It's been a great 2013 so far for risk-assets right? Wrong. Credit markets have hardly budged (spreads, as opposed to yields) as stocks have surged. We have seen this 'risk' disconnect a couple of times in the last few years and, well, it didn't end well for stocks... but this time is always different.
With the Fed no longer even pretending it is not all about the stock market, where some mysterious trickle down force is supposed to boost the economy the second the S&P hits new all time highs, and injecting billions into stocks via Primary Dealers courtesy of the daily now-unseterilized POMO (today's edition saw another $3.4 billion enter risk assets), there is apparently no reason to worry about anything. Sure enough, institutions don't need a second invitation to BTFD especially if they can do so on margin. According to the latest NYSE margin debt data, the December of margin debt used for various leveraging activities rose for the fifth consecutive month, reaching $331 billion - the highest since February 2008, when the market was declining, and back to the levels from May 2007 when the market was ramping ever higher to its all time highs which would be hit 3 short months later, and just as the subprime bubble popped.
For many the rise of nominal equity prices over the past few years has been remarkable given the back-drop of stagnating growth and joblessness. But it is the last few months that perhaps beggars belief as macro fundamentals plunge to 5-month lows, consumer confidence to 13-month lows, and earnings show considerable weakness (if you look at the data and ignore the anecdotes); and yet, day-after-day, stocks push higher little-by-little, stop-run by stop-run to five-year highs. The chart below suggests, though, that for now the parabola may need a little pullback before gathering steam once again.
The sad fact is that it appears completely rational to be ignorant about politics. The cost of being an 'informed' voter - as opposed to a bigotted closed-minded ignoramus - is high, from the time spent following (and interpreting) the news in the paper, online, and on the television. As the following clip notes, "becoming an informed voter is competing with a lot of other needs in your life," from American Idol watching to eating Cheetos in the bath. Of course, the sad truth is that it has never been more important to be 'informed' and so the 'bread-and-circuses' will continue lest we stumble upon the truth - but perhaps this brief clip will sway a few more to the dark side of 'the informed' - though just because 'you' are better-informed does not mean politicians will do a better job - as the probability of your vote changing the outcome of an election is for all practical purposes, zero!
Moments ago the Treasury closed its latest 5 Year bond auction in what was probably the most boring auction of 2013 to date, and perhaps of the last several months. The high yield was 0.889%, just inside of the 0.89 When Issued, with 32.39% allotted at the high, some 12 bps higher than December's 0.769 and the second month in a row of increasing yield. While hardly anything to write home about, this was the highest yield on 5 Year paper since march 2012. The Bid To Cover also rose, at 2.88, it was higher than last auction's 2.72, and right on top of the past 12 month average. The internals were boring too, with last month's record Direct take down of 30.4%, and correspondingly low Indirect 32.4% take down, inverting, with some 16.8% of the auction going to Directs, still the second highest ever, while Indirects ended up with 39.7%, and the remaining 43.5% handed to Dealers. In short- very uneventful, and just like yesterday, not even a trace that someone, anyone, may be losing their appetite for US paper.
In early June 2007, Treasury futures saw their largest-ever put volume traded (821,978 contracts) and within a few days, Treasury yields had peaked at 5.32% and never looked back. Yesterday, according to CME data, Treasury futures put volume hit 758,020 contracts (second only to that 2007 high) as 74% of the entire options trading volume was in puts (and 88% of 5Y futures options were puts!). With the FOMC tomorrow and everyone seemingly convinced that the 'great rotation' is in place, it would appear the crowded trade is being bearish bonds.
A regular feature back in 2010 when we had our first taste of global currency warfare as Brazil's finance minister accurately summarized when he said "a currency war has broken out" (and yes: currency war existed then, and especially in the 1930s which led to the Great Depression, long before the recent eponymous book came out desperate to take credit for this simplistic concept) were the global FX heatmaps which showed how any given currency is doing on any given day. Since currency warfare is now back and more violent than at any time in the past 80 years, it only makes sense to bring back a long-time reader favorite: the currency warfare heatmaps which show who, on any given day, is winning and losing, the global race to debase and in the process beggar all globalized and SWIFT-interlinked neighbors. But don't forget: in a relativistic fiat world, nobody can actually win the global race to debase. Well, not nobody: gold (and other precious metals) can, assuming it is not confiscated as it was the last time the US ended the global currency war with a 50%+ devaluation of the USD relative to gold... and promptly confiscated all gold.
Buried deep in the bowels of the much-heralded last-minute fiscal-cliff deal, that saved us from a fate worse than death and raised taxes on 77% of Americans, was a quiet little provision, inserted at the last minute, that sharply slashed Medicare payments to brain-tumor radiation provider Elekta by 58% while leaving its main competitor Varian's payments unchanged. As the WSJ reports, the provision was put through by none other than Harry Reid - who has a 'deep relationship' with Varian (the winner). Whether crony capitalism is alive-and-well is up for debate - as Varian suggests this 'levels the playing field' but it is the fact that Varian beefed up its outside lobbyists to 18 (from 10) and the provision was not added until the last day suggests this stinks. Once again, it appears, our government is picking winners - and losers (with Elekta as a foreign company unable to participate financially in American elections). As the WSJ notes, the insert looks like the kind of provision helping a specific company or industry that lawmakers have repeatedly vowed to halt. Nonetheless, even in the budget bill tackling the so-called fiscal cliff, lawmakers found time to craft such provisions.
We could tell readers' that earlier today, just like two weeks ago when Beijing was blanketed by the worst smog on record, the official reading of Beijing air quality moved from "hazardous (at a 24 hour exposure at this level)" to the laughable "Beyond Index" reading (which maybe means Beijing needs a bigger index) ... or we could just show these two pictures of Beijing before and after the smog
Amid growing concern of yet another liquidity-fueled real estate bubble in the UAE (real estate firms up 92% in the last year in USD terms), the government (via bank regulations) have drastically restricted the proportion of loans that can be provided to foreign investors. However, this has had absolutely no impact as Bloomberg reports that increasingly 'suitcases of cash' are being used to pay for the property. With relatively lax capital controls 'cash is king' as the efforts of the UAE central bank to cap speculation in real estate (which saw property prices crash 65% from their peak in 2009) are failing as one local realtor noted "[the market] is increasingly dominated by cash buyers," and UAE real estate stocks are up over 20% in the last month alone. From Russian diamond dealers to Iranian speculators, Morgan Stanley notes that "property prices ... have continued to rise because of ample liquidity given negative real interest rates and nominal mortgage rates below rental yields," as the world's central banks do what they do best - blow bubbles in unintended places.
It is impossible to understand job creation without understanding value creation and labor/overhead costs. People hire other people when their labor creates more value than it costs to hire them. When labor costs are high, the value created must also be high; it makes no sense to hire someone if doing so generates a loss. When labor is cheap, the bar of value creation is lowered, and so the risk of hiring a worker is also lower: they don't have to add much value to be worth their wage. This is why you see many low-value jobs in developing-world countries. If overhead costs - the cost-basis of doing business in the U.S. - keep rising faster than gross profits (out of which overhead is paid), then the owners have little choice: they can either close the business before they are personally bankrupted, cut everyone's pay or lay off some employees and somehow raise the productivity of the remaining workers to maintain enough value creation to survive. This is the U.S. economy in a nutshell.
Consumer Confidence Crashes To 2011 Levels After Biggest Plunge Since August 2011 Debt Ceiling DebacleSubmitted by Tyler Durden on 01/29/2013 11:13 -0400
It would appear that the hike in taxes on 77% of Americans that was heralded as a success, has dented confidence just a little. As the efficient stock market moves to all-time nominal highs in many cases, Consumer Confidence just fell off a cliff. The conference board printed at the worst level in 13 months - so all those 2012 gains are gone - and fell month-over-month by the most since the August 2011 fiscal cliff debacle. For every income levels (except those earning under $15k) confidence plunged with the $35k-$50k bracket crashing the most. It would appear that the driver of 70% of the US economy is not buying the new normal being fed to us daily by any and every media outlet possible. No matter how much the market is held up by mysterious runs in FX markets or volatility compression, it would appear that - just as we have been noting - the underlying macro fundamentals will eventually be priced in, as this does not bode well for retail sales.
Case-Shiller Home Price Index Posts Second Consecutive Monthly Decline, Average Home Prices Back To Fall 2003 LevelsSubmitted by Tyler Durden on 01/29/2013 10:31 -0400
The Case-Shiller Home Price Index is unique among other economic data indicators for recommending that analysts focus solely on its Non-seasonal adjusted data series, as this is what the report uses in its own headline figures. It adds that "for analytical purposes, S&P Dow Jones Indices publishes a seasonally adjusted data set covered in the headline indices" - a far cry from the BLS, whose Arima X 12 models are the basis of the data "moves" on a monthly basis: moves which are based not so much in the underlying data but on the seasonal adjustment and fudging the government employees apply to it. And it is the unadjusted Case Shiller data that showed that in November, the 20 City Composite index posted its second consecutive monthly price decline in a row. Yes: on a year over year basis home prices did rise some 5.5%, but on the other hand, "average home prices across the United States are back to their autumn 2003 levels for both the 10-City and 20-City Composites." And while the price decline into the year end is somewhat seasonal, it certainly does not fit with all the other economic data released by the government showing a housing picture so bright not even the tiniest drops in prices were allowed.
Following his impromptu discussion early this morning with Mario Draghi, Italy's finance minister has proudly stepped before the cameras to discuss the farce that has become Monte Paschi. In a stream of seemingly incredulous hypocrisy, the minister explains that:
- *GRILLI SAYS MONTE PASCHI IS SOLID
- *MONTI BOND HELPED MONTE PASCHI MEET EBA RULES: GRILLI
- *GRILLI SAYS OVERSIGHT OF MONTE PASCHI WAS CONTINUOUS, THOROUGH
- *GRILLI SAYS GOVT AID TO PASCHI NOT TO HELP AN INSOLVENT BANK
- *GRILLI SAYS ITALY BANKING SYSTEM UNIQUE FOR NO BAILOUTS
Indeed, it seems that Juncker-ism has leaked across to all the ministers as a new realm of reality strikes the Italian banking system. So the 'bank is solid', 'aid is not a bailout', and 'water is not wet'.
In a shocking development, one which comes out of central planning left field, after eight years in his role as safe-guarder of the Shekel, the head of the Bank of Israel Stanley Fischer - Ben Bernanke's personal mentor, and famous underwater investor in AAPL - has announced his intention to step down. This resignation comes 10 months (and $100 less in AAPL) after the central bank's announcement to begin buying foreign stocks. Is this a harbinger of the change in the old brigade, and does it make Bernanke's departure one year from today virtually assured - we hope to find out, unless, of course, the most aggressive and ambitious central banking experiment in history to keep the global house of cards afloat fails in the meantime.