David Rosenberg had some succinct thoughts on the continuing inflation/deflation debate this morning. He cuts right to the heart of the argument noting that, because end demand remains weak, we are still at a higher risk of deflation than inflation:
There is no more significant source of inflation than the U.S. labour market and we found out on Friday that total employment costs slowed to just +0.4% in Q3 and the YoY trend is extremely tame, at +1.9%. Wages came in at +0.3% sequentially and just +1.5% on a YoY basis.
We can understand the temptation to believe in the inflation story because of what the CRB index has been doing, but our advice is to resist that temptation and remember what we were talking about, quite unexpectedly by the way, six months after oil hit $140/bbl back in 2008. Deflation.
In many cases, pricing power is hard to achieve and so the bump in commodity costs serves as a margin squeeze as opposed to a sustained source of final stage inflation. For real-life examples as opposed to the data, what did the NYT have to say about Colgate’s profit results? This — “Colgate’s revenues in the United States, which produces 19% of its sales, grew 2%, while the company sold 3% more products. Price cuts reduced earnings in the United States by 1.5%.”
This is important because a lot of investors prefer to just look at commodities as evidence of impending U.S. inflation. This is partly misguided for several reasons. First of all, there are many variables influencing commodity prices at any given time. Currently, I would attribute the move in commodities to Asian strength (there is very real inflation in much of Asia ex-Japan), fears of U.S. “money printing” and the rise of the commodity investment class. Except for the case of “money printing” (which I believe is largely the result of misunderstanding how our monetary system works) there remains little worry of these variables influencing U.S. consumer inflation. As Mr. Rosenberg highlighted, there is only so much commodity price inflation that a weak U.S. consumer will allow (reference 2008).
The rise of the commodity investment class has largely created a hedging mechanism for investors and this component of the commodity price increase represents a “bet” that inflation is coming. Gold…
In this interview by Bloomberg’s Erik Shatzker (we have added the full interview, not the abbreviated version), Hugh Hendry tries hard not to dance on the euro’s grave… and fails. He compares the European currency to the gold standard in the 1920′s: "We are now seeing a conflict between domestic stability, prosperity and the need for external balance, and that typically rings the bell on such a system." He further discusses George Soros’ recent media appearances and his recent Op-Ed in which as was noted, the Hungarian is very concerned about the eurozone courtesy of Germany’s non-Keynesian actions. In tried and true fashion, Hendry doesn’t mince his words: "George is someone we all aspire to match his brilliance. But remember the richest people in the planet become socialists. Socialism is a great thing for George. I want to bring George down. I want George’s reputation. But George is now embracing socialism. Socialism is where you build a moat around the castle. I am spending all of my time trying to decide where I’m gonna live, because taxes in this country are so high, and less of my time trying to work out how do I surpass Soros and his reputation." And his take home message: "The noose is getting tighter and tighter… not in Europe, but in Asia."
Corporate bond sales are poised for their worst month in a decade, while relative yields are rising the most since Lehman Brothers Holdings Inc.’s collapse, as the response by lawmakers to Europe’s sovereign debt crisis fails to inspire investor confidence.
Companies have issued $47 billion of debt in May, down from $183 billion in April and the least since December 1999, data compiled by Bloomberg show. The extra yield investors demand to hold company debt rather than benchmark government securities is headed for the biggest monthly increase since October 2008, Bank of America Merrill Lynch’s Global Broad Market index shows.
Junk bonds issued in the U.S. have been especially hard hit, with spreads expanding 141 basis points this month to 702, contributing to a loss of 3.78 percent. Leveraged loans, or those rated speculative grade, have also tumbled. The S&P/LSTA U.S. Leveraged Loan 100 Index ended last week at 89.23 cents on the dollar, from 92.90 cents on April 26.
Question of Solvency
“This is a quintessential liquidity crisis,” said William Cunningham, head of credit strategies and fixed-income research at Boston-based State Street Corp.’s investment unit, which oversees almost $2 trillion.
I disagree. This is a return, and rightfully so, to questions of solvency. Many corporations were given a new lease on life in May of 2009 by once again securing funding at cheap levels.
Now, huge cracks are appearing in the corporate bond market. At least seven junk bond deals have been pulled. This environment is not good for equities.
JNK – Lehman High Yield Bond ETF
click on chart for sharper image
Is this another scare like we saw in January and February or is this the real deal? I think the latter, but I thought so in February as well.
Notice how the top in junk bonds coincided with the top in equities. I cautioned many
North Korean leader Kim Jong II ordered the country’s military to get ready for combat in a message televised nationwide last week following South Korea’s announcement that North Korea torpedoed the South’s warship.
South Korea’s President Lee Myung Bak said yesterday the country will push for United Nations censure against North Korea for the March 26 sinking of a naval ship, which killed 46 sailors. A multinational team concluded on May 20 that North Korea fired a torpedo to split apart the 1,200-ton Cheonan.
Tensions are rising in the Korean peninsula following the report, with both sides threatening counter-measures should they come under attack. South Korea plans to define North Korea as its “main enemy” when it maps out military strategy, Yonhap reported today, citing a government official it didn’t identify.
South Korea’s won slumped to an eight-month low on growing hostilities with the North over the sinking of one of the South’s warships with the loss of 46 lives.
The U.S. yesterday announced plans to conduct joint anti- submarine exercises with South Korea as “a result of the findings of this recent incident.” Japan will consider imposing financial sanctions on North Korea, Finance Minister Naoto Kan said at a news conference in Tokyo today.
“We won’t see the bottom of this fall until we hear some good news on North Korea,” said Cho Hyun Seok, a currency dealer at Kookmin Bank in Seoul. “The won’s exchange rate can go as high as 1,260 won per dollar.”
The military exercises are among steps the U.S. and South Korea are pursuing, including possible further United Nations sanctions, in response to the March sinking of the 1,200-ton Cheonan. The U.S. and South Korea say evidence shows the explosion was caused by a North Korean torpedo.
Asian Stocks Fall to 10-Month Low, Won Dives, Commodities Drop
Caterpillar Inc. reported a profit in the first quarter, citing improved economic conditions, particularly in emerging markets, as the heavy machinery maker also raised its forecast for the year.
Ok, so we should have seen a beat on both revenue and earnings, right? Remember, the first quarter of 2009 was the depth of the recession – the bottom – if you believe the headlines.
So what did we get?
For the first quarter, Caterpillar reported a profit of $233 million, or 36 cents a share, compared with a prior-year loss of $112 million, or 19 cents. Excluding items such as tax charges related to new health-care legislation and prior-year restructuring impacts, per-share earnings rose to 50 cents from 39 cents.
That’s good! A profit .vs. a loss; exactly what one would expect. How were revenues?
Revenue dropped 11% to $8.24 billion.
Analysts polled by Thomson Reuters had forecast earnings of 39 cents a share on $8.84 billion in revenue.
Uhhhhhhhh….. wait a second.
Economic recovery eh?
Machinery sales were down 1% from a year ago – but I thought a year ago was the depths of the recession and we have been recovering since? So how do we get a negative year-over-year comparison?
Worse, in North America (that’s here!) machinery sales were down 15% with dealer inventories half of year ago levels. That is, not only is heavy equipment not selling, dealers don’t think it will be in the near future either. So how did we get big increases? Asia, up 40%. Yep, that matters, and it’s what drove the results.
Engine sales were even worse, off 28%, and even in Asia they were down, in that case 15%.
The street is cheering this report on the back of everyone and their brother pumping the company (most especially the fools on CNBS) but the facts are what they are. With no revenue increases you can argue for improving profit due to firing huge numbers of people all you want, but the top-line, particularly in America, is horribly bad and does not point to any sort of turn-around in construction equipment sales of any sort, nor any improvement in over-the-road trucks and other engine markets (such as marine.)
You kind of saw this coming didn’t you. Asians remember the Depression that began there a decade ago all too vividly. Many still see the West to blame because of the draconian economic policy solutions meted out by the IMF, including now-US Treasury Secretary Tim Geithner amongst others.
Incongruously, the very same Tim Geithner of “deeply unpopular, deeply hard to understand” economic policy fame is part of an American economic policy making group now perpetrating perhaps the largest financial and economic bailout in history. I certainly doubt this policy will be effective over the long-term. Even so, this hypocrisy has been noted in Asia. The political fallout is just now coming due.
Ronnie Chan, chairman of Hang Lung Properties in Hong Kong writes in the FT:
While the world debates the future of its financial system, global rebalancing or even power shifts along five dimensions are quietly taking place. Their implications are profound and may well lead to a more stable world.
The first is a rebalancing of moral authority. The system that the west touted as superior has failed. Why should developing countries blindly follow its model now? Remember the moral high ground that western leaders took during the Asian financial crisis? Hong Kong was bashed when its government intervened in August 1998 in the stock market to fend off the western investment banks and hedge funds bent on destroying the city’s currency.
Yet only a month later, the US government intervened in the market to bail out Long-Term Capital Management, a move that proved to be the harbinger of the western bail-outs of financial institutions in the past year. Hong Kong’s government was not allowed to save its citizens, yet by a double-standard the US could save its companies.
The waning of the west’s moral authority is also due to the many conflicts of interest inherent in investment banking as it is currently structured. The west turned a blind eye to them. What can developing economies do? Nothing, for the wealthy countries dictated the rules of the game, which became a licence to misbehave.
The moral superiority of the west was also expressed through its ideology. China was barred from being a member
Kian Abouhossein at J.P. Morgan delivers some excellent insight into the Dubai crisis. The wealthy UAE will be able to easily bail out Dubai if need be, this time. It just might not be so optimistic to do so in the future.
We are less concerned for global banks about Dubai World’s direct $59bn outstanding debt exposure with $4.3bn due to mature in Dec-09 and a further $4.9bn in 1Q10, considering “only” $13bn of syndicated loans across global banking sector based on Dealogic data. Assuming a 10% “hold” strategy, the most exposed banks would be RBS with $0.23bn, DB and CS with $0.17bn each.
The view from our MENA team is that this event reflects cash flow challenges rather than refinancing ability. They believe that obligations on Dubai World and its property unit Nakheel PJSC are likely to be fulfilled at the new May 2010 earliest repayment date, and that Dubai should be eventually be able to fulfill its debt obligations maturing in the short-term ($4bn in Dec-09, relating to Dubai World, and $9 to $10 in 2010) with continued Abu Dhabi support. Abu Dhabi is strong financially with fiscal and current account surpluses, ~$150bn in FX reserves and a ~$300bn sovereign wealth fund. However it seems that Abu Dhabi will no longer be happy to underwrite all debt, and rather will differentiate more strongly between supporting Dubai’s strategically important assets (such as DEWA, and Dubai Ports), and the non strategic assets – hence the concurrent timing of the Dubai World debt restructure and the Abu Dhabi underwritten government of Dubai debt raising.
Here’s one rough measure of relative bank exposure to Dubai, based on Dubai World syndicated loans since 2007. Overall, JP Morgan believes the exposures are relatively small compared with the major banks involved.
Here’s probably a better estimate of relative exposure, by loans made to the UAE as a whole. The amount of direct loan exposure to Dubai specifically, within this UAE-wide figure, are apparently very difficult to know.
Yesterday, European markets saw their biggest one-day losses since March. Dow Jones Industrial Average futures were off 187 points.Everyone is talking about the effects of Dubai World asking creditors for an extension on its debt.
So here’s a quick whip around what happened when Asia woke up to its first day of trading following the Dubai World news.
Fears of a dangerous new phase in the economic crisis swept around the globe yesterday as traders responded to the shock announcement that a debt-laden Dubai state corporation was unable to meet its interest bill.
Shares plunged, weak currencies were battered and more than £14 billion was wiped from the value of British banks on fears that they would be left nursing new losses.
We here at TPC aren’t the only ones concerned about the parallels with Japan. There appears to be an increasingly loud drumbeat over the shocking similarities between Japan in the 90’s and the U.S. This morning, Hong Kong’s leader Donald Tsang had some rather alarming comments:
I’m scared and leaders should look out. America is doing exactly what Japan did last time.”
As opposed to dealing with our issues here at home, Tsang believes the Fed has created a dollar carry trade that is simply reflating bubbles all over the world:
“We have a U.S. dollar carry trade at the moment. Where is the money going — it’s where the problem’s going to be: Asia. You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals.”
One of the most interesting takeaways from the video is the current tax situation in the U.S. In Japan, the credit crisis was prolonged mainly because Japan attempted to bail their way out of their sinking ship. Rather than deal with the problems directly (IT’S THE DEBT STUPID!) they attempted to circumvent the problem by creating an environment where the government spent hordes of money to prop up failing institutions. Here in the U.S., we have not only bailed out failing institutions to the tune of several trillion dollars, but we have also continued to promote fiscal irresponsibility via government programs such as cash for clunkers and the first time homebuyers tax credit. Making matters worse, we have a Federal Reserve and Treasury which have agreed to double team the ailing dollar as they print money to no end and effectively punish the prudent while rewarding the speculators (the same bastards that helped create this mess to begin with). Our tax issues have…
I’m very happy to introduce the Mad Hedge Fund Trader. The Mad Hedge Fund Trader is not all that mad (from what I can tell). He’s beenon a spectacular journey throughlife, and is now returning to the fun and excitement of actively managing a hedge fund. Here’s MadHedge’s diary entry from yesterday. Stay tuned for more. – Ilene
1) The one absolute, take it to the bank, bet the ranch fact you can count on right now is that there is no value in the stock market. We are at a lofty 20 X earnings, and historically, when the market sported such a rich valuation, a 7% drop ensued in the following year. But what is history, but the ravings of an angry, frustrated old trader? Maybe having seen the best bargains in a century only six months ago, I’m spoiled. I have always been a tightwad. I must be the only guy around who flies his own private plane to garage sales for the sheer love of the deal (where else can one find Dean Martin records in decent playable condition for 25 cents each?). I just reviewed all of the stocks and sectors I liked at the beginning of the year, and a more picked over field you never saw. (Click here for my New Year list.)
The list of big winners is long: FCX, FXI, BYDFF, BIDU, X, gold, silver, copper, crude, oil services, junk bonds (JNK), (HYG), emerging markets (EEM), BRIC’s, Korea (EWY), with shorts in long dated Treasuries (TBT), volatility (VIX), and the dollar (UDN), (ULE). Even tax exempt munis have been on a tear. Many of my core positions are up over 400%. When everything in your portfolio has done so well, it’s time to go hide. The problem is that my more loyal, even fanatical followers have taken out paid subscriptions for up to two years, so I must keep dancing. Hence, the recent increase in book reviews, political pieces, or just outright frivolous stories. What you do here is deep research and list building, so when the window opens you can jump…
Please review a collection of WWW browsing results.Date Found: Tuesday, 13 January 2015, 01:43:37 PM
Click for popup. Clear your browser cache if image is not showing. Comment: Ouch! See the last point of demand between $60 and $70 In Dec at resistance, now strong selling, Large pattern forecast sees a price under $40
Date Found: Tuesday, 13 January 2015, 06:54:16 PM
Click for popup. Clear your browser cache if image is not showing. Comment: Coffe ETF bounces off support, minor spring, if get some strength to $40, a trade may be on!
Date Found: Friday, 16 January 2015, 01:03:56 PM
Click for popup. Clear your browser cache if image is not showing. Comment: Apple forming a continuation stepping sto...
I think it was almost two years ago that I was in Cyprus. Cyprus had just come through its crisis and was still in shell shock. I was there to get a feel for what it was like, and a number of my readers had courteously arranged for me to meet with all sorts of people and do a few presentations. A local group arranged for me to speak at the lecture hall of the Central Bank of Cyprus in Nicosia.
There were about 50 people in the room. I was busily working on Code Red at the time and had money flows, quantitative easing, and currency wars at the front of my brain. As part of my presentation, I talked about how countries would seek to use currency devaluation in order to gain an advantage over other countries – that we were getting ready to enter an era of currency wars, which would be dis...
Last week two prominent Ukrainian opposition figures were gunned down in broad daylight. They join as many as ten others who have been killed or committed suicide under suspicious circumstances just this year. These individuals have one important thing in common: they were either part of or friendly with the Yanukovych government, which a US-backed coup overthrew last year. They include members of the Ukrainian parliament and former chief editors of major opposition new...
Google has had a disappointing year when comparing it to the S&P 500 and other tech stocks. As you can see above, it has under performed the Nasdaq 100 index by nearly 19% and it has lagged the broad market by more than 10% in the past year.
Did Google create a double top over the past year, prior to this under performance? The jury is out on this question at this time.
This under performance by Google now has it testing a support line that dates back to its IPO price over a decade ago.
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As we get into the heart of earnings season and anticipate the GDP report for Q1, the investor spotlight has been taken off the Federal Reserve and timing of its first interest rate hike, at least temporarily. Even though Q1 economic growth will undoubtedly look weak, the future remains bright for the U.S economy – even though many multinationals will struggle with top-line growth due to the strong dollar – and any near-term selloff resulting from weak economic or earnings news should be bought yet again in expectation of better results for the balance of the year. High sector correlations remain a concern, reflectin...
As noted earlier, with equities now a barren wasteland of volume (and liquidity), the last remaining HFT master (of whale order frontrunning)has been forced to go to those asset classes where organic flow is still abundant such as FX, courtesy of central banks engaged in global currency wars. However, HFTs rea...
Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show live on Wednesday night (it was recorded on Monday). As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. ~ Ilene
The replay is now available on BNN's website. For the three part series, click on the links below.
Part 1 is here (discussing the macro outlook for the markets)
Part 2 is here. (discussing our main trading strategies)
Part 3 is here. (reviewing our pick of th...
In my last post (Part 1 of this article), I looked at alternative ETFs that could be used as hedges against the corrections that we have seen during that long 2 year bull run. Looking at the results, it seems that for short (less than a month) corrections, a VIX ETF like VXX could actually be a viable candidate to hedge or speculate on the way down. Another alternative ETF was TMF, a long Treasuries ETF which banks on the fact that when markets go down, money tends to pack into treasuries viewed as safe instruments. In some cases, TMF even outperformed the usual hedging instruments like leveraged ETFs. There could of course be other factors at play since some of 2014 corrections were related to geopolitical events which are certain...
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PSW Members - well, what a year for biotechs! The Biotech Index (IBB) is up a whopping 40%, beating the S&P hands down! The healthcare sector has had a number of high flying IPOs, and beat the Tech Sector in total nubmer of IPOs in the past 12 months. What could go wrong?
Phil has given his Secret Santa Inflation Hedges for 2015, and since I have been trying to keep my head above water between work, PSW, and baseball with my boys...it is time that something is put together for PSW on biotechs in 2015.
Cancer and fibrosis remain two of the hottest areas for VC backed biotechs to invest their monies. A number of companies have gone IPO which have drugs/technologies that fight cancer, includin...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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