October 11th, 2012
It may come as a surprise (until very recently) to many who watch the flashing red headlines spewed forth by Bloomberg and Reuters terminals as each and every firm manages to coincidentally report earnings within a smidge of guidance (and maintain their 'near-perfect' records of 'sustainable' growth) when all around the signals seem to point to an economy in malaise. However, earnings quality - that ephemeral view of just how manipulated the end number really is - remains critical (in the medium-term, if not the short-term thanks to the headline-reading algos). To wit, Bloomberg notes a recent paper (below) that finds 20% of CFOs will "manage earnings to misrepresent economic performance" with 93.5% admitting it is to influence the stock price. 'Red flag's include EPS inconsistent with cash-flows, unusual accruals, or an industry outlier. Amid pressure to maintain stock prices (and keep a career going), 60% of earnings 'management' is to increase income and of course 66% of CFOs hope for fewer accounting rules going forward.
While stating the somewhat obvious - that the Fed's actions will cause 'pain' when they (try to) stop QE - when it comes from a high-ranking officer of the establishment elite (as opposed to a tin-foil-hat-wearing, BLS-exposing, HFT-undermining, fringe blog) such as Goldman Sachs' President Gary Cohn, perhaps more mainstream will begin to question the one-way path we are on. Cohn's interview on Bloomberg TV ranged from his reading habits (Greg Smith's tell-all) to the world's central bank printfest and how "we will have to go through the pains of stopping QE" and from his views of the election status quo to the global economic malaise, he does so well on the reality front - until he shovels undying praise on Mario Draghi's back for his "spectacular job" - though admits he has not solved Europe's real problems.
A new monetary era has began in the West. Its consequences will probably be very different in the United States and Europe. However, one way or the other, investors now operate under a regime of central bank asset price targeting. Everything we know about investors’ traditional reflexes and all historical points of reference are potentially invalid.
UBS' Art Cashin provides the clearest 'simile' for our current economic malaise as he remembers back 90 years... On this day in 1922, the German Central Bank and the German Treasury took an inevitable step in a process which had begun with their previous effort to "jump start" a stagnant economy. Many months earlier they had decided that what was needed was easier money. Their initial efforts brought little response. So, using the governmental "more is better" theory they simply created more and more money. But economic stagnation continued and so did the money growth. They kept making money more available. No reaction. Then, suddenly prices began to explode unbelievably (but, perversely, not business activity). Think it can't happen here? read on...
Round 2: Midget Mayhem
Another week, another retail outflow from domestic equity mutual funds - but this time it's different. Now 11 weeks-in-a-row of outflows have led to this week's highest outflow since August 2011 - just as stocks hit multi-year highs. It seems no matter how much Bernanke says 'come on in, the water is fine', the newly-smart money (or fooled one too many times perhaps - is it any wonder when only yesterday CNBC was discussing Selling AAPL Puts as a viable strategy?) of the retail investor is smelling sharks and fading the strength. With $250bn in outflows since the start of 2011, and $50bn alone in the last 11 weeks (as the market inexorably rises on Johnny-5's instruction), we can't help but think this week's $10.6bn outflow is redemptions at the end of Q3 - not exactly what the performance-chasing, money-on-the-sideline-hoping, recovery-is-around-the-corner-believing long-only commission-taking 'managers' wanted to see.
Call it a fat-finger, or a deus ex 'aurum' machina, but during this morning's COMEX gold futures trading, we wonder if the obvious 'glitch' gave us a premonition of things to come?
It would seem things are going from worse to worserer as, while US citizens prepare to see 30,000 drones over their own 'domestic' heads, Israel's Benjamin Natanyahu accuses Lebanon's Hezbollah of launching a previously unidentified drone (which has been shot down) over Israel last week. As the Globe and Mail reports (via AFP) -
"We are acting with determination to protect our borders," his office quoted him as saying during a visit to the frontier with Egypt.
"As we prevented last weekend an attempt by Hezbollah. We shall continue to act aggressively against all threats," Mr. Netanyahu said.
Stronger Periphery close will be the usual opportunity for politicians to rant about the lack of clout of rating agencies.
Good Jump in Risk appetite. Question is how far. Lack of absence of negative news, or better, markets simply ignoring the latter, doesn’t make for a convincing bullish rebound.
I’d say: We won’t get fooled again! European Bull trap.
The notion that increased consumption leads to increased happiness is self-evidently false, yet consumption remains the focus of our economy and society. The appeal of consumption is understandable once we grasp that it is the only empowering act in a neofeudal society where we are essentially powerless. In the mindset of the consumerist economy, purchasing something feels empowering because the act of consuming is experienced as renewing our sense of identity and social status. But since that identity is inauthentic, the sense of euphoric renewal is short-lived and soon defaults to the base state of insecurity. Since the consumer is only empowered by buying and displaying status signifiers, the balance of their lives is experienced as powerless – that is, a chronic state of social defeat. In the act of consuming, the only feature that continues on after the initial euphoria fades is the debt taken on to make the purchase.
This is the stuff that would never be aired in the US mainstream media, at least before a POTUS election!
Yesterday even as the broader market slid materially, much to the dismay of permabulls everywhere, taking out post QE3 lows, one stock that obstinately refused to join the trend was Apple, which as we have noted before is the vanguard of the index known as NASDAAPL, and whichever way the NASDAAPL goes, so go America's hedge funds, all of which have decided to piggyback on the stock in hope of catching up to the market performance and avoid being redeemed to death. Today, we get a mirror image of yesterday, when after opening at its highs, AAPL has since tumbled 2.5% from its highs, following news that an Apples court has allowed sales of Samsung Galaxy to continue. Finally, the broader market, which ramped early on hope that the intolerable Basel III requirements would be delayed by 1 year (they will be eventually as they demand that banks sell trillions in assets: something they can't do), is about to slide not only with AAPL as the catalyst but following news from Dow Jones that the "EU Trialogue Didn't Discuss Basel III Delay Thursday." In other words, we ramped on a completely bogus rumor originating in Europe once again. What else is new?
One of the most egregious aspects of the Great Moderation was the issuance (and thus demand for) of large amounts of grossly mispriced extremely 'junky' debt at the peak as investors stymied by the lack of spread (return) pushed further and further out the credit risk spectrum. The driver at the time was the liquidity flood triggered by large-scale securitizations (and that ended well eh?); this time it is central banks providing the fuel for investors to seek yield through leverage (either through fundamental leverage in riskier firms or technical leverage through riskier instruments). To wit, the last few weeks have seen a resurgence of issuance of PIK-Toggle bonds.
Economics would benefit from self-restraint in regard to the usage of mathematics. Alfred Marshall made some useful suggestions:
- Use mathematics as shorthand language, rather than as an engine of inquiry.
- Keep to them till you have done.
- Translate into English.
- Then illustrate by examples that are important in real life
- Burn the mathematics.
- If you can’t succeed in 4, burn 3. This I do often.
I hope the blowout growth in mathematics in economics is a bubble that soon bursts.
Just when we all thought the Macondo disaster could be put behind us and TV ads proclaim the Gulf's recovery, a sheen of oil has reappeared and the coastguard confirms it is directly linked to the Macondo well. According to WDSU, the sheen is a light oil and would be difficult to clean up. "The exact source of the sheen is uncertain at this time but could be residual oil associated with wreckage and/or debris left on the seabed from the Deepwater Horizon incident in 2010," the agency said in a release Wednesday night.