There are many channels through which changes in the monetary policy stance are transmitted to the real economy. Recent statements by Draghi and Noyer (and a dropped word by Nowotny) suggest that the ECB is concerned about the uneven transmission of its July interest rate cut to bank lending rates across the Euro area. Goldman finds this empirically true, noting that the influence of official ECB rates on retail interest rates in Italy and Spain has diminished, while it has increased in Germany and France and in fact there is a ‘reversal of policy transmission’ in Spain and Italy, whereby ECB rate cuts are now associated with an increase, rather than a fall, in retail rates (as the rapid deterioration in peripheral banking systems has more than offset any impact of lower rates). This 'failure' of standard monetary policy to ease conditions has led to the non-standard measures being discussed now. We see three points from this: rate cuts are less likely than the market believes; while SMP is now being priced in, it doesn't specifically address the transmission-mechanism; and just as Draghi hinted at in his last conference, we suspect he will reiterate his reduced collateral standards and increased eligibility to private-sector loans directly (an LTRO 2.5) - which, however, will necessarily encumber bank balance sheets even more (if Zee Germans will even agree to it).
Both earnings and revenues for 2012 have been cut dramatically in the last three months, rejuvenating a sliding consensus trend for 2012 that began in the middle of last year, and now Q3 expectations are negative YoY for the first time since Q3 2009. However, as we are told again and again, the economy must be doing fine because the market is up so much in that period. In fact, what is even more fun to hear is that the market is cheap (never mind the incredulous hockey-stick expectations for Q4 this year). In fact, the market is not cheap at all. The correlation between the S&P 500 in the last two years and the P/E multiple shows that performance has been driven almost entirely by multiple-expansion alone. Forward P/E is now getting close to recent peaks suggesting the market is far from cheap and on a longer-term view (based on both an as-reported and operating basis), the S&P 500 appears expensive - and perhaps these charts will re-anchor whatever cognitive bias that seems to pervade the long-only manager's herding mentality.
Every day we are told how this recovery is the slowest since WWII and that nothing is working. Well, we think we can trump that for dysphoria. Not only is this the slowest recovery since WWII, it is even slower than the average 'stagnation'. Based on Goldman's analysis of 93 stagnations the US GDP per capita is growing even more stagnantly than ever (and dramatically worse than during Japan's 'lost decade').
When the Lieborgate scandal broke out and the Bank of England trace became publicly known, some of the more conspiratorially inclined elements saw in this epic shakedown at the English central bank nothing but an opportunity for the world's dominant investment bank, Goldman Sachs, to capitalize on the scandal and the succession panic now that Paul Tucker is obviously out of succession rotation, and to appoint its own tentacles to the head of this most important central bank that is currently squid free. In fact, on July 3 we said:"now that the natural succession path at the BOE has been terminally derailed, it brings up those two other gentlemen already brought up previously as potential future heads of the BOE, both of whom just happened to work, or still do, at... Goldman Sachs: Canada's Mark Carney or Goldman's Jim O'Neil. Granted both have denied press speculation they will replace Mervyn King, but it's not like it would be the first time a banker lied to anyone now, would it (and makes one wonder if this whole affair was not merely orchestrated by the Squid from the get go... but no, that would be a 'conspiracy theory'.)" We wonder if this speculation can be upgraded from conspiracy theory to conspiracy fact, now that Bloomberg itself has written a major article discussing just this suddenly very likely outcome.
Wondering what Draghi really meant this morning when he spoke at an informal Investment Conference? Apparently nothing just as we said first thing this morning: IMF SAYS DRAGHI'S REMARKS ARE A WELCOME REITERATION OF ECB'S WELL-KNOWN COMMITMENT TO DO WHAT IS NECESSARY. So now the talking down of expectations, or in this case today's iteration of "baffle with bullshit" begins. Yet surely there is some additional agenda. For the best interpretation of what the ECB head said, we go to his former employer, Goldman Sachs, which is always ready to tell its clients to do the opposite of what its own prop desk is doing.
There's Hope. There's Faith. And then there is Q4 Consensus Earnings Expectations...
Why a new LIBOR based on Fed Funds (OIS) is determined by back door dealings between government sponsored failures (Fannie/Freddie) and a handful of compromised TBTF banks
Two weeks ago we highlighted the dismal performance (and massively over-crowded momentum factor tilt) of the 2-and-20 crowd relative to a passive equity ETF investment over the past few years. The reality is, in a Central Bank systemically-driven, high correlation, low dispersion world, the herding of hedge fund cats (with expert networks now dead) leaves them massively over-exposed and chasing the same relative returns as their mutual fund index-tracking peers - for fear of the career-limiting (Tilson-esque) miss of the great bull market's next leg. Apropos of this, Goldman's index of the most-widely-held stocks by hedge-funds is back to levels not seen since March 2009 and down a whopping 7.2% in Q2 of this year as all that momentum fades. Interestingly JNJ is the most widely held (by $ amount) short among hedge funds and of course Apple is the most widely held long.
A highly correlated market - both across asset-classes and across individual stocks within the equity indices - is now well known. It's a stockpicker's market is the refrain. Well, as Goldman points out, a dramatically narrow leadership is running the show in S&P 500 performance this year. 20 companies (22% of market cap.) account for 55% of 2012 YTD return for the S&P 500. Pick away (and by the way CRAAPL accounted for 17% of the S&P 500's YTD performance until last night) as while correlation removes alpha so concentration removes liquidity.
In the last year, consensus EPS for 2012 among those oh-so-smart equity analysts has been crushed from over $113 to under $104 but multiple expansion has held the index together on the back of the hopes and dreams of a hockey stick recovery in Q4 thanks to a 'this-time-is-different' response to NEW QE at some point. Goldman has a different perspective. The Earnings Revision Leading Indicator points to a dramatic drop in ISM as micro data not just comfirms macro data but notably points to further weakness. Of course this will be eaten up by all asunder as bad-is-good but worse-is-better, but we worry that the scope of the drop is extreme and given a far more 'aware' market (as Stephen Roach alluded to) that this hole might just be too large this time.
Independent from Congress … or from the American People?
"This market isn't real. The two percent on the ten-year, the ninety basis points on the five-year, thirty basis points on a one-year – those are medicated, pegged rates created by the Fed and which fast-money traders trade against as long as they are confident the Fed can keep the whole market rigged. Nobody in their right mind wants to own the ten-year bond at a two percent interest rate. But they're doing it because they can borrow overnight money for free, ten basis points, put it on repo, collect 190 basis points a spread, and laugh all the way to the bank. And they will keep laughing all the way to the bank on Wall Street until they lose confidence in the Fed's ability to keep the yield curve pegged where it is today. If the bond ever starts falling in price, they unwind the carry trade. Then you get a message, "Do not pass go." Sell your bonds, unwind your overnight debt, your repo positions. And the system then begins to contract... The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an "interest rate." That isn't a market price of money or a market price of five-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he's still in a positive spread. And you can't have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That's essentially what we have today."
With the 302 events across 32 sports of the Olympics about to start (with early round soccer starting tomorrow), we conclude our five part (Part 1, Part 2, Part 3, and Part 4) series of posts bringing markets, economics, and sports together by looking at 10 exhibits that Goldman sees as describing how various aspects of the Olympics have evolved from the first modern Games in 1896 (where Greece won 46 medals compared to USA's 20) all the way to London 2012. From the monetary value of the distributed gold medals to the globalization of medal wins, the trends are analogous to the world's change but the full report attached provides some incredible interviews with many of the greatest Olympians ever with Michael Johnson reminding us that: "People are generally very fed up with political processes and the bickering that comes with it. You have some politicians with one particular set of ideas as to how to fix the problems and one with another set of ideas, and this continues to create a divide between people. The Olympic Games is the epitome of non-politicised activity. It’s about coming together... and having the opportunity to put differences aside and get behind their country and the athletes who are representing them."
UPDATE: AAPL -6.25% AH
Major misses everywhere, and this for the second quarter in a row - from the Q3 earnings report:
- APPLE 3Q REV. $35.02B, EST. $37.25B
- APPLE 3Q EPS $9.32, EXP. $10.37
- APPLE 3Q NET PROFIT $8.8B
- APPLE SEES 4Q REV. ABOUT $34B, EST. $38.01B
- AAPLE 3Q GROSS MARGIN 42.8%, EST. 43.8%
- APPLE SOLD 17.0 MILLION IPADS DURING QTR, UNIT EST. 15.4M
- APPLE 3Q IPOD UNITS SOLD 6.8MLN , DOWN 10%
- APPLE SOLD 4.0 MILLION MACS DURING QTR, UNIT EST. 4.3M
- APPLE SOLD 6.8 MILLION IPODS IN QTR, UNIT EST. 6.6M
Is the dream over?
The technical guys are feeling bearish.