payrolls level from Aug 1st. From the moment US cash equity markets closed yesterday, stocks have been dropping back. But now, thanks to this:

SIKORSKI: RUSSIAN UNITS POISED TO PRESSURE OR INVADE UKRAINE

The Dow, S&P and now Nasdaq have tumbled below yesterday's lows, eradicating all the post-payrolls gains in stocks. Treasury yields are tumbling (5bps off highs) and gold and silver and rising.

Over the weekend, the Ukrainian government imposed a series of “temporary” taxes to help the war effort as Ukrainian press reports several hundred solders were left without weapons or ammunition and crossed the border into Russia. The Ukrainian government is in a hurry to raise money. For the last few months, even before the turmoil began, Ukraine has been in an inflationary cycle. Both retail and asset prices were spiraling higher. Now they’ve entered a stagflationary period. The currency has gone into freefall. Unemployment is rising. The economy is contracting (6% by phony government estimates). And inflation is a whopping 19%... and rising. These people are getting abused. And the worst is yet to come.

In the clip below, Michael Oren, former Israeli ambassador to the United States, said he could no longer hear an MSNBC news anchor when she asked about allegations that Israel spied on U.S. Secretary of State John  Kerry. According to Al Arabiya it was not possible to independently verify whether Oren could not hear the question or if he was pretending, but he answered previous questions during the interview without difficulty. Perhaps the most surprising take home is just how little truth it takes for a politician to "lose the audio."

The three charts below are still another reminder that the Fed’s heedless fueling of the third financial bubble this century has done enormous damage to the internals of financial markets.  In this case, investors and savers being brutally punished by ZIRP were herded into bonds funds in a desperate scramble for yield. Yet the market’s structural liquidity condition has gone in the opposite direction. Dealer inventories of corporate bonds have plummeted by nearly 75% from pre-crash levels, meaning that the ratio of dealer inventories to bond fund assets has virtually been vaporized. The implication is no mystery. When the financial markets eventually succumb to a “risk-off” selling panic, the corporate bond market will gap down violently, "everyone is hoping to be first through the exit,” warns Citi's Matt King, "by definition, that’s not possible."

As we warned previously, it appears Russia is stepping up its sanctions-retaliation confirming its threat that "US will feel tangible losses."

• *PUTIN ORDERS GOVT TO PREPARE RETALIATORY SANCTIONS: RIA
• *PUTIN ORDERS GOVT TO READY STEPS IN RESPONSE TO SANCTIONS: IFX
• *PUTIN: RETALIATORY MEASURES SHOULDN'T HURT RUSSIA CONSUMERS:IFX

Russian stocks and currency are sliding this morning, not helped by this announcement. Of course, Putin has already put pressure on major US companies such as MSFT, IBM, MCD, INTC, AMD, and car manufacturers. And as far as "isolation" - the signing of a 5-year trade agreement with Iran would suggest there are still plenty of nations willing to work with Putin.

"We tried not to equivocate too materially yesterday but we hoped we had made it clear that it was our intent to move off of the centre point of neutrality to something a bit more bullishly inclined.... We’ll err bullishly then, albeit not aggressively so. Rather, as we’ve been in the past, we are “pleasantly” bullish and look to add to our positions..." - Dennis Gartman

A two-star US General has been killed in Afghanistan, according to ABC News, which appears to be the highest-ranked US officer KIA since The Vietnam War. The attack took place in the relative safety of the officers academy at Camp Qargha, Kabul, when a gunman wearing an Afghan army uniform apparently turned his weapon against Americans and other Afghans. In addition to the US general's death, a German brigadier general was injured along with 15 other ISAF personnel. Afghan President Karzai said the attack was "an act by the enemies who don’t want to see Afghanistan have strong institutions."

With rates seemingly flip-flopped today (yields higher as stocks drop), we thought it worth skimming what the smart money in the bond market is thinking. As RBS Strategist Bill O'Donnell warns, "Janet must act like a diving instructor, hoping to bring levels to the surface without giving the economy the bends. What makes it really risky for Janet is that financial sector regulation has created a ‘one-way valve’ in secondary market liquidity. Nobody really knows how the system will hold up under duress." This is confirmed by Scotiabank's Guy Haselmann who fears, "the Fed will have difficulties controlling market gyrations and its potential loss of credibility from troubles that are likely to arise from its exit strategy."