Capital Expenditures

Tech isn’t exactly booming, but that hasn’t kept “valuations” of tech startups from being pushed into the stratosphere, for the benefit of an elite club.

A common argument that has been made to explain the precipitous decline of the price of precious metals in 2013 (in spite of the significat demand for the physical bullion) is of investors’ disenchantment with gold and silver, which had been piling up in exchange traded products as a way for investors to gain exposure to the metals. However if redemptions are a symptom of investors' disenchantment with precious metals as an investment, shouldn't silver have suffered the same dramatic redemptions fate as gold? Indeed it should have, but we think the reason silver ETFs were not raided like gold was that Central Banks do not have a silver supply problem, they have a gold problem...

By now most are aware that the primary reason there was EPS growth last year was the relentless buying back of their own stock by corporate treasurers, accounting for 75% of the increase in S&P500 earnings per share even as revenues stagnated for the second year in a row and actual earnings growth was comatose at best. At $500 billion in net stock buybacks in 2013, this was an immense amount of bidding power, equal to half of the Fed's entire annual liquidity injection. And while EPS was artificially boosted by an allocation of capital that most would say is the least efficient in terms of future growth (remember when companies spent on capital expenditures to fund long-term growth, not satisfy activist shareholders?) the only good thing that could be said about the second highest annual corporate buyback in history was that companies still saw their stocks as cheap: after all, not even the most aggressive of CFOs would greenlight a massive buyback campaign if they expected their stock to plunge. That is no longer the case.

The start of 2014 was less than exuberant as the markets turned in the steepest loss for the first trading day of a new year since 2008.  What does this mean for the rest of 2014?  Likely not much.  The old Wall Street axioms of "the first 5 trading days" and "so goes January, so goes the year" tend to be statistically more important.  However, it did get me thinking about the new year from a more macro perspective.  This weekend's "Things To Ponder" is a collection of ideas to get you to do the same.

The chart below looks at the Year over Year change in Durables ex transports for the month of November across 4 different years. What immediately stands out is that while 2010 through 2012 acted just as expected, with SA and NSA data almost identical, in 2013 the data... diverged. In fact, the divergence between the SA and NSA was inexplicably over $2.2 billion. What does that mean? Well, if the SA number was accurate, and in line with what the NSA number predicted, Durables Goods ex-transports would have declined by -0.5% instead of rising by 1.2%. The same would apply to all other key categories from the report. In other words, when all else fails, and when Unadjusted data points to a decline, just do what the government's Arima X 12 model is so good at doing, and adjusted the data.

Key events in the week ahead with implications for early 2014.

"Twas the Friday before the Friday before Christmas..." and as the year end rapidly approaches the mainstream consensus is that 2014 will be another bouyant year for the stock market despite the impact of a potential Federal Reserve tapering.  The optimistic view is an easy one.  While it isn't popular, or fun, to look at the non-bullish view it is nonetheless important to consider the risks that could potentially lead to a larger than expected loss of investment capital.  There is one simple truth about financial markets and investing:  what goes up must come down.   It is the downside risk that is most damaging to long term investment returns.  Therefore, this week's "Things To Ponder" is a sampling of views and thoughts on what to watch out for as we enter the new year.

• Glass-Steagall Fans Plan New Assault If Volcker Rule Deemed Weak (BBG) ... "if"? The banks control the legislators and regulators...
• Cellphone data spying: It's not just the NSA (USA Today)
• Major tech companies push for limits on government surveillance (Reuters)
• Shanghai Warns Kids to Stay Indoors for Seventh Day on Smog (BBG)
• Protesters fell Lenin statue, tell Ukraine's president 'you're next' (Reuters)
• Everyone must be flying private these days: EADS to cut 5000-6000 jobs, close Paris HQ in restructuring (FT)
• Big Players Trade 'Upstairs' (WSJ)
• There’s no way to tell how many people who think they’ve signed up for health insurance through the U.S. exchange actually have (BBG)
• Slower China inflation reduces worries of tighter policy (Reuters)

"The shale oil plays are going to be probably much less than a 10-year flash in the pan. They are very dependent on a lot of different things, including low interest rates and the ability to keep borrowing - which could turn around very quickly. Lower oil prices would tend to do the same thing. But even if you hypothesize that we can keep the low interest rates and that the oil price will stay up there, under the best of circumstances, the Barnett data says they probably will not go for very long... And so these companies put together optimistic financial statements that have the benefit of these extremely low interest rates. They keep adding debt onto debt onto debt. How long can they continue to get more debt to finance this whole operation? It's not a model that anybody who is very sensible would follow."

While the Census Bureau disclosed that headline Durable Goods declined in October by 2.0% (and much more on an unadjusted basis), this was in line with expectations, and was driven by an unexpected -15.9% collapse in new aircraft orders, driven by Boeing which had a 60% drop in orders, down from 127 to only 79 for the month. However, the big surprise was in the ex-transport durable goods number, which declined by -0.1%, crushing expectations of a 0.5% increase and down from last month's revised +0.2%. In other words, the modest rebound in orders in late summer now appears to have been purely a function of channel stuffing, which now has to work its way through the system, as manufacturing with unfilled orders dropped by a whopping -3.1%.

When neither the private nor public sector is willing to invest in the future, it seems appropriate to ask, what happened to the future? Have corporations along with governments figured out that a return to slow growth does not necessary equal a return to normal growth? Why invest in new infrastructure, new workforces, new office space, equipment, highways, or even rail, when the demand necessary to provide a return on this investment may never materialize? Many sectors in Western economies remain in oversupply or overcapacity. There is a surplus of labor and a surplus of office and industrial real estate, as well as airports, highways, and suburbs that are succumbing to a permanent decrease in throughput and traffic. Perhaps the private sector is not so unwise. Collectively, through its failure to invest, it is making a de facto forecast: No normal recovery is coming

Having beaten consensus earnings and revenues, it seems that the momentum stock of the year is finally getting its come-uppance as it missed whisper numbers on earnings and deliveries:

*TESLA 3Q ADJ. EPS 12C, EST. 10C (whipser ~17c)

*TESLA FINISHED 3Q WITH SLIGHTLY MORE THAN 5,500 DELIVERIES (whisper ~6,000)

*TESLA SEES 4Q NON-GAAP PROFITABILITY `CONSISTENT' WITH 3Q

This has sent the stocks down over 9% after-hours near 10 week lows... perhaps Musk was right after all.

This morning, as part of the US Treasury's report on global currencies, Secretary Lew made the following remark:

• *LEW SAYS JAPAN 'APPEARS TO BE TURNING AN ECONOMIC CORNER'

Which got us thinking... when have we heard the US Treasury say exactly the same thing... (for exactly the same "policy-based" reason)... The answer is 10 years ago!

• FHFA Is Said to Seek at Least $6 Billion From BofA for MBS Sales (BBG)
• Record Pact Is on the Table, But J.P. Morgan Faces Fight (WSJ)
• Magnetar Goes Long Ohio Town While Shorting Its Tax Base (BBG)
• Mini-Wall Street' Rises in Hamptons (WSJ)
• Obama to call healthcare website glitches 'unacceptable' as fix sought (Reuters)
• Starbucks Charges Higher Prices in China, State Media Says (WSJ)
• Cruz Is Unapologetic as Republicans Criticize Shutdown (BBG)
• Berlusconi struggles to keep party united after revolt (Reuters)
• SAC Defections Accelerate as Cohen Approaches Settlement (BBG)

While there haven't been many economic data points to highlights the so-called damage to if not the economy, then the confidence of the all important US consumer, data on consumer confidence has been trickling in, and as expected, has been sliding. However, nowhere more so than in the just released latest read in the Bloomberg Weekly Consumer confidence index, whose expectations gauge just tumbled to -31, or the lowest level since November 2011. Bloomberg reports: "Americans in October were the most pessimistic about the nation’s economic prospects in almost two years as concern mounted that continued political gridlock will hurt the expansion. The monthly Bloomberg Consumer Confidence Index expectations gauge plunged to minus 31, the lowest level since November 2011, from minus 9 in September, a report showed today. The share of people projecting the economy will worsen jumped by the most since the collapse of Lehman Brothers Holdings Inc. five years ago. The weekly measure of current conditions fell to minus 34.1 in the period ended Oct. 13, the weakest since March."