Dec 5. US Rate futures report: “YES WE’RE OPEN”
–Obama says that when a deal is reached on the fiscal cliff, the economy is “poised to take off.” Yeah, like the Hindenburg. Well actually the Hindenburg was landing when it exploded, not really ‘taking off’. But you get the analogy. So our elected representatives can’t come to an agreement to stave off financial disaster, but the mayor of LA is able to strongarm burly longshoremen into a labor deal to reopen LA and Longbeach ports. Well, actually it was the clerical staff that were striking, and it was more like gentle prodding from the mayor, but apparently a deal was reached.
–A headline on the Drudge Report says “Obama Consults with MSNBC Hosts Sharpton, Maddow on Tax Rates…” No. I am not making it up, though the article in question only says that the above two were seen visiting the West Wing. So I googled “Al Sharpton tax problem.” And voila, the results page lit up. As of 2011 he owed $360k for 2009 and his group is delinquent by $3.5 million from previous misunderstandings with the IRS. I hope he’s able to convince Obama not to cave in on having the rich pay their fair share. I didn’t bother with Rachel Maddow. She scares me.
–In other news, eurozone retail sales swooned, falling by 1.2% in October, even before Sandy. Non-mfg ISM expected 53.6 and Factory Orders expected -0.1 from +4.8 previously.
Dec 4. Unbalanced, slow growth
–ISM, expected 51.5, slipped below 50 to 49.5 yesterday, which spurred a stock sell off. SPs had an outside day and closed slightly lower (though Nasdaq and Russell didn’t quite take out Friday’s lows). Australia cut rates to 3% today.
–Fed’s Bullard says new QE shouldn’t be dollar for dollar with expiring twist, since new QE will expand the balance sheet and have a larger effect. A Reuters article says Bullard expects growth of around 3.5% in 2013. I have to think that was a mistake; at zero rates how could one possibly argue for an increase in QE with 3.5% growth expectation? I think consensus is for 1-1.5% growth next year, and if the latest data indicating a mfg slowdown with inventory build-up and lack of capital spending is combined with a negative outcome on fiscal cliff, then recession looms. Eurodollar spreads lean heavily toward a forecast of marginal growth, for example the spread between the 2nd and 3rd year contracts (reds/greens) is only 19 bps.
–Interest rate trading extremely quiet. Regular quarterly eurodollar calls have all but ceased trading, from EDM13 to EDU15 only 1900 calls traded yesterday, (because 1500 EDZ3 straddles were sold).
–Gold down 14 this morning, and is below last Tuesday’s spike low. Gold turned up in early November, before stocks, and now may portend further equity weakness.
–Note on Huff Post citing Morgan Stanley says that 88% of 2012 SP500 earnings growth came from just 10 companies. AAPL of course was tops, but of the remaining 9, 7 were financial firms (if you count GE as finance).
“A striking chart from Morgan Stanley’s Adam Parker shows that 2012 earnings growth among S&P 500 companies was highly concentrated, with 88 percent of it coming from the top 10 firms. I was even more struck by the inequality within the top 10. Just four companies—Apple, AIG, Goldman Sachs, and Bank of America—together provided a majority of overall earnings growth among large-cap companies.”
http://www.huffingtonpost.com/2012/12/03/sp-500-earnings-growth_n_2231967.html?utm_hp_ref=business
So is this the country’s (Fed’s) goal? To create ‘growth’ through the financial industry? Isn’t that what caused problems in the first place?
Dec 3. Small business confidence waning
–PMI data in Asia generally better ex-Japan. Europe mixed but mostly better readings. New recent high in euro as Greek bond yields fall. Late Friday downgrade of ESM and ESFS by Moody’s was ignored. SP’s remain near Friday’s high despite lack of fiscal cliff progress, and despite strikes at Long Beach and LA ports creating bottlenecks in the US supply pipeline.
–Interesting post on Business Insider: “U.S. small-business owners are pessimistic post-election, with the Wells Fargo/Gallup Small Business Index plunging to -11 in November from 17 in July. This is the most pessimistic that owners have been about their operating environment since July 2010, when the index stood at -28.” The NFIB confidence index (just prior to election) had a small uptick, BUT uncertainty about the future hit a record high: “The survey, conducted before the presidential election, found that the percent of owners uncertain about whether business conditions will be better or worse in six months, was at a record high of 23%. This eclipsed the pre-recession record of 15% reached during the Carter Administration.” Not good when you are compared with Carter years…
http://www.nfib.com/research-foundation/surveys/small-business-economic-trends
http://www.businessinsider.com/theres-been-a-staggering-collapse-in-small-business-optimism-since-the-election-2012-12#ixzz2DzAbWsYq
–Worst of fiscal cliff outcomes will supposedly drain $40b month from the economy. Ironically, this is just about the same number being thrown around for the next installment of unsterilized QE, likely announced at next week’s FOMC.
–In yet another sign of the apocalypse: http://gawker.com/5964623/after-nearly-60-years-bazooka-gum-is-killing-its-iconic-comic-strip. Bazooka gum dismissing Bazooka Joe comics. No wonder they’re striking everywhere.
–It was over 60 degrees in Chicago this weekend. But winter overnight parking restrictions started Dec 1. Not that the city is hungry for revenue, but they towed 301 cars on Saturday night ($150 tow cost plus ticket).
“If you ignored the winter overnight parking restrictions on some Chicago streets last night, you may be one of the 301 owners whose vehicles were towed for violating the ban… The ban hours, from 3 a.m. to 7 a.m., started early today and were enforced along 107 miles of the major streets. Last year, 188 vehicles were towed on the first day of the ban, officials said.”
Nov 28. Student loan default rates surging
–Strong underlying bid in treasuries as end of year approaches. Beckner suggests strong support at the Fed for replacing Operation Twist, which ends in December, with further outright purchases to expand the balance sheet. (Twist leaves balance sheet unch’d as shorter maturities were sold while long end was bought). This topic will likely be decided at the next FOMC on Dec 12.
–Zero Hedge has an interesting article about student loans, now nearly $1 trillion ($956B) and soaring default rates.
http://www.zerohedge.com/news/2012-11-27/scariest-chart-quarter-student-debt-bubble-officially-pops-90-day-delinquency-rate-g
Around 11% are 90 days delinquent! These loans only get paid from income, and the job situation is still fragile. Maybe the Fed can just buy the $30 billion of monthly production of these loans… The crunch in higher education is just around the corner.
–Flatter curve in eurodollars, with red/gold down 1.625 to 115.5. Looks like this spread will go out near the low of the year which was 107. (High was a bit over 200 in March, started the year at 160).
–Relentless vol selling in interest rates, with an early seller yesterday of 2k TY straddles for Friday (TY5X) at 23 to 22 ref 133-01. This straddle is now 28 intrinsic with TYH 133-14.
–News today includes New Home Sales, 5 yr note auction, Beige Book.
Nov 27. Capital vs Labor
–Light volume in financial futures, slightly flatter curve yesterday, red/gold fell nearly 3 bps to 117. Implied vol in interest rates continues to ease.
–Today’s data includes Durables expected -0.8 from +9.9 and Consumer Confidence, expected at multi year high of 72.8. The contrast between consumer confidence/spending and other measures of economic health is brought into sharp relief when looking at yesterday’s Chicago Fed Nat’l Activity Index, which was -0.56, (as was 3 month avg). This index is the lowest it has been since late 2009, when Consumer Confidence was 50ish, and you could probably say it’s in recession territory. Capital spending growth has stopped. It’s ironic that in the grand struggle between capital and labor, consumer confidence (a “labor” measure?) seems to be correlated to the stock market, once the ultimate symbol of “capital”, while US business capital expenditures and plans reflect extreme caution. I’m probably grasping, but the Shanghai Comp Index fell below 2000 today, nearing 2008 lows, while manufacturing laborers in China have recently seen wage gains. Perhaps the Chinese stock market is actually a barometer for forward business prospects while the US and eurozone seem overly dependent on CB liquidity and restructuring, on finance. In an Asian comparison the Nikkei jumped as the liquidity-juiced fight against deflation and a high yen went into high gear.
–I don’t know if this story has broader implications, but I found it interesting that GM, still 32% owned by the US Gov’t after its bailout, is buying Ally’s (74% owned by US Gov’t) Europe and LatAm financing businesses to expand sales. I’d infer that in-house financing embraces more lenient lending standards than the outside market. The deal was announced late last week and didn’t need gov’t approval, but is it a small sign of drug dependency on cheap credit? Maybe a boost to sales due to financing will lead to a double in GM shares and let the US Gov’t get out even on its investment? (Now 25, breakeven at 53).
http://www.reuters.com/article/2012/11/22/allyfinancial-gm-idUSL1E8ML9MD20121122
–Speaking of GM, Rob’t Reich had a good post on HuffPo noting that 50 years ago GM was the nation’s largest private employer, and now it’s Walmart. He thinks unions are [part of] the answer to wage inequality. Of course the reality is that frenzied shoppers trampled the Walmart labor protesters; I guess you could say the vision of the masses hasn’t exactly come into focus yet. http://www.huffingtonpost.com/robert-reich/walmart-black-friday-strikes_b_2171524.html
–In the same way the Greek deal seems to make some Olympian assumptions about future growth. It all works out if enough is lent at lenient terms.
Nov 20. Bernanke speaks to Economics club today, think he’ll mention rate hikes?
–Moody’s strips France of AAA, the market yawned. It’s almost as if there was widespread suspicion that France shouldn’t have a top credit rating. Existing Home Sales rose yesterday. Is that a surprise as well? Credit standards ease and the Fed targets lower mortgage rates to make owning as inexpensive as renting… and if it doesn’t work out then Treasury can bail out the FHA. Yes, housing is recovering.
–Stocks continued a strong rebound. Gold also had a $20 move up and looks constructive. And of course oil is responding to mideast tensions, with Crude one-yr spread Jan’13/Jan’14 moving from -382 a week ago to -65 yesterday as demand for the front contract surged (noted by Gartman).
–Bernanke speaks at the Economics Club of NY, followed by Q&A. No drama, we already know from Fed minutes that most participants favor endless easing. Even though the worst of the fiscal cliff may be averted, there is still likely to be a drag associated with the compromise agreement (and the Fed can address it).
–Interestingly, rate futures were only slightly lower in spite of the rally in risk assets, though option trades lean to the bearish side. Of course, Moody’s downgrade of France didn’t affect rates the other way either; low volatility through year end?
–Rosenberg cites an article in the Financial Times with Blackrock’s CIO with this interesting quote: “We have never seen in history the population ageing and living longer in such a fashion, not just in the U.S. but around the world, and that raises the question of how high growth can go…. we are in the midst of a major deleveraging in the entire developed world, which is going to continue in 2013 and 2014.” This from the firm that says “it’s time to be an investor again.” To be fair, the Blackrock website could be construed as downright dour, with this quote from the home page: “In recent years, the increase in cost of life’s essentials has dwarfed the growth of familiar investment vehicles. And it’s only likely to get worse – as retirement lasts longer and costs even more.” Wow. That’s from the firm that optimistically says it’s time to be an investor?! How about we just put it all on black and spin the wheel? As one of my friends constantly reminds me, it costs more for the things you NEED, less for the things you don’t. I personally think inflation data should be more reflective of life’s essentials, rather than the current biased lower blend.
–NY Times Krugman, reminiscing about the innocent era of twinkies, suggests that the high tax rates of the 1950’s should be revisited to help income inequality, and that economic performance isn’t likely to suffer. http://www.nytimes.com/2012/11/19/opinion/krugman-the-twinkie-manifesto.html “… in the 1950s incomes in the top bracket faced a marginal tax rate of 91, that’s right, 91 percent, while taxes on corporate profits were twice as large, relative to national income, as in recent years.” “And the high-tax, strong-union decades after World War II were in fact marked by spectacular, widely shared economic growth…” In the era he mentions, the US had just proven itself the geopolitical superpower. US GDP as a % of the world was 30% or greater, now around 25%, while Asia has gone from less than 15% to 25% currently. It simply isn’t the same world now, as low wage, low regulation China/Asia has ascended as an economic competitor in a global market. To opine that the high tax rates of our formerly insulated world would have clear benefits and no downside is simply disingenuous. He’s feeding his fans twinkies instead of vegetables.
–An item in Reuters says bankrupt San Bernadino, CA wants to negotiate fees it owes to CALPERS, the public retirement fund for CA. http://www.reuters.com/article/2012/11/20/us-sanbernardino-bankruptcy-plan-idUSBRE8AJ07Y20121120 The city says it has unfunded pension liabilities of $143 million, CALPERS puts the figure at more than DOUBLE $319 million. In the grand scheme of things, this story might not be important, but it does have an echoing ring relating to Europe, where one cash strapped public entity after another tries to restructure with other public entities, revealing large fissures in the entire system.
Nov 19. Progress on fiscal cliff
–Hint of progress from Boehner was all it took in an oversold market to pop stocks higher on Friday. Interesting note from Ben White of Politico says the fiscal cliff will certainly be averted as Republicans understand that they will be blamed for higher taxes, and therefore will work out a deal. Selling related to beating capital gains tax increases has been ongoing, and may taper off, easing another source of pressure.
http://www.businessinsider.com/ben-white-the-fiscal-cliff-is-already-over-2012-11
–The mideast situation is the focus of intense cease fire diplomacy and thus far doesn’t seem to be spreading into a devastating regional conflict.
–Several articles note increased estimates of bad loans in Spain, but that info is likely reflected in the markets currently.
–In terms of the US economy (on a longer term macro timeline) this morning’s Wall Street Journal has this negative snippet in a lead article: “U.S. companies are scaling back investment plans at the fastest pace since the recession, signaling more trouble for the economic recovery.” And a piece by the San Fran Fed cites capital spending risks as well: “This pessimism appears to be showing up in orders for nondefense cap goods, which have fallen nearly 10% since their Dec 2011 peak. While this is nowhere near what one would see in a recession, declines of this magnitude are rare at other times. …raise the risk the economy will perform worse than we expect.”
http://www.frbsf.org/publications/economics/fedviews/fv20121108.pdf
–Bernanke speaks tomorrow at Economics Club with Q&A afterwards. Existing Home Sales today.
–The curve was marginally flatter, enough to mark new lows, with 2/10 just above 133 and red/gold pack spread down by 2.25 bps to just above 113. Some of the near one-yr eurodollar calendar spreads also posted new lows, with Dec/Dec, March/March, and June/June all below 10 bps.
Nov 16. Fiscal cliff ad nausem
–Stocks continue to be pressured in front of today’s fiscal cliff meeting. AAPL has lost about 1/4 of its value since September, having gone from 700 to 525, which equates to market cap loss of about $170 billion. (It started the year at 400). That’s really the danger of hanging policy objectives around the neck of the wealth effect, as Bernanke did when he pointed to a rising stock market as evidence that the Fed’s magic was working. The wealth effect on consumption can cut both ways.
–In spite of lower stocks and weak economic data, ten year notes can’t seem to rally. Ten year yield essentially unchanged at 159. Perhaps all the talk about fiscal problems has sharpened focus on the fact that the US must borrow from the world to plug its massive deficit, and perhaps the rest of the world isn’t a willing lender at paltry rates. (Although Japan’s tens are only 73 bps). A note from Sovereign Man is sobering: There are three categories of fed’l govt spending, 1) interest on the debt, 2) mandatory (social sec’y and medicare) and 3) discretionary (all else). “In Fiscal Year 2011, for example, the US government spent $176 billion MORE on debt interest and mandatory spending than they generated in tax revenue…In Fiscal Year 2012, which just ended 6 weeks ago, that shortfall increased to $251 billion. This means that they could cut the ENTIRE discretionary budget and still be in the hole by $251 billion.” The Post Office alone lost $16 billion last year. And while Fannie and Freddie are now stable (though both only trade at share prices of around 28 cents), the FHA which came to housing’s rescue as the former two flamed out, may now need a bailout.
–November midcurves expire today, atm calls were exited in good size yesterday. There was also a seller of about 100k Dec 2yr notes at 110-085, capping the contract…perhaps related to long call positions.
Nov 12. Record number on food stamps
–Holiday trading today (Veteran’s Day). Interest rate futures were marginally lower Friday as stocks stabilized.
–Just a few snippets since today should be quiet. Number of people on food stamps hit a new high of 47 million, about 15% of the population. (Obama got 61.7m votes). “Since October 2007, food stamp usage has increased 74.4%. Population has increased 3.9% during the same time period.” http://www.economicpopulist.org/content/food-stamp-usage-reaches-record-high-15-america-food-stamps In Jan 2009 about 31.5 million were on food stamps.
–There has likewise been a troubling surge in federal disability payments. From Social Security website, Oct 2012 had 8.803m people on disability, vs 7.726 in Oct 2009. An increase of 14% over 3 years. “It is plain to see that permanently stagnant labor markets are making Social Security disability the new unemployment benefit,” he writes. (Jack Albin, Harris) http://articles.latimes.com/2012/aug/22/business/la-fi-mo-disability-claims-20120822
In Jan 2009 the ratio of disability to workers was 19 to 1. Now it’s more like 15 or 16 to 1.
–Certainly we want a social safety net. But we seem to have people just dropping out, as can be seen in employment to population ratio. On Oct 2012 the ratio is 58.8. High was 65% in 2000, and in 2008 it was about 63%. Certainly, restoring growth is the priority, and the Fed’s QE doesn’t appear to be the answer. Now we face the fiscal cliff…a more serious threat than most recognize according to Ambrose Evans-Pritchard. http://www.telegraph.co.uk/finance/comment/9670975/World-cannot-afford-second-Fiscal-Cliff-after-Europes-failed-attempt.html
Nov 9. Germany concerned about France
–Continuation of yesterday’s action with new lows in the curve, weakness in equity markets. Ten year note closed 1.628, approximately 50% retrace of the July to Sept move from 1.38 to 1.87. 30 yr bond (which sailed through the auction) closed at 2.77 also halfway from July low of 245 to Sept high of 309. (62% retracement levels are 1.57% and 2.70%, which I would expect to hold). Nasdaq was down another 1.4% to 2895, but I think will find support around 2825, approximate level of upward trendline from 2009 low.
–Interestingly, while copper and crude had minor bounces after yesterday’s sell off, gold and silver were quite strong, with former up $20 and latter up 75 cents. Euro continues to weaken.
–New lows again in all back month eurodollar calendar spreads. Red/gold fell 3.75 to 114.625 and red/green is now just above 19, low for the year has been just below 16. Huge buyer of Gold Dec 9862/9875/9887/9900 c condor for 4.5 to 5. New position.
–While data today from China indicate a rebound, other reports reflect weakness. For example, McD signaled an October sales decline because of the weak global economy. Express Scripts CEO cited a slowdown in prescription drug sales due to a weak economy and curtailed hiring or shifts to part time labor. And Europe is still struggling…this from Reuters: “Two officials, speaking on condition of anonymity, told Reuters this week that Schaeuble asked the council of economic advisers to the German government, known as the “wise men”, to consider drafting a report on what France should do.” Not Spain or Italy…FRANCE.
