Day after day we are bombarded by self-referential talking-heads bloviating on the last extrapolated data point and how that means to buy the dip because at "Name Your P/E ratio" stocks are still cheap. Well on a long enough timeline, the current 16.3x P/E is in fact extremely fair. While many point to entirely bubble-prone 28.6x peak in 2000 as 'evidence' that we can go much higher, the facts are that over the last 113 years of US equity markets, as P/E between 15.1x and 18x has indeed marked the 'top'. So are stocks cheap?
And so, in two short days, Portugal has gone from a "poster child" of European periphery success to a full blown "Crise Politica." In moments, the country's PM Coelho will address the nation and while he is not expected to announced his resignation, according to local media he will announce a vote of confidence in parliament to test his majority. Even so, now that his coalition is blown, it is unlikely he will have a comfortable majority and the country will see early elections adding even more uncertainty to a continent where Greece is also on the rocks, and where Italy and Spain (despite the now blatant data manipulation) are constantly on the edge. Of course, to those who listened to our short EURUSD call in the aftermath of the latest Stolper reco, congrats: 100 pips in 24 hours beats a fausterity stick in the eye.
Update: the local army has already laid out the framework of what the upcoming "coup" will look like. via Reuters:
- ARMY ROADMAP WOULD BE IMPLEMENTED IF PRESIDENT MURSI, OPPOSITION FAIL TO AGREE - SOURCES
- ARMY ROADMAP WOULD PROVIDE FOR RULE BY INTERIM COUNCIL UNTIL CONSTITUTION CHANGED - SOURCES
- ARMY ROADMAP ENVISIONS CONSTITUTION CHANGE WITHIN MONTHS, FOLLOWED BY PRESIDENTIAL ELECTION -SOURCES
- ROADMAP SUBJECT TO AGREEMENT OF OPPOSITION SALVATION FRONT, OTHER FORCES ONCE DEADLINE EXPIRES -SOURCES
From the open last Thursday, high-yield bonds (as priced by the HYG ETF) are down notably while stocks are in ignore any taper news mode. The last 4 days have seen a very similar pattern play out where stocks jump exuberantly at the open, ride through POMO and the EU close, and then drop back in hurry to credit's less sanguine view of the world. It seems each and every ramp in the S&P away from credit stalls at the 50DMA and today was no different.
Tuesday humor struck early, courtesy of Goldman's head of the New York Fed, Bill dudley:
- DUDLEY SAYS FED AT TIMES WAS `TOO OPTIMISTIC' ON FORECASTS
That in itself is not the humor. The humor is, as always the context. Such as this:
- DUDLEY SEES STRONG CASE GROWTH TO PICK UP 'NOTABLY' IN 2014
Now that is funny when one considers the following past headlines...
Following finance minister Vitor Gaspar's resignation, the foreign affairs minister Paulo Portas has just added to Prime Minister Coelho's problems and quit in light of who the PM chose as replacement for Gaspar. Gaspar was one of the key Portuguese policy makers to oversee the country’s bailout program, and in his letter of resignation, noted that he had lost the public's support to continue with the deeper-than-expected recession and above-target public deficit developments. Mr. Gaspar's replacement will be the current treasury secretary, Maria Luís Albuquerque, and that is what sparked the Portas to exclaim, "the Prime Minister decided to follow the path of mere continuity at the Finance Ministry. I respect that but disagree." Coelho is due to make a statement at 1900GMT but in the meantime, Portugal's bond market has spiked its most in 10 months relative to its risky neighbor Spain back above 200bps.
The chairman of the Suez Canal Authority is coordinating a "high alert" military response as protests escalate against President Morsi. The army and navy stepped up patrols of the 190-kilometer (118-mile) canal linking the Red and Mediterranean seas about a week ago, he said. "Closing the canal outright would be very difficult without the support of the military," Barclays notes as the army and navy steps up patrols of the 190km canal. While unrest that toppled Hosni Mubarak, Mursi’s predecessor, failed to halt traffic last year, fewer vessels passed along the canal. An average of 1,435 ships a month used the link, the lowest figure since 2005. So far, traffic is "normal and has not faced any disruptions."
It appears the market is in sell-first, question-later mode as a series of confusing headlines just hit from Bloomberg, citing a Merkel interview from SDZ, in which the German leader appears to have said that Greece May and/or May not get the next Troika bailout package...
*GREECE MAY NOT GET NEXT EU8.1B AS PLANNED, MERKEL TELLS SZ
*GREECE MAY GET NEXT EU8.1B IN TRANCHES, MERKEL TELLS SZ
*MERKEL SEES NO ADDITIONAL DEBT CUT FOR GREECE: SUEDDEUTSCHE Z
As we noted here, the IMF has already warned on non-payment (and a 3-day ultimatum has been set) and with the election so close, it seems Frau Merkel is between a populist rock (keeping the leash tight and explaining that they may not get the full amount but may get a tranched amount based on smaller performance hurdles) and a hard place (of saying nein and losing Europe).
China is so "fine" that it has resorted to the full central-planning manipulation trifecta: first making up data, then deleting data, and now outright censoring anyone who reports the data, especially data which reveals the suddenly illiquid state of the local banking system caught in the middle of the grand Likonomics experiment. FT reports that with (the extensively reported here) cash crunch roiling the Chinese economy, "propaganda authorities have told local media to tone down their reporting to help stabilise financial markets. In a directive written last week and transmitted over the past few days to newspapers and television stations, local propaganda departments of the Communist party instructed reporters to stop “hyping the so-called cash crunch” and to spread the message that the country’s markets are well stocked with money." This is vaguely reminiscent of the US, only there those who describe the ugly truth behind the propaganda wholesale numbers are merely mocked and ridiculed as the tinfoil hat-wearing conspiracy theory gallery (until such time that one after another "theory" becomes "fact") not censored. At least not yet.
Things are turning from bad to worse for the real-life version of The Terminal's Edward Snowden, who a day after applying to 21 countries for political asylum has been flooded with rejection letters near and far, even as he was forced to cancel his application to his current host nation, Russia, after being told he would have to stop leaking secrets as a condition to stay. More from the FT: "The 30-year-old fugitive’s options narrowed further on Tuesday when China reacted coolly to the idea of him moving there, Poland rejected an application and other European nations said asylum requests had to be made in the country."
With Egypt's stock market jumping its most in a year and US equities exuberant over the bad data this morning, it seems the world is ready to ignore Egypt for now. Of course, as we noted here, there are some growing concerns about what is possible and probable should the coup occur. Suez Canal closure fears and US infrastructure problems have smashed WTI crude prices above $99 - its highest in over 9 months - and overlaying the lagged retail price shows we could see near $4.00 gas at the pump by August. As a gentle reminder of why US equity investors should care... there's something scary about the $3.80 level.
Barclays: "In the short run, such rebalancing and deleveraging point to further downside risks for both economic growth and asset prices, including the exchange rate. Based on an increasingly likely downside scenario, we think Chinese growth could experience a temporary ‘hard landing’, which we would define as quarterly growth dropping to 3% or below, within the next three years."
A better than expected Factory Orders print at +2.1% (versus 2.0% expectation) and preior levels revised higher has provided just enough good is bad news to cancel the bad is good news from the ISM miss. Orders were led by a seasonally adjusted 13.7% rise in defense (sequestration?) but inventories remain flat even as shipments rise 1%. IT new orders dropped 2.9% unadjusted and computers and electronics dropped 3.7%. What a market...
While not a primary macro indicator, the ISM New York's collapse (at the fastest 2-month drop in 4 years) to the lowest in 4 years is yet another indication that the hope the Fed discussed for a recovering economy (and therefore a taper) is an entrely false premise. Business Conditions dropped and expected demand in 6 months cratered from 64.7 to 50.0. This 'bad news' was certainly greeted by the market as good news as taper-off met risk-on...