If Fed action was based solely on getting the economy to a desired growth level, tapering discussions may not have arisen yet. Instead, the Fed likely would have continued to ‘buy’ as much time as possible to allow the economy to ‘heal’ further; and to get better clarity on the impact of the Sequester and outcome of budget negotiations. In reality and as we have emphasized all year, Fed policy has to also weigh the costs, the risks, and the unintended consequences of buying assets at such an extraordinary pace. The bottom line is that the market can finally see the beginning of the end of QE and therefore the risk versus reward in the Treasury market is in Scotiabank's opinion still to higher yields. The question becomes just how fast rates will rise.
For the second time in a week, a Drone has been destroyed at Tyndall Air Force Base in Florida. This morning's crash - and later self-destruction - of the unmanned QF-4 drone ( a modified F-4 Phantom apparently used for target practice) on the east-side of the base caused Highway 98 to be closed "as a precaution," for the next 24 hours due to fires resulting from the crash and a small self-destruct charge carried on board the drone. The charge is used to destroy the drone if it leaves its pre-approved flight plan. The last drone crash was last Wednesday morning when Tyndall destroyed a drone over the Gulf of Mexico south of Cape San Blas in Gulf County.
Following Barclays' fine of $453 million by FERC for manipulating electric energy prices in California (and other other Western markets), it seems the price of infamy is weighing heavy on Blythe Masters' overlords at JPMorgan in yet another derivative debacle for the "I invented CDS" queen. As we discussed in great detail here, FERC's investigations into JPMorgan's actions saw them pursuing actions against the firm and Ms. Masters. In recent weeks settlement rumors have been heard and now as the NYTimes reports, it appears - in light of last year's PR and P&L 'London Whale' disaster - the best-CEO-in-the-entire-world-so-there is preparing to settle to the tune of $500 million to keep Blythe out of jail. To settle Ms. Masters' alleged “manipulative schemes” that transformed “money-losing power plants into powerful profit centers,” and then her giving “false and misleading statements” under oath, must mean she has some serious dirt on Jamie (and his fortress balance sheet and best-in-class risk management).
You might think that we have been living in a post-bubble world since the collapse in 2006 of the biggest-ever worldwide real-estate bubble and the end of a major worldwide stock-market bubble the following year. But talk of bubbles keeps reappearing – new or continuing housing bubbles in many countries, a new global stock-market bubble, a long-term bond-market bubble in the United States and other countries, an oil-price bubble, a gold bubble, and so on. Speculative bubbles do not end like a short story, novel, or play. There is no final denouement that brings all the strands of a narrative into an impressive final conclusion. In the real world, we never know when the story is over.
Back in September we, somewhat naively, penned "US Totalitarianism Loses Major Battle As Judge Permanently Blocks NDAA's Military Detention Provision" in which we said that "the war against the true totalitarian terror won a decisive battle." Sadly, the "victory" lasted for about 10 months. Today, US totalitarianism strikes back with a vengeance.
- U.S. APPEALS COURT THROWS OUT PERMANENT INJUNCTION THAT HAD LIMITED U.S. GOVERNMENT'S USE OF INDEFINITE MILITARY DETENTION -- COURT RULING
In other words, every legal decision will be binding... until Obama's cronies in the 13 circuit courts of the appellate system get a tap on the shoulder. And good luck with the SCOTUS.
We suspect few would have expected a relatively quiet kind of day for stocks and bonds today but that is what we got - with all the action taking place at the release of Bernanke's prepared remarks. Thanks to DuPont (Peltz not talking) which added 21 points to the Dow, the Dow ended mildly green. The Nasdaq and S&P had small gains as the Trannies outperformed. Treasuries saw a notable 'hump' compression with the belly dropping 6bps but the long-end and the short-end only -2bps. VIX unwound all of yesterday's relative 'hedge' premium and closed unch to Monday. The USD ended modestly higher as did WTI (back over $106.50) but gold and copper end down 0.75% for the week. It was silver that suffered from apparent sanguineness (sic.) as it slumped 4% from the earlier highs of the day. Of course, tomorrow's another day of Bernanke as the "wait-and-see" market rolls on - closing once again perfectly at VWAP...
The recent attempt by AT&T to expand into the smartphone leasing business company in order to encourage customers to upgrade their equipment more frequently only confirms something that most industry observers have suspected for a long time: end customers have finally had it with annual (or even biannual) cell phone updates. And now we have proof. According to the WSJ, fewer people are upgrading their smartphones: "The rates at which American cellphone users have traded in their devices for more advanced models have declined over the last few years, according to analysts at UBS. They turned negative last year, when about 68 million people upgraded their phones in the U.S., down more than 9% from a year earlier." That was the first year in the past decade in which the turnover rate was below 0%. Sadly for Apple, Samsung and their competitors, 2013 is not shaping up any better: "UBS predicts upgrades will fall again this year."
Since March 2009, the S&P 500 is up 148% - an excellent performance given the economic unreality occurring under the covers (for example the bounce and fade in real EBITDA for the S&P 500 which is up only 18% from the March 2009 lows). However, to get a sense of just what a fiasco Ben Bernanke and his merry men (and women) have created (and mis-allocated), the performance of firms that are not 'high quality' is up 250% in the same period (massively outperforming the 'excellent' companies' gains of 180%). Based on 'quality' rankings from Barry Bannister's "In Search of Excellence," the un-excellent companies have crushed their 'excellent' peers - what could possibly go wrong?
It is becoming much more apparent that, as we have seen each year for the past three, the Fed's prediction of stronger economic growth by the end of 2013 will be revised lower from the current level of 2.5%. Either Bernanke was lying back then or is he lying now? The problem is that the Fed is literally caught in a "liquidity trap" from which there is currently no escape. If they reduce liquidity the markets tank, taking down consumer confidence and negatively impacting the economy. If they keep the liquidity going they will inflate an asset bubble which will ultimately burst destroying the financial markets and the economy. The choice is, ultimately, a lose-lose scenario even as the bullish case for equities persists. Of course, as Chuck Schumer stated to Bernanke at the last Humphrey-Hawkins testimony, "You are the only game in town."
Those who have been following the ongoing "revenue recession" will hardly be surprised that in the trifecta of major corporate earnings releases hitting the tape after the close, there were precisely zero revenue beats. To wit:
- INTC: Revenue misses $12.81bn, Exp. $12.89 bn, cuts guidance.
- EBAY: Revenue misses $3.88bn, Exp. $3.89bn, sees earnings and revenue on lower end of guidance.
- IBM: Revenue misses $24.92 bn vs $25.34 bn; But since this is the largest component of the DJIA, leaving it there may lead to unpleasant consequences for tomorrow's Dow, the company had to inject a mega dose of hopium and boosted its forecast.
Since EPS is the most easily fudgable number in existence (just look at BAC's "non MTM" EPS today), all companies beat on the bottom line. Without looking we will assume that at least 2 out of the 3 are trading higher after hours. And if not, all the three companies need to do to make the algos forget about the top-line non-growth reality is take a page from the YHOO book, hold a very "edgy" video conference call, and see their stocks up 10% tomorrow. Of course, everyone will ignore that the relentless decline in revenues is merely a function of depressed CapEx spending, a tapped out consumer, a crash in EM demand, and major FX headwinds, and blame it all on the [hot|cold] weather.
Any day now...
It is somewhat ironic that a Federal Reserve which is now more committed to "forward guidance", transparency and communication than ever in history, just announced the resignation of Krishna Guha, the head of NY Fed's Communications Group, aka the head PR contact for all media. More importantly, the resignation took place without a handy substitute ready. Our advice to the Fed, if unable to find a worthy replacement: just hire Jon Hilsenrath - after all he already is effectively the Fed's mouthpiece.
McDonalds has created a ridiculously condescending budget (along with Visa) which provides some advice for its staff's planning (beginning with "get a second job"). Critically though, the key factor of all this is that food stamps are corporate welfare. They actually are not welfare for the workers themselves, who undoubtably don’t have wonderful lives. What ends up happening is that because the government comes in and supplements egregiously low wages with benefits like food stamps, the companies don’t have to pay living wages. So in effect, your tax money is being used to support corporate margins.
Jan Hatzius' assessment of Bernanke's first congressional testimony was just released. We assume it was not written while he was having lunch with Bill Dudley at the Pound and Pence.
Stolper: "On July 5, rising EM external funding costs, following a strong Payrolls report in the US, prompted us to express our view of EM FX vulnerability by recommending a long USD against a basket of TRY, ZAR, INR, BRL, CLP. A combination of events has worked against our recommendation; relaxation of Fed tapering fears, unwinding of long dollar positioning and activism by EM authorities to stem depreciation pressures. As a result, at the close of London trading today, the recommended basket closed at 97.8, below the stop-loss of 98."