Big picture and dispassionate discussion.
Hong Kong's richest are busy offloading local assets which institutions are happy to buy. It's exhibit A why institutional money often represents dumb money.
It may seem counter-intuitive but the US dollar appreciated last week, despite the partial closure of the Federal government, the heightened risk of default and the nomination of Yellen. The dollar can move higher next week too.
- A U.S. Default Seen as Catastrophe Dwarfing Lehman’s Fall (BBG)
- Software, Design Defects Cripple Health-Care Website (WSJ)
- Gunmen kill 5 Egyptian soldiers near Suez Canal, 2 people die in blast (Reuters); Egypt death toll rises to 53, streets now calm (Reuters)
- Three retailers sell Apple iPhone 5C for $50 or less (Sun Sentinel)
- New American Economy Leaves Behind World Consumer (BBG)
- Dow's Exiles Often Have Last Laugh (WSJ)
- Macy's Puts China Online-Expansion Effort on Hold Amid Economic Slowdown (WSJ)
- Gold Befuddles Bernanke as Central Banks’ Losses at $545 Billion (BBG) - just ask the BIS gold selling team: they are unbefuffdled
- Markit Group Said to Avoid U.S. Antitrust Claims as EU Proceeds (BBG) - being owned by the banks has benefits
- Paulson leads charge into Greek banks (FT) - and scene for the Greek banking sector
Dispassionate overview of the key factors shaping the investment climate in the week ahead.
Last Thursday when we reported the surreal sequence of investor disinformation events facilitated by both JCP's management team, CNBC and a conflicted "source", we said that "it was only a matter of time before lawyers started making phone calls, and before someone got implicated in what in retrospect can be construed as very serious, and costly, 10(b)-5 securities fraud." Sure enough, it took a little under 48 hours before the first (of many) lawyers smelled blood, and resulted in Shareholder Rights Law Firm Johnson & Weaver, LLP starting an investigation " if a securities violation was committed by J.C. Penney Company, Inc., when it made specific representations about the company's liquidity and the need to raise cash." The answer: yes. The only question is who is guilty, and how much the settlement will be for all those who lost cash on the second most active trading day of JCP stock in history (followed only by the next trading day in which the stock tumbled another 6% from the Goldman follow on offering price to a fresh 13 year low).
Thus, we see the “smart money” exiting the markets. We also see fewer and fewer companies participating in the market rally. Those who run these companies are more pessimistic than at any point in the last five years dating back to the nadir of the 2009 collapse. And finally we have investors as a whole displaying the most complacency about the market in history.
If you want to track how close we are to the next financial collapse, there is one number that you need to be watching above all others. The number that we are talking about is the yield on 10 year U.S. Treasuries, because it affects thousands of other interest rates in our financial system. When the yield on 10 year U.S. Treasuries goes up, that is bad for the U.S. economy because it pushes long-term interest rates up. When interest rates rise, it constricts the flow of credit, and a healthy flow of credit is absolutely essential to the debt-based system that we live in.
- Egypt, U.S. on Collision Course (WSJ), Gunmen kill 24 Egyptian police in Sinai ambush (Reuters)
- India’s efforts fail to prevent new rupee low (FT)
- More bad news for AAPL: Steve Jobs Biopic Crashes on Opening Weekend (WSJ)
- "Sustainable" - U.S. Stocks Beat BRICs by Most Ever Amid Market Flight (BBG)
- Merkel cancels election rally after hostage taking (Reuters)
- Some day, Abenomics might work... Not today though: Japan Exports Rise Most Since ’10 as Deficit Swells (BBG)
- China July Home Prices Rise as Nation Seeks Long-Term Policy (BBG)
- Spanish Bank’s Bad Loan Ratio Rises to Record in June (Reuters)
- Recovery... for some - Ferrari NART Spyder Sets $27.5 Million Auction Record (BBG)
- Bund yields hit 17-month high, rupee slumps (Reuters)
- Regulatory Headaches Worsen for J.P. Morgan (WSJ)
A low cost of capital is the underpinning of much of the exuberance that shareholders are showing for stocks as management are able to lever-up (in the face of deteriorating fundamentals) to reward shareholders (via buybacks or state-sponsored dividends). With rates surging in the last few days, a critical question is how much will it take to accelerate outflows from bond funds and lead to significantly wider credit spreads for corporations? As BofAML notes, the consensus is now that a 3.5% 10Y rate is enough to trigger a disorderly rotation by which institutional investors are unwilling (based on risk expectations) to bid for the yieldier credit market debt as retail flows out. This is crucial since if the credit markets sell-off, firms will be unable to fund the expectations priced into equity markets and lead to a shift back to the sidelines from risk-assets in general.
There is a known tendency for JPY to appreciate in August. As Citi's FX Technicals group notes, this tendency is particularly strong when the differential between Japanese and US policy rates is less than 2%, and given the current rate gap, JPY is highly likely to rise again this August. USD selling for JPY by Japanese exporters puts larger downward pressure on USD in August than usual, partly since trading is thin because market players are on vacation. However, in recent years the income account surplus has had a larger impact and along with the major Treasury auctions (interest payments and redemptions) there is an appreciable fundamental flow. In addition, the much-watched technicals (considerably more widely followed in Asian FX markets than the US) are not supportive (of either JPY weakness of Nikkei strength) and given the massively crowded trade, for a foreigner who has purchased the Nikkei on a hedged basis (Long Nikkei and Long USD JPY) this trade could become very painful.
President Obama recently stopped in Phoenix to deliver his latest diatribe on how he is going to fix the economy. Yes, that is correct, another round of "campaign speeches" that, as has been the hallmark of this Administration to date, have generally wound up mired in an abyss of a broken congressional system. What really struck me, however, was his comprehensive plan designed to further boost the housing market. Another housing bailout program is the last thing we need. It's time to stop trying to fix what is broken by trying to cure the symptoms rather than the disease.
With euphoria returning to equity markets, it's worth remembering that stocks are unlikely to make you really rich. We have some ideas what might though.
When is the last time you got a stock tip from a cab driver or chatty not-in-the-business neighbor? It’s probably been the better part of a decade, if not longer. Yes, that’s probably the most bullish argument for owning stocks just now, but, as ConvergEx's Nick Colas notes, it also raises a question. What investments are retail investors considering, exactly? Various online tools and resources provide some answers. From Yahoo! Finance’s analysis of number of requested price quotes last week: AAPL, BAC, TSLA, INTC and CALL. From Google Trends: AAPL, GOOG, and YHOO. And from one very popular online brokerage for today’s volume: AAPL, F, BRCM, BAC, and NUGT. Whether this interest indicates a top or a crowded momentum trade is in the eye of the beholder, of course. But in a light volume period like summer, Nick notes, tracking individual investor attention can be an important piece of the day-to-day trading puzzle.
The optimism over the housing recovery has gotten well ahead of the underlying fundamentals. While the belief was that the Government, and Fed's, interventions would ignite the housing market creating an self-perpetuating recovery in the economy - it did not turn out that way. Instead it led to a speculative rush into buying rental properties creating a temporary, and artificial, inventory suppression. The risks to the housing story remains high due to the impact of higher taxes, stagnant wage growth, re-defaults of the 6-million modifications and workouts and a slowdown of speculative investment due to reduced profit margins. While there are many hopes pinned on the housing recovery as a "driver" of economic growth in 2013 and beyond - the data suggests that it might be quite a bit of wishful thinking.