It seems equity markets at all-time highs, high-yield funding markets near all-time low yields, and supposed money on the sidelines flooding back into stocks are just not enough to provide cover for the latest IPO:
*TOYS R US FILES TO WITHDRAW IPO :TOYS US
Not citing any specific reasons for the withdrawal, we suspect the weather and market conditions will be blamed as they just reported abysmal earnings of $239mm vs $343mm last year and sales down $155mm from last year (with Q4 comp sales -4.5% domestically and 5.4% international). Back to the drawing board for KKR and Bain to push this off to the next greater fool.
In one of a few early hints that Europe might surprise the world with its Cyprus bailout, on February 10th the Financial Times leaked the content of a secret EU memo. It reported that bank depositor haircuts were among three options being considered to reduce bailout costs. And the memo also warned ominously that “such drastic action could restart contagion in eurozone financial markets.” Clearly, policymakers decided to take their chances. And now we’re living through the contagion that the memo’s authors predicted. But what exactly does that mean? Sure, we can see volatility in asset prices, but how long will it last? Some pundits say it’ll blow over like a late afternoon shower on an otherwise sunny day. I disagree. I’ll suggest there’s more to it than rising market volatility and that we should take a closer look at the meaning of contagion. I’ll argue there are three different types at work today: vanilla contagion, latent contagion and stealth contagion. And when you add up the three effects, Cyprus will have a bigger global impact than many expect.
For those claiming there is something called a "recovery" underway, perhaps they can point out just where on this chart of Real Disposable Income per capita one can find said recovery. Because we are confused: with the average Real Disposable Income of $32,663 per person, or lower than where it was in December 2006 ($32,729), one may be excused for scratching their head.
One of the prevailing false conventional wisdoms about the Cypriot cash confiscation is that it primarily affected rich, tax-evading individuals of Russian origin. Alas, those same individuals are likely to have been least affected, as subsequent discoveries of capital control breaches by the "richest and best connected" reveal, while increasingly it appears that the uninsured depositors on whose back the nation of Cyprus was bailed out are small and medium corporations, who had been parking cash for net working capital purposes with Cyprus' banks, cash which is now gone forever to feed the creeping insolvent Euro-monster, and which can't be used to fund such day to day business activities as payroll, purchases, and business operations. Such as this one.
Far from being a unique situation, the fragile exposure of unsecured depositors across the Euro zone is the norm; and their fragility was further increased in the last twelve months thanks to policies created by the same authorities who now refuse to honor their promise of a banking union, and instead impose capital controls, which have effectively destroyed any credibility on the safety of capital in the Euro zone. However, even if one accepts my view, the unintended outcome begs the following question: Why was there cheap money available for subordinated debt holders to cash out, but there is none now to protect the savings of depositors?
For the last year or so, Mario Draghi (the omnipotent head of the ECB) has discussed 'market fragmentation' as a major concern. The reason is clear - his easy money policies are entirely ineffectual in a monetary union when his actions do not 'leak' out to the real economy. Nowhere is this fragmentation more obvious than in the inexorable rise in peripheral lending rates (to small business) compared to the drop (over the last 18 months) in the core. Simply put, whether it is demand (balance sheet recessionary debt minimization) or supply (banks hoarding for safety), whatever the punch ladeled from the ECB's bowl, it is not helping the most needy economies. Of course, that was never really the point anyway - as we have pointed out many times; the actions of the ECB are (just as with the Fed) to enable the banking system to live long enough to somehow emerge from the black hole of loan losses and portfolio destruction that they heaped upon themselves. This chart is yet another example of proof that monetary policy is entirely ineffectual in the new normal - and yet the central planners push for moar...
Hopefully the $155 million purchase of Picasso's "Le Reve" by Steve Cohen coupled with his splurge on a $60 million East Hamptons pad comes with a 30 full day money back guarantee, because very soon he may have more practical and immediate uses for the money. If the SAC head was hoping that the recent $602 million settlement his firm had reached with the SEC was enough to put all his troubles behind him, he may want to think twice. First, yesterday, New York District Judge Victor Marrero pulled a "Judge Rakoff", when he balked at the SEC’s use of the “neither admit nor deny” provision (the same argument used by Rakoff when he rejected an SEC settlement with Citigroup in 2011). Marrero also asked what would happen if Martoma, who has pleaded not guilty to related criminal charges, is convicted. “How would it look if in the settlement before it, the parties were allowed to say ‘We did nothing wrong?’” Marrero asked. “The ground is shaking, let’s admit that,” said Marrero. “This court is in the same position that Judge Rakoff was some months ago." But in the end we are sure that Marrero, just like Rakoff, will fold to pressure, and money. However, where things got interesting is that moments ago the Feds arrested long-time SAC suspect and PM Michael Steinberg, giving him a perp walk out of his Park Avenue apartment. This was the highest profile arrest so of any SAC employee and means that while the SEC may be trying to close the book on Cohen, the Feds are only now getting started.
The Russians are taking a page from the Europeans book (and not a positive one for libertarians). Given the substantial criminal activity and illegal entrepreneurship in Russia - the grey and black economies account for 50–65 percent of GDP and estimates that about $50 billion was taken out of Russia illegally in 2012 alone - the great and glorious leaders have decided to impose restrictions on cash transactions. As Russia Beyond The Headlines reports, Russia may ban cash payments for purchases of more than 300,000 rubles (around $10,000) starting in 2015 - starting with a higher ($19,500) restriction in 2014. They will also enforce mandatory cash-free salary payments (cash compensation accounts for 15% of GDP currently) in an effort to both bring some of the population's 'grey' income out of the shadow; and increase the volume of cash reserves in the banks. It would appear that wherever we look now, leadership are realizing that the limits of fiscal and monetary policy have been reached and now changing rules, limiting freedom, and outright confiscation are the only way to maintain a status quo. Ironic really, when the enforcement of said rules may just be the catalyst for the end of the status quo as the middle class suffers.
It's not been a great evening so far for the leadership in Japan. We are now six months into the greatest monetary policy bluff of all time and thanks to the sound and fury from Abe (and now his henchmen) the JPY has devalued by an impressive 25%. The goal, of course, to target inflation and combat the dreaded deflation - that Abe himself today said "can take a long time." So how are we doing? Not so great it seems. Just as the US went 4-for-4 today in dismal data so Japan is 3.5-for-4 as the much-watched 'inflation' missed expectations once again with a -1% print (that would be deflation) - the worst level since August 2010; Japanese Industrial Production slumped 11% year-over-year, far in excess of the consensus 5.8% drop (biggest miss since Feb 2009) and the biggest collapse (ex-Fukushima) since October 2009; and to top it all off, Japanese unemployment ticked up higher than expectations to 4.3% - equal worst in 7 months. The one saving grace was a PMI above 50 (but driven by an 18-month high print in input costs and accompanied by a drop in backlogs and slump in employment sub-indices - so not exactly bursting with euphoria). Need moar Abenomics...
First it was thousands of dead pigs floating in the Shanghai water supply (at last estimate over 16,000), then a thousand dead ducks were pulled from a river in the Sichuan province, and now, pushing the meme beyond even its most grotesque boundaries, we learn that five black swans were found floating lifeless on the pond of Anhui University’s old campus in Hefei, traditionally inhabited by a bevy of black swans. From Danwei: "The latest instance of floating dead animals in China – first pigs, then ducks, and now black swans – these mere five black swans became an object of heated discussion on the Internet right after the announcement was made. How did they die? Was it a natural disaster or another man-made one? As Star News tells us today, upon hearing of the news yesterday it immediately sent a journalist to the scene to find out exactly what happened. What he found was just one more filthy pond filled with oily water and garbage."
- Lesson #1 Government agencies allocate capital better than the private sector
- Lesson #2 Central banks should control asset prices and prevent them from falling
- Lesson #3 Darwin & Schumpeter were wrong, creationists are right; there is such a thing as a free lunch
- Lesson #4 Towards a new orthopraxy
- Lesson #5 Wondrous tools used by the clergy to grow GDP
- Lesson #6 How to finance infinite needs
The “Cyprus deal” as it has been widely referred to in the media may mark the next to last act in the the slow motion collapse of fractional-reserve banking that began with the implosion of the savings-and-loan industry in the U.S. in the late 1980s. The happy result will be that depositors, both insured and uninsured, in Europe and throughout the world will become much more cautious or even suspicious in dealing with fractional-reserve banks. They will be poised to grab their money and run at the slightest sign or rumor of instability. This will induce banks to radically alter the sources of the funds they raise to finance loans and investments, moving away from deposit and toward equity and bond financing.
The housing recovery was described by one muppet on CNBC yesterday as 'parabolic' so we decided to go in search of this mystical anecdotal surge that is so often heard on the airwaves of the preachers. It turns out, the recovery (if that's what you want to call it) is not so much. Just as in Europe, it seems if we repeat the same lie (or hope) often enough, it may just come true. So it is in the US. Headlines crow of YoY gains and ad hoc surges (Vegas and Silicon Valley) but if you dig down just an inch or two into the real data, the housing 'recovery' is the little train that isn't. As Bloomberg notes, regional home prices have recovered to only 2004 levels and while the REO-to-Rent model remains for the late-to-the-gamers, it is inevitably a self-destroying bubble if there is no organic growth and one glance at the rate of mortgage applications ('real' buyers) says all we need to know about the housing 'recovery'.