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Facebook has lost a major advertiser, UniCredit SpA, which has severed all ties alleging that the social media giant hasn’t acted ethically, reports Bloomberg – which notes that “other large companies” may follow suit. 

CEO Jean Pierre Mustier says the bank maintains that Facebook hasn’t acted properly, and the Italian financial group will no longer have any type of business relationship with the Menlo Park, CA company. 

Mustier was referring to business activities including advertising and marketing campaigns, a spokesman for UniCredit said. The bank currently has a swath of Facebook accounts — which are regularly updated. –Bloomberg

Facebook has come under intense scrutiny for failing to safeguard user data amid the Cambridge Analytica data harvesting scandal, revealed in March by The Guardian and The New York Times. The data from up to 87 million users, and possibly more, was found to have been “harvested” via the psychological profiling app “Thisisyourdigitallife” – which was created by two psychologists (one of whom currently works for Facebook), and was specially designed to collect and share information. 

Despite Facebook’s attempts at damage control, UniCredit says they’re done with the social media giant – and there have been others. Unilever UV and Sonos Inc. have also threatened to pull ads. 

In late July, Facebook’s shares fell over 20 percent after second-quarter revenue showed the first signs of user disenchantment in the midst of public scandals over privacy and content. The company has been under fire following revelations that personal information on as many as 87 million users ended up in the hands of Cambridge Analytica, a political consulting firm that worked on Donald Trump’s presidential campaign. Mozilla Corp., which develops the Firefox web browser, said in March it would pause its ads from appearing on Facebook as a result. –Bloomberg

Was UniCredit’s decision really based on Facebook’s ethics? Or was the data harvesting scandal perhaps a convenient excuse to disengage from an advertising model that wasn’t worth the expense?

In late 2016, Proctor & Gamble cut $200 million in digital ad spending – including scaling back targeted ads from Facebook. In March, the company contended that too much digital ad spending is “a waste.” 

Once armed with more measurement data, P&G discovered that the average view time for a mobile ad appearing in a news feed, on platforms such as Facebook , was only 1.7 seconds. The Cincinnati-based company also realized some people were seeing P&G ads far too many times. –WSJ

“Once we got transparency, it illuminated what reality was,” said P&G’s chief brand officer, Marc Pritchard. Ad fraud was another concern.

About a year ago, Mr. Pritchard publicly issued an ultimatum for tech companies to clean up the digital ad ecosystem or it would cut spending. He called on the industry to fix the rampant digital ad fraud and asked tech giants such as Alphabet Inc.’s Google and Facebook Inc. to implement safeguards to prevent ads from appearing around controversial content and to allow independent verification of their ad measurements. –WSJ

Whatever the case, Facebook has now lost a major corporate advertiser – will others follow suit?

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Authored by Lance Roberts via RealInvestmentAdvice.com,

Michael Lebowitz previously penned an article entitled “Face Off” discussing the message from the bond market as it relates to the stock market and the economy. To wit:

“There is a healthy debate between those who work in fixed-income markets and those in the equity markets about who is better at assessing markets. The skepticism of bond guys and gals seems to help them identify turning points. The optimism of equity pros lends to catching the full run of a rally. As an ex-bond trader, I have a hunch but refuse to risk offending our equity-oriented clients by disclosing it. In all seriousness, both professions require similar skill sets to determine an asset’s fair value with the appropriate acknowledgment of inherent risks. More often than not, bond traders and stock traders are on the same page with regard to the economic outlook. However, when they disagree, it is important to take notice.”

This is an interesting point given that despite the ending parade of calls for substantially higher interest rates, due to rising inflationary pressures and stronger economic growth, yields have stubbornly remained below 3% on the 10-year Treasury.

In this past weekend’s newsletter, we discussed the current “bullish optimism” prevailing in the market and that “all-time” highs are now within reach for investors.

“Currently, the “bulls” remain clearly in charge of the market…for now. While it seems as if much of the “tariff talk” has been priced into stocks, what likely hasn’t as of yet is rising evidence of weakening economic data (ISM, employment, etc.), weakening consumer demand, and the impact of higher rates.

While on an intermediate-term basis these macro issues will matter, it is primarily just sentiment that matters in the short-term. From that perspective, the market retested the previous breakout above the March highs last week (the Maginot line) which keeps Pathway #1 intact. It also suggests that next week will likely see a test of the January highs.“

 

“With moving averages rising, this shifts Pathway #2a and #2b further out into the August and September time frames. The potential for a correction back to support before a second attempt at all-time highs would align with normal seasonal weakness heading into the Fall. “

One would suspect with the amount of optimism toward the equity side of the ledger, and with the Federal Reserve on firm footing for further rate increases at a time where the U.S. Government is about to issue a record amount of new debt, interest rates, in theory, should be rising.

But they aren’t.

As Mike noted previously:

“Given our opinions on the severe economic headwinds facing economic growth and steep equity valuations, we believe this divergence poses a potential warning for equity holders. Accordingly, we thought it appropriate to provide a few graphs to demonstrate the ‘smarter’ guys are not on board the growth and reflation train.”

In today’s missive, we will focus on the “price” and “yield” of the 10-year Treasury from a strictly “technical”perspective with respect to the signal the bond market may be sending with respect to the stock market. Given that “credit” is the “lifeblood” of the Government, corporate and consumer markets, it should not be surprising the bond market tends to tell the economic story over time.

We can prove this in the following chart of interest rates versus the economic composite of GDP, inflation, and wages.

Despite hopes of surging economic growth, the economic composite has remained in an elongated nominal range between 40 and 60 since 2011. This stagnation has never occurred in history and is a function of the massive interventions by the Government and the Federal Reserve to support economic growth. However, now those supports are being removed as the Federal Reserve lifts short-term borrowing costs and reduces liquidity support through their balance sheet reinvestments.

As I said, credit is the “lifeblood” of the economy. Think about all the ways that higher rates impact economic activity in the economy:

1) Rising interest rates raise the debt servicing requirements which reduces future productive investment.

2) Rising interest rates will immediately slow the housing market taking that small contribution to the economy away. People buy payments, not houses, and rising rates mean higher payments.

3) An increase in interest rates means higher borrowing costs which leads to lower profit margins for corporations. 

4) The “stocks are cheap based on low interest rates” argument is being removed.

5) The massive derivatives and credit markets are at risk. Much of the recovery to date has been based on suppressing interest rates to spur growth.

6) As rates increase so does the variable rate interest payments on credit cards. 

7) Rising defaults on debt service will negatively impact banks.

8) Many corporate share buyback plans and dividend issuances have been done through the use of cheap debt, which has led to increases corporate balance sheet leverage.

9) Corporate capital expenditures are dependent on borrowing costs. Higher borrowing costs lead to lower CapEx.

10) The deficit/GDP ratio will begin to soar as borrowing costs rise sharply. The many forecasts for lower future deficits will crumble as new forecasts begin to propel higher.

I could go on, but you get the idea.

So, with the Fed hiking rates, surging bankruptcies for older Americans who are under-saved and over-indebted, stumbling home sales, inflationary prices rising from surging energy costs, what is the 10-year Treasury telling us now.

Short-Term

On a very short-term basis, the 10-year Treasury yield has started a potential-topping process. Given that “yield” is the inverse of the “price” of bonds, the “buy” and “sell” signals are also reversed. As shown below, the 10-year yield appears to be forming the “right shoulder” of a “head and shoulder” topping formation and is currently on a short-term “buy” signal. Such would suggest lower yields over the next couple of months.

The two signals above aren’t a rarity. The chart below expands this view back to 1970. There have only been a few times historically that yields have been this overbought and trading at 3 to 4 standard deviations above their one-year average.

The outcome for investors was never ideal.

Longer-Term

Even using monthly closing data, which smooths out volatility to a greater degree, the same message appears. The chart below goes back to 1994. Each time yields have been this overbought (remember since yield is the inverse of price, this means bonds are very oversold) it is has signaled an issue with both the economy and the markets.

Again, we see the same issue going back historically. Also, notice that yields are currently not only extremely overbought, they are also at the top of the long-term downtrend that started back in 1980.

Even Longer Term

Okay, let’s smooth this even more by using quarterly data closes. again, the picture doesn’t change.

As I noted yesterday, the economic cycle is extremely advanced and both stocks and bonds are slaves to the full market cycle.

“The “full market cycle” will complete itself in due time to the detriment of those who fail to heed history, valuations, and psychology.”

Of course, during the late stage of any market advance, there is always the argument which suggests “this time is different.” Mike made an excellent point in this regard previously:

“Given the divergences shown between bond and equity markets, logic says somebody’s wrong. Another possibility is that neither market is sending completely accurate signals about the future state of the economy and inflation. It is clear that bond traders do not buy into this latest growth narrative. Conversely, equity investors are buying the growth and reflation narrative lock, stock and barrel. To be blunt, with global central banks buying both bonds and stocks, the integrity of the playing field as well as normally reliable barometers of market conditions, are compromised.

This divergence between bond and equity traders could prove meaningless, or it may be a prescient warning for one or both of these markets. Either way, investors should be aware of the divergence as such a wide gap in economic opinions is unusual and may portend increased volatility in one or both markets.”

While anything is certainly possible, historical probabilities suggest that not only is “this time NOT different,” it will likely end the same way it always has for investors who fail to heed to bond markets warnings.

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There was a surprising development back in June, when that month’s JOLTS report revealed a curious, if welcome for the US economy, inflection point: for the first time in reported BLS data, the number of US job openings surpassed the number of unemployed workers.

Fast forward two months, when as the BLS reported last Friday, the number of unemployed workers increased from 6.0 million to 6.3 million (after hitting 6.6 million in July). The question was whether this increase would also reverse this Opening-Unemployed trend. However, as the just released June JOLTS report revealed, for the third month in a row the number of job openings stayed above the total number of unemployed workers, as May’s 6.638MM job openings number was revised higher to 6.659MM, yet which rose modestly again to 6.662MM in June which was once again quite comfortably still above the 6.280MM unemployed workers. This means that June was the third consecutive month in which the number of job openings was higher than the number of unemployed Americans.

In other words, in an economy in which there was a perfect match between worker skills and employer needs, there would be zero unemployed people at this moment (which of course is not the case.)

According to the BLS, the number of job openings increased in educational services (+20,000) but decreased in transportation, warehousing, and utilities (-84,000). The number of job openings was little changed in all four regions.

Adding to the exuberant labor picture, while job openings remained above total unemployment, the number of total hires also remained just shy of a new record, at 5.561 million in June, down slightly from 5.747 million in May, and on the verge of an all time high. The number of hires s increased in finance and insurance (+31,000).

According to the historical correlation between the number of hires and the 12 month cumulative job change (per the Establishment Survey), either the pace of hiring needs to drop, or else the number of new jobs will rise significantly in the coming months.

Meanwhile, last month’s biggest surprise, the record number of Americans quitting the job – the so-called “take this jobs and shove it” indicator which shows worker confidence that they can leave their current job and find a better paying job elsewhere – dipped modestly in June, from a record 3.480MM to 3.402MM, but still just shy of a record print, with the BLS reporting that biggest number of quits in educational services (-14,000).

Putting all this in in context

• Job openings have increased since a low in July 2009. They returned to the prerecession level in March 2014 and surpassed the prerecession peak in August 2014. There were 6.7 million open jobs on the last business day of June 2018.
• Hires have increased since a low in June 2009 and have surpassed prerecession levels. In June 2018, there were 5.7 million hires.
• Quits have increased since a low in September 2009 and have surpassed prerecession levels. In June 2018, there were 3.4 million quits.
• For most of the JOLTS history, the number of hires (measured throughout the month) has exceeded the number of job openings (measured only on the last business day of the month). Since January 2015, however, this relationship has reversed with job openings outnumbering hires in most months.
• At the end of the most recent recession in June 2009, there were 1.2 million more hires throughout the month than there were job openings on the last business day of the month. In June 2018, there were 1.0 million fewer hires than job openings.

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After its worst day in 10 years, the Turkish Lira’s early rebound is already starting to fade amid denied rumors of US officials predicting Lira’s demise, a record high yield at its bond auction, and Goldman warning of the collapse of Turkey’s financial system.

Turkey’s 10Y bond yield topped 20% for the first time ever and Turkey’s Treasury sold 539.7 million liras of 5Y debt today at 22.1% compound yield.

With tensions remaining high, the U.S. Embassy in Turkey has denied news in Turkish media that a U.S. official predicted the lira would weaken to 7 per dollar, calling the claim an entirely baseless “lie.” In two tweets, the Embassy said:

“Despite current tensions, the United States continues to be a solid friend and ally of Turkey. Our countries have a vibrant economic relationship.”

“For this reason, it is unfortunate and disturbing that an American official, who estimates that the U.S. dollar will be $7 TL, is completely unfounded and irresponsible in the Turkish media. It’s a fabricated and baseless lie.”

Well, they are right, it was not “officials” from the US government, it was “unofficials” from Government Goldman Sachs warns that further lira depreciation to 7.1 would erode all of Turkey’s banks’ excess capital.

Within the current backdrop, we view banks as being vulnerable to Turkish Lira depreciation given that it impacts:

(1) capital levels due to a meaningful portion of FC assets, which increase RWAs in local currency terms on Turkish Lira depreciation,

(2) asset quality and cost of risk, as Turkish Lira volatility can put stress on borrowers’ ability to repay as well as underlying collateral values. Moreover, Lira depreciation leads to higher provisioning requirements for FC NPLs, though banks are hedging this risk and can offset the impact through trading income.

The CET 1 ratio for Turkish banks under our coverage is around 13.2% on average on a bank-only basis and 12.2% on a consolidated basis, vs. 8%-9% fully-phased in requirement. We calculate that every 10% Lira depreciation impacts bank’s capital by c.50bp on average. Indeed, 14% Lira depreciation in 2Q18 took away around 80bp off bank’s CET 1 ratios. We estimate that the c.12% depreciation of the Turkish lira since June 30, 2018 would further reduce capital by c.60bp on average (pre internal capital generation and any management action).

We view Yapi Kredi as the weakest positioned on capital levels, with 2Q18 consolidated CET 1 of 10.7% vs. 8.5% fully phased-in minimum requirement. While the recent rights issue added 140bp to capital levels, Lira depreciation offset it by around 80bp.

We calculate that quarter to date 3Q18 Lira depreciation would offset the remaining c.60bp capital uplift from the rights issue, though this may be mitigated through internal capital generation and a potential transition to an IRB-based approach. As a result, incremental Lira depreciation could increase capital concerns for banks, especially for ones with lower capital levels.

We calculate that further Lira depreciation to around 7.1 vs. USD on average could largely erode banks’ excess capital

Finally, we note that JPMorgan is desperately keeping its ‘EM is cheap’ narrative alive, carefully dissecting Turkey away, explaining it is “miles apart” from the most of the Emerging Markets.

Gabriela Santos, global market strategist at JPMorgan Asset Management, told Bloomberg TV, that most EM economies are in a “much healthier” place, adding that investors need to see slightly stronger growth than U.S. in 2H18 and simmering trade tensions for emerging-market assets to benefit.

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Authored by John Rubino via DollarCollapse.com,

Money manager Rob Arnott and finance professor Lisa Meulbroek have run the numbers on underfunded pension plans and come up with an interesting – and highly concerning – new angle: That they impose a “stealth mortgage” on homeowners. Here’s how the Wall Street Journal reported it today:

The Stealth Pension Mortgage on Your House

Most cities, counties and states have committed taxpayers to significant future unfunded spending. This mostly takes the form of pension and postretirement health-care obligations for public employees, a burden that averages $75,000 per household but exceeds $100,000 per household in some states. Many states protect public pensions in their constitutions, meaning they cannot be renegotiated. Future pension obligations simply must be paid, either through higher taxes or cuts to public services.

Is there a way out for taxpayers in states that are deep in the red? Milton Friedman famously observed that the only thing more mobile than the wealthy is their capital. Some residents may hope that they can avoid the pension crash by decamping to a more fiscally sound state.

But this escape may be illusory. State taxes are collected on four economic activities: consumption (sales tax), labor and investment (income tax) and real-estate ownership (property tax). The affluent can escape sales and income taxes by moving to a new state—but real estate stays behind. Property values must ultimately support the obligations that politicians have promised, even if those obligations aren’t properly funded, because real estate is the only source of state and local revenue that can’t pick up and move elsewhere. Whether or not unfunded obligations are paid with property taxes, it’s the property that backs the obligations in the end.

When property owners choose to sell and become tax refugees, they pass along the burden to the next owner. And buyers of properties in troubled states will demand lower prices if they expect property taxes to increase.

It doesn’t matter if we own or rent; landlords pass higher taxes on to tenants. Nor does it matter if properties are mortgaged to the hilt or owned outright. In time, unfunded pension obligations will be reflected in real-estate prices, if they aren’t already. A state’s unfunded liabilities are effectively a stealth mortgage on private property. Think you can pass your property on to your heirs? Only net of the unfunded pension obligations.

We calculated the ratio of unfunded pension obligations relative to property values in each state. We used 3% bond-market yields as our discount rate to measure unfunded obligations, because while other assets ostensibly earn a risk premium above the bond yield, these assets can also underperform.

Unfunded pension obligations range from a low of $30,000 per household of four in Tennessee to a high of $180,000 per household in Alaska. They amount to less than 11% of the average home values in Florida, Tennessee and Utah and more than 50% in Alaska, Mississippi and Ohio.

There are a few surprises. California, Hawaii and New York have large unfunded obligations, but because property in these states is so expensive, the average household burden is less than 15% of the average home price. Meanwhile, West Virginia and Iowa have relatively low pension debts—but the average household obligation is more than 30% of the average home price because property is far less expensive in these states.

On average nationwide, unfunded state and local pension burdens represent 20% of real-estate values. This ratio can rival or exceed an owner’s home equity, depending on the size of his mortgage. If real-estate prices adjust to reflect unfunded pension obligations, many homeowners’ equity could be at risk. As we’ve seen in Detroit, the public pension stealth mortgage can ultimately devastate the housing market.

This is yet another confirmation that we’re not nearly as rich as we think we are. If your home is your biggest asset but a big part of your equity is secretly claimed by the local government, you don’t really own it. And if you’re counting on a public sector pension and home equity to finance your retirement you might be hit with a double whammy when your pension is cut (despite what the state constitution says, it will be cut one way or another) at the same time your property tax bill soars to protect what’s left of pension benefits.

And the pension crisis is actually much worse than Arnott’s and Meulbroek’s research implies, because they’re using peak-of-the-cycle numbers. When the next recession brings an equities bear market, pension plans will lose money, causing their underfunding to explode. So that 20% stealth mortgage is about to get even bigger.

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On Monday, the twin fires being treated as one incident north of San Francisco became the largest wildfire in state history, destroying 443 square miles (1,148 square kilometers), nearly the size of the city of Los Angeles and 45% greater than New York City. 

The Mendocino Complex grew to span 283,000 acres (114,526 hectares) on Monday when two wildfires merged at the southern tip of the Mendocino National Forest, the California Department of Forestry and Fire Protection said. The size of the fire has surpassed the previous record set by the Thomas Fire which burned 281,893 acres in Santa Barbara and Ventura counties when it destroyed more than 1,000 structures. It is now the largest of eight major fires burning out of control across California, prompting U.S. President Donald Trump to declare a “major disaster” in the state.

The wildfire about 225 miles (360 kilometers) north of San Francisco started more than two weeks ago by sparks from the steel wheel of a towed-trailer’s flat tire. It killed two firefighters and four residents and displaced more than 38,000 people.

And as the record-breaking wildfire continued to grow amid hot and windy conditions, it challenged thousands of fire crews battling eight major blazes burning out of control across the state.

The Mendocino Complex, which is 30% contained, has been less destructive to property than some of the other wildfires in the state – it has so far burned down 75 homes – because it is mostly raging in remote areas. But as AP notes, officials say it threatens 11,300 buildings and some new evacuations were ordered over the weekend as the flames spread.

More than 14,000 firefighters are battling more than a dozen major blazes throughout California, state Department of Forestry and Fire Protection spokesman Scott McLean told AP. “I can remember a couple of years ago when we saw 10 to 12,000 firefighters in the states of California, Oregon and Washington and never the 14,000 we see now.”

Unfortunately, there is no respite in sight as temperatures could reach 110 degrees (43 Celsius) in Northern California over the next few days with gusty winds fanning the flames of the complex, a National Weather Service meteorologist said.

The 3,900 crews battling the Mendocino Complex on Monday were focusing on keeping flames from breaking through fire lines on a ridge above the foothill communities of Nice, Lucerne, Glen Haven, and Clearlake Oaks, said Tricia Austin, a spokeswoman for Cal Fire.

Elsewhere, the Carr Fire – which has torched 164,413 acres in the scenic Shasta-Trinity region north of Sacramento since breaking out on July 23 – was 47% contained according to Reuters. The Carr Fire has been blamed for seven deaths, including a 21-year-old Pacific Gas and Electric Company lineman Jay Ayeta, whom the company said on Sunday was killed in a vehicle crash as he worked with crews in dangerous terrain.

Even Trump commented on Twitter on the California conflagrations: “California wildfires are being magnified and made so much worse by the bad environmental laws which aren’t allowing massive amount of readily available water to be properly utilized.”

The Northern California fires have created such a haze of smoke in the Central Valley that Sacramento County health officials advised residents to avoid outdoor activities for the entire week.

Below we shows 10 haunting photos from the wildfire, courtesy of Bloomberg:

 

 

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