On June 19, 2013 Ben Bernanke announced that later this year the Federal Reserve would very likely begin to print less money than what they are printing today, in effect resulting in many investors refusing to catch the bouncing ball. This pronouncement was enough to send all financial markets into a tizzy with everything declining, except for the US Dollar. Investors must understand that this is a game changer. Whether the Federal Reserve actually carries through with this plan is open to debate; but, perhaps the most important observation from the “tapering” announcement was the reaction by all financial markets to what was in reality a very small move by the Federal Reserve...
Over two years ago we highlighted just how out-of-touch with reality our central planners are when we exposed Bill Dudley's infamous inflation comments. Now it seems, Argentina is taking over the mission of totalitarian supreme command (or government gone mad). While not publicly admitting they have a problem, despite the price of bread doubling to 20 Pesos in the last year alone, Bloomberg reports the government plans to apply a 1974 law that forces holders (on penalty of fines and prison) of wheat and flour suitable for bread-making to sell it in the domestic market. This entirely un-free-market response to the dreadful reality in the nation comes on the heels of the freezing of prices on 500 goods at Supermarkets back in February and, unbelievably, suggestions that citizens combat higher prices by "baking bread at home." How long can a country plunge into a hyper-inflationary spiral before the people 'coup-like-an-Egyptian'?
On the day after celebrating its independence and with likely half the nation suffering from over-consumption, we thought it appropriate to 'celebrate' another #winning rank by the US. At an average of 181.27lbs (gender-weighted!), Bloomberg finds that the US is the 'heaviest' nation on earth.
UPDATE: Egypt Clashes Leave 10 Dead, Health Ministry Says (AP)
As we feared, the initial celebratory images have turned rapidly into running skirmishes, molotov cocktails, burning cars, and now six deaths. As the night rolls on, the clashes are escalating...
The market remains confused. The better-than-expected headline jobs data prompted USD strength (Taper-on), gold/silver weakness (Taper-on), Homebuilder stocks drop (Taper-on), Bond yields surge (Taper-on), and credit market widening (Taper-on); but the good-old trusty US equity market was not having any of that. After dumping 25 points from its post-NFP highs, S&P 500 futures gapped and jerked up to VWAP, ran stops at the highs of the day, dropped back to VWAP, then surged into the close. The Dow ended up 150 points. Treasury yields rose the most in 2 years - an impressive 22bps. Despite a late surge, high-yield bonds had their worst day in 2 weeks. Gold and silver down 2.3% and 3.5% respectively and copper dumped 3.2% (not exactly the growth-exhibiting factor that everyone suggests is driving stocks up and bonds down). Meanwhile, WTI topped $103 for its highest close in 14 months.
The mid-1970s have been a useful template for what is possible (and even probable) in a centrally-planned world. As a reminder, the underlying backdrop was also similar (major economic downturn following the housing crashes in 1974-75 and again in 2006-2007 followed by aggressive Fed policy which was ultimately too loose for too long). It is quite clear, Citi notes, that the rally in the Dow has lasted longer than the “road map” would have suggested - at least in part driven by the ongoing expansion of the Fed’s Balance sheet - but with Taper talk increasing we wonder how long before the 70s are back in vogue.
As the escalation in violence between members of the pro-Mursi Muslim Brotherhood and the military-backed victors of this week's coup gets worse with at least 6 dead now according to Al Arabiya, the US Secretary of State is busy...
a) Getting debriefed and preparing for a diplomatic statement
b) In the air between point A and point B promoting US domestic and foreign interests abroad
c) Informing Warren Buffett about the aphrodisiac benefits of ketchup
d) Spending a (second consecutive) exhausting afternoon on his sailboat.
And the correct answer is...
As we head into earnings season in the US (amid hopeful margin expansion), the big picture for earnings remains bleak. Markets are back close to highs as negative guidance is piling up and as Citi notes, their global earnings revision index is at its worst since early July 2012. If the Fed is heading towards a Taper then this fundamental fear may once again become relevant - or hope-fueled multiple expansion will fill that gap.
"In this respect the Gini coefficient had apparently reached in 2006 the previous high seen in 1929, prior to the Great Depression. This is a reminder that capitalism’s natural way of dealing with excesses is via business failure and liquidation; which is why wealth distribution would have become much less extreme as a consequence of the 2008 crisis if losses had been imposed on creditors to bust financial institutions, for example owners of bank bonds, in line with capitalist principles; as opposed to the favoured ‘bailout’ approach pursued for the most part by Washington. This means, unfortunately, not that the problem has been avoided but that the ‘great reckoning’ has been deferred to another day as the speculative classes have continued to game the system by resort to carry trades actively encouraged by the Fed and other central bankers, which is why fixed income markets freak out when they see signs of an exit."
As a reminder: jobs have quantity and quality components. The quantity component was good enough to convince the 10 Year the taper is imminent (if not stocks, which continue to trade dislocated from any and all fundamentals). But how about the quality? In a word: not good. In June, the household survey reported that part-time jobs soared by 360,000 to 28,059,000 - an all time record high. Full time jobs? Down 240,000. And looking back at the entire year, so far in 2013, just 130K Full-Time Jobs have been added, offset by a whopping 557K Part-Time jobs. And there is your jobs "quality" leading to today's market euphoria (if only for now).
So much for Iceland's bid as the world safe haven from government (and intellectual status quo) persecution. The tiny country that was such a vocal supporter of Julian Assange, and which originally was speculated as being the final destination of Snowden upon his departure from Hong Kong, has just opined on his request for Icelandic citizenship, and the answer is a resounding no, following the country's "parliament voted not to debate it before the summer recess" Reuters reports.
The situation in Egypt has not been tenable since the Muslim Brotherhood and President Mohamed Morsi took over, post-revolution, but now that the military has stepped in, ousted Morsi and placed him in detention, foreign investors are celebrating. No one knows what’s going to happen next, but the general consensus—at least for investors—is that things couldn’t get any worse, only better. (Unless you’re Qatari, but more about that later.)
Presented with little comment aside to note that the 6 point vertical ramp in the S&P 500 (which just happened to stall perfectly at VWAP) was accompanied by no news, no other-asset-class support, and a smack-down in front-end VIX... S&P futures are back above the 50DMA once again intraday (as Discretionary names outperform and builders are battered). Did 3:30PM Ramp Capital leave for the Hamptons early?