“Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said the Federal Reserve’s zero-bound interest rate policy and quantitative easing programs are becoming more of a problem for an economy that needs structural reforms.

The Fed’s polices are “desperately attempting to cure an economy that requires structural as opposed to monetary solutions,” Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco’s website. “Central banks, including today’s superquant Kuroda, leading the Bank of Japan, seem to believe that higher and higher asset prices produced necessarily by more and more QE check writing will inevitably stimulate real economic growth via the spillover wealth effect.”

The Fed is purchasing $85 billion a month in Treasurys and mortgage debt as part of its third round of quantitative easing, which began after it dropped its benchmark rate to almost zero to lift the economy out of recession. The central bank cut its target rate for overnight loans to a range of zero to 0.25 percent in December of 2008.

Global Stimulus….”

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“If earnings guidance is any guide, the S&P could be in trouble. The second quarter earnings picture that we can piece together from S&P 500 guidance is a negative one indeed.

Over the past five years, an average of 62 percent of S&P companies that have issued earnings-per-share guidance have given projections below the mean EPS estimate. But research company FactSet reports that for the second quarter, 86 of the 106 S&P companies have projected below the mean, meaning that 81 percent of the guidance has been negative. In the materials sector, a whopping 88 percent of guiding companies have issued negative guidance.

“There’s certainly a trend where companies tend to be more conservative when giving guidance, so that can turn around and beat that number,” said John Butters, senior earnings analyst at FactSet. But on the other hand, “if we finished here, it would be the quarter with the highest percentage of negative pre-announcements since we began tracking the data in 2006.” Butters adding that the percentage of negative guidance is likely to change somewhat in the coming days.

Analysts, for their part, have slashed their earnings growth expectations over the course of the second quarter. Whereas they have previously expected earnings growth of 4.4 percent for the S&P 500, analysts now expect growth of just 1.3 percent, FactSet reports.

In the battered materials sector, analysts used to expect earnings growth of 9.4 percent. But since the second quarter began, analysts have cut earnings growth expectations so that they now anticipate materials companies to report a 3 percentdecline in earnings.

That said, it’s not all bad news…”

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“…..Below is a copy from a Laikie Bank customer’s business account. This was one of the “bad” banks in Cyprus. This puts into clear terms what happened to client’s funds. As they say a picture tells a thousand words. (This image is published courtesy of MarketOracle.Co.UK).

No wonder the European Central Bank has ceased providing accurate information on Euro wide bank liquidity levels. According to sources of mine funds are transferring out of Euroland at an alarming rate. Given what is currently being discussed in Dublin who would blame any corporate entity or individual removing all  Euro funds from possible confiscation….”

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“You’re not to be so blind with patriotism that you can’t face reality. Wrong is wrong, no matter who does it or says it. – Malcolm X

Over the last couple of months we’ve heard the IMF, ECB and US Federal Reserve all come out and tell us that they have the right policies in place and things are getting better. Unfortunately, the statistics just don’t bare that out even though they’re often biased in favor of the very governments that produce them. On Friday I saw that unemployment has reached a new high in the Eurozone while inflation remains well below the European Central Bank’s target, underscoring just how severe a challenge EU leaders face to revive the bloc’s sickly economy. Joblessness in the 17-nation currency area rose to 12.2% in April, this according to Eurostat on Friday, marking a new record since the data series began in 1995.

 

With the Eurozone also in its longest recession since its creation in 1999, consumer price inflation was far below the ECB’s target of just below 2 percent, coming in at 1.4 percent in May, slightly above April’s 1.2 percent rate. Some think the slight rise may quiet concerns about deflation, but the deepening unemployment crisis is a threat to the social fabric of the Eurozone, with almost two-thirds of young Greeks unable to find work exemplifying southern Europe’s threat of creating a ‘lost generation’. Policy makers have expressed concern that the greatest threat to the unity of the Eurozone is now social breakdown from the crisis, rather than market-driven factors.

In France, Europe’s second largest economy, the number of jobless rose to a record in April, while in Italy, the unemployment rate hit its highest level in at least 36 years, with 40 percent of young people out of work. Some economists expect the ECB, with meetings on June 6, to act to revive the economy and go beyond another interest rate cut and consider a US style money-printing program known as quantitative easing. With the Organization for Economic Cooperation and Development forecasting this week that the euro zone economy would contract by 0.6 percent this year, unemployment is set to worsen long before it turns around.

In April, 5.6 million people under 25 were unemployed in the European Union, with 3.6 million of those in the Eurozone. Even if governments take on unions and vested interests to enact reforms, they will need time to produce benefits. Meanwhile the impact of the Eurozone’s debt and banking crises has been sapping confidence from companies and households. Private consumption saved Germany from slipping into recession in the first three months of this year, but retail sales still fell unexpectedly in April because of the cold European winter. In France consumer spending dropped again in February, falling by 0.2 percent after contracting in January. French household purchasing power contracted in 2012 for the first time since 1984.

Meanwhile across the pond the consumer spending in the U.S. unexpectedly declined in April as incomes stagnated, putting the biggest part of the US economy on shaky ground at the start of the second quarter. Household purchases, accounting for about 70 percent of the economy, dropped 0.2 percent after a 0.1 percent rise the prior month that was smaller than previously estimated, this according to a Commerce Department report on Friday. Personal income, meanwhile, decreased 0.1%” in April after a revised 0.3% gain in March, mostly because of lower rents and farm-related earnings. The personal savings rate held steady at 2.5% and remains near a five-year low. Inflation as gauged by the core PCE price index increased less than 0.1% in April, and it’s up just 1.1% in the past 12 months. That’s the lowest level since March 2011 and just a notch above an all-time low. Overall PCE declined by 0.3% and is up a meager 0.7% in the past year. That’s the lowest rate since October 2009.

Many believe the data underscore the risk to the economy from the federal budget cuts that began in March and a higher payroll tax implemented at the start of 2013. The drop in spending last month was the first since May 2012. The Commerce Department’s price index tied to spending, the gauge tracked by Federal Reserve policy makers, fell 0.3 percent in April, the biggest drop since December 2008, as fuel costs retreated. The so-called core price measure, which excludes food and fuel, was unchanged from the prior month and was up 1.1 percent from April 2012, matching a record low. Adjusting consumer spending for inflation, which renders the figures used to calculate gross domestic product, real purchases rose 0.1 percent, the smallest advance since October, after a 0.2 percent increase in the previous month, today’s report showed.

Strength in consumer spending and business investment helped the economy weather government cutbacks. Gross domestic product rose at a 2.4 percent annualized rate, and household spending expanded 3.4 percent, the most since the last three months of 2010. Purchases may be underpinned by gains in equity and housing markets. The Standard & Poor’s 500 Index (SPX), which reached a record on May 21, is up 16 percent since the start of 2013 through Friday. The S&P/Case-Shiller index of home values in 20 cities advanced in the 12 months to March by the most in seven years. As a result many are calling for a continued improvement in the housing market.

Lowe’s, the second-largest US home-improvement retailer, is among companies counting on a strengthening housing market to lift demand. The Mooresville, North Carolina-based chain said sales last month also recovered from a cold spring that sapped demand for outdoor merchandise such as flowers and fertilizer. Unfortunately, the chart of Lowe’s may tell us a different story:

Aside from the obvious warning signs we see in the previous chart, there is the issue of plummeting lumber prices:

So for those of you hoping and praying for a housing bubble to support the US economy, you might want to hang your hat on something else. These two charts indicate that the housing market’s best days are behind it.

Strangely enough the Dow is trying to continue higher regardless of the economy. I have to assume that investors have complete faith in Bernanke and his ability to keep a floor under stock prices at all costs. How else can you explain the fact that the Dow has now gone seven months without so much as a 5% correction:

That is something that has never happened before and is in spite of the fact that RSI has been extremely oversold for the better part of 2013. Still the Dow last made a new all-time closing high on Tuesday at 15,409.39, although the Dow’s new all-time closing high went unconfirmed by the Transportation Index as you can see below:

One of the drivers behind the surge in the Dow has to do with companies borrowing cheap to buy back their own stock at nosebleed prices, and doing so in a volume that will soon emulate the carefree abandon of those pre-Lehman days. By some estimates this has driven half the US equity gains this year:

Dollar-value share repurchases amounted to $93.8 billion over the fourth quarter and $384.3 billion for 2012. The fourth quarter total is in-line with that of Q3, but represented year-over-year growth of 9.6%.

Estimates for the first quarter of 2013 approach US $100 billion! Looking forward I see several companies in the S&P 500 have authorized new programs or additions of $1 billion or more since December 31st, including Gap (GPS), Blackrock (BLK), Marathon Petroleum (MPC), L-3 Communications (LLL), Visa (V), Allstate (ALL), Moody’s (MCO), CBS Corporation (CBS), Dow Chemical (DOW), and AbbVie (ABBV). In addition, even larger authorizations were made by United Technologies Corp. (UTX), 3M Co. (MMM), and Lowe’s (LOW), which all announced replacement programs worth approximately $5.4 billion, $7.5 billion, and $5 billion, and Hess Corporation (HES), which announced a $4 billion buyback program on March 4th.

Additionally, a number of banks were approved to buy back large amounts of common and preferred shares in 2013. JPMorgan Chase (JPM) was approved for $6 billion in share repurchases, Bank of America (BAC) was approved for $5 billion in share repurchases plus $5.5 billion in redemption of preferred shares, and Bank of New York Mellon (BK), U.S. Bancorp (USB), State Street Corp (STT), and American Express (AXP) were all approved to repurchase greater than $1 billion worth of shares. Why buy back shares when prices certainly are not cheap? The answer is that much of the buybacks are in conjunction with massive shareholder dilution via stock option grants to executives. Insiders continually unload their shares and corporations buy them back thereby pushing the share price higher.

In spite of the rises in the Dow and S & P 500 there are still a number of companies struggling. This list includes Apple…”

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“Volatility is rising, liquidity is falling in some places and anxiety is increasing, according to Mohamed El-Erian, CEO and co-chief investment officer of fund giant Pimco.

El-Erian believes that these changes are not just a “blip,” but rather are “indicative of a deeper change.”

“The related underlying shifts could be secularly beneficial or could well signal more volatile times ahead,” he notes.

And the “dislocations seem to be cascading gradually from the least liquid [markets] to the more liquid ones,” instead of impacting all the market segments at the same time.

For instance, he explains, Japan’s central bank’s purchases of large amounts of securities has helped sparked a rally in Japan’s stock market.

“In the last few days, however, Japan is no longer emitting a consistently constructive signal,” El-Erian writes in an article for Fortune. “The Nikkei has fallen 12 percent since May 22, with some notable daily drops of 7 percent, 5 percent and 3 percent. The behavior of Japanese government bonds has been quite volatile and increasingly inconsistent. And the yen is now less unidirectional.”

Japan’s government has good cause to be worried, he says. If it cannot get the country on the road to economic growth, the risk of financial turbulence will substantially increase.

“It has no choice but to venture even deeper into experimental territory as it attempts to influence market pricing and investor behavior,” El-Erian states….”

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“SAC Capital Advisors LP is bracing for investors to pull an estimated $3.5 billion from the firm, according to people briefed on the matter, as the hedge-fund giant continues to battle fallout from an intensifying insider-trading probe.

The anticipated withdrawals, which the people described as preliminary estimates that were still in flux, come in response to a quarterly deadline Monday for SAC clients to ask for money back. The firm received withdrawal requests for $1.7 billion in the first quarter.

If the estimates hold, the outflows would represent more than half of the firm’s remaining outside capital and bring the total that investors have sought back this year to more than $5 billion.

The withdrawals illustrate the worsening toll the government’s investigation is having on the Stamford, Conn., firm, which for 20 years has churned out huge gains. Its founder, Steven A. Cohen, is one of Wall Street’s most high-profile investors.

The majority of the firm’s roughly $14 billion in assets belong to Mr. Cohen or the firm’s employees….”

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MRK, GSK, AAPL, MSFT, AIG, AMGN, BBY, MET,

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“LONDON (Reuters) – European Union rules to curb abusive short-selling of shares and government bonds have made financial markets more transparent, but changes are needed to the seven-month old law, the bloc’s market watchdog said on Monday.

Short-selling is a bet on stock or bond prices falling. The seller borrows the securities first, sells them on loan and seeks to buy them back at a lower price to pocket a profit.

Critics say short-selling accelerates sharp swings in markets, worsening losses for ordinary investors in a bear market. Supporters argue it provides the market with additional trading volume.

Under the new rules, which apply to bank shares and some government bonds, short positions above a certain threshold must be reported to supervisors and markets.

The measures, the EU’s first set of bloc-wide rules to curb short-selling, were rushed through at the height of the euro zone debt crisis in an attempt to calm markets and took effect last November.

Politicians accused hedge funds at the time of exacerbating the debt crisis by betting on falls in Greek and other government debt prices.

The European Securities and Markets Authority (ESMA) said the rules have had some positive effects.

“However, ESMA is advising the European Commission to consider adjusting a number of aspects in the regulation that do not alter its main elements,” the watchdog’s chairman, Steven Maijoor, said in a statement….”

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“Building the $5.3 billion Keystone XL oil pipeline across the middle of the U.S. will require thousands of workers and millions of pounds of steel.

It will also require a lot of smelly dead rats.

The U.S. Fish & Wildlife Service this month said that Keystone’s proposed route across Nebraska put the endangered American burying beetle at risk. The agency said the black and orange-spotted insect could be spared, and the project move forward, if proper procedure is followed.

That means pipeline builder TransCanada Corp. (TRP) will have to trap and relocate the one-inch beetles, using frozen rats that have thawed for at least three days for maximum pungency, according to detailed protocols U.S. authorities have drawn up to protect the burrowing bug.

“It’s amazing that you have to go through all this time and effort to protect a beetle, but they do,” said Michael Whatley, executive vice president of the Consumer Energy Alliance, an industry-backed group based in Washington that promotes low energy costs and supports Keystone. “The take away is that no matter what t’s have to be crossed or i’s dotted, they are doing it.”

The State Department is still reviewing the Calgary-based TransCanada’s application to build the pipeline linking Alberta’s oil sands to refineries along the U.S. Gulf Coast, and a decision on whether it’s in the national interest is expected in the fall. The department has jurisdiction because Keystone would cross the border with Canada.

Birds, Squirrels…”

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“Japanese companies’ capital spending fell 5.2 percent in the first quarter from a year earlier, underscoring the challenge the government faces in sustaining momentum in the world’s third-biggest economy.

The decline in spending excluding software compared with a 7.2 percent slide in the previous quarter, a Ministry of Finance report showed in Tokyo today. The median forecast of six economists surveyed by Bloomberg News was for a 5.5 percent decrease. Investment fell 0.9 percent from the prior quarter, according to the report.

Campaigning to boost company outlays and wages through fiscal and monetary stimulus and a loosening of business regulations, Prime Minister Shinzo Abe needs to sustain confidence amid weakness in the global economy and volatility in Japanese stock and bond markets. Abe has pledged to restore annual private investment to the 70 trillion yen ($695 billion) level before the 2008 financial crisis.

“Companies are not confident in the economic outlook as we haven’t seen a clear signal of a solid global recovery,” Daiju Aoki, a Tokyo-based economist at UBS AG. said. “This will pressure the Abe government to come up with measures to support businesses in the growth strategy” due this month, he said….”

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“About the claim that central banks will never let asset bubbles pop ever again–their track record of permanently inflating asset bubbles leaves much to be desired.

The problem with trying to solve all our structural problems by injecting “free money” liquidity into financial Elites is that all the money sloshing around seeks a high-yield home, and in doing so it inflates bubbles that inevitably pop with devastating consequences.

As noted yesterday, the Grand Narrative of the U.S. economy is a global empire that has substituted financialization for sustainable economic expansion. In shorthand, those people with access to near-zero-cost central bank-issued credit can take advantage of the many asset bubbles financialization inflates.

Those people who do not have capital or access to credit become poorer. That is the harsh reality of neofeudal, neocolonial financialization. Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012).

Injecting liquidity by creating credit and central bank cash out of thin air is not a helicopter drop of money into the economy–it is a flood of money delivered to the banks and financial elites. The elites at the top of the neofeudal financialization machine already have immense wealth, and so they have no purpose for all the credit gifted to them by the central banks except to speculate with it, chasing yields, carry trades and nascent bubbles (get in early and dump near the top).

Life is good for the kleptocratic financial Aristocracy: for debt-serfs, not so good.

 

No wonder the art market and super-luxury auto sales have both exploded higher. Thanks to the central banks’ liquidity largesse, the supremely wealthy literally have so much money and credit they don’t know what to do with it all.

If you want to borrow money to attend college, the government-controlled interest rate is 9%. If you want to speculate in the yen carry trade or buy 10,000 houses, the rate is near-zero or at worst, the rate of inflation (around 2% to 3%). If you want to borrow money for anything other than a socialized mortgage to buy a single-family home, tough luck, you don’t qualify. But if you want to speculate with $10 billion–here’s the cash, please please please take it off our soft central-banker hands.

If your speculations end badly, then no problem, we transfer the toxic trash heap of debt and phantom assets onto the balance sheet of the central bank or onto the public (government) ledger.

Given this reality, it was inevitable that the stock, bond and housing markets would all be inflated into bubbles by this monumental flood of free money. Please consider these three charts…”

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“The latest reading on April margin debt at the NYSE showed an all-time high.  The most recent reading of $384,370MM topped the all-time high from July 2007 when margin debt reached $381,370MM.

As I’ve explained in the past, this is one sign of how the disaggregation of credit has come to dominate many borrowing trends in the last 30 years.  Instead of seeing credit used for productive purposes it has increasingly been used for things such as speculation in asset prices.  My guess is that this is largely the result of a Fed driven economy whose policies have been uniquely asset price focused leading many to speculate due to excessive faith in the “Bernanke Put” or the “Greenspan Put”.

This trend is particularly interesting during the most recent recession since household credit has remained extremely tight….”

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“This you can bet on: The Federal Reserve will eventually stop its $85 billion-a-month bond-buying program, an economic lifeline aimed at getting the country back on its feet after the financial crisis.

While no one knows when the central bank will start winding down the quantitative easing that has pushed down interest rates, Fed Chairman Ben Bernanke hinted last week that the taps may start running dry sooner rather than later — perhaps as early as this summer.

The very thought sent a shiver through world stock and bond markets, though investors took some comfort after a closer look at Bernanke’s remarks and reassurances from European and Japanese central banks.

Markets got back on track this week on the prevailing view that Bernanke may not act all that soon after all. Still, the underlying message was clear: All good things must come to an end.

That said, there are ways to protect your portfolio and perhaps profit from the big shift. Experts recommend three strategies — a move into cash, alternative bond funds and buying shares that have lagged the recent run-up in stock prices — among other ideas.

Here are some tactics investors might consider as the era of quantitative easing ends:

CASH IS KING….”

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“…………..that’s a lot of stock being pulled out of the market.

 

 

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“Former Federal Reserve Chairman Paul Volcker said today the central bank will probably “fall short” by being asked to do too much.

“It’s fashionable to talk about a dual mandate, that policy should somehow be directed toward two objectives, of price stability and full employment,” Volcker told the Economic Club of New York. “Fashionable or not, I find that mandate both operationally confusing and ultimately illusory.”

With unemployment lingering at 7.5 percent — still higher than before the last recession — the Federal Open Market Committee announced May 1 that it will increase or decrease the pace of its monthly bond purchases in response to changes in inflation and the labor market. The policy makers agreed to maintain monthly buying of $40 billion in mortgage securities and $45 billion of U.S. Treasuries in a bid to boost employment.

“Asked to do too much, for instance to accommodate misguided fiscal policies, to deal with structural imbalances, to square continuously the hypothetical circles of stability, growth and full employment, then it will inevitably fall short,” Volcker said. Those efforts cause it to lose “sight of its basic responsibility for price stability, a matter that is within the range of its influence.”

Volcker, 85, served as chairman of the Fed from 1979 to 1987. He helped cut the unemployment rate to an eight-year low of 5.7 percent in 1987, his last year as Fed chairman, after reversing interest-rate increases that brought inflation down from as high as 15 percent.

Rewriting Regulations…”

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“The Organization for Economic Cooperation and Development warned central banks that ending the global loose-money policies could result in much higher borrowing costs for governments.

“Exit from unconventional monetary policy, when needed, may be difficult to manage and less smooth than desirable, possibly leading to sharp rises in bond yields and serious negative consequences for growth in a number of advanced and emerging economies,” said OECD Chief Economist Pier Carlo Padoan. We think that the eurozone could consider more aggressive options. We could call it a eurozone-style QE.”

The rich-country group also cut its outlook for the US to 1.9% for this year, down from 2%. It expects global GDP to rise 3.1%, down from an earlier estimate of 3.4%. The eurozone is likely to shrink 0.6%, a more severe contraction than the 0.1% drop previously forecast.

Europe’s unelected executive body, the European Commission, is acknowledging that it’s unlikely that some countries meet their budget deficit targets, the Financial Times reports. The EC will emphasize structural reform and give Spain, France, and the Netherlands more time to lower deficits to 3% ….”

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“Australia’s central bank may need to cut record-low interest rates at least two more times as mining investment peaks and slowing growth in China damps exports, said Pacific Investment Management Co., manager of the world’s biggest bond fund.

With resources investment providing 60 percent of Australian economic growth last year, policy makers need to act to support other sources of domestic demand, Sydney-based portfolio managers Adam Bowe and Robert Mead said today. The Aussie dollar is still high enough to restrict the economy even after dropping to a 1 1/2-year low, they said.

“Australian and global policy rates are reconverging and the risks are that there are more rate cuts to come rather than less,” Bowe said today in a phone interview. “The single cut currently being priced in by the markets looks like it won’t be sufficient unless the exchange rate suffers a more meaningful correction than the current decline.”

The Reserve Bank of Australia indicated weak inflation gives it scope for further reductions after cutting its benchmark rate to 2.75 percent this month. Non-mining industries are struggling to take up the slack in the economy, damped by a currency that is more than 20 percent overvalued on a purchasing power basis. The government last week said the resources-investment boom may be at its peak as A$150 billion ($144 billion) of projects have been scrapped or delayed.

Aussie Plunges….”

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