It's early, but as we pointed out yesterday in our Q2 earnings preview, the background noise is starting to grow louder. With near record levels of negative pre-announcements post the financial crisis (most recently AMD and Cummins), we are shocked (shocked we tell you) that analysts could have got it so wrong. Expectations for Q2 2012 EPS Growth have dropped from a Viagra-based 'its-always-better-two-quarters-out' view in August 2011 of +11% to -1.8% today. What is not surprising is the hope-filled 14% S&P 500 EPS growth rate expected for Q4 2012! With EURUSD down almost 11% from Q2 2011, we can only imagine the FX translation impacts that analysts are desperately trying to goal-seek into their forecasts - which we presume accounts for the surge in Q4 when Europe will be 'fixed'. With negative macro surprises so disconnected from equity market performance (and implicitly hope for earnings), it seems there is notable room for disappointment.
In yet another negative pre-announcement, following AMD, MAKO and AMAT (just to start, many more coming), Cummins (common bellwether among the talking-est heads) has just cut its revenue guidance dramatically. From expectations of a 10% jump in 2012 revenues, they have cut the full year to breakeven with 2011 now. S&P 500 futures dipped on this news and remain at the cliff's edge. CMI is down over 4% but thanks to a 25% boost in their dividend (makes perfect sense when cutting forecasts?) it's not more (yet - we expect more) - though this confirms some of the signals of increased leverage in credit land as cash piles get burned through just to support dividends or share prices.
We have discussed at length the need for the equity market to be significantly lower in order for Bernanke to step in with his munificence. Critically, this is less about the absolute level of the S&P 500 (though anyone expecting the Fed chairman to step in with the S&P 500 within a few percent of multi-year highs is dreaming) but, as Barry Knapp from Barclays notes - based on Bernanke's writings - additional monetary stimulus is a function of a significant drop in inflation expectations (as opposed to a shallow drop in the S&P 500). It is the risk of deflation that will trigger a policy reaction. Current conditions are not even close to levels that have warranted additional stimulus in the past - which we estimate to be a 2% 5Y5Y forward inflation breakeven rate. In order for that level to be triggered - based on the post-crisis relationship between equities and inflation expectations - the S&P 500 trailing earnings yield would need to rise over 8.2% implying an S&P 500 level near 1200. Tracking inflation expectations is critical to any NEW QE hope - and for now, there is none on the horizon, no matter how much everyone clamors for it.
The last time the US navy sent three aircraft carriers into the Arabian Sea/Persian Gulf was just a few short weeks before WTI broke above $110, and aggressive military tensions, coupled with concerns of an imminent invasion of Iran by Israel and/or 'others', were running high. Then summer arrived, as did the need to lower the price of gas and crude ahead of a veritable cornucopia of central banks easing into June and July, not to mention the need to keep gas as low as possible into the July 4th holiday. Now that the peak summer months are behind us this is all changing, and 4 months ahead of the presidential election, the need to have the "Wag the Dog" put option to round up the troops, not to mention votes, has arrived, as has the need to return to an outright aggressive military stance where Iran is concerned. Which is why we were not very surprised to learn that that Middle East veteran aircraft carrier, the CVN-74 Stennis, is going right back into Mordor, a few short months after it came back from its long stint in the Fifth Fleet, and will shortly complete the trio of aircraft carriers stationed within miles of Iran.
A question on the minds of many people today (increasingly those who manage or invest money professionally) is this: How do I preserve wealth during a period of intense official intervention in and manipulation of money supply, price, and asset markets? As every effort to re-inflate and perpetuate the credit bubble is made, the words of Austrian economist Ludwig Von Mises lurk ominously nearby: "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner, as the result of a voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the currency system involved." Because every effort is being made to avoid abandoning the credit expansion process -- with central banks and governments lending and borrowing furiously to make up for private shortfalls -- we are left with the growing prospect that the outcome will involve some form of "final catastrophe of the currency system"(s). This report explores what the dimensions of that risk are.
Scoffing at the smugness of a CNBC talking head suggesting he is long-term bullish because of the Bernanke Put, TrimTabs' CEO Charles Biderman empirically analyses the effects of QEs-past and just as we have noted again and again - highlights the fact that without at least a 15% drop in stocks, Bernanke will not ride to the rescue. Based on his analysis of wage and salary growth, he believes the US economy is now starting to contract in line with what is going on in Europe and the rest of the emerging world. Earlier this year in the US, portfolio managers hoped and prayed that what looked like rapid growth was real, "It Wasnt!" and, as we have noted, Charles adds that with earnings season starting we will see future guidance cut and this will kick the leg out from the bullish stool - leaving only the hope for another QE flush to save us. However, with the effects of Bernanke's beneficence diminishing with each round, he suspects that we will be lucky to see a 10% rally on NEW QE.
MF Global 2 is now official. At least one can never accuse ex-Goldmanite, and current head of the CFTC Gary Gensler, as being behind the curve:
- U.S. COMMODITIES REGULATOR SUES PEREGRINE FINANCIAL GROUP
- FIRM HAS $200 MILLION CUSTOMER FUND `SHORTFALL', CFTC SAYS
- CFTC LAWSUIT FILED ONE DAY AFTER FIRM ANNOUNCES NFA PROBE
Hopefully, the CFTC's now meaningless action will help all those farmers whose money has just vaporized. Luckily, they can make it all up on record corn profits.
Earlier today, when futures were soaring, we rhetorically asked whether "A German Constitutional Court Delay Today Cripple The EUphoria?" a delay which "could have “serious economic consequences” for the Eurozone as well as Germany, and in turn would risk placing the entire euro project “in question,” Schaeuble warned." Specifically, in terms of timing we said "Judges during the hearing suggested a two-part decision was likely, first on the injunction in about three weeks, and then in early 2013 on the broader constitutional question." Moment ago, according to CNBC's Sylvia Wadhwa, the court has announced the delay could be as great as large as three months, which in turn would put the Schauble scenario into play.
Last Tuesday we suggested that "Now The Fed Gets Dragged Into LiEborgate" when we observed that "Barclays also cited subsequent research by the New York Federal Reserve staff members that, according to the lender, concluded that banks’ Libor quotes were systematically below their borrowing rates by 39 basis points after the Lehman bankruptcy. “Barclays own submissions for tenors of 1 month to 1 year Libor were higher than actual Barclays trades on 97% of the occasions when Barclays had actual trades during the financial crisis,” the lender said." It seems that unlike the BOE, which had no idea of any Barclays problems and was merely calling up Diamond now and then to make sure the bank's money market risk mechanisms were operational and to chit chat about the weather (as per the BOE at least), the Fed has decided to take the high road and openly admit it was well aware of Barclays' LIBOR "problems." And like that the Senatorial circus just got exciting, while that popping noise is bottles of Bollinger going off at every class action lawsuit legal firm.
It seems increasingly the European leaders themselves (absent the self-referential peripheral political paeons) are getting the joke in Europe. Following Buba's Weidmann's rational comments this morning (via Bloomberg):
- *WEIDMANN SAYS CAN'T SOLVE EURO CRISIS WITH EVER BIGGER FUNDS
- *WEIDMANN BANK FINANCING (Bailout - kicking the can) COULD WORSEN WITH EURO CRISIS
Now, Poland's deputy finance minister is pulling back dramatically from their desire to enter the European union:
- *POLAND PLANS `OPPOSITE OF ACCELERATION' IN EURO DRIVE: DOMINIK
- *POLAND SAYS EURO-AREA STABILITY IS NEW CRITERION FOR EURO ENTRY
It seems there is some rational thinking occurring in Europe - no matter how algos react to recycled headlines.
The MF Global playbook is playing out step by step:
- JEFFERIES HAS BEGAN AN ORDERLY LIQUIDATION OF PFG’S POSITIONS
- JEFFERIES DOESN'T EXPECT TO INCUR ANY LOSS IN RESPECT OF PFG
- JEFFERIES ALREADY LIQUIDATED SUBSTANTIAL PORTION OF POSITIONS
- JEFFERIES SAYS PFG POSITIONS SECURED BY CASH HELD IN MARGIN ACC
- JEFERIES TO KEEP PFG LIQUIDATION PROCEEDS IN SEGREGATED ACCOUNTS
If we look at the global economy with unclouded eyes, we reach this conclusion: "This whole thing is about leverage." If leverage doesn't increase, the system implodes. But since collateral is disappearing from the global economy like sand castles in a rising tide, and disposable income has stagnated, there is no foundation for more leverage. As a result, the State/finance cartel has only one choice: increase leverage by whatever means are left. There are only two:
- Allow banks to claim phantom assets as capital/reserves
- Lower interest rates so stagnant income can leverage ever greater quantities of debt
The State/finance Empire and its army of academic toadies (economists) must cloak this reliance on leverage from the citizenry, lest they grasp the precariousness of the entire financial system. As the economic Establishment is discredited by reality (that their sputtering reflation policies have come at an unbearable cost is now undeniable), their attempts to discredit their critics become increasingly comic: only PhD economists in the employ of the Empire are qualified to comment on the Empire's policies, etc.
The debate around San Bernardino County’s proposed program to use eminent domain rights to seize ownership of underwater mortgages has continued to heat up since we first wrote about it here last week. As Barclays notes, the county (along with two other cities in the area) has formed a joint powers authority, which would not need permission from the respective city councils unless they need public money. There are conflicting reports of the path that such an authority would take and the role of private investors. However, the most likely path seems to be that the authority is funded by private investors and it uses this money to buy current loans that are underwater at a "fair price" and then refi the borrower into a new private or more likely into an FHA mortgage. So, this program, if implemented, is likely to be a transfer of wealth from existing investors in these loans to the city governments and the newer investors led by venture-capital firms. Barclays does note though that there are many challenges to such a program including the legal issue of whether eminent domain can be used to seize financial assets in this fashion, especially if the primary beneficiaries are private investors at the expense of existing investors, which include, among others, pension funds and mutual funds and the fact that new mortgage origination is likely to suffer with new mortgagees bearing the costs of such a program in the form of higher mortgage rates/less credit availability.