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Market Update

The Container Store CEO Says the Consumer in Still Stuck in a Polar Vortex….But Wait it’s Summer

“Following a chilly winter that froze economic growth, economists have been forecasting a sharp snapback in activity for Q2 and the second half of the year.

Recent reports on jobs and auto sales confirm as much. Add the fact that the stock market is near an all-time high, and you would assume the consumer would be feeling pretty confident.

But new comments from a major U.S. retailer contradict all of the optimism out ther.

On Tuesday afternoon, The Container Store Group announced that its comparable store sales fell 0.8%, which led to a wider than expected net loss of $0.07 per share.

CEO Kip Tindell warned that weakness at his stores wasn’t a company-specific problem.

“Consistent with so many of our fellow retailers, we are experiencing a retail ‘funk,'” Tindell said in the company’s earnings announcement…..”

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U.S. Equities Take Another Dip as Earnings Jitters Rise

“U.S. stocks declined Tuesday, pushing the Dow industrials below 17000, as investors showed caution ahead of a slew of corporate earnings reports.

The Dow Jones Industrial Average shed 109 points, or 0.6%, to 16915.

The S&P 500 index fell 12 points, or 0.6%, to 1966, and the Nasdaq Composite Index declined 47 points, or 1.1%, to 4404.

Traders said that volumes were muted even as stocks tumbled, and cited no single catalyst for the selling. After the broad stock-market rally, and ahead of the release of earnings reports, many investors were reluctant to commit more money to the market, traders said.

Jarred Kessler, global head of equities at Cantor Fitzgerald, said that he saw small orders to sell rather than chunks of stocks for sale from large clients, which would indicate higher conviction in further declines. Rather, he said that many investors appeared to be in a holding pattern.

“Every time there’s a move down, the market bounces back up,” Mr. Kessler said. “No one is fearful of anything.” ….”

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Challenger, Gray, & Christmas: Planned Layoffs Fall 41% After Hitting 15 Month Highs

“After climbing to a 15-month high in May, planned job cuts announced by U.S. companies in June dropped 41 percent to 31,434, the lowest level of the year, according to a report released Thursday by Challenger, Gray & Christmas. So far, the pace of job cuts is down 5 percent from a year ago.

June job cuts were 20 percent lower than the same month a year ago, when employers announced 39,372 job cuts.

The June number was down sharply from May, with 52,961 planned layoffs announced—the largest monthly total since February 2013.

n the second quarter, a total of 124,693 job cuts were announced, up 3 percent from the 121,341 job cuts announced in the first quarter. Second-quarter job cuts also were up 9.5 percent from the same period last year, when 113,891 planned layoffs were announced…..”

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Pension Funds Concentrate Risk and Approach the Danger Zone

“Pension funds and other long-term investors are taking ever bigger risks and could be laying the ground for renewed turmoil when money gets more expensive, one of the world’s leading economists told Reuters.

As memories of the financial crisis fade and market confidence soars, policymakers have warned that investors desperate for any return on ultra-cheap money could be creating yet another bubble to go bust.

Now the chief economist of the body bringing together global central bankers has warned that while banks are still repairing the damage of the last crisis, pension funds have cast off their risk aversion in the hunt for profit.

“Things look and feel great but we are storing up a possibly more painful and more destructive reversal,” said Hyun Song Shin of the Bank for International Settlements (BIS).

“The one thing that is different between now and 2006/2007 is that the protagonists … are no longer … the banks. This risk taking is happening through other market players. Long-term investors are also joining in.”

This changing pattern of behavior carries “a potential source of danger,” he said. “We are going into somewhat unfamiliar territory.”

Central banks in the eurozone, Japan, Britain and the United States risk keeping the taps of cheap money open for too long after the financial crisis, he said.

Shin is the economic adviser to a group that brings together policymakers from across the globe, including European Central Bank President Mario Draghi and Federal Reserve Chief Janet Yellen.

He called on regulators to be alert to the new risks…..”

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The Black Swan Index Notches Higher

“Where some investors see nothing but rolling green fields and placid summer lakes, others see black swans circling high above.

Such is the picture painted when comparing the widely followed Chicago Board Options Exchange Volatility Index—the market’s “fear” gauge— and its sister measure, the Skew, aka the “Black Swan Index,” which charts, well, lots of fear. (The black swan is a metaphor for a highly unusual occurrence and took on added significance in the market following Nassim Taleb’s 2007 book, “The Black Swan.”)

While the VIX is closing in on historic lows and has tumbled nearly 20 percent year-to-date— meaning there is a high level of complacency among investors— the Skew has surged in June, rising more than 12 percent for the month.

Taken together, the two measures reflect an interesting dichotomy among investors.

One crowd, buying plain-vanilla VIX options, anticipates a smooth ride, while the other is not necessarily anticipating but at least bracing for not just an ordinary market disruption—say, a weak economic number or one-off geopolitical event—but something really off the wall happening and knocking the seemingly indestructible stock market for a major loop.

“It’s just up like a hook for the whole month of June,” said Catherine Shalen, the CBOE’s director of research. “What’s happening is that in spite of the fact that everybody says the VIX is low and the market is complacent, the market is not complacent in every way. This is telling us that some investors who trade in options believe that the probability for a sharp, three-standard-deviation move has increased.”

The VIX measures near-term or next-term options whose price targets have not been hit—called “out of the money”—and its long-term average is around 20, as opposed to the 11 where it traded Tuesday. The Black Swan, or Skew, uses an options formula to gauge risks greater than the VIX. A reading of 100 indicates little risk of “fat tail” or highly unusual events; the index is now trading around 139 and was at 143 Friday, its second-highest level ever…..”

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NAR Report Not So Bullish: The Über Wealthy Prop Up Yesterday’s Housing Report

“A month ago we showed a chart that, in our humble opinion, summarized all that is wrong with the US housing market. The chart in question showed the April breakdown of existing home sales on a Y/Y basis by pricing bucket.


Needless to say, what the chart showed was the symptomatic, and schizophrenic, breakdown of US housing into two camps: the housing market for the 1%, those costing $750K and above, where the bulk of transactions are mostly between non-first time buyers, and typically take place as all cash transactions, and the market for “everyone else” which continues to deteriorate.

Moments ago the NAR released its May data, which on first blush was widely lauded as bullish: the topline print came at a 4.9% increase, rising from 4.65MM to 4.89MM, above the 4.74MM expected. Great news… if only on the surface. So what happens when one drills down into the detail? As usual, we focused on the last slide of the NAR breakdown, located at the very end of the supplementary pdf for good reason, because what it shows is hardly as bullish.

So how does this “housing recovery” in which the NAR has proclaimed the “sales decline is over” look on a granular basis.

The answer is below, and it is even worse than the April data. It also explains why first time buyers have dropped to even further cycle lows of just 27%, down from 29% both a month and year ago.

This is bad because while in April there was a modest increase sales in house buckets from $250 all the way up to $1MM +, in May the only bucket that had an increase in sales from a year ago was that exclusively reserve for the ultra-richest….”

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State of the Union: The Crumbling of America

“No state is needier than West Virginia when it comes to fixing crumbling highways, airports and water works, with annual repair needs of $1,035 per resident that’s three times the national average.

Yet even with borrowing costs hovering close to four-decade lows, lawmakers rejected a January proposal to sell $1 billion of bonds to repair roads that run through the Appalachian Mountains. Budget cuts were a more immediate concern, they said.

Across the U.S., localities are refraining from raising new funds in the $3.7 trillion municipal-bond market after the worst financial crisis since the Great Depression left them with unprecedented deficits. Rather than take advantage of Federal Reserve policy that’s held benchmark interest rates at historic lows since December 2008, they’re repaying obligations by the most on record.

“When you’re trying to be frugal, it’s probably not the time to eat caviar,” said Margaret Staggers, head of West Virginia’s House transportation committee, who said she was unable to persuade Democratic colleagues to support the bond plan.

The legacy of the 18-month recession that ended in June 2009 still looms large for America’s states and cities. While revenue has revived, governments are under pressure to increase funding for education and other services after years of cuts. They’re balancing those needs against required payments toward entitlements such as pensions, having set aside $1.4 trillion less than they’ve promised to retirees, according to Fed data.

Pennsylvania Hangover

“There’s a psychological hangover,” said Uri Monson, chief financial officer of Montgomery County, Pennsylvania, outside Philadelphia. “We’re not going to go out and borrow unless we absolutely have to.”

Issuance this year has tumbled to $123 billion nationwide through June 13, down 20 percent from the 2013 pace, according to data compiled by Bloomberg. It’s also 30 percent below levels seen in 2010, the final year of the federally subsidized Build America Bonds program, which was designed to spur infrastructure investment.

Since 2010, states and localities have lowered their bond load by $111 billion, the most since the Fed began keeping records in 1945. They’ve paid down the liabilities even as yields on 20-year general obligations have averaged 4.25 percent in the five years since the recession, the lowest since 1969, according to Bond Buyer data.

Corporate Contrast

In contrast, Apple Inc. and Verizon Communications Inc. have led investment-grade companies selling $648 billion of dollar-denominated debt this year, a record pace, Bloomberg data show. The 3.05 percent yield on the Bank of America Merrill Lynch U.S. Corporate Index is within 0.4 percentage point of an all-time low reached in May 2013.

States’ and localities’ spending on construction has fallen every year since its 2009 peak, declining $39 billion, or 13 percent, over the period, U.S. Commerce Department figures show. Their investments in roads, schools and office buildings account for the smallest share of the economy since at least 1947.

“Infrastructure is one of the only ways that states and local governments directly affect commerce in the United States — the trucks have to use the roads and bridges, the boats have to use the ports,” said Daniel White, an economist with Moody’s Analytics in West Chester, Pennsylvania.

“If we continue to let them deteriorate, it could have disastrous consequences,” he said.

Peak Days

State and local spending on roads, railways and other infrastructure crested as a share of the economy during the post-war population boom. In the first quarter, the expenditures accounted for 1.4 percent of the economy, less than a third of the 1967 level, according to data compiled by Moody’s Analytics.

America’s governments would need to spend about $3.6 trillion through 2020 to put everything from roads and water to sewers and electricity networks into adequate shape, according to the American Society of Civil Engineers, based in Reston, Virginia. That’s about $1.6 trillion more than governments are expected to dispense.

“We are not investing adequately in maintaining our infrastructure,” said Joshua Schank, president of the Eno Center for Transportation in Washington. “We are missing an opportunity to borrow at lower rates in order to do it.”

Governments aren’t avoiding the market altogether. Municipalities routinely borrow billions of dollars each week for public works….”

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Investor Sentiment Among the 1% is Becoming Squeamish

“The bull market of the last five years has resulted in extraordinary gains for the wealthy, but some in the 1% aren’t sure how much longer the good times can roll.

A comprehensive study of wealthy families by private bank U.S. Trust found that only 40% of high net worth investors feel “bullishly optimistic” about the market. At the same time, 10% said they felt downright pessimistic and 12% described themselves as fearful of losing money.

im Quinlan, Chief Market Strategist for U.S. Trust, says a lot of rich people continue to worry about regulation, Washington gridlock, and the lingering effects of the Federal Reserve’s unprecedented stimulus program, which has propped up stocks and the housing market but hasn’t done much for the rest of the economy.

Related: America’s middle class: Poorer than you think

“There’s a lot of things keeping them from jumping in with both feet,” Quinlan claims. He says many investors are more focused on the headlines, as opposed to the true earnings potential of American companies.

At the same time, Quinlan is encouraged by the statistics. He thinks they show that stocks still have room to run once more wealthy investors finally do get back into the market.

In that regard, 42% of those surveyed are pursuing higher returns despite the increased risk they see in the stock market. That’s up from just 30% who said the same thing in 2012. Many in the upper class are focused on the long game, with an overwhelming number saying that funding future financial needs takes precedence over short-term financial needs.

But Quinlan says the rich may also be playing catch-up after sitting on the sidelines for the last few years. The study revealed that wealthy investors who currently hold more than 10% of their portfolio in cash were three times as likely to say they missed out on the market rally.

“These investors have been whipsawed. Five years ago their big nest egg was shrinking dramatically,” he says. “Some of these folks may have been lagging behind, now they’re coming back.”

That puts the ultra-wealthy in a similar category to the rest. Many individual investors sat on the sidelines as the stock market experienced tremendous gains…..”

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Interest Rates Remain Unch, FOMC Leave Markets with No Real Direction

“The Federal Reserve has released its latest monetary policy decision. Mostly it was a non event, as the Fed is not indicating a quicker pace of rate hikes, despite improving unemployment and inflation data.

The Fed kept interest rates between 0% and 0.25%, and took another $10 billion off its monthly asset purchases.

The Fed also released its latest Summary of Economic Projections, which includes an updated version of its “Dot Plot,” and it looks like the FOMC has no idea where interest rates are going.

The Dot Plot shows what various members of the FOMC are predicting for the path of future rate hikes. It’s a forecast.

The latest version of its Dot Plot shows an even wider dispersion among where FOMC members believe interest rates will be, both at the end of the next three years and over the longer run. In other words, there’s no consensus about what’s going to happen with interest rates. It’s anyone’s guess.

Here’s the latest Dot Plot, followed by the previous Dot Plot from March…..”

Full article

More commentary on the economy

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A Minuscule Rise in Mortgage Rates Slams Applications by 9.2%

“It didn’t take much to keep potential borrowers away from their mortgage lenders last week—a minimal rise in rates sent volume tumbling 9.2 percent on week, seasonally adjusted, according to the Mortgage Bankers Association (MBA).

Applications to refinance a loan fell 13 percent on week, while applications to purchase a home fell 5 percent on week and are now 15 percent below the volume seen a year ago.

“Interest rates increased relative to the previous week, as incoming economic data continues to suggest a pickup in the pace of growth,” said Mike Fratantoni, MBA’s Chief Economist….”

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S&P: China Over Takes U.S. as Coporations Borrow Over $14 Trillion

“The Chinese corporate bond market has overtaken the United States as the world’s biggest and is set to soak up a third of global company debt needs over the next five years, according to rating agency Standard & Poor’s, underscoring the growing risk China’s debt market is imposing on the global financial system.

Chinese corporate borrowers owed $14.2 trillion at the end of 2013 versus $13.1 trillion owed by U.S. corporations with the switch in rankings taking place a year earlier than it had expected, S&P said on Monday.

The Asia-Pacific region, led by China, is seen accounting for half of global corporate debt financing needs of $60 trillion over the five-year period to 2018 when the region will account for more than half the projected total debt outstanding of $72 trillion.

China, the world’s second-largest economy is currently financing a quarter to a third of its corporate debt through its shadow banking sector and this had global implications, S&P said.

“This means that as much as 10 percent of global corporate debt is exposed to the risk of a contraction in China’s informal banking sector,” the agency said, estimating this at $4 trillion to $5 trillion. “With China’s economy likely to grow at a nominal 10 percent per year over the next five years, this amount can only increase.”

Cash flows and leverage at Chinese corporations are the worst among global peers, having deteriorated from being the best in 2009, according to a corporate financial risk trend measure used by Standard & Poor’s….”

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Trannies Start to Tumble on Higher Volume, Looking More Like the Recent Tech and Bio Tech Selloff

Volume is well above average pro rata as US equity markets are stumbling notably this morning. Was retail sales’ miss the final straw that broke the hope back? Or was it China’s CNY vol, failed auction, warehouse probe, or Japan’s dismal data and misery, or Iraq’s reignition, or Ukraine, or Q1 GDP downgrades, or earnings outlook downward revisions, or flows? Since Mario Draghi promised the world and made everyone believe that’s what he gave them, US equity markets have rolled over hard today and Dow Transports are now notably in the red….”

Full article and charts

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The ECB Cuts Rates Less Than Expected

“Congratulations Europe: you now get to pay your insolvent bank to keep your deposits for you.

The full announcement:

At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:

  • The interest rate on the main refinancing operations of the Eurosystem will be decreased by 10 basis points to 0.15%, starting from the operation to be settled on 11 June 2014.
  • The interest rate on the marginal lending facility will be decreased by 35 basis points to 0.40%, with effect from 11 June 2014.
  • The interest rate on the deposit facility will be decreased by 10 basis points to -0.10%, with effect from 11 June 2014. A separate press release to be published at 3.30 p.m. CET today will provide details on the implementation of the negative deposit facility rate….”

Full report

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ADP Reports 179k in Job Creation vs Estimates of 215k


“The post-weather bounce is over in exuberant employment trends appears to be over. After January’s plunge, the last 3 months have seen beats but May’s data – printing at 179k (against expectations of 210k) is a major disappointment for the extrapolators and presses job griwth back to its lowest since January. Rubbing salt in the wound of recovery, April’s data was revised downward. It was so bad, even the permabullish Mark Zandi was unable to spin the data:  “Job growth moderated in May. The slowing in growth was concentrated in Professional/Business Services and companies with 50-999 employees. The job market has yet to break out from the pace of growth that has prevailed over the last three years.”




From the report….”

Full report 

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Dark Pools Shed Some Light on Their Trading Practices

“After years of operating in the shadows, dark pools are coming into the light.

Goldman Sachs Group Inc. GS +0.14% and Credit Suisse Group AG CSGN.VX -1.35% , two of the biggest operators of opaque trading venues known as dark pools, which execute trades away from stock exchanges, on Monday published documents explaining in detail how their venues work.

The disclosures came on the day that the Financial Industry Regulatory Authority issued for the first time data on volume of shares traded on dark pools.

Goldman Sachs has been weighing the move for more than two months. The bank has grown concerned that increases in complexity and instability in the stock market are harming investor confidence and hopes to address the issue by being more transparent about its own trading operations, said Brian Levine, co-head of Goldman’s Global Equities Trading and Execution Services.

Goldman executives have raised the possibility of closing its dark pool, known as Sigma X, in conversations with market participants in recent months, The Wall Street Journal reported in April.

Goldman is concerned that complexity is hurting investor confidence. Reuters

Dark pools, private, lightly regulated trading venues where buyers and sellers can swap shares with greater anonymity than on stock exchanges, have come under criticism recently as part of a wider complaint that the U.S. stock market has become too complex. Together with so-called internalizers—firms that execute trades on behalf of retail brokerages—they account for nearly 40% of all stock trading, according to Tabb Group.

Critics say that off-exchange trading hurts the ability of the market to accurately price securities, since buy and sell orders aren’t published. Some have also questioned the role played by high-frequency firms, superfast traders that use turbocharged computers and telecommunications networks to buy and sell stocks, in dark pools.

Dark-pool proponents say their venues offer big institutional investors the opportunity to buy or sell stocks without moving prices as much as they would by displaying their order on an exchange…..”

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June Marks 5 Years as the Offical End of the Great Recession, Are You Celebrating?

“It’s June 2014, and that means it’s been five years since the Great Recession officially ended. If you’re not ready to celebrate this milestone, you’re certainly not alone.

The majority of Americans still rate economic conditions as “poor” and for good reason: This jobs recovery is the slowest on record, wages are barely rising, home prices are still below their peak and more Americans are using food stamps than ever before.

Main Street America still doesn’t feel recovered, because, quite frankly, it’s not.

So how much longer will the healing process take? Economists surveyed by CNNMoney expect a full recovery is still two to three years away.

“The labor market is the scar on the economy that remains from the Great Recession, the financial and housing crises. It may be fading, but it is still clearly visible and will remain for years to come,” said Sean Snaith, economics professor at the University of Central Florida.

Interactive: Why you don’t feel recovered

Here’s how far we’ve come: Technically, the Great Recession ended in June 2009. That determination was made by the National Bureau of Economic Research, an independent group of economists that has officially called the beginning and end of business cycles since the 1920s.

Why pick that date? Essentially, that’s when the bleeding stopped and the slow healing process began. After that point, economic activity started picking up. Auto sales started rising, and the manufacturing sector slowdown ended. Home prices hit their bottom and finally started rising again, and the stock market came back to life.

Now, five years later, U.S. economic activity and the stock market are at all-time highs. States like North Dakota and Texas are benefiting from energy-related booms. Jobs in health care keep growing, and professional office positions are back. There are also more low-wage jobs at restaurants and bars.

But the recovery was far from a quick bounce-back. It’s been more like a long, slow slog, and here’s the key missing component: The broader job market…..”

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S&P 500 Companies Purchase $160 Billion Worth of Company Stock in Q1

“With the Fed having tapered its liquidity injections into the stock market from $85 billion to “only” $45 billion per month, retail investors getting burned by the recent high beta and momentum stock flame out and “greatly unrotating” into the renewed safety of bonds, not to mention a churning market that until last week was unchanged for the year, and hedge funds ever shorter into this latest ramp, many are asking themselves: who is buying?

Here is the answer.

According to the most recent CapitalIQ data, the single biggest buyer of stocks in the first quarter were none other than the companies of the S&P500 itself, which cumulatively repurchased a whopping $160 billion of their own stock in the first quarter!

Should the Q1 pace of buybacks persist into Q2 which has just one month left before it too enters the history books, the LTM period as of June 30, 2014 will be the greatest annual buyback tally in market history.

And now for the twist.

Unlike traditional investors who at least pretend to try to buy low and sell high, companies, who are simply buying back their own stock to reduce their outstanding stock float, have virtually zero cost considerations….”

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World Markets Linger at New Highs, ECB Installs Confidence for Continued Liquidity

“(Reuters) – World shares hovered just off an all-time high and the euro was steady on Tuesday, as the European Central Bank made sure there was little doubt in investors minds that global liquidity will continue.

Britain’s FTSE 100 .FTSE opened up 0.3 percent as it played catch-up after a holiday. The rest of Europe’s main bourses .FTEU3, which saw mostly steady starts, had made gains on Monday following European election results.

Asian trading had been timid too, but another solid session for Japan’s Nikkei .N225 and shares in China, nudged MSCI’s 45-country all-world index up to 420 points leaving it just below its 2007 record high of 428.63 points.

Asset markets around the world continue to be supported by record-low interest rates in most of the world’s big economies.

ECB chief Mario Draghi on Monday bolstered the already-strong expectation that the bank will cut euro zone interest rates again next week and dip back into its unconventional policy cupboard.

Draghi said the ECB needed to be “particularly watchful” for any negative price spiral in theeuro zone, and that “more pre-emptive action may be warranted,” citing broad-based asset purchases as one of the ultimate options.

He is set speak again later in an ‘armchair’ discussion in the final day of the ECB forum underway in Portugal, along with a handful of the bank’s other policymakers.

The easing expectations kept plenty of downward pressure on euro zone government borrowing costs in the region’s buoyant bond markets….”

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