Yields for Italy, Spain, France, and Germany …
Comments »Yearly Archives: 2013
The Fed’s QE Exit Will More Than Quadruple Interest Costs For The US
“With the Fed now openly warning that there may actually come a time when the ‘flow’ stops; the most recent Treasury Borrowing Advisory Committee (TBAC) report has some concerning statistics for those change-ridden hopers who see a smooth Fed exit, deficit-reduction, and blue skies ahead. While they are careful not shout ‘sell’ in a crowded bond market; hidden deep in the 126 page presentation are two charts that bear significant attention. The first shows what TBAC expects (given the market’s expectations) to happen to interest rates in the US as the Fed ‘exits’ its QE program (taper, unwind, hold) – the result, the weighted-average cost of financing for the US government will almost triple from around 1.6% to around 4.3% over the next ten years. But more problematic is that even with CBO’s rather conservative estimates of the growth in US debt over the next decade the USD cost of financing will explode from around $205bn (based on TBAC data) to over $855bn. Still convinced the Fed can exit smoothly?
As TBAC warns…”
Comments »“The Public is Smarter Than Smart Money” and Why You May Want to Consider Smaller Companies
“People have called me a “perma-bull” forever. Mish Shedlock called me a “wacko”. Zerohedge has called me insane. Nouriel Roubini has laughed in my face. My daughters still quote Don Luskin when he was on CNBC shaking his head and saying, “James, James, James…” while laughing after I said the market was going to hit new highs.
Well, the market has hit new highs. That’s ok for those guys. I’m sure they all do well on their newsletters. I have no newsletter. I only invest with my own money. I live and die in the markets and I don’t depend on anyone else.
Is there a reason to change my mind? Not really. Eventually, the market will be higher than it is now.
But for the first time in a long time, I’m not a super bull on the overall market (although I like certain smaller stocks, see below).
The overall market (let’s say, the S&P 500) price is a function of supply and demand. I know people know this from Economics 101 and they view this as a micro-economic principle but it’s also macro-economic. it’s not only the price of Oranges determined by supply and demand, the aggregated price of every company in the world is also determined by this.
So what is “Supply” in terms of the stock market? Answer: it’s the total number of shares outstanding.
What is “Demand”? It’s the appetite to buy shares.
Supply is going down. This is both a good thing and a bad thing.
The good: Companies have enormous profit margins and are using their excess cash to buy back shares. This, of course, reduces shares outstanding. When companies with $100 billion in cash like Apple buy back shares, this reduces supply for the big mutual funds, etc.
Also good: When supply goes down, price goes up. This is why the stock market right now is at all time highs.
But then there is the BAD: I am seeing first hand within the private companies that I am invested in: nobody wants to go public. How come? Private markets are valuing companies higher than the public is.
Thats really funny: the PUBLIC is actually smarter than the supposed smart money. Look at Facebook (FB), Groupon, and Zynga (ZNGA) for examples.
And even the companies that want to go public: it’s pretty damn hard. I can’t quote you statistics. I only see this because I’m getting all the calls from brokers. If a broker is calling me to dump their little shitty IPO it means they can’t get institutions in.
How come?
Demand: Everyone is still pretty nervous.
Someone asked me the other day: when will this recession be over?
Guess what? It’s been over for four years.
But people don’t seem to know that?
How come? Because they feel like shit. Because people are getting jobs less than what their skillset suggests they should get. Because people are taking jobs for pay that doesn’t match what they would’ve gotten ten years ago. Underemployment, as this is called, is supposedly around 20% but my guess is it’s more like 30-40%.
Things feel like they suck.
Nobody feels like the stock market is back. Or that housing is starting to creep up. Or that America is starting to insource manufacturing again because globalization has crept up prices worldwide.
People look at their crappy jobs and salaries and say, “I don’t feel so good”. And so they get a scarcity mentality and don’t want to buy shares.
I don’t blame them.
Meanwhile, supply is going to flatten out. There’s only so much stock that people can buy.
So Demand will probably remain the same, but now Supply will stop going down.
What happens then? Stocks go down. Or struggle to stay afloat.
My solution: I am buying smaller stocks where I am not competing for information against massive hedge funds and mutual funds that do everything they can to cheat the system (insider trading, manipulative trading, high frequency trading, special access to secondaries, etc).
I also invest in long-term demographic trends that I believe in. These companies will do well regardless of the overall stock market. It’s why microcaps always outperform large caps in the long run.
So I’m invested in…”
Comments »NYSE Margin Debt Approaches All-Time High
“Dis-aggregationof credit is the understanding that there are good forms of credit and bad forms of credit. A good form of credit is something like a standard business loan in which a company obtains access to a line of credit in order to make investments in the firm. It pays employees, invests in equipment, etc. This form of credit, when issued prudently, is usually productive in that it helps the company expand and it rewards the lender for having taken the risk.
As a credit based money system we rely largely on the health of these sorts of loans to keep the system running smoothly. But there are also bad forms of credit. For instance, when a homeowner decides they want to speculate on real estate as an investment because they (incorrectly) believe real estate can outpace inflation over the long-term. We could make this matter even worse by repackaging the original loan and selling it off to new investors as AAA rated securities. In other words, disaggregation of credit was a core piece of the 2008 crisis.
I think another sign of disaggregation of credit is the extraordinary growth in borrowing that occurs around stock market booms. As the market surges we inevitably see a sort of ponzi effect in the market where more confidence breeds more credit and the bidding up of prices. It works until it doesn’t and when it doesn’t the air sure comes out fast.
So it’s rather alarming to see NYSE margin debt just shy of its all-time high….”
Comments »The Pope Speaks About ‘Slave Labour’
“Pope Francis on Wednesday condemned as “slave labour” the conditions for hundreds of workers killed in a factory collapse in Bangladesh and urged political leaders to fight unemployment in a sweeping critique of “selfish profit”.
The pope said he had been particularly struck by a headline saying workers at the factory near Dhaka were being paid just 38 euros ($50) a month.
“This is called slave labour!” the pope was quoted by Vatican radio as saying in his homily at a private mass in his residence to mark May Day.
More than 400 workers have been confirmed dead and scores are missing in the collapse, which occurred in a suburb of the capital Dhaka last week in the country’s worst-ever industrial disaster.
“Today in the world this slavery is being committed against something beautiful that God has given us — the capacity to create, to work, to have dignity,” the pope said at the mass.
“How many brothers and sisters find themselves in this situation!” he said, as protesters in May Day demonstrations around the world rallied against unfair work conditions and unemployment.
“Not paying fairly, not giving a job because you are only looking at balance sheets, only looking at how to make a profit. That goes against God!” the pope said in his strongly-worded address.
The Argentine pope, formerly the archbishop of Buenos Aires Jorge Bergoglio, became a powerful voice on the side of the poor during his homeland’s devastating economic crisis….”
Comments »The World’s Smallest Movie
Many great things are developing in the nano technology world. Here is a bit of fun with atoms….
Comments »FLASH: Fed Leaves Rates Unch, Target Range Remains at 0-0.25%
Inflation is well anchored,
Purchase expected to be continued until outlook for labor market has improved substantially,
The Fed will change policy only when inflation becomes a problem or unemployment improves,
Inflation is running below expected long term rate,
Only one dissenter in today’s decision,
Markets largely unchanged currently down 108 on the DOW
Comments »High Speed Traders Engage in Illegal Trading Ahead Practices
“High-speed traders are using a hidden facet of the Chicago Mercantile Exchange‘sCME -0.65% computer system to trade on the direction of the futures market before other investors get the same information.
Using powerful computers, high-speed traders are trying to profit from their ability to detect when their own orders for certain commodities are executed a fraction of a second before the rest of the market sees that data, traders say.
The advantage often is just one to 10 milliseconds, according to people familiar with the matter and trading records reviewed by The Wall Street Journal. But that is plenty of time for computer-driven traders, who say they can structure their orders so that the confirmations tip which direction prices for crude oil, corn and other commodities are moving. A millisecond is one-thousandth of a second.
The ability to exploit such small time gaps raises questions about transparency and fairness amid the computer-driven, rapid-fire trading that increasingly grips Wall Street and confounds regulators.
The Chicago Mercantile Exchange, a unit of CME Group Inc., is the largest U.S. futures exchange, handling 12.5 million contracts a day on average in the first quarter, according to Sandler + O’Neill Partners L.P. High-frequency trading generated about 61% of all futures-market volume, up from 47% in 2008, according to Tabb Group.
Fast-moving traders can get a head start in looking at key information because they connect directly to the exchange’s computers, giving them the data just before it reaches the so-called public tape accessible to everyone else. The exchange connections contain a host of data, of which the advance notice of trade confirmations is only a piece.
All firms that connect directly to CME’s trading computers are able to get information ahead of the market when their trades are executed, firm officials say. But many companies are unaware of the advantage or choose not to use it, traders say, either because they don’t have the technology to take advantage of such tiny edges or employ different investing strategies.
CME spokeswoman Anita Liskey said the exchange operator is aware of the order delays, which industry officials refer to as a “latency.” …”
Comments »Uncle Sam’s Math
Never trust the headline number. Uncle Sam needs to go back to school and brush up on those math skills.
Comments »Fun Times for May Day in Europe
May day was celebrated with massive rallies against austerity…
[youtube://http://www.youtube.com/watch?v=B1T8xgHdMEM 450 300]Comments »
Refining Margins Help $PSX to Crush Estimates
“Phillips 66 (NYSE: PSX) reported first-quarter 2013 results before markets opened this morning. The oil refiner posted adjusted diluted earnings per share (EPS) of $2.19. In the same period a year ago, the company reported EPS of $1.20. First-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $1.89 and $41.44 billion in revenues. Phillips 66 did not include revenues in its press release…”
Comments »Crude Supplies Rise by 6.7m Barrels, Much More Than Expected
distillates rose by 474m barrels
Gazoline inventories fall by 1.82m barrels
WTI remains under serious pressure…currently down $2.93
Comments »$F and $GM Sales Rise Thanx to Pick Up Truck Sales
Another Chart Indicating Equities are Rigged by the Fed
“The Citigroup Economic Surprise Index, which tracks how various economic data releases come in relative to expectations, is now below zero.
That means recent economic data releases have been disappointing relative to the market consensus.
Just in the past week, we’ve seen some nasty surprises – flash PMI, durable goods orders, GDP, and Chicago PMI have all come in below consensus.
Yet stocks keep moving higher, and it seems like lately “good news is bad news” (in that if the economy doesn’t strengthen, continued monetary easing from the Federal Reserve should keep markets afloat).
In a note out last night, Mike O’Rourke of Jones Trading wrote:
The US equity market has given up even the appearance of caring about economic data. Throughout Q1, as the S&P 500 garnered an impressive 10% return, high hopes were pinned on a 3.5% GDP print, then expectations retrenched to 3% before the actual print of 2.5% emerged. The chart below illustrates that the economy continues to trudge along at a 2% year over year GDP growth rate.
Not to say that a single data point like the Dallas Fed Manufacturing index merits a market move, but it is surprising when the 3rd worst print since the recession is met by another push higher in Equities. Few would describe earnings season as anything but a disappointment. Obviously, the Central Bank Benevolence trade continues to dominate the tape.
The chart below shows the Citigroup Economic Surprise Index and the S&P 500….”
Comments »Republicans Introduce a Bill to Go Dark
Many people complain that most economic data distributed by uncle Sam is doctored and tinkered with to produce a better outcome.
Well now Republican Congressman would have no statistics released at all if his bill passes.
Being dubbed as insane; thankfully the bill is getting shot down.
Perhaps going dark is better than lying…..
“You can’t handle the truth”
Comments »
Pimco’s El-Erian: Unwinding Fed’s Bond Buying Will Have ‘Collateral Damage’
“The Federal Reserve will struggle to unwind its giant bond-buying program, says Pimco CEO Mohamed El-Erian.
Although the Fed’s program of purchasing $85 billion of Treasurys and mortgage securities has benefits, it also poses risks and unintended consequences, El-Erian warned while speaking at a panel discussion at the Milken Institute Global Conference in Los Angeles.
It may not be able to end its massive bond buying without “collateral damage,” he said.
“Right now we are seeing distortions in markets,” he explained. “Resources are being misallocated. And already, there are already concerns about bubbles. That’s what gets broken in this journey.”
If genuine, unassisted growth returns, those concerns will fade, but the Fed’s bond buying may not be effective in restarting genuine growth.
“It’s a fifty-fifty proposition,” El-Erian cautioned, saying that explains why there’s so much excitement and anxiety in the market now.
“The Fed will exit under two conditions: either because they are successful or because they become ineffective,” El-Erian noted.
Other speakers on the panel also expressed concerns about the Fed’s bond purchasing.
“I don’t think the central banks or the Fed have thought about how they’re going to get out of the trade,” said Terry Duffy, the executive chairman of CME Group. “I started trading at 21 years old. You always have to have a vision of how to get out of a trade before you get in. The Fed needs to do that before they get in any deeper.”
Minutes of the Federal Reserve meeting last month indicated that policymakers seemed headed to winding down their bond purchasing before a weak March jobs report took them by surprise, according to Reuters. A few of the 12 Fed members hoped to start decreasing the purchases this summer and end them by the end of the year. …”
Comments »ISM Index: Prior 51.3, Market Expects 51, Actual 50.7, Construction Spending Down 1.7%
U.S. PMI Posts a 0.1% Gain Over Flash Estimates
“Markit’s April U.S. manufacturing PMI survey results are out.
The headline index came in at 52.1, slightly above the flash estimate of 52.0 published earlier this month, but down from March’s 54.6 reading.
Any reading above 50 on the index signals expansion, so the 52.1 reading in today’s release suggests that American manufacturing is still expanding, but at a markedly slower pace than in March.
The new orders sub-component of the index fell to 51.5 from March’s 55.4 reading. The output sub-component fell to 53.7 from 56.6, and the employment sub-component fell to 53.2 from 54.6.
Below is a complete breakdown of the sub-components from the release…”
Comments »Bill Gross: THERE WILL BE HAIRCUTS
“Bill Gross’ latest monthly letter is out, and the title is There Will Be Haircuts.
Haircuts, of course, are a popular topic of discussion ever since Cyprus clipped the savings of large depositors in order to recap the banks.
In his latest letter, Bill Gross points argues that there’s no way that governments will ever be able to reduce total debt to GDP unless they find creative ways to clip bondholders.
He comes up with four main ways.
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(1) Negative Real Interest Rates – “Trimming the Bangs”
During and after World War II most countries with high debt overloads resorted to artificially capping interest rates below the rate of inflation. They forced savers to accept negative real interest rates which lowered the cost of government debt but prevented savers from keeping up with the cost of living. Long Treasuries, for instance, were capped at 2½% while inflation was soaring towards double-digits. The resulting negative real rates together with an accelerating economy allowed the U.S. economy to lower its Depression-era debt/GDP from 250% to a number almost half as much years later, but at a cost of capital market distortions.
 PIMCO |
Today, central banks are doing the same thing with near zero-bound yields and effective caps on higher rates via quantitative easing. The Treasury’s average cost of money is steadily grinding lower than 2%. If current policies continue to be enforced in future years it will eventually be less than 1% because of the inclusion of T-bill and short maturity financing. The government’s gain, however, is the saver’s loss. Investors are being haircutted by at least 200 basis points judged by historical standards, which in the past offered no QE and priced Fed Funds close to the level of inflation. Large holders of U.S. government bonds, including China and Japan, will be repaid, but in the interim they will be implicitly defaulted on or haircutted via negative real interest rates….”
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