Author: admin

Jay Powell and The Fed have avoided President Trump’s twitter ire for a while, but ahead of next week’s FOMC meeting, the president has come out swinging…

“The Federal Reserve is derelict in its duties if it doesn’t lower the Rate and even, ideally, stimulate. Take a look around the World at our competitors. Germany and others are actually GETTING PAID to borrow money. Fed was way too fast to raise, and way too slow to cut!”

If one looks to the market, it is clear that President Trump is (and will) get what he wants, as rate-cut odds are now almost certain of a cut next week…

Source: Bloomberg

And The Fed is once again inflating its balance sheet in ‘stimulus’ liquidity provision…

Source: Bloomberg

Anything to keep the stock market near highs.

Authored by Bill Blain via Shard Capital,

“You steal a little and they throw you in jail. Steal a lot and they make you King.”

It’s Mario Draghi’s last day chairing an ECB meeting today. End of an era – move along, nothing to see..

Boeing – yet more evidence they are numpties.

I have to accept I am a complete idiot.  

I’ve been so focused on the many trees representing Boeing’s multiple problems: its failure to make planes airlines want to buy, its pursuit of profits and management bonuses over safety, it’s wobbly finances in the wake of unpaid for aircraft, potential fines and claims, plus the loss of credibility – that I missed the forest:  the dismal quality of its management who clearly understood precisely nothing about their company.

The proof is in its Stock Buyback history.  In 2018 it bought back $9 bln of its own shares, and boosted dividends by 20%.  It approved a further $20 bln stock buyback for 2019.  Its stock price has rising pretty much in line with the $40 plus bln in equity its bought back in recent years.

Source: Bloomberg

Conventional logic says companies buy back stock when they perceive it as the most efficient thing to do with their profits.  It’s also an alarm bell warning of unimaginative/poor management.  Perhaps the right thing for Boeing to have done in the mid-2010s would have been to invest $10 bln to develop a new modern smaller regional single airliner?  Instead Boeing’s bosses went with the bull stock market, stuck some bigger engines on the venerable and increasingly unbalanced B-737 and gave it the snappy Max moniker, while awarding themselves bigger bonuses.

The cost of the Max debacle will far exceed $10 bln and could crush the company.  Their failure to invest in the future during times of easy money is the ultimate management failure – failing to ensure the company’s long-term future with new products.  Instead they chased a higher stock price and higher bonuses juiced by the buybacks.  Numpties indeed.  Sack them all.

How many other senior company executives have made the same short-term mistake?  How many were seduced by the rising stock market, access to cheap and easy debt from the bull bond market?  Leverage up companies to push up stock prices?

 The rot goes right across the corporate world. Central banks and politicians are complicit – QE, Austerity, bad regulation… The unintended consequences of the last 10-years are coming back to bite us all.

Tesla – a profit?

Long-term porridge readers know I blow hot and cold on Tesla. It surprised the market to the upside last night, by producing numbers that we’re nearly as bad as the market expected.  It’s on course to sell shy of 400,000 cars this year, which still means it’s a small fry specialist firm.  Yet its valuation would say it’s a world leader.

Declaration: I own 10 Tesla Shares.  I keep them out of curiosity.  They will either be worth nothing or a lot.  I’m just not sure which.  There is massive value in the data Tesla has collected in terms of driverless cars, but I reckon we are years away for that reality.  They dominate the EV sector and forcing everyone else to play catch up – with raises long-term competition issues for them.  Their existing line up of cars is looking tired, but they will intro a new sports next year.  The only thing I’m certain of – Tesla is probably not worth $50 bln.  That doesn’t mean it doesn’t have a future.

I do find it hilarious to view the comments sections on any Tesla story: opinion is extreme – with Telsaphobes or Musk-o-philes and few perspectives inbetween. Some will praise Musk as the greatest visionary of all time, and say they’ve invested their whole pension pot in him. Others call him a con-man.  I’m pretty sure the reality is out there somewhere… (I’d judge Musk by his actions: his disgraceful accusations about the British diver who rescued kids trapped in a cave does not speak in his favour.)

Goldman Sachs..

I read a story this morning about Goldman Sachs sacking a senior banker over compliance violations in the Middle East.  Excellent stuff.  Suggests the Squid is learning.. but far too late.  It’s also the day a couple of former Deutsche Bank traders will face the judge in NY accused of the most heinous crime in financial history – rigging LIBOR!  Anyone with any real understanding knows the charges are bunkum – individual traders wishing for a high or low rate were more than balanced, and the real effect of the “fraud” will have been a rounding error. Yet the authorities are determined that justice is seen to be done and the guilty proven so!

All of which compares rather badly to what’s going on in Malaysia.  I am reading a superb book at the moment. For a racy story and improbable characters, I really can’t recommend better than The Billion Dollar Whale.  (If you can’t find the time, try the BBC’s Channel 4 Storyville: “The PM, The Playboy and the Wolf of Wall Street” for the gist of the story.)  The fact a Malaysian Sovereign Wealth fund got conclusively turned over by the country’s kleptocracy is bad enough, but in the introduction to the book is the line:  “Goldman Sachs has made unfathomably large profits helping the fund raise money”.  It looks like about half the $8 bln Goldman raised for the fund was nicked.

Gosh. Surely not?  Goldman is the universally admired top investment bank, advisor to the rich and powerful and centre of the Davos set…. Someone must have pulled the wool over their eyes?  (US Readers – raised eyebrow (denoting sarcasm) alert.)  That the Vampire Squid Sucking the Face off Humanity (allegedly) might have been duped into ramming its feeding funnel into the Malaysian people’s rainy day development fund must be profoundly shocking to clients of the firm.. but the only surprises for anyone working in professional finance will be they apparently got caught.

In today’s compliance driven banking business it should be 110% impossible to be facilitate, or miss a financial heist on the scale of 1MDB.  But, no. The story confirms its relatively easy. It’s always been easier to steal a couple of billion dollars than it is the steal a loaf of bread.

I won’t go into the whole story – check it for yourself – but I do think the book doesn’t dwell enough on just how deep Goldman’s involvement in the fraud might have been – despite describing the bond deals as “one of Goldman’s biggest ever paydays”.   The book is littered with similar comments about how the bank operated.  I’d like to understand more, but I’m pretty sure the US journalists who wrote have had it explained carefully to them why they should not to go there.

It really doesn’t matter.  Facts are simple.  Goldman was involved.  The only question is how gullible they were, or how guilty might they be?

Goldman’s former star Asian banker and regional chairman Tim Leissner has already pled guilty in the US to Money laundering and bribing foreign officials.  The books says he admitted circumventing compliance because he knew Jho Low, the playboy at the centre of the scandal, was “dodgy”.  Yikes.

Earlier this week Bloomberg carried a story naming Goldman’s top HK banker, Andrea Vella, currently on a break “preparing for a triathalon” from the bank, as “Co-Conspirator No 4” in the investigation of the fraud in Malaysia.  Court documents says he was briefed on plans to pay bribes and kickbacks to ensure the Fund was able to raise bond finance, for which Goldman was paid extraordinarily high fees for what should have been a quasi-sovereign deal.

Goldman apparently earned 8% fees on $8 bln of effectively SSA bond debt it raised for 1MBD.  That should have set alarm bells ringing.  Vella arranged the deals.  Goldman’s ex-employee Leissner has told US investigators the he and others arranged the fundraising for 1MBD as bond issues specifically to generate higher fees. Who was asking questions internally about it?  He’s said a lot of other things – allegedly.  (Thanks Mr Hislop for reminding me to add that qualifier.)

I suspect the book and its allegations must be true-ish – the efforts made to prevent its publication were extraordinary.  Being gullible of allowing fraud, or being guilty of fraud are both financial crimes.  Has Goldman been punished?  I even read the US Department of Justice is investigating Deutsche Bank over a former Goldman Sacks banker involved in the story its hired.  I was wondering how long it would take for DB to be implicated.

And that’s the really interesting thing…  Can you imagine how the US authorities would be reacting to a European bank so clearly wrapped up – either for being gullible or guilty – in something as fraudulent as 1MDB?  They would have been fined for gross incompetence or for facilitating it.  If it was Deutsche Bank, HSBC or Barclays, I bet my bottom dollar they’d already have paid fines in double digit billions.  But this is Goldman.  So That’s different.  Isn’t it?

Thus far Goldman does not appear to have paid any fines in relation to the case.  At one stage the Malaysian Government was looking for Goldman to divvy up about $7 bln to settle the case for “misreprenting to investors” the proceeds of the bond sales would be used for legitimate purposes, although the latest rumours say a $3.3-2 bln settlement is more likely.  Although the bank intends to “vigorously defend itself”, a settlement that ends the investigation will be great news for the 17 Goldman executives currently under investigation by the Malaysians for their involvement in the trades underlying the fraud.  The US DoJ say they are investigating.

On the much wider global scale, zoom out and look at this in terms of all the other things now breaking across markets: the collapse and bust of the hollow WeWork model, the fact Boeing isn’t making any planes airlines want to buy and has potentially fatally wrecked its future, Nissan and Renault self-destructing over pride, or Saudi Aramco failing to convince investors their fossil fuel based business is worth as much as they think it is.  Snapshots of disintegrating business entitled capitalism?

Goldman is a bank with a reputation for making money.  The fact they are being exposed for not particularly caring how… well that’s for their clients to opine on and for markets to value in terms of their stock price.  Seller.  

*  *  *

Blain’s Financial Porridge Podcast on Website (Subscribe to Audioboom podcast or go via Spotify or iTunes (Other channels available from Audioboom).  Book: The Fifth Horseman – How to Destroy the Global Economy, is on Amazon in Kindle or book format.

With mortgage applications plunging (on just a modest rise in mortgage rates) and a disappointing tumble in existing home sales, new home sales were expected to slow in September (after a huge bounce in August) and they did (but less than expected thanks to a downward revision).

August’s 7.1% MoM spike was revised lower to a 6.2% rise which left September’s 701k new home sales SAAR down 0.7% MoM.

Source: Bloomberg

The YoY rise in new home sales slowed…

The supply of homes at the current sales rate held at 5.5 months, unchanged from the prior period.

The number of new homes for sale decreased for a fourth month, to 321,000.

Very notably, the median home price plunged 8.8% from a year earlier to $299,400 – to its lowest since Feb 2017…

Purchases of new homes declined in three of four U.S. regions, led by the West and Northeast. The Midwest rose.

Let’s just hope rates don’t inch higher any further…

Source: Bloomberg

 

Authored by Lance Roberts via RealInvestmentAdvice.com,

At the beginning of August, I discussed the following tweet from the President:

What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world….

— Donald J. Trump (@realDonaldTrump) July 31, 2019

“But if it is the ‘strongest economy ever,’ then why the need for aggressive rate cuts which are ’emergency measures’ to be utilized to offset recessionary conditions?”

The following chart should quickly put that claim to rest.

While the claims of an exceptionally strong economy rely heavily on historically low unemployment and jobless claims numbers, historically high levels of asset prices, and strong consumer spending trends, there is an underlying deterioration that goes unaddressed.

For example, while reported unemployment is hitting historically low levels, there is a swelling mass of uncounted individuals that have either given up looking for work or are working multiple part-time jobs. This is shown by those “not in labor force” as a percent of the working-age population, which has skyrocketed since the recession.

The employment to population ratio would not still be at levels from the 1980s.

If employment was indeed as strong as reported by government agencies, then social benefits would not be comprising a record high of 22% of real disposable incomes. Here is the breakdown:

• 40 million Americans on food stamps

• An estimated 50% of the 330 million Americans in this country get at least one federal benefit, according to the Census Bureau.

• An estimated 63 million get Social Security; 59.9 million get Medicare; 75 million get Medicaid; 5 million get housing subsidies; and 4 million get Veterans’ benefits.

Those numbers continue to rise.

Without government largesse, many individuals would literally be living on the street. The chart above shows all the government “welfare” programs and current levels to date. While unemployment insurance has hit record lows following the financial crisis, social security, medicaid, veterans’ benefits, and other social benefits have continued to rise and have surged sharply over the last few months.

With 1/5 of incomes dependent on government transfers, it is not surprising that the economy continues to struggle as recycled tax dollars used for consumption purposes have virtually no impact on the overall economy.

In fact, in the ongoing saga of the demise of the American economy U.S. households are now getting more in cash handouts from the government than they are paying in taxes for the first time since the Great Depression. This, of course, at a time when the current administration is more enthralled with trying to find some universe where cutting taxes actually increases tax revenues as a percent of GDP rather than actually cutting spending.

In 2018, households received $2.2 trillion in some form of government transfer payments, which was more than the $1.7 trillion paid in personal income taxes.

“Yes, but wages are now the highest ever.”

Fair enough, but if that were truly the case, then why are transfer payments as a percent of disposable personal income still hanging near its highs from the “Great Recession?”

In the “strongest economy in history,” American’s should be earning a bulk of the income from their labor, rather than from Government handouts. This is why, despite tax cuts, tax revenue growth has waned as the economy has remained weak.

You simply can’t create economic growth by recycling tax dollars. 

In short, Americans have the government, not private enterprise, to thank for their wealth growth – but, of course, there are massive implications to this.

 

As I noted in our recent discussion on the fallacy of the “savings rate:”

“The ‘gap’ between the ‘standard of living’ and real disposable incomes is shown below. Beginning in 1990, incomes alone were no longer able to meet the standard of living so consumers turned to debt to fill the ‘gap.’ However, following the ‘financial crisis,’ even the combined levels of income and debt no longer fill the gap. Currently, there is almost a $2654 annual deficit that cannot be filled.”

That gap explains why consumer debt is at historic highs and growing each year.

Furthermore, if more households have the government to thank for their wealth, does that mean those households are more inclined to re-elect politicians who are pushing for more government handouts? 

The answers to that question is quite obvious if you look at the candidates currently running for President on the Democratic ticket.

The bottom line is that America can’t grow its way back to prosperity on the back of social assistance. The average American is fighting to make ends meet as their cost of living rises while wage growth largely remains stagnant.

This brings us to the hard truth.

The budget deficit is set to grow over the next few years as interest payments alone absorb a chuck of the tax revenue. This comes at a time when that same dollar of tax revenue only covers entitlement spending as 75 million baby boomers begin their migration into the social safety net.

The call by the American people at the last election was a mandate to reduce the size of government and spending, however, that has fallen on deaf ears and weak stomachs. The current electorate is log jammed by personal agendas as the White House elected to cut taxes, increase defense spending, and exacerbate the crony-capitalism which currently plagues the country.

By the way, the only other time government income support exceeded taxes paid was during the “Great Depression” from 1931 to 1936.

Strongest economy ever? Hardly.

But it could be.

Today, we have the ability to choose our battles, make tough choices, and restore the economic balance for future growth. However, 800-years of history tells us that we will fail to make those choices, and at some point, those choices will be forced upon us.

After September’s bounce, expectations for preliminary US PMIs in October are mixed (better for Services, worse for Manufacturing) as Eurozone PMIs stagnated at multi-year lows this morning.

In the US, the flash October data was better than expected…

• US Manufacturing PMI 51.5 (51.1 prior, 50.9 exp)

• US Services PMI 51.0 (50.9 prior, 51.0 exp)

This is the 2nd month in a row of rebound…

Source: Bloomberg

However, Employment tumbled to 47.5 vs 48.6 in September, the lowest reading since Dec. 2009 (and second consecutive month of contraction) and new business falls vs prior month (lowest reading since series began).

With US macro surprise data increasingly disappointing, we wonder how long this shallow bounce can be sustained.

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit, said:

“Despite business activity lifting from recent lows, the survey data point to annualized GDP growth of just under 1.5% at the start of the fourth quarter, and a near-stalling of new order growth to the lowest for a decade suggests that risks are tilted toward growth remaining below trend in coming months.

Additionally, Williamson notes…

“An increased rate of job culling adds to the gloomy picture, with jobs being lost among surveyed companies at a rate not seen since 2009. At current levels, the survey’s employment gauge indicates non-farm payroll growth slipping below 100,000.

“The overall subdued picture reflects a spreading of economic weakness from manufacturing to services, but encouragingly we are now seeing some signs of manufacturing pulling out of its downturn, in part driven by a return to growth for exports and improved sentiment about the year ahead, linked to hopes that trade war tensions are starting to ease.

“If manufacturing can continue to gain momentum this should hopefully feed through to stronger jobs growth and an improved service sector performance, leading to better GDP growth, but it remains too early to determine whether the economy has truly turned a corner.”

Is this rebound enough to stall The Fed’s dovish rate-cycle hopes?

While yesterday’s closing ramp was ‘triggered’ by The Fed hiking the size of its liquidity bailouts, it appears the US market open was all the algos needed to dump their overnight gains…

While there was no immediate catalyst (other than the huge size of liquidity demands suggesting there is something The Fed is not telling us), some suggested Mario Draghis’ farewell press conference was disappointingly un-dovish and topped off by him suggesting that “the ECB must be cautious in its communication to the broad public.”

Which sounds a lot like Juncker’s “when it’s serious, you have to lie” comment.

Nokia shares plunged 25% on Thursday after management warned its 2019/2020 profits would be disastrous after a delay in earnings from 5G networks, reported Bloomberg. As a result of the abrupt revision in outlook, the Finnish telecom network equipment maker cut its 2020 forecast and suspended a dividend to investors. 

Find our Financial Report for Q3 and January-September 2019 here: https://t.co/7IbDQ1Fk9R

Our Q3 2019 Earnings Conference Call will take place today 24 October 2019 at 3 PM EET. https://t.co/e4vIk0189Z pic.twitter.com/OOY79a1zzX

— Nokia (@nokia) October 24, 2019

Nokia says 2019 EPS is around 0.18 to 0.24 euros for 2019 and will be around 0.20 to 0.30 euros in 2020. Earlier this year, the telecom maker was expecting EPS to be about 0.25 to 0.29 euros for 2019, and 2020 EPS of 0.37 to 0.42 euros, a dramatic revision lower, which is what spooked investors to panic sell the stock into one of the worst declines in the company’s history in nearly three decades. The last time Nokia puked this hard, most millennial traders weren’t even born. 

Nokia shares down 23% this morning on weak earnings report, largest intra-day drop since 1991 pic.twitter.com/ikEjN47Rs1

— Justin McQueen (@JMcQueenFX) October 24, 2019

Nokia doesn’t expect an earnings recovery until 2021, due to the loss of 5G market share by rivals that are outperforming it this year.  

• NOKIA OYJ NOKIA.HE – SOLID Q3 AND EXPECTED STRONG Q4; LOWERING FULL YEAR 2019 AND FULL YEAR 2020 OUTLOOK DUE TO MARGIN PRESSURE AND ADDITIONAL INVESTMENT NEEDS

• NOKIA OYJ NOKIA.HE – WE ARE ADJUSTING OUR TARGETS FOR FULL-YEAR 2019 AND 2020; AND WE EXPECT OUR RECOVERY TO DRIVE IMPROVEMENT IN OUR 2021 FINANCIAL PERFORMANCE RELATIVE TO 2020.

• NOKIA OYJ NOKIA.HE – SOME OF RISKS THAT WE FLAGGED PREVIOUSLY RELATED TO INITIAL PHASE OF 5G ARE NOW MATERIALIZING

The abrupt change in the forecast comes as macroeconomic headwinds are continuing to pressure telecoms and technology companies across Europe. The news of Nokia lower its outlook also sent Swedish rival Ericsson AB down by more than 4%. 

Bloomberg notes one of the significant contributors to the revision of the outlook is due to Nokia “no longer expects to win a bigger piece of the 5G market by outperforming rivals this year and over the long term — the new outlook has the company performing in line through 2020.”

“Some of the risks that we flagged previously related to the initial phase of 5G are now materializing,” CEO Rajeev Suri said in a statement, pointing to price competition and the steep cost of products. Nokia will now spend more on developing 5G products and making them less expensive, he said. “We expect that we will be able to progressively mitigate these issues over the course of next year.”

The depressing outlook for Nokia wasn’t unexpected, but it was the extent of the downgrade and the delay of an earnings turnaround that cause the stock to plummet. 

Authored by Mike Shedlock via MishTalk,

Donald Tusk and the Remainers seek a Jan 31 extension. France wants a shorter extension. Jan 31 is counterproductive.

In the misguided belief that extension after extension increases the chance of remaining, the alleged “Stop No Deal” crowd actually increase the odds of No Deal.

I have made that case before, and Eurintelligence (a Remain supporter), laid out a point-by-point scenario this morning.

Long Delay Scenario

• European Council extends for three months;
• UK holds elections;
• Tories win with a small majority;
• Johnson brings back the bill but falls short of a majority after a rebellion among hard-line eurosceptics;
• the House of Commons has no majority this time for Letwin/Benn style wrecking tactics.
• UK crashes out without a deal on January 31.

Eurointeligence Comments

​This is not a prediction, only one of many scenarios. But, from today’s perspective, it is more plausible than a second referendum or a customs union. We don’t think the opposition would help Johnson. After the next election, both Labour and the LibDems will compete for the pro-EU votes. The die-hard eurosceptics in the Tory party may feel less of a need to compromise if they believe their no-deal nirvana is possible.

We don’t think that Brussels has really thought this through. If the goal is to avoid a no-deal Brexit, Macron’s strategy is a more promising route: put pressure on UK MPs to pass the bill by keeping the extension short. A three-month extension would bring back the uncertainty.

Understanding the Setup

​I agree on all but bullet point 3: “Tories win with a small majority.”

A “small” majority most likely but not necessarily results in Johnson’s deal.

It’s the large and especially moderate-sized wins that are the problems.

My Scenario

1. Assume having won the election Johnson is at least somewhat ambivalent between No Deal and his deal.

2. Assume a Tory majority of 20 or so, not counting DUP.

3. Assume 15 of the Tories are still closet remainers, customs union backers, or No Deal advocates.

4. Assume 30 ERG and Hard Brexit lovers still prefer No Deal.

If the Hard Brexit supporters hold support and DUP holds support, there is no majority for anything but No Deal.

This is not at all far-fetched.

Moreover, if Johnson was just faking wanting a deal to get re-elected, then even a small majority might suffice if the closet Remainers, customs union backers, and No Deal advocates are mostly outed from the Tory Party.

Thus, any Tory win is more likely than now to result in No Deal.

The hard-core No Deal advocates only went along with Johnson to ensure a “reasonable deal” they could live with.

If they get a chance, and any Tory win with the right conditions (and there are numerous right conditions) may result in No Deal.

Heads Johnson Wins, Tails Johnson Wins

Two days ago, I commented Brexit Coin Toss: Heads Johnson Wins, Tails Johnson Wins

Flip a Coin

Remainers have a choice. They can force elections and lose or they can pass the Johnson’s deal and lose.

There is no majority for another referendum.

No Deal Liars Exposed

Labour MPs secretly think that all Leavers are numbskulls. They believed that if they could force a delay in Brexit, the working-class Eurosceptic thickoes would blame Boris. Now, that strategy lies in tatters. https://t.co/2cW49Ebc5g

— Daniel Hannan (@DanielJHannan) October 23, 2019

Johnson’s Offer

Yes, and the fools still would not agree.

I suspect that offer will now be withdrawn! https://t.co/Rsr4qcGy1K

— Mike “Mish” Shedlock (@MishGEA) October 23, 2019

Expect Johnson to Withdraw Offer

Johnson offered an amendment that would have guaranteed not “crashing out” with a WTO agreement a year from now.

That still was not enough for the “Stop No Deal” liars.

In the event of election or even a short extension request, Johnson can safely withdraw that offer because the clock has nearly run out.

Likely Outcome

Eurointelligence commented “The two most likely scenarios are that Johnson pulls the bill and goes for early elections, or a short extension to allow passage of the bill under a more relaxed timetable”

I agree, while pointing out this Eurointelligence view, also the same as mine, and as described above: “We argue that the risk of a no-deal Brexit would increase with a three-month extension“

In regards to that position, it’s not just a small Tory victory that increases the chances of No Deal, but rather any Tory victory.

Playing With Fire

If needed to win, Johnson can easily change his mind and court the Brexit Party while the Liberal Democrats and Labour remain seriously split.

The polls indicate a victory outright, without such a deal.

Stop No Deal Makeup

1. Most of the “Stop No Deal” crowd are nothing but liars who want to outright remain.

2. The rest are simply fools.

Johnson offered a guaranteed way to prevent No Deal!

The alleged “Stop No Deal” crowd refused the offer, even with an amendment that would prevent a WTO settlement.

Both groups are seriously playing with fire. Their antics dramatically increase the odds of No Deal.