Middle East

In a day in which there was and will be virtually no A-list macro data (later we get the FHFA and Richmond Fed B-listers), the inevitable low volume centrally-planned levitation was attributed to news out of China, namely that Likonomics has set a hard (landing) floor of 7% for the GDP, and that just like other flourishing economies (Spain, Italy, California) China would invest in "monorails" to get rid of excess capacity, as well as a smattering of European M&A activity involving Telefonica Deutscheland and KPN. In Japan, the government upgraded its economic view for the 3rd straight month and also raised its view on capex for the 1st time in 4 months: who says the (negative Sharpe ratio) PenNikkeistock market is not the economy? All this led to a 2% rise in the Shanghai Composite - the most in 2 weeks - and the risk on sentiment also resulted into tighter credit spreads in Europe, with the iTraxx Crossover index falling 4bps and sr. financial also declining by around 4bps, with 5y CDS rates on Spanish lenders down by over 10bps. Naturally, US futures wouldn't be left far behind and took today's first major revenue miss of the day, that of DuPont, which beat EPS and naturally missed revenue estimates, as bullish and a signal to BTFATH (all time high). On the earnings side, in addition to Apple, other notable companies reporting include Lockheed Martin, Altria, AT&T and UPS.

The bigger question is why it's taken 5 since after the financial crisis to realize these big banks are bad market participants? 

In testimony yesterday on Capitol Hill before the Senate Banking Committee, Federal Reserve Chairman Bernanke remarked:

“Gold is an unusual asset. It's an asset that people hold as disaster insurance. A lot of people hold gold as an inflation hedge.  But movements of gold prices don't predict inflation very well, actually. But anyway, the perception is that by holding gold you have a hard asset that will protect you in case of some kind of major problem.

One of the prime reasons why the Middle East holds such importance to the West is partiality because it is the main supplier of oil and natural gas to countries in the West. Over the past several decades Western countries had few, if any, options other than to purchase its oil and gas from Middle Eastern oil producing nations despite the headaches that came with it. Headaches, for example, that’s included political unrest, turmoil and strife. But now with the newly found fields of oil and gas in Central Asian countries that are only the beginning of what may lie in these vast oil fields of the steppes and the Caucuses, there may be options.

Bernanke today testifies on monetary policy before the House Financial Services Committee (formerly the Humphrey-Hawkins). The testimony will be released at 8:30 am NY with Q&A after his testimony. Tomorrow he testifies before the Senate Banking Committee but the prepared remarks are the same for both days. Indeed it’s likely that the Q&A will be where all the fun starts. As DB says, he will likely try to pull off the trick of continuing to prepare the groundwork for tapering but try to give bond markets something to help them fight off the pressure of higher yields. With no post-meeting press conference planned for the July 30th/31st FOMC, and Bernanke not scheduled to speak publicly until he appears at the Global Education Forum event on August 7th, this week’s testimony may well be the only remarks we hear directly from the chairman for some weeks.

“There is no cure for high prices, like high prices.” This is why the Middle East can never truly have a prolonged supply shortage. They will price their customers out of the market!

Former House Speaker and presidential hopeful Newt Gingrich said a then-struggling U.S. economy can't afford to spend billions of dollars overseas to buy foreign oil when there was plenty of that Texas tea at home in the United States. Gasoline prices, he said, could drop to $2.00 per gallon if drilling activity increased dramatically in the United States. A year later, nearly 90 million barrels of oil was produced worldwide and almost half of that came from new drilling operations in the United States. Gasoline is still nowhere near $2.00 per gallon even though the United States is mentioned in the same breath as Saudi Arabia...

If you’ve wondered what the next recession might bring in the way of U.S. corporate earnings, you don’t have long to wait for an answer.  Analysts expect the 30 companies of the Dow Jones Industrial Average to post a meager 0.7% top line growth for the upcoming Q2 2013 reporting season.  If recent history – think all the way back to Q1 2013 – is any guide, that means we’ll actually see a decline in revenues for the just completed quarter once all the numbers are out.  And with Q1 posting an average negative 0.6% top line comparison to last year, that will constitute a “Revenue recession” for these large and generally well-managed multinationals.  If that makes you question why U.S. stocks are still up 15% on the year, look to both corporate profits (still at record highs) and the anticipation for a better second half.  Hope may not be a strategy, as the old saying goes, but it certainly moves markets.

According to analysts, the world will end up facing a crisis over water shortages, and it has already begun in many parts of the world; and not just in those that are in Africa.

Ahead of this evening's earnings report (and Alcoa outperforming today), and amid Alcoa's ongoing capacity reduction, the yawning chasm between production (of aluminum) and price continues to suggest significant pain ahead. With China and the Middle East seemingly unwilling to follow the market's signals and reduce production (helped un-economically by their respective governments no doubt), the 'if you produce it, demand will come' view of the world is just not working out (and hasn't for 18 months). As Bloomberg reports, "the market is still looking at over-capacity, over-production and an unprecedented overhang of metal," and furthermore, while prices have plunged 12% in recent weeks, there is doubt that producers will follow-through on planned production cuts. Of course, we are sure the Alcoa CEO will be on CNBC to tell us all how great it is and how the world economy is about to pick up... this chart suggests otherwise...

There was some confusion yesterday when news hit that the SecState's wife, Theresa Heinz Kerry, was hospitalized. This came shortly after yet another fiasco involving Kerry who was caught in a rejection, then admission snafu, that while Egypt was burning he was on his yacht not one but two days in a row. We now get some clarity as to the affliction affecting the billionaire heiress:

HEINZ KERRY SAID TO HAVE BEEN HOSPITALIZED AFTER SEIZURE SIGNS
HEINZ KERRY'S DOCTORS HAVEN'T MADE EXACT DIAGNOSIS, PERSON SAYS
HEINZ KERRY'S CONDITION DISCUSSED BY PERSON CLOSE TO FAMILY

Today’s AM fix was USD 1,232.75, EUR 957.40 and GBP 822.55 per ounce.
Yesterday’s AM fix was USD 1,249.50, EUR 961.15 and GBP 819.67 per ounce.

Is the global economic downturn going to accelerate as we roll into the second half of this year?  There is turmoil in the Middle East, we are seeing things happen in the bond markets that we have not seen happen in more than 30 years, and much of Europe has already plunged into a full-blown economic depression.  Sadly, most Americans will never understand what is happening until financial disaster strikes them personally.  As long as they can go to work during the day and eat frozen pizza and watch reality television at night, most of them will consider everything to be just fine. Unfortunately, the truth is that everything is not fine.