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Revenues Flat with Rising Earnings?? HOW DOES CONTINUE TO WORK WHEN LABOR HAS BEEN COMPLETELY SQUEEZED OUT? |
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BOND SCARE - Only An Intermediate Price Bottom. Recession Suggests 0.75% 10UST The 10-Year Yield Is A Whopping 4 Standard Deviations From Its Long-Average 07-09-13 Lance Roberts via ZH I have been very vocal since the beginning of June that now is a great time to be adding bonds to portfolios. (See here and here) There are several fundamental reasons for my belief that the recent rise in interest rates was more related to a short term liquidation cycle rather than a shift in global economic sentiment.
However, even if you disagree with the fundamental arguments, it is hard to argue against one of the most compelling reasons for buying bonds which has 35 years of history supporting it. I discussed this particular reason during a Fox Business interview recently stating that: "Interest rates are now 4-standard deviations above their long term moving average." As shown in the chart below the driving force behind the long term decline in interest rates has been the ongoing slide in both economic activity and inflationary pressures. Interest rates track the direction, and trend, of economic activity as does inflation. Less demand in the economy leads to declines in prices (deflation) and interest rates.
There are two important things to take away from the chart above. The first is that, as I have notated with blue arrows, is that each time interest rates have spiked it has led to a peak in economic activity. You can already see that economic growth has peaked for the current economic cycle which has led to a subsequent decline in inflationary pressures. Secondly, most of the commentary surrounding the reason that rates are on track to go higher is based on the the similar spike seen in 1994. First, that spike in rates led to a sharp slowdown in economic activity and rates quickly fell. Secondly, the economy was in the midst of a secular growth cycle due to the "Internet/financial boom" which currently does not exist today. The next chart, however, is the "technical" reason as to why I think now is the time to start acquiring bonds. Again, you can argue the fundamental story, depending on how you want to selectively build your economic "case", however, it is difficult to argue with 35 years of interest rate history. The chart below shows the 10-year treasury rate on a weekly basis with bands set at 4-standard deviations above and below the 50-week moving average. The green shaded area is the current downward trend that has remained intact post the interest rate spike in the late 70's. What is important to notice is that there have only been a few times in history that rates have gotten to 4-standard deviations above the long-term moving average. Every single time, as noted by the vertical red dashed lines, such extreme movements in rates has been a peak in rates for the intermediate term. Most recently these extreme spikes were witnessed prior to the recession following the "technology bubble" in 2000 and the "housing bubble / financial crisis" in 2008. The blue shaded area at the bottom of the chart shows the current range of interest rates that are likely to occur given the context of the downtrend. The peak of that range is 3% on the 10-year treasury and the bottom of that downtrend would suggest rates on the 10-year during the next recession to fall below my current estimate of 1%. There are many reasons to own bonds in portfolios as they have a capital preservation function by returning principal at maturity, creating an income stream and lowering portfolio volatility. However, there are three reasons to add bonds to portfolios currently:
With the reality that the economy has likely peaked for this current economic cycle, deflationary pressures rising and the potential for less monetary interventions in the quarters ahead the catalysts for higher bond prices are tilted in investors favor currently. As I stated previously: "Investors are panic selling what is likely an intermediate term bottom in bond prices and holding onto to equities in what is clearly one of the most overbought, valued and extended markets since 2000 or 2007. While the mainstream market analysis continues to tout 'buy and hold' strategies - statistical evidence clearly weighs in favor of a rather significant correction at some point in the not so distant future. While timing of such an event is difficult at best, given the extreme amounts of artificial intervention by Central Banks globally, the impact to investors portfolios devastate retirement plans." For all of these reasons I am bullish on the bond market through the end of this year. Furthermore, with market volatility rising, economic weakness creeping in and plenty of catalysts to send stocks lower - bonds will continue to hedge long only portfolios against meaningful market declines while providing an income stream. Will the "bond bull" market eventually come to an end? Yes, it will, eventually. However, the catalysts needed to create the type of economic growth required to drive interest rates substantially higher, as we saw previous to the 1980's, are simply not available currently. This will likely be the case for many years to come as the Fed, and the administration, come to the inevitable conclusion that we are now in a "liquidity trap" along with the bulk of developed countries. While there is certainly not a tremendous amount of downside left for interest rates to fall in the current environment - there is also not a tremendous amount of room for them to rise until they begin to negatively impact consumption, housing and investment. It is likely that we will remain trapped within the current trading range for quite a while longer as the economy continues to "muddle" along. |
07-10-13 | STUDY BOND SCARE |
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CHINA - A Looming Banking Crisis Chinese banking: a Wild West in the Far East? 07-06-13 Harry Wilson, The Telegraph China’s banks are now the biggest in the world but fears are growing they are very unstable, writes Harry Wilson. As Government ministers ponder whether to split Royal Bank of Scotland into a “good bank” and a “bad bank”, it is worth remembering that China did something similar with not one big lender, but four at the turn of the millennium. In October 1999, a month before Fred Goodwin began his ill-fated reign as chief executive of RBS, the Chinese government created four massive “asset management companies” that would eventually take on toxic loans valued at $480bn (£320bn). Thirteen years on, these bad banks still exist, operating out of office blocks dotted around Beijing and Hong Kong, and continue to hold non-performing loans worth Rmb1.7 trillion (£180bn), according to credit rating agency Moody’s. Largely unknown to the outside world, they are a reminder that China’s banking system remains as prone to boom and bust as any Western economy and perhaps more so. As the rescue showed, the “Big Four” banks were, and are, not just “too big to fail”, but the beating heart of the entire Chinese economic system, controlling nearly half the country’s $19 trillion of financial assets. Taken together, the four largest lenders,
have a combined market capitalisation of £470bn, about £200bn more than the total value of Britain’s five largest lenders. ICBC alone has 393m individual customers, the equivalent of a single bank managing the bank accounts of every man, woman and child in western Europe, and this year became the first Chinese lender to top The Banker magazine’s annual table of the world’s biggest banks by market value, with a total capitalisation of $236bn. Ranking the world’s banks by profits made, the top four positions are now taken by China’s behemoths. Hold on everyone, the Chinese are not coming, they have arrived. Despite paying negative savings rates — the 3.5pc base rate interest on Chinese deposit accounts is generally believed to be well below the real rate of inflation — 70pc of Chinese household wealth is held in cash and bank deposits. Just over a third of India’s private wealth is kept in its banking system. With this largely captive market, citizens’ savings have been used to fund an infrastructure and property boom on an unprecedented scale and led to warnings of an asset bubble. While official figures show a 113pc increase in property prices in the past eight years, research by Tsinghua University and the National University of Singapore found prices actually rose by 250pc between 2004 and 2009, a faster increase than was experienced by the US in the lead to the sub-prime crisis. Carson Block, of Muddy Waters Research, which has laid bare several accounting scandals in Chinese companies, thinks the problems in China’s banking system are more severe than those which kick-started the global crash in 2008. “We believe that the domestic Chinese banking system is a mess, with an enormous amount of bad loans, or loans waiting to go bad. The problems of China’s lenders are greater than those of Western banks on the eve of the financial crisis,” he says. So, as Chinese lenders take their place at the pinnacle of the world’s banking system, the warning appears to be that things could be about to go very wrong, very quickly. The risks to the banks come largely from three areas:
LOCAL GOVERNMENT LOANS: As of last September, about 14pc of all Chinese bank loans, or Rmb9.3 trillion of debt, was accounted for by local governments. In large part, this money has been used to finance a vast infrastructure spending spree. While detailed information on local government finances is not available, analysts at Nomura believe that much of this investment is unprofitable and is only being financed through land sales, which have stalled in the past two years, and the sale of new debt to repay existing loans. This process is reaching its limit and local government financing vehicles will need to find Rmb1.8 trillion (£197 billion) this year just to repay their existing debt, according to Nomura — an amount greater than the total amount of urban construction bonds sold in 2012. PROPERTY DEVELOPER LOANS: Banks also have a direct exposure to property developer loans of Rmb3.9 trillion (£426 bn), giving rise to fears of new non-performing loans as developers struggle to find buyers for their latest projects amid a downturn in demand.# SHADOW BANKING: Most worrying of all is the shadow banking sector. This amorphous network of
has ballooned in the past five years as the central government has sought to limit the major banks’ lending at the same time as it has attempted to sustain economic growth with a series of stimulus packages. Back in 2008, the assets managed by trust companies stood at just Rmb1.2 trillion (£130 bn). However, by the end of last year this had grown to Rmb7 trillion, with trusts overtaking the Chinese insurance and mutual fund sectors in terms of the total funds placed with them. Though Chinese savers might be wary of the trusts, the attraction of a higher interest rate and the perceived backing of the state has helped put the sector in a position to fill the space left by banks. Last year, 50pc of all new credit in China was provided by these shadow banks, according to Bestinvest. “The authorities have placed increasing restrictions on the mainstream lenders in order to improve capital ratios and stave off further debt delinquency. Despite this, the central government continues to target a long-term growth rate of 7.5pc, effectively driving local governments and private companies alike into the hands of the shadow banking system to provide the necessary funding,” said the fund manager in a recent letter to clients. One of the greatest problems created by the increased reliance on shadow banks is the maturity mismatch. While most infrastructure and property investments are financed over three to five years, products sold by the shadow banks generally have a maturity of less than one year and often as little as three months. This has effectively created what Bestinvest describes as a nationwide “Ponzi scheme”, whereby existing investors’ returns are paid for from the influx of money gathered from new depositors. The funding mismatch has echoes of the problems which brought down British lenders, such as Northern Rock and HBOS, where short-term wholesale funding was used to finance an aggressive expansion in lending that led to disaster as lending markets shut in the wake of the credit crunch and the collapse of Lehman Brothers. Charlene Chu, a credit analyst at Moody’s in Singapore, has been one of the most vociferous critics of this system, and last year the credit agency cut China’s rating from AA- to A-, largely on fears about the potential cost of bailing out trust company depositors if the market collapsed. Chu pointed out that in the last 10 days of June alone Rmb1.5 trillion (£164 bn) of wealth management products were due to mature, highlighting the scale of the “maturity wall” faced by the shadow banks. “It is a Wild West atmosphere in many respects and that is one of the reasons why we are so worried,” Chu said of China’s shadow banking sector at a conference in Frankfurt last month. Trusts have frequently failed in the past and the size of the industry today is several orders of magnitude larger. The risks are clear. Among the largest sellers of these products have been mid-tier Chinese lenders. The aptly-named Evergrowing Bank had nearly 350 separate wealth management products outstanding as of the end of June and the 15 largest non-rated sellers of the schemes accounted for about half the 3,500 products in existence. Another potentially worrying sign for the banks has been the increase in pay. Though still well below the amounts paid out on Wall Street or in the City, Chinese financial services sector employees are better paid than workers in any other profession or industry. Over the past nine years, banking and insurance industry wages have grown by a compound annual average of 17.7pc, according to Credit Suisse. At the Big Four banks, the rise has been even more pronounced with average salaries increasing by 70pc in the past five years to Rmb156,000 (£17,000). As the banking industry’s problems have become clearer, the banks themselves are on the cusp of becoming less transparent. After opening up about the state of their finances over the past decade, rule changes are likely to make the Chinese banks more opaque again. Carl Walter and Fraser Howie, the co-authors of Red Capitalism and both financiers with decades of experience in China, pointed out in the Wall Street Journal last week that from 2017 onwards no Chinese bank will be audited by an international accountancy firm. “The fact is that no purely local firm has the experience required to audit some of the largest and most important banks in the world,” they wrote. The bankers pointed out that the first-ever professional audit of China Construction Bank, the country’s second largest lender, took more than 1.2m man-hours. The fear is that with non-performing loans at risk of imploding, the rule changes will not just make it easier for lenders to hide their problems, but also it is effectively an officially-sanctioned accounting policy. “The accounting rules will send China’s financial reform process back to the 1980s — all in the name of creating Ministry of Finance-sponsored 'national champion’ auditors. This is not a sound financial policy,” Walter and Howie said. With little external investment in China’s banking system, its problems may seem of minimal interest to the global economy. However, any bail-out of a major Chinese lender will be bad news for the rest of the world. It is true that unlike their Western rivals, Chinese banks have lower global salience, given their size, in the global capital markets. This is in part down to the fact that on average 86pc of the shares in the big four Chinese banks are held by the state, and also a reflection of their infrequent use of the international debt markets where total sales of debt by Chinese lenders since 2007 totalled under $8bn (£5.4bn) — one tenth the amount sold by Russian banks. However, if the banks and the wider financial system were to require a rescue package it could set in train a process that would cause chaos around the world. “Because they are state-owned, the government will most likely print money and prop them up. This will of course have dire consequences for China’s economy,” says Block. “Everyone goes on about the size of China’s reserves, but this will count for very little if they have to mount a rescue of their domestic banking system as most of these assets are denominated in dollars. What people don’t seem to realise is that funds are pretty much useless for this job,” says one senior portfolio manager at a major international bank. This is not the only problem China will face. Compared with 2000 — the time of the last bank bail-out — the economic and demographic backdrop in 2013 is less forgiving. Thirteen years ago a series of aggressive reforms, combined with entry to the World Trade Organisation and the mass migration of hundreds of millions of people from the country’s interior to booming coastal regions, helped the Chinese economy recover. Today, such routes to growth are no longer open to China, while its working age population has begun to shrink for the first time in two decades. This has heralded the end of the huge pool of cheap labour. How to deal with the banking sector’s problem is likely to create a civil war among the Chinese financial establishment, with the Ministry of Finance and the China Investment Corporation, the national sovereign wealth fund, expected to push for increased support for lenders, against the more hawkish People’s Bank of China (PBoC), the country’s central bank, and the China Banking Regulatory Commission. “The PBoC will want commercial banks to recognise non-performing loans on their balance sheets in order to inject more transparency into the financial system and assuage the perception of widening risk. But commercial banks and their owners will push back against such efforts citing the risk of capital flight and weaker assets bases,” says Nicholas Consonery, a senior Asian analyst at Eurasia Group. Problems in the Chinese banking industry could put it into competition with Asian rivals. The Bank of China is already preparing plans to hoover up more offshore deposits and is expected to increase interest rates on its Taiwanese savings accounts. This mirrors the short-lived war between banks in Britain and Ireland in 2008, following the Irish government’s offer of a full guarantee on all bank deposits. Given regional tensions, any suggestion that Chinese banks were attempting to grab more foreign deposits to shore up their domestic financial system would be inflammatory. The hope remains that the Chinese authorities have spotted the dangers early and will be able to manage the slowdown of the economy without precipitating a crisis. However, given the repeated boom and busts of the past 30 years, it seems likely that today’s highpoint will be seen in hindsight as the ultimate warning signal of a coming crash. |
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EARNINGS - How the "Beat Estimates" Game is Played When Earnings are a Disaster Here Is Why Alcoa Just "Beat" Earnings 07-08-13 Zero Hedge Moments ago Alcoa reported adjusted earnings (because the unadjusted earnings were a disaster) of $76 million, or $0.07, on consensus expectations of a $0.06 print. In other words, a beat. So just how did the company beat its forecast? Here's how. Presenting the company's Q2 EPS consensus forecast over time in the short term: And over the longer-term: Summarizing the above:
So: from January 2011 to today, the company's "consensus" EPS forecast was revised from just under 70 cents to $0.06 cents. But hey: at least it "beat". By the way, here is why the EPS number is absolutely meaningless: it "excludes" $244 million in restructuring charges - something which makes a complete mockery of both an apples to apples comparison, and also the company's tax rate. Of course, not excluding the restructuring charge from Net Income would have meant a $148 million loss. But at least Alcoa provisioned $21 million in income taxes in Q2... As for what actually mattered, here are the highlights:
But at least the company still sees a stable and growing China, expecting Chinese aluminum demand to rise 11% in 2013 versus 9% in 2012. Well, it's not like China is undergoing an unprecedented, historic deleveraging or anything so why not... THE REALITIES The Chart That Scares Alcoa Shareholders The Most 07-08-13 Bloomberg via ZH Ahead of this evening's earnings report (and Alcoa outperforming today), and amid Alcoa's ongoing capacity reduction, the yawning chasm between production (of aluminum) and price continues to suggest significant pain ahead. With China and the Middle East seemingly unwilling to follow the market's signals and reduce production (helped un-economically by their respective governments no doubt), the 'if you produce it, demand will come' view of the world is just not working out (and hasn't for 18 months). As Bloomberg reports, "the market is still looking at over-capacity, over-production and an unprecedented overhang of metal," and furthermore, while prices have plunged 12% in recent weeks, there is doubt that producers will follow-through on planned production cuts. Of course, we are sure the Alcoa CEO will be on CNBC to tell us all how great it is and how the world economy is about to pick up... this chart suggests otherwise... Chart: Bloomberg
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07-10-13 | EARNINGS STUDY BEATS |
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PATTERNS - Clsssic Trendline Resistance Retest The One Chart That Proves We're Not in a "Recovery" 07-08-13 Zero Hedge The US economy continues to fall to pieces, though accounting gimmicks make our employment numbers look better than reality. Most of the new “jobs” being created are part-time, not full time positions. Indeed, we’ve added over 500,000 part-time jobs to the US economy in 2013 so far. An incredible 360,000 of this came last month. And all in all we’ve now got a record 28+ million people working part-time in the US. As for full-time jobs, well, we LOST 240,000 last month. And despite all the rhetoric coming out of Washington about a “recovery,” we’ve actually only added 130,000 in 2013 so far. To put this into perspective, we need to create at least 90,000 new full-time jobs PER MONTH to maintain employment levels based on population growth. This is why the employment population ratio (take the number of people employed and divide it by the number of people who are of working age) hasn’t really moved in the four years since the Great Recession allegedly “ended.”
This is the #1 reason all the talk of “recovery” and “jobs growth” is totally bogus. If you are willing to fudge numbers and adjust measurements, then sure, things look much better. But the reality is that since 2009, there hasn’t been anywhere NEAR the job growth needed to claim we’re in a recovery. With that in mind, the US stock market has rallied to retest its former trendline. This is a classic breakdown pattern. If we do not reclaim this line and go to new highs then the markets are set for a sharp decline, like to 1,550 if not more. And if you account for where stocks should be based on bonds, the S&P 500 should be down near 1,200.
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07-10-13 | PATTERNS
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Q2 EARNINGS - Revenues Flat with Rising Earnings?? Q2 2013 Earnings Week 1 Cheatsheet 07-08-13 Bloomberg and Ransquawk via ZH Despite terrible negative-to-positive pre-announcements...
... global earnings revisions fading fast, and plunging analyst' earnings downgrades; according to Bloomberg data, S&P 500 Earnings are expected to grow over 8% in Q2 2013 as we head into this season with top-line revenues growing almost 5% (with Consumer Discretionary expected to deliver around 10% growth). With Alcoa kicking us off this evening and likely being extrapolated for at least one trading day (although it is the lowest market cap name in the Dow by far), we note the top-down and bottom-up fundamental trends that 'support' this market. |
07-10-13 | EARNINGS Q2 |
ANALYTICS |
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - July 7th - July 13th | ||||||||||||||||||||||||||||||||||||||||||||||||||
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| BOND BUBBLE | 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
BOND SCARE - Nearing Support Another Breakdown for Bonds 07-05-13 Carl Swenlin of Decision Point Last week TLT, our bond market surrogate, made a new low, then bounced up to the resistance of the declining tops line drawn from the May top. It turned down on Wednesday, we thought beginning a move to test the recent low, but today TLT didn't bother to retest the low. It gapped down below the support and kept heading south.
The situation is more obvious on the weekly chart. A massive top has been forming over the last two years, and price is headed toward support at 105. We are tempted to say that it is all over for bonds, but we can see that bond prices are nothing if not volatile. It is notable that the weekly PMO (Price Momentum Oscillator) has reached a level where it has previously found support. Conclusion: TLT is near long-term support in price and internally, so a bounce in price is possible; however, the rise to over 125 was excessive in speed and amplitude, and we think that a more extended correction is needed. |
07-09-13 | US-ANALYTICS PATTERNS
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EU BANKING CRISIS |
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| SOVEREIGN DEBT CRISIS [Euope Crisis Tracker] | 5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| CHINA BUBBLE | 6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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US ECONOMIC REPORTS & ANALYSIS |
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OFF BALANCE SHEET - $70T Federal Liabilities Off-balance-sheet federal liabilities 07-03-13 EconobrowserHere's the abstract for a paper I recently completed on Off-Balance-Sheet Federal Liabilities:
What follows is a brief summary of the paper. One important category of federal off-balance-sheet commitments involves housing. The government's commitments began in 1934 when Congress established the Federal Housing Administration to insure approved mortgages, an agency that's still going strong today. Last year, the FHA issued $213 B in new guarantees, bringing its total portfolio of insured mortgages to $1.3 trillion. In 1938, Congress created Fannie Mae as a separate entity to purchase mortgages, and in 1970 chartered Freddie Mac to compete with Fannie. Throughout their history, both entities had features of both public and private enterprises. They were able to issue their own debt at favorable interest rates and offer separate credible guarantees on massive volumes of mortgage-backed securities in part because of the common perception that the government would back them up if they ran into trouble. Any doubts about this were resolved when Fannie and Freddie were taken into conservatorship in 2008. With any profits that the GSEs make currently going to the Treasury, it is reasonable to assume that any losses they currently make would also come out of the Treasury. As of the end of 2012, the outstanding debt and guarantees issued by Fannie and Freddie (along with those of the Federal Financing Bank, Federal Home Loan Banks, Farm Credit System, Federal Agricultural Mortgage Corporation, FICO, and REFCORP) came to $7.5 trillion, or 2/3 the size of the total Treasury debt held by the public. In my paper I discuss the role of the huge federal involvement in the housing boom and bust of the last decade. Another category of federal commitments that we are likely to be hearing more about in the next few years is student loans. I was surprised to discover that most of this federal commitment has recently become an on-balance sheet liability, as the Department of Education has evidently been using funds borrowed by the U.S. Treasury to buy up some of the federally-guaranteed student loans that have now run into trouble. Borrowing by the U.S. Treasury on behalf of the Department of Education came to $714 B as of the end of fiscal year 2012, accounting by itself for 6% of the outstanding publicly-held U.S. debt. The contribution of remaining off-balance-sheet commitments for these and other non-housing federal loan guarantees appears to be relatively modest.
A separate category of off-balance-sheet commitments involves deposit insurance. The Federal Deposit Insurance Corporation had issued guarantees on bank deposits worth $7.4 trillion as of the end of 2012. However, this should decline by about $1.5 T with the expiration of some of the Dodd-Frank extensions on guarantees. Moreover, the FDIC ended up with a positive cash flow even through the stress of the financial crisis. In the most recent experience, I would say that deposit insurance worked as intended-- bank runs were avoided at no loss to the taxpayers. On the other hand, Curry and Shibut (2000) estimated that the earlier FSLIC deposit guarantees ended up costing U.S. taxpayers $124 B as a result of problem saving and loans during the 1980s. In arriving at the figures in the table above, I have added the reserves created by the Fed under its emergency-lending programs and QE1-3 as another off-balance-sheet liability of the federal government, regarding interest-bearing reserves as essentially an overnight loan from banks to the Fed. On the other hand, I also subtract off the Treasury securities and MBS held by the Fed, viewing QE as basically swapping one on- or off-balance-sheet federal liability (Treasury debt or GSE MBS) for another (interest-bearing reserves). Because I treat cash held by the public as imposing no further potential demands on the U.S. Treasury, my conclusion is that the Fed was on balance reducing the federal government's net liabilities by $1.1 T as of the end of 2012. The biggest category of off-balance-sheet liabilities comes from the additional funds that the trustees of the Social Security and Medicare trust funds believe would need to be found in order to fulfill commitments to current program participants (i.e., those currently aged 15 and older). These are reported to be $26.5 T for Social Security (see Table IV.B7 of the trustees report) and $27.6 T for Medicare (Table V.G2). As I write in my paper:
Adding all these items together, I calculate total off-balance-sheet federal liabilities of around $70 T, or 6 times the size of reported on-balance-sheet liabilities. My paper concludes:
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07-09-13 |
US FISCAL
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US ECONOMY |
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PATTERNS - An Artificial Market Guess What The Fair Value Of The S&P Is 07-04-13 Zero Hedge On the off chance there is still any confusion about what would happen should the Fed "step away"...
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07-08-13 | PATTERNS
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EARNINGS REVISIONS - Disconnected From Steepening Treasury Term Structure A Tale Of Two Growth Outlooks 07-07-13 Bloomberg Charts via ZH Just over a month ago, global earnings revisions were on the upswing (admittedly off markedly low levels); since then they have turned sharply lower to the worst levels in a year (based on Citi's Global Earnings Revision index - ERI). Critically though, as 'hope' is pinned on a steepening term structure as indicative of 'growth' and happy times ahead for stocks, the ERI has dramatically diverged from the yield curve. As Citi notes, it is evident that analysts are not at all convinced about the improvement in the growth outlook that this steeper curve has historically suggested. What is perhaps more worrisome for the "it's different this time" crowd is that the last time we saw this kind of dramatic divergence between global earnings and the US term structure was in the run-up to Lehman - and that did not end well... Global earnings revisions typically track the US Treasury term structure very closely - both implicitly suggesting growth or no growth expectations... But in recent weeks, the steepening of the US Treasury curve (growth - whether due to Fed Taper discussions explicitly reducing the flow or implicitly by the Taper meaning the Fed is more optimistic about the future - which has never ended well) has been entirely dismissed by the analyst community globally as earnings revisions have been slashed to their lowest in a year! The last time we saw this kind of divergence was in September 2008... And that did not end well... Charts: Bloomberg |
07-08-13 | PATTERNS
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EARNINGS - Net Unrealized Bond Gains / Losses Taper Fears Lead To Biggest Monthly Loss In Bank Securities Portfolios Since Lehman 07-08-13 Zero Hedge Wondering how the blow out in interest rates is impacting commercial banks, which just happen to have substantial duration exposure in the form of various Treasury and MBS securities, not to mention loans, structured products and of course, trillions in IR swap, derivatives and futures? Wonder no more: the Fed's weekly H.8 statement, and specifically the "Net unrealized gains (losses) on available-for-sale securities" of commercial banks in the US gives a glimpse into the pounding that banks are currently experiencing. In short: a bloodbath. After crashing from $15 billion to just $6 billion, the reported balance of net unrealized gains is barely positive for just the first time since April 2011. And to think this number had topped out at over $43 billion in December 2012. But the worst is that monthly drop in "gains" of $24 billion is the biggest by a wide margin since the Lehman collapse. Note the crash in the long-term chart:
And zoomed in: The skeptics will say: $6 billion? Big deal. The Fed did almost that much in its POMO last Wednesday. The issue, however, is that the AFS line, which runs through the Accumulated Other Comprehensive Income line as the last thing banks want is for MTM to crush their reported bottom line is merely a proxy for how rising rates impact on a snapshot basis the consolidated bank balance sheet of US banks, which at last check had $7.3 trillion in loans and leases (still below pre-Lehman levels) not to mention countless other undisclosed instruments that represent their "London Whale" equivalent prop positions, funded with customer deposits. In other words, the shorthand is to look at the massacre that is going on in the AFS line and extrapolate it to all other levered commercial bank (and hedge fund) rate exposure. Expect math PhD-programmed GETCO algos that determine the marginal momentum of the S&P to figure this out some time over the next 2-3 weeks once banks begin reporting results that are not quite in line with expectations.
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07-09-13 | EARNINGS SECTORS
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EARNINGS - Negative Guidance Worst Since Early 2012 Global Earnings Downgrades Worst In 12 Months 07-05-13 Citi Research via ZH As we head into earnings season in the US (amid hopeful margin expansion), the big picture for earnings remains bleak. Markets are back close to highs as negative guidance is piling up and as Citi notes, their global earnings revision index is at its worst since early July 2012. If the Fed is heading towards a Taper then this fundamental fear may once again become relevant - or hope-fueled multiple expansion will fill that gap.
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EARNINGS - Q2 EPS Estimates Because Fundamentals Matter? 07-07-13 Zero Hedge Presented with little comment aside to note that US equities are once again resurgent near all-time highs fully supported by err... umm... fundamentals. Bottom-Up? Top-Down? Charts: Bloomberg and @Not_Jim_Cramer |
07-08-13 | EARNINGS | ANALYTICS |
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RISK - Hayman Capital Dramatically Reduces Risk Kyle Bass Hunkers Down: "We Dramatically Reduce Portfolio Risk" 07-04-13 Hayman Capital via ZH Kyle Bass goes to Japan and finds all as expected...
And also learns something new, if not unexpected...
But perhaps most interesting are Bass' thoughts on China:
In short, Bass is once again hunkering down. Full Hayman Capital investor letter below, courtesy of Valuewalk: |
07-08-13 | RISK CANARIES |
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STATISM - The Militarization of America's Police Forces Rise of the Warrior Cop: The Militarization of America's Police Forces by Radley Balko The last days of colonialism taught America’s revolutionaries that soldiers in the streets bring conflict and tyranny. As a result, our country has generally worked to keep the military out of law enforcement. But according to investigative reporter Radley Balko, over the last several decades, America’s cops have increasingly come to resemble ground troops. The consequences have been dire: the home is no longer a place of sanctuary, the Fourth Amendment has been gutted, and police today have been conditioned to see the citizens they serve as an other—an enemy. Excerpted from "Rise of the Warrior Cop: The Militarization of America's Police Forces"
Overkill: The Rise of Paramilitary Police Raids in America By Radley Balko Americans have long maintained that a man's home is his castle and that he has the right to defend it from unlawful intruders. Unfortunately, that right may be disappearing. Over the last 25 years, America has seen a disturbing militarization of its civilian law enforcement, along with a dramatic and unsettling rise in the use of paramilitary police units (most commonly called Special Weapons and Tactics, or SWAT) for routine police work. The most common use of SWAT teams today is to serve narcotics warrants, usually with forced, unannounced entry into the home. These increasingly frequent raids, 40,000 per year by one estimate, are needlessly subjecting nonviolent drug offenders, bystanders, and wrongly targeted civilians to the terror of having their homes invaded while they're sleeping, usually by teams of heavily armed paramilitary units dressed not as police officers but as soldiers. These raids bring unnecessary violence and provocation to nonviolent drug offenders, many of whom were guilty of only misdemeanors. The raids terrorize innocents when police mistakenly target the wrong residence. And they have resulted in dozens of needless deaths and injuries, not only of drug offenders, but also of police officers, children, bystanders, and innocent suspects. This paper presents a history and overview of the issue of paramilitary drug raids, provides an extensive catalogue of abuses and mistaken raids, and offers recommendations for reform. |
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EMPLOYMENT - It is as Much the Quality, as the Quatity of Jobs 15 Signs That The Quality Of Jobs In America Is Fading Fast 07-07-13 Michael Snyder of The Economic Collapse blog via ZH Trying to find a job in America today can be an incredibly frustrating experience. Most of the jobs that are available seem to pay very little, and there is intense competition for just about any job that is open. But it wasn't always like this. When I was in high school, I was immediately hired when I applied for a job at McDonalds because they were so desperate for workers that they would hire just about anyone that could flip a burger. But in this economic environment, a single nationwide hiring event conducted by McDonalds resulted in a million job applications, and only a small percentage of those applicants were actually hired. Our economy simply does not produce enough jobs for everyone anymore, and the percentage of "good jobs" continues to decline. That means that it is getting really hard to find a job that will enable you to support a family, and a lot of people end up doing jobs that they are massively overqualified for. But when times are tough, people are going to do what they have to do in order to survive. One thing that we have seen in recent years is an explosion in the number of "temp workers" in America. Even some of the largest companies in America are using them. They like the flexibility of being able to bring in workers when they need them and of being able to dump them the moment they don't need them anymore. Sadly, those that work in the "temp industry" often work in deplorable conditions for very little pay. The following is a brief excerpt from an absolutely outstanding Pro Publica article...
But these are the types of jobs the U.S. economy is "creating" these days. Low paying part-time jobs are continually becoming a bigger part of the economy. This is one of the primary reasons why the middle class in America is shrinking. You can't support a family on what most of these part-time jobs pay. But our economy is not producing many high quality full-time jobs these days. The average quality of American jobs just continues to sink. The following are 15 signs that the quality of jobs in America is going downhill really fast... #1 The number of part-time workers in the United States has just hit a brand new all-time high, but the number of full-time workers is still nearly 6 million below the old record that was set back in 2007. #2 In America today, only 47 percent of adults have a full-time job. #3 Even though the U.S. economy created nearly 200,000 jobs in June, the number of full-time jobs actually decreased. #4 There are now 2.7 million temp workers in the United States - a new all-time high. #5 One out of every ten jobs in the United States is now filled through a temp agency. #6 The U.S. economy has actually lost manufacturing jobs for four consecutive months. #7 The official unemployment rate has been at 7.5 percent or higher for 54 months in a row. That is the longest stretch in U.S. history. #8 According to one recent survey, 76 percent of all Americans are living paycheck to paycheck. #9 At this point, one out of every four American workers has a job that pays $10 an hour or less. #10 High paying manufacturing jobs continue to be shipped overseas. Sadly, there are fewer Americans employed in manufacturing now than there was in 1950 even though the population of the country has more than doubled since then. #11 Today, the United States actually has a higher percentage of workers doing low wage work than any other major industrialized nation does. #12 The U.S. economy continues to trade good paying jobs for low paying jobs. 60 percent of the jobs lost during the last recession were mid-wage jobs, but 58 percent of the jobs created since then have been low wage jobs. #13 Back in 1980, less than 30% of all jobs in the United States were low income jobs. Today, more than 40% of all jobs in the United States are low income jobs. #14 At this point, an astounding 53 percent of all American workers make less than $30,000 a year. #15 According to a study that was released by the Center for Economic and Policy Research, only 24.6 percent of all jobs in the United States qualify as "good jobs" at this point. In a previous article, I detailed the three criteria that they used to define what a "good job" is….
All of this is absolutely heartbreaking. Once upon a time, just about any adult that was willing to work hard in America could go out and find a good paying job that would support a middle class lifestyle. Now those days are gone forever. But different conditions exist in different parts of the country. What are you seeing in your area? Are good jobs difficult to find? |
07-09-13 | THEMES
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