Market Conditions

It seems equity markets at all-time highs, high-yield funding markets near all-time low yields, and supposed money on the sidelines flooding back into stocks are just not enough to provide cover for the latest IPO:

*TOYS R US FILES TO WITHDRAW IPO :TOYS US

Not citing any specific reasons for the withdrawal, we suspect the weather and market conditions will be blamed as they just reported abysmal earnings of $239mm vs $343mm last year and sales down $155mm from last year (with Q4 comp sales -4.5% domestically and 5.4% international). Back to the drawing board for KKR and Bain to push this off to the next greater fool.

Below are portions of a comment letter submitted by R.T. Leuchtkafer to the SEC on April 16, 2010, just 3 weeks before flash crash. The second paragraph in the excerpt below, unknowingly describes exactly how the flash crash was started. The letter goes on to alert the SEC on the dangers of High Frequency Trading (HFT), phantom liquidity and other concerns.

While everyone likes to hate on Cyprus, it is Italy that is the focal point of today's European "omnishambles" that has seen the EURUSD tumble to a five month low as of this writing. First it was economic data that scared investors, with Industrial Sales and Orders tumbling far below expected, posting numbers of -1.3% and -1.4%, respectively, on expectations of an increase. Retail sales were just as ugly, declining by -0.5% in January, on expectations of an unchanged print, with the December 0.2% number revised also into negative territory. Then Bersani, who has been tasked to form a government until tomorrow, said that the possibility of a broad coalition government does not exist, adding that no lasting government is possible without him as a premier, and requesting that Grillo's Five Star party not block his path to government, for which we wish him the best of luck as moments later Five Star ruled out all external support for a broad government and would vote no confidence for Bersani. Then we got news that the Italian financial police has searched the Nomura in Milan in connection with the Monte Paschi case, which means even more skeletons in the closet are about to be uncovered. Finally, Italy just held a 3.5% 5 and 4.5% 10 year bond auction in which the country raised less than the maximum targeted €7 billion, and in which the Bid to Cover on the 5 Year dumping to the lowest since 2002, with bidding quite soft and the yield rising to 3.65% versus 3.59% previously. This has resulted in a blow out in Italian yields by 16 bps to 4.73% compared to 4.705% earlier. End result, as noted yesterday, has been an acceleration in the rush out of the EUR, with the EURUSD sliding to under 1.28 for the first time since November 21, a blow out in Greek bonds with yields pushing up 55 bps to 12.68% and a push for real safety (sorry, not the DJIA) in the form of German 2 Year bonds, which have dipped to -0.018%, the lowest since December, on rising fears that despite endless lies out of its bureaucrats, Europe may not be fixed after all.

The developed world has now become a fully operational Something-for-Nothing society. Once a Something-for-Nothing psychology has been fully implemented the majority of its citizens have become the functional equivalent of LOCUSTS! 

Unable and unwilling (they no longer have the skills to make the wages they believe they are entitled to) to produce more than they consume and support themselves they set off the consume those that do to FEED on and SUPPORT themselves. The TAKERS or WEALTH EAT the MAKERS of WEALTH, Cannibalism of the worst sort.

Ignore corporate margins tumbling to a three year low: the Philly Fed is here to kiss and make it all better, after surging from -12.5 to +2.0 , beating expectations of a -3 headline print. This was driven by a bounce in New Orders from -7.8 to +0.5, Inventories up from -10.0 to 0.0, and number of employees rising from 0.9 to 2.7. Curiously, the average employee workweek plunged from -1.6 to -12.9, but who needs to actually put in hours when one has a part-time job. Alas, if today's Philly Fed, which printed at levels seen last in 2012, 2011, 2010 and 2009, was supposed to push the market higher, it has failed, as economic data is so "pre-QE" - now all that matters is if a central bank will inject a few trillion into the "market", and if yet another sovereign bankruptcy can be prevented at a time when the DJIA has never been higher.

Following last month's surprising surge in the Empire Fed from a deep negative number to 10.04, the March print was less exciting, declining modestly to 9.24, on expectations of an unchanged number. Per the report, the new orders and shipments indexes also remained above zero, though both were somewhat lower than last month’s levels. Price indexes showed that input price increases continued at a steady pace while selling prices were flat. Employment indexes suggested that labor market conditions were sluggish, with little change in employment levels and the length of the average workweek. The Number of Employees index dropped from 8.08 to 3.23, back to September 2012 levels. Naturally, with reality worse than expected, all hopes were put in the future as indexes for the  six-month outlook pointed to an increasing level of optimism about future conditions, with the future general business conditions index rising to its highest level in nearly a year. This is only the 4th year in a row in which optimism about the future is orders of magnitude higher than the current reality. Thank the Fed's "wealth channel to support consumer spending." In other economic news, headline inflation came slighlty higher than the expected 0.5%, with the 0.7% sequential print the highest in one year, driven by a surge in the gasoline index which rose 9.1% in February, "to account for almost three-fourths of the seasonally adjusted all items increase. The indexes for electricity, natural gas, and fuel oil also increased, leading to a 5.4 percent rise in the energy index. The food index increased slightly in February, rising 0.1 percent."

The reversal begun yesterday in the FX market is continuing today. Although we are skeptical of the factors being cited as causes of the price action, we suggest it should be respected and will look for opportunities next week to get back with what we suspect is the underlying trend.

U.S. equity markets rallied once again after opening weaker Monday repeating previous performances. There wasn’t much news domestically. The Fed continued modest POMO actions which will grow in scope throughout the week. Stocks were quiet most of the day but got a lift on rumors that Apple (AAPL) will declare a dividend of some kind. If they do this, then the SEC should be monitoring who and what groups were front-running this piece of news.

As Mark Grant so poignantly reminded us yesterday, the Fed is printing $188 million per hour. That is the cost of Dow 14,000 -- that is the price we pay to see Jim Cramer and company consecrate the new bull market via impromptu CNBC specials. This hourly rate is of course implied by the $85 billion of assets the Fed now buys each and every month.

The following five charts reflect the hollowing out of the private-sector employment. This has profound implications for education, taxes, housing and inequality. What no one dares admit is that the U.S. economy is burdened by overcapacity (too many malls, restaurants, MRI machines, etc.) and too much debt, much of which was taken on to fund mal-investments. We suffer from a systemic failure of imagination. The financial and political Aristocracy that rules the neofeudal, financialized economy have no other model other than debt-based misallocation of capital and endless growth of debt-based consumption. That this model is broken and cannot possibly get us where we need to go does not matter; they will continue to do more of what's failed because they have no alternative model that leaves their power and wealth intact.

Ben was in congress campaigning er, testifying mostly about the effectiveness of all things ZIRP and QE. He was grilled about possible risks with QE especially if interest rates should rise. The Bernank saying that interest rates would rise was unlikely but he then cavalierly stated if rates rise, the Fed would just “hold back on payments” er, stiff the Treasury. That’s no big deal for him since by then he’ll be down the road writing his memoirs, making speeches and joining some big Wall Street firm as a well-paid consultant. The Bernank was also asked if he noted any bubbles or market excess and said he saw none. 

The great trade, capital flow and debt imbalances that were built up over the preceding two decades must reverse themselves. Michael Pettis notes, however, that these imbalances can continue for many years, but at some point they become unsustainable and the world must adjust by reversing those imbalances. One way or the other, in other words, the world will rebalance. But there are worse ways and better ways it can do so. Pettis adds that, any policy that does not clearly result in a reversal of the deep debt, trade and capital imbalances of the past decade is a policy that cannot be sustained. It is likely to be political considerations that determine how quickly the rebalancing processes take place and whether they do so in ways that set the stages for future growth or future stagnation. Pettis' guess is that we have ended the first stage of the global crisis, and most of the deepest problems have been identified. In 2013 we will begin to see how policymakers respond and what the future outlook is likely to be. The following 10 themes are what he will be watching this year in order to figure out where we are likely to end up.

It appears that not only we are tracking the phaseout in equity inflows, all of which are simply the reversal of the massive $220 billion surge in bank deposits in the month of December due to fears of Fiscal Cliff dividend and capital gains tax increases (explained previously), and which as today's ICI update indicates have trickled down to just $683 million - the lowest weekly inflow year to date. Among the others who are keeping track of the weekly reduction in inbound capital euphoria, in addition to the six companies which priced equity offerings on Monday as was shown previously, are these fine corporations and existing stakeholders, including Apollo, KKR, Carlyle, Blackstone, Thomas H. Lee, and Bain,  who just can't wait to get out while the getting is good, split once again evenly between secondaries and follow ons.

The price action in the foreign exchange market is choppy as short-term participants seem nervous after being whipsawed yesterday. Sterling fell nearly a cent to new multi-month lows following the BOE's inflation report that confirmed official expectations that price pressures will remain above target and King welcomed the recent depreciation of the point. Also of note the Australian dollar, which staged a sharp recovery off the year's lows yesterday and has seen follow through buying today, helped perhaps by gains in a consumer confidence measure.

The was nothing in the rogue G7 sourced comment yesterday that that Japanese Finance Minister Aso did not say prior to the G7 statement and before the weekend. The pace of the yen's depreciation was too fast. The market reacted to it at the time.

We have long held the machinations of The National Association of Realtors (NAR) up to some ridicule. As many will note, we ignore every NAR data release due to the fact that it is certified guesswork (at best) as per the massive periodic revisions that just so happen wipe out all prior year gains. We also suspect a darker side, as the NAR, courtesy of its anti money-laundering exemption, is simply a middleman allowed to close its eyes as dirty money is ferried into the US and specifically its real estate market. But former Fannie Mae chief credit officer Ed Pinto digs a little deeper into the real driver behind the NAR. For 90 years the NAR (and its predecessor organization) has supported expanding the government’s role in housing finance. Today, the government guarantees upwards of 90 percent of all new mortgages. It is easy to reconcile the NAR’s interest in home ownership and its support for the expansion of the government’s role in housing finance. In Ed's research he has not come across a single instance where the NAR has stated that lending standards should be tightened. To the contrary the NAR has almost always called for loosened lending standards and continued or increased government involvement, no matter the market conditions.