We have long been discussing the fundamental paradox dichotomy that Europe finds itself in, where on one hand the continent needs ECB intervention to keep it together with indirect debt monetization and current account deficit funding via TARGET2, yet on ther other, where ECB intervention always ends up pushing the EUR higher relative to its FX peers as the natural trendline of the artificial currency is to its natural long-term price level: 0.00. The problem of course, is that the higher the EUR goes, the weaker German exports become, and as we observed just this morning, the faster Germany's collapse into recession happens. Sure enough, Europe finally figured out what has been obvious to virtually anyone with half a brain for many months:
- JUNCKER SAYS EURO EXCHANGE RATE 'DANGEROUSLY HIGH'
That's great, and we agree with Juncker for once, but there is major problem with this: the lower the EUR goes, the greater the redenomination risk. Sorry Europe - that's just the way it is. The second the EUR goes back to the mid and lower 1.20s (or below) PIIGS bonds will go bidless, liquidity will go bump in the night, currency swaps will get all banged up, and "redenomination risk", or fear of currency implosion, will once again rear its ugly head. But at least German exports, and thus German GDP, and thus the only viable economy in Europe, will prosper.
As we anxiously await the titanic announcement about to spew forth from Menlo Park, we thought a look at 2013's +20% performance was worthwhile. We would expect to hear a plethora of 'monetizing mobile' and a cajillion eyeballs must mean something. Will the Facebook phone replace the Obama-phone? Will being 'liked' provide external stimulus? Will they be merging with Dell (or Radioshack?) Feeling bullish? Be wary, implied vol is at its most expensivce to realized vol in 7 months... Rest assured, we will bring the critical headlines as they break...
*FACEBOOK SAYS IT'S A PRODUCT ANNOUNCEMENT :FB US
*FACEBOOK ANNOUNCES GRAPH SEARCH :FB US
FB stumbling now -1.7%
One of the biggest "givens" of the New Normal was that no matter what happens, US corporations would build their cash hoard come hell or high water. Whether this was a function of saving for a rainy day in a world in which external liquidity could evaporate overnight, whether it was to have dry powder for dividends and other shareholder friendly transactions, or to be able to engage in M&A and other business transformations (but not CapEx, anything but CapEx), corporate cash swelled to over $2 trillion (the bulk of it held in deposit accounts, or directly invested in "cash equivalents" i.e. risk assets, in banks in the US and abroad). Whatever the use of funds, the source was quite clear: ever declining interests rate which allowed corporate refinancings into ever lower cash rates, a "buyer's market" when it comes to employees, the bulk of which have been transformed into low paid geriatric (55 years and older), part-time workers: the only two categories that have seen a steady improvement in employment since the start of the second great depression, and low, low corporate taxes (for cash tax purposes; for GAAP purposes it is different story altogether). So some may be surprised that the great corporate cash hoard build appears to have finally tapered off. As the chart below from Goldman shows, after hitting an all time high of 11.2%, the ratio of S&P500 cash to total assets has once again started to decline.
With price-targets now apparently nothing more than a 'talking-point', it is, perhaps, of little surprise that the gap between the average sell-side analyst's price target for AAPL and the current price is the widest it has ever been. And of course, the 'buys' versus 'sells' has not budged at all... for your reading pleasure, the 50 analysts' price targets for AAPL... and the two non-lemmings (Per Lindberg and Edward Zabitsky) that see potential downside for AAPL.
Just as the president reminded us yesterday we are not a deadbeat nation, merely borrowing money today to pay the bills of yesterday, so, as the NY Times reports in this all-too-real article, many of the citizens of the US are also living not just paycheck-to-paycheck but short-term-loan-to-short-term-loan. As one debt-consolidation service noted "They've been borrowing just to meet payments on previous loans; it builds on itself." Rings an awfully loud bell eh? (and yes, we know the government's finances are not run like a households - though at some point the check book needs to balance). People in tough 'economic' situations fall into the 'poverty trap', borrowing money at ever higher interest rates in a shell game to keep previous borrowers at bay. The average debt for households earning $20,000 a year or less more than doubled to $26,000 between 2001 and 2010 - as people dig deeper, precisely because they long to escape. As the focus of the article notes, "the belt-tightening was the easy part... the larger problem was cash-flow." Critically, experiments show that 'economic' scarcity by itself - independent of personality or any other factors - fuels a drive to borrow recklessly.
2012 was an odd year in many senses. The Fed and the ECB are both verging on $4 trillion balance sheets, the total for all of the world’s central banks is $14 trillion and these small pieces of paper float around in the breeze and are plucked at will to feed the fires of Wall Street. When all of the central banks on the planet work in concert then, without off-world bourses, there is no place else left to go and the spatial restraints of our planet are the same boundaries for the investment of money. Here then we find the explanation of 2012. It is not a dot-com bubble or a real estate bubble or a specific bubble of any type at all or any we have ever seen but the Big Lebowski, the giant squid, the mother of all Blue Whales and the days of living in some place that we have never occupied before. Those that bet with the central banks have prospered, made fortunes, become vastly richer but how long does this game go on and is there a way out that is devoid of the usual pain to be found in contractions. The bet of last year was to place your money with the bankers-at-large but will that be the correct bet of this year as the plastic is stretched so thin now that a misstep, the politics of nationalism either of the funding or the funded bursts the balloon and sends it cascading around the room in some wildly gyrating manner.
In what could be a watershed moment for the price, provenance, and future of physical gold, not to mention the "stability" of the entire monetary regime based on rock solid, undisputed "faith and credit" in paper money, German Handelsblatt reports in an exclusive that the long suffering German gold, all official 3,396 tons of it, is about to be moved. Specifically, it is about to be partially moved out of the New York Fed, where the majority, or 45% of it is currently stored, as well as the entirety of the 11% of German gold held with the Banque de France, and repatriated back home to Buba in Frankfurt, where just 31% of it is held as of this moment. And while it is one thing for a "crazy, lunatic" dictator such as Hugo Chavez to pull his gold out of the Bank of England, it is something entirely different, and far less dismissible, when the bank with the second most official gold reserves in the world proceeds to formally pull some of its gold from the bank with the most. In brief: this is a momentous development, one which may signify that the regime of mutual assured and very much telegraphed - because if the central banks don't have faith in one another, why should anyone else? - trust in central banks by other central banks is ending.
The defense of $500 was valiant, but as we expected, brief. And as of moment ago, Apple was finally trading well below the psychological barrier, or at $496 $495 $494: some $30 below Joe Terranova's "generational buy." The catalyst? Nothing unknown, but a big downgrade from Nomura which cut the Price Target from $660 to $530 did not help. What certainly did not help is that Nomura also sees $400 as a downside case, roughly in line with where Jeff Gundlach has said for many months is what his personal target on the faddy stock is. As for the record 230 uber-levered hedge funds who are still long the name: good luck with exiting in an orderly fashion.
In a world where "3 and 50" funds are revealed to be nothing but expert network-boosted Armstrong clones, performing great until exposed for having been boosted to the brim with stimulants, in this case inside information, or where even serious players are caught in ego pissing contests over who is right and who is wrong over a given stock (Herbalife comes to mind) it becomes almost difficult to find true alpha generators, which outperform the market not due to non-public, material information. Yet they still do exist, and probably the best example of one, continues to be Ray Dalio's Bridgewater, a fact which is not lost on us, or the bulk of the sophisticated asset allocators out there. As per the firm's latest monthly update, the hedge fund's total AUM has risen to a mind-blowing $142.1 billion - a record for any hedge fund anywhere, of which $60.8 billion is allocated to Pure Alpha, the firm's active strategy.
Good news, bad news on the economic front this morning. The good news: December advance retail sales rising 0.5% on expectations of a 0.2% increase, up from a 0.4% revised November print. Excluding the volatile auto sales, the number was up 0.3% on expectations of a 0.2% increase, and up from a 0.1% decline. Excluding autos and gas, the print was 0.6%, on expectations of a 0.4% increase. The biggest increase in December retail sales by category was in food services and drinking places which rose 1.2% in December, the same as November. Strong numbers were posted at clothing and accesory stores (+1.0%) and health and personal care (+1.4%) - all very low margin sales. Yet where the report was undisputedly weak, and where many were hoping for a boost but did not get it, was in the higher margin electronics and appliance stores, which dropped -0.6% in December, down big from the 2.3% increase in November, and further weakness for those hoping that December saw a surge in spending over gadgets and gizmos.As for the bad news: it was all in the Empires State Manfuacturing Index which missed expectations big, and in fact posted a decline from the abysmal November miss, revised to -7.30, and now down to -7.78, the sixth negative print in a row, on expectations of an unchanged print. This was the 5th miss in the series in the last 6 reports, the worst miss in 4 months, and the lowest number in 4 months. Alas there was no hurricane in December to blame this major miss on. Oh yes, we remember, "the fiscal cliff."
That China openly manipulates, goalseeks and otherwise distorts its economic data is no secret to anyone: and it is not at all surprising - after all the Chinese GDP model is based on how much goods and services are produced, which means end demand is completely irrelevant, and thus unfalsifiable. It also explains why as part of its miraculous 8% GDP growth year after year, we get such wonderful externalities as ghost cities, the biggest mall in the world lying totally empty, and shoddy buildings that tumble over. But one piece of data that not even China dared to fudge was trade data, for the simple reason that every Chinese "credit" is someone else's "debit", and vice versa, and could therefore be easily confirmed or denied. After all, bilateral trade is always a zero sum game. Except... in China. Which is what the observent eyes of some ANZ (and even Goldman) analysts caught over the weekend, and as was described in "Even Goldman Says China Is Cooking The Books." It didn't take long for China to take offense and boldly state that there is nothing at all wrong with its books.
With precisely one month left until the early bound of the debt ceiling crunch and a possible US government shut down and/or technical default, and with M.A.D. warnings from the president and treasury secretary doing nothing to precipitate a sense of urgency (which will not arrive until there is a 20% market drop, so far consistently delayed but which will eventually happen), here comes the most toothless of rating agencies, French Fitch which somehow kept its mouth shut over the past 18 months, when US debt rose by over $2.1 trillion and debt to GDP hit 103%, shaking a little stick furiously, no doubt under guidance by its corporate HoldCo owners: French Fimilac SA.