You were born free … a bundle of tremendous potential...
Final Q2 GDP Surges 4.6% Thanks To Profit Definition Change; Personal Consumption Weaker Than ExpectedSubmitted by Tyler Durden on 09/26/2014 09:08 -0400
The good news in the just released final Q2 GDP estimate soared by 4.6%, just as Wall Street expected, which was the biggest quarterly jump since 2011 Q4 2011, driven by gains in business spending, where mandatory forced Obamacare outlays led to a $17.5 billion chained-dollars increase in Healthcare spending to $1815.9 billion. Also helping were corporate profits which rose 8.4% in Q2, the most since Q3 2010, once again courtesy of adjustment in definitions (recall the IVA vs CCAdj change we discussed previously).
"Risk: NEW LOW for Net free credit at -$183b is major risk should the market drop: Net free credit is free credit balances in cash and margin accounts net of the debit balance in margin accounts. Net free credit dropped to -$183b and moved to a new low below the prior record of -$178b in February. This measure of cash to meet margin calls remains at an extreme low or negative reading below the February 2000 low of $-129b. The risk is if the market drops and triggers margin calls, investors do not have cash and would be forced to sell stocks or get cash from other sources to meet the margin calls. This would exacerbate an equity market sell-off." - BofA
Sad, but true...
When The New Normal Fails: The "Problem With Traditional Economics" In A Bizarro, Centrally-Planned WorldSubmitted by Tyler Durden on 09/23/2014 15:45 -0400
It has been several years since the disjointed, confused, and extremely disorganized Occupy Wall Street movement made any headlines. Alas, in the interim, the career prospects of those who comprise its up prime age demographic have gone nowhere but down while inversely impacting the nominal free time of said cohort, which is why we were somewhat surprised it took as long as it did for the same individuals, best known for camping out in Zucotti Park (until it started snowing of course), to stage a daring comeback. Which they did today, following a weekend in which New York City was overrun with "The People's Climate March", protesting against climate change by... leaving behind them tons of non-biodegradable garbage. It is this same group that has once again made its way all the way down into the Financial district, and specifically in front of the TV studio formerly known as the NYSE.
It has been quite an eventful week between Scotland's battle over independence, the Federal Reserve's FOMC announcement and the markets making new all time highs. The FOMC announcement was more comedy than anything else as the continued facade of the Fed's forecasting capabilities was revealed, it appears the biggest factor in the world of investing and for this weekend's list of "Things To Ponder" we have accumulated a few reads relating to the Fed.
Cable (GBPUSD) is surging as the first results from the Scottish Referendum hit and a resounding "No" to independence appears confirmed. Almost back to pre-Scottish-Vote-fears level (1.66), cable is up 250 pips in the last 24 hours (its biggest move in over a year). GBP is also strengthening notably against EUR (2-year highs), CHF (2 year highs) and of course the JPY (6 year highs) as the Japanese government admits defeat and downgrades its economic assessment for the first time in 5 months (hence sell JPY as they 'must' do more money printing (despite Japanese businesses all pushing for a stronger JPY). FX markets are extremely volatile this evening and implicitly, equity futures are clanging around cluelessly. The USD Index is flat (gaving retraced all FOMC gains). Gold is down on the Japan news (below $1220).
Minutes ago the Yen hit another multi-year low against the dollar, which sure enough, is great for the nominal value of Japanese stocks, if horrible for the actual Japanese companies, the Japanese middle class, and pretty much everyone except for a few superrich people. Such as Sony. Because the (now former) electronic giant, which once upon a time was the target of an activist campaign by none other than Dan Loeb who mysteriouly saw value in the company, once again stunned everyone when it reported overnight that it expects its annual loss to swell to $2 billion, but, far worse, canceled the payment of its dividend for the first time ever after writing down the value of its troubled smartphone business.
China warns "the outside world doesn't get it, we do," in a statement related to the "stealth QE" they unleashed yesterday, noting investorsd "do not realize that today's Chinese economy is moving towards "new normal" in the process," and "need to accept the volatility of economic data," during this transition. Crucially, PBOC adviser Chen Yulu clarifies what Western central banks simply cannot grasp: "Hoping for stimulus policies in the face of increased economic pressure is short-sighted and does no good to long-term economic development," warning investors should not expect "strong stimulus." Wall Street is less than exuberant about the liquidity injection, as the impact on real economy may be limited due to lenders' risk aversion.
The Fed Chairman has some words of encouragement for the tens of millions of Americans who live at or below the poverty level, including that threatened with extinction class, affectionately known as "the middle." Her message? Build assets, or said otherwise... get rich.
Aside from the "sure thing" of buying the Alibaba IPO, achieving a 10% yield return in the new normal world requires leverage and excess risk-taking. To compare the risk/reward of various assets, Citi accounts for haircuts and leverage costs of the typical investor and finds an investors needs a 1.9x leverage in the S&P 500, 8.1x leverage in Treasuries, and 2.3x leverage in high-yield to achieve (based on historical norms) the required return. However, after accounting for downside risks, high-yield cash and leveraged loans both top the S&P 500 as the best way to meet a 10% bogey yield.
Because what's two weeks between propaganda spewing friends?
In the New Normal, yellow may or may not be the new black, but stock buybacks are certainly the new CapEx. And yet, companies are still forced to continue their sad existence in which the bulk of their cash is handed over to a few loud activist investors, and thus have no choice but to spend the bare minimum on capital investments. The following table shows where it all goes.
Even the most avid Bulls should grasp that market corrections of 10% to 20% are statistical features of all markets. Cranking markets full of financial cocaine so they never correct simply sets up the crash-and-burn destruction of the addict.