On Monday it was Alcoa, now it is Yum! Brands' turn. The food company, best known for its KFC mystery meat, and over-reliance on a suddenly careening China just reported results which were mixed. Revenue of $2.904 billion was less than the expected $2.92 billion and was 8% lower than the $3.2 billion reported a year ago. Operating profit excluding refranchising gains and losses was $358MM, below expectations of $375MM, leading to a EBIT margin of 12.5% also substantially less than the 14.5% reported a year ago. In short, worldwide operating profit crashed 20% including a 63% drop in China. But thanks to various below the line adjustments, including a tax rate of 22.1% or lower compared to the 23.9% a year ago, the company's EPS of $0.56 beat expectations of $0.54.
Bonds and silver ended the day lower, gold and stocks unch, and WTI crude (and RBOB - back over $3.00) notably higher. While the Nasdaq, Russell, and Trannies are comfortably above the FOMC meeting levels (from 6/19), the Dow and S&P struggled to hold it into the close after the extreme swings that the FOMC minutes dragged through the markets. Maria B might say 'off the lows', others may say 'off the highs', but it seems the machines had it all under control as the S&P 500 closed at VWAP (amid the total lack of clarity that the minutes provided). Financials underperformed (but remain green from FOMC 6/19) along with energy - as Brent-WTI was crushed to below $2, historically average around $1.
If weak PC sales throughout 2012 were blamed on expectations for Windows 8, now it is the turn to blame weak PC sales on Windows 8 "lukewarm reception" disappointment. Just never the economy, and the fact that there just is no actual end demand. "Although the reduction in shipments was not a surprise, the magnitude of the contraction is both surprising and worrisome," is how IDC describes the utter collapse in PC Shipments in Q1 2013. Against a forecast -7.7%, the worldwide shipment of PCs collapsed -13.9% to a mere 76.3 million units. This is the fourth consecutive quarter of declines and is the worst quarter since records began in 1994. Interestingly, Europe did not do as bad as expected (though the consumer was worse) but the US and AsiaPac (Ex Japan) both plunged more than expected. Lenovo has almost closed the gap to HP as the world's leading supplier after HP's shipments fell a stunning 23% in Q1. HP opened -7.5% and MSFT -4.3%.
Bernanke gives a speech today in Boston beginning at 4:10 PM entitled “The First 100 Years of the Federal Reserve: The Policy Record, Lessons Learned, and Prospects for the Future”. There will be a post-speech ‘Question & Answer’ period. This is an ideal time for him to fine-tune the Fed’s complicated message to markets. He can use this opportunity to send up a trial balloon for next week’s semi-annual report to Congress. We suspect Bernanke could even have his staffers leak questions to ask to those in the audience in order to frame and direct the conversation. We believe the Fed has drifted toward acceptance of tapering because of concerns about: 1) financial instability, 2) asset bubbles and 3) amassing difficulties for its exit strategies, not because economic nirvana has been reached. Therefore, we believe the decision to taper at one of the next two meeting is almost a certainty.
The Fed may have finally taken speaking out of all sides of its mouth a step too far. Enter GMP's Adrian Miller with the best roundup of the sheer indecipherable gibberish just excreted by the Fed:
- "We are not sure how you can go from ‘many’ needing to see labor gains before tapering begins to half seeing bond buying ending by year end. At the same time, ‘many’ other Fed officials saw bond buying into 2014”
- "We are pretty good at math, but we are having trouble adding up the ‘many,’ ‘several’ and ‘about half’ to equal 100%
- FOMC members appear to have ‘‘decided to cover every possible scenario," and "left us with no clear picture as to what the group is thinking”
Great absurdist summary of a centrally-planned world that has been taken out straight from the pages of the Onion, but honestly, at this point who even cares anymore.
UPDATE: All Change; now the knee-jerk rally in bonds and stocks is fading rapidly (and the USD is bid). S&P 500 and EURUSD have now retraced all gains.
It seems the markets are as confused as the Fed members. The initial knee-jerk bid for bonds, stocks, and gold was retraced soon after; only to be ignored for another push higher as we post. Interestingly FX markets are 'less' undecided - it is taper-off as the USD is being offered everywhere with little retrace. As the Russell 2000 hits an all-time intrday high, equities still feel unstable (and VIX dropped to 14.06%). It seems the "if confused buy" meme may just hit a wall today?
Discord appears to be the best word to describe the FOMC minutes but the baffle 'em with bullshit seems like the order of the day:
- FED SAYS SEVERAL ON FOMC SAW QE TAPERING LIKELY WARRANTED SOON
- FED SAYS MANY ON FOMC SAID LABOR GAINS NEEDED BEFORE QE TAPER
- FED SAYS FOMC SAW FISCAL POLICY RESTRAINING ECONOMIC GROWTH
As a reminder, uberdove Charles Evans wanted 200K or more in job gains in the past two quarters. Here's the thing - the average monthly job gain in the past 6 months is... 201,000. As for the punchline:
- HALF OF THE FED INDICATED IT LIKELY WOULD BE APPROPRIATE TO END ASSET PURCHASES LATE THIS YEAR - NOT SLOW END
- A FEW PARTICIPANTS INDICATED THAT THE COMMITTEE SHOULD SLOW OR STOP ITS PURCHASES AT THE JUNE MEETING - "OR STOP"
Communication matters apparently. But the key is that taper appears (forget about an all out stop) to be coming soon - and as usual - it's all data-dependent. Aside from that, it is the usual baffle with BS schtick. Most importantly, with half the Fed saying not just taper, but flat out end to QE by 2014, we now have a full blown mutiny in the Fed.
Nanex thinks this is blatant manipulation. We don't: we think the following rollercoastering, fractalized charts (shown both zoomed out and zoomed in) of intraday trading in AAPL stock merely confirm what happens when the only trading is that done by momentum ignition algos desperate to force stop cascades in a world devoid of actual volume, when the smallest trading burst leads to a complete collapse of the bid/ask stack. Although who knows: it may well be both...
Just like yesterday's 3 Year $32 billion bond auction, so today's 9-year 10-month $21 billion re-reopening of Cusip VB3 was largely much better than last month's auction, if not quite stellar, driven likely by the jump in rates, which rose from 1.81% in May, to 2.21% in June to 2.67% today, which was on top of the 2.669% When Issued, and the highest auction yield since July 2011 or right before the first debt ceiling crisis. Today's Bid To Cover, while better than last month's ugly 2.53, was still the second worst since August's 2.49. Finally, the internals were uninspiring, with Dealers taking down $9.5 billion of the precious collateral (10 Year was once again special today at -0.30%) or 45.2% of the total meaning Bernanke can proceed to monetize another $10 or so billion in the 15 Year range for one more month, slightly higher than the LTM average, while Indirects left with 38.6% (in light with the average), and Directs got 16.3% of the auction. Altogether a forgettable auction that was just good enough to relieve the now monthly collateral shortage that gets worst just before auctions.
When you get into too much debt, really bad things start to happen. Sadly, that is exactly what is happening to Italy right now. Harsh austerity measures are causing the Italian economy to slow down even more than it was previously. And yet even with all of the (supposed) austerity measures, the Italian government just continues to rack up even more debt. This is the exact same path that we watched Greece go down. But if Italy collapses economically, it is going to be a far bigger deal than what happened in Greece. Italy is the ninth largest economy on the entire planet.
It’s summer. Markets are supposed to be in the doldrums. But, that characterization hardly fits thus far this summer. What is different this year? We are nearing a possible inflection point in terms of Fed actions. The mere suggestion from the Fed that something is going to change is enough to supercharge markets, either up or down. If anyone was not convinced of market dependence on liquidity (and not fundamentals), the last thirty or so days should have clued them in. The Fed’s charter never included keeping markets levitating beyond where they should be. Now, at least de facto, it does. The Fed surrendered whatever independence it supposedly had. It is now just another tool of the political class. Stay tuned, this story has hardly begun.
WTI crude oil prices have jumped over 14% in the last 12 days (from $92.67 to $105.99) since Egypt erupted - and no, it's not 'growth' hopes as last night's collapse in China did nothing to dent the surging social-unrest-premium. It seems, as much as Egypt, that the total collapse in the Brent-WTI spread is becoming self-feeding now - back below $2.50, its lowest in over 31 months. So between infrastructure issues in the US, technicals in the market, and Middle-Eastern unrest-premia, we are looking at the possibility of $4.10 gas in the not-too-distant future if this is anything but instantly transitory.