iftttwall

No matter what measure of confidence, sentiment, or animal spirits one uses, the consumer is not encouraged by the record-er and record-er highs in the US equity market. The Conference Board's consumer confidence data missed for the 2nd month in a row – its biggest miss in 8 months – as it seems in October consumers were un-confident due to the government shutdown… but in November they are un-confident-er due to its reopening. As we have noted in the past a 10 point drop in confidence has historically led to a 2x multiple compression in stocks (which suggests the Fed will need to un-Taper some more to keep the dream alive). Ironically, more respondents believe stocks will rise of stay the same over the next 12 months even as the 'expectations' sub-index collapsed to its lowest in 8 months.

 

 

Once again we remind that it's all about confidence and hope appears to be fading…

As we have noted previously – this move in confidence is key…

But, it's all about confidence… investors will not be willing to pay increasing multiples unless they are confident that the future streams of earnings are sustainable and forecastable… And simply put, the current levels of Consumer Sentiment need to almost double for the US equity market tp approach historical multiple valuation levels…

 

 

 

and the cycle appears to be shifting…

Via Citi,

Is consumer confidence set to turn?

Consumer Confidence is once again following a dynamic where we see it move higher for 4 years and 4 months before beginning to collapse

• Moves higher from 1996-2000 with a smaller dip halfway through in October 1998
• Moves higher from 2003-2007 with a smaller dip hallway through in October 2005
• Moves higher and so far tops out in June 2013. Also sees a small dip halfway through in October 2011.

 

Higher yields do not help confidence…

 

A sharp rise in mortgage rates has a negative feedback loop to consumer confidence. For those families and individuals that were now looking/able to enter the housing market, the recent spike in rates acts as a headwind.

 

In addition to the economic backdrop, there is plenty of tail risk as we head into the end of the year. Oil prices have been rising since the summer began (and in reality since the Summer of 2012), partially due to geopolitical risks which are very much “top of mind.” A bigger spike due to a supply shock would choke the economic recovery.(In our view)

In the US, the appointment of a new Fed Chairman and the upcoming budget/debt ceiling debates are likely to bring added volatility. Tapering itself can also induce concern as the “Bernanke put” is being removed from markets.

In Europe, many of the structural problems related to the single currency union have not actually been addressed and the peripheral countries could still create turmoil going forward (see Fixed Income section focusing on Italy in particular for more on this). There has also been little concern with both the German elections and the German Court decision on the constitutionality of the OMT program. A surprise in either of these could be cause for concern.

Emerging Markets are still not out of the woods yet as growth has been weak relative to expectations and countries with current account deficits are beginning to feel pressure in their FX and Bond markets. This is an issue we believe is only starting to develop which we will continue to expand on at later dates.(We have also looked at this in our EM FX section this week)

Overall, the weak economic backdrop, poor housing recovery and potential for tail risk events over the next few months suggest that we have topped out in Consumer Confidence, a warning sign for equity markets.

 

The relationship between Consumer Confidence is clear, and IF June did mark the high and Confidence continues to decline, then we would expect to see that translate to weakness in the equity markets. The removal of the “Bernanke put” only adds to this concern.

A major turn has taken place in equity markets on average four months after Consumer Confidence turns, which would point to a decline beginning around September-October. As we have previously expressed, we remain of the bias that a correction in equity markets on the order of 20%+ is likely this year/ into 2014 and the current dynamics support such a move.

Should we see a decline of that magnitude, it is almost certain that yields would move lower in a rush to safe assets.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/NXXS92XIVCE/story01.htm Tyler Durden

Below we present a twitter exchange we had with a Japanese media outlet overnight on Twitter. It needs no commentary.

Plan in the works to decontaminate Fukushima’s J-Village in time to reopen it as soccer facility ahead of 2020 Olympics.

— SNA Japan (@ShingetsuNews) November 26, 2013

Is this a joke “@ShingetsuNews: Plan in the works to decontaminate Fukushima’s J-Village to reopen it as soccer facility ahead of Olympics.”

— zerohedge (@zerohedge) November 26, 2013

@zerohedge No joke. TEPCO, Fukushima Prefecture, and the Japan Football Association have begun talks on the plan.

— SNA Japan (@ShingetsuNews) November 26, 2013

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ckTNdbe3SFc/story01.htm Tyler Durden

Concluding the trifecta of today’s housing data, we present perhaps the most authoritative report on what is actually going on in the market, that by RealtyTrac. What RealtyTrac has to say is in direct contradiction with both the Permits and Case-Shiller data, both of which are now openly reliant on yield-starved institutional investors dumping cash into current or future rental properties. In fact it’s worse, because if RealtyTrac is accurate, the great institutional scramble for any housing is now over – to wit: “Cash Sales Pull Back From Previous Month, Still Represent 44 Percent of Total Sales Institutional Investor Purchases Plummet Nationwide…  Institutional investor purchases represented 6.8 percent of all sales in October, a sharp drop from a revised 12.1 percent in September and down from 9.7 percent a year ago. Markets with the highest percentage of institutional investor purchases included Memphis (25.4 percent), Atlanta (23.0 percent), Jacksonville, Fla., (22.2 percent), Charlotte (14.5 percent), and Milwaukee (12.0 percent).” And plunging.

Some other observations from RT’s October 2013 Residential & Foreclosure Sales Report, which makes one thing clear – while prices may still be going up, transaction volumes have cratered:

Despite the nationwide increase, home sales continued to decrease on an annual basis for the third consecutive month in three bellwether western states: California (down 15 from a year ago), Arizona (down 13 percent), and Nevada (down 5 percent).

 

The national median sales price of all residential properties — including both distressed and non-distressed sales — was $170,000, unchanged from September but up 6 percent from October 2012, the 18th consecutive month median home prices have increased on an annualized basis.

 

The median price of a distressed residential property — in foreclosure or bank owned — was $110,000 in October, 41 percent below the median price of $185,000 for a non-distressed property.

 

“After a surge in short sales in late 2011 and early 2012, the favored disposition method for distressed properties is shifting back toward the more traditional foreclosure auction sales and bank-owned sales,” said Daren Blomquist,vice president at RealtyTrac. “The combination of rapidly rising home prices — along with strong demand from institutional investors and other cash buyers able to buy at the public foreclosure auction or an as-is REO home — means short sales are becoming less favorable for lenders.”

 

More in the full report

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/sN66tKt5WFg/story01.htm Tyler Durden

Concluding the trifecta of today’s housing data, we present perhaps the most authoritative report on what is actually going on in the market, that by RealtyTrac. What RealtyTrac has to say is in direct contradiction with both the Permits and Case-Shiller data, both of which are now openly reliant on yield-starved institutional investors dumping cash into current or future rental properties. In fact it’s worse, because if RealtyTrac is accurate, the great institutional scramble for any housing is now over – to wit: “Cash Sales Pull Back From Previous Month, Still Represent 44 Percent of Total Sales Institutional Investor Purchases Plummet Nationwide…  Institutional investor purchases represented 6.8 percent of all sales in October, a sharp drop from a revised 12.1 percent in September and down from 9.7 percent a year ago. Markets with the highest percentage of institutional investor purchases included Memphis (25.4 percent), Atlanta (23.0 percent), Jacksonville, Fla., (22.2 percent), Charlotte (14.5 percent), and Milwaukee (12.0 percent).” And plunging.

Some other observations from RT’s October 2013 Residential & Foreclosure Sales Report, which makes one thing clear – while prices may still be going up, transaction volumes have cratered:

Despite the nationwide increase, home sales continued to decrease on an annual basis for the third consecutive month in three bellwether western states: California (down 15 from a year ago), Arizona (down 13 percent), and Nevada (down 5 percent).

 

The national median sales price of all residential properties — including both distressed and non-distressed sales — was $170,000, unchanged from September but up 6 percent from October 2012, the 18th consecutive month median home prices have increased on an annualized basis.

 

The median price of a distressed residential property — in foreclosure or bank owned — was $110,000 in October, 41 percent below the median price of $185,000 for a non-distressed property.

 

“After a surge in short sales in late 2011 and early 2012, the favored disposition method for distressed properties is shifting back toward the more traditional foreclosure auction sales and bank-owned sales,” said Daren Blomquist,vice president at RealtyTrac. “The combination of rapidly rising home prices — along with strong demand from institutional investors and other cash buyers able to buy at the public foreclosure auction or an as-is REO home — means short sales are becoming less favorable for lenders.”

 

More in the full report

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/sN66tKt5WFg/story01.htm Tyler Durden

It’s a full-on “Baffle with BS” onslaught this morning. On one hand, the Case-Shiller Top 20 Composite Index rose by 13.3% Y/Y, better than the 13.00% expected, and the highest annual price increase since 2006. Unfortunately, the ramp is coming to an end, especially since the touted NSA data shows that monthly price increases have slowed for the fifth consecutive month, and stood at just 0.7%. At this rate the sequential price change in October will be negative. This is further reinforced by today’s “other” housing report: the September FHFA House Price Index, which unlike Case-Shiller rose 0.3%, below expectations and in line with last month. So on one hand home prices are better than expected, on the other: worse. Clear as mud.

 

But one thing is certain: the surge in the housing market of bankrupt Detroit has never been stronger, and the Y/Y price change just picked up once again, rising to a 3 month high of 17.2% compared to last year.

Perhaps all US cities should just file bankruptcy and see their home prices go through the roof?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/XWedj0_Zvhg/story01.htm Tyler Durden

Call it the last hurrah for Private Equity and hedge funds as they scramble to “telegraph” that there is still some interest in rental property conversions. Despite ever louder cries that the REO-to-Rent and the general surge into rental properties is over (see our report on RealtyTrac’s latest data due out shortly), as many PE firms seek to cash out and to flip their existing exposure, today’s Housing Permits number for October showed just the opposite.  Because while permits for single-family housing units was virtually unchanged month over month, barely rising from 615K to 620K on a seasonally adjusted annualized basis, it was the structures with 5 units or more, aka rentals, that exploded by the most in the past two months going back all the way to 2008.

Whether this is merely an attempt to game the system and buy virtually zero-cost permits by the boatload, thus engineering a last-minute momentum push in the rental market, offloading existing properties to the last and dumbest money around, remains to be seen. However, one thing is clear: the rebound in the conventional, single-family housing market is over, and the only variable remains rental. The variable will become a constant once it becomes clear that increasingly fewer Americans can afford all time record high rent payments.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/rZT9CyAP9cQ/story01.htm Tyler Durden

As we showed very vividly yesterday, while the world is comfortably distracted with mundane questions of whether the Fed will taper this, the BOJ will untaper that, or if the ECB will finally rebel against an “oppressive” German regime where math and logic still matter, the real story – with $3.5 trillion in asset (and debt) creation per year, is China. China, however, is increasingly aware that in the grand scheme of things, its credit spigot is the marginal driver of global liquidity, which is great of the rest of the world, but with an epic accumulation of bad debt and NPLs, all the downside is left for China while the upside is shared with the world, and especially the NY, London, and SF housing markets. Which is why it was not surprising to learn that China has drafted rules banning banks from evading lending limits by structuring loans to other financial institutions so that they can be recorded as asset sales, Bloomberg reports.

Specifically, China appears to be targeting that little-discussed elsewhere component of finance, shadow banking. Per Bloomberg, the regulations drawn up by the China Banking Regulatory Commission impose restrictions on lenders’ interbank business by banning borrowers from using resale or repurchase agreements to move assets off their balance sheets. Banks would also be required to take provisions on such assets while the transactions are in effect. Ironically, it may be that soon China will be more advanced in recognizing the various exposures of shadow banking than the US, which is still wallowing under FAS 140 which allows banks to book a repo as both an asset and a liability. 

Recall from a Matt King footnote in his seminal “Are the Brokers Broken?”

Quite apart from the fact that FAS 140 contradicts itself (with paragraph 15 (d) making borrowed versus pledged transactions off balance sheet, and paragraph 94 making them on balance sheet, a topic complained about by many broker-dealers immediately after its issue), there seems to be little consensus as to who is the borrower and who is the lender. As far as we can tell, terms like ‘borrower’ and ‘lender’ are used in exactly the opposite sense in the accounting regulations relative to standard market practice. The description above follows common market practice. The accounting documents seem to refer to this the other way around, a source of confusion commented upon in some of the accounting literature

So while in the US one may be a borrower or a lender at the same time courtesy of lax regulatory shadow banking definition (depending on how much the FASB has been bribed by the highest bidder), in China things will very soon become far more distinct:

The rules would add to measures this year tightening oversight of lending, such as limits on investments by wealth management products and an audit of local government debt, on concerns that bad loans will mount. The deputy head of the Communist Party’s main finance and economic policy body warned last week that one or two small banks may fail next year because of their reliance on short-term interbank borrowing.

 

“China’s banks and regulators are playing this cat-and-mouse game in which the banks constantly come up with new gimmicks to bypass regulations,” Wendy Tang, a Shanghai-based analyst at Northeast Securities Co., said by phone. “The CBRC has no choice but to impose bans on their interbank business, which in recent years has become a high-leverage financing tool and may at some point threaten financial stability.”

Cutting all the fluff aside, what China is doing is effectively cracking down on the the wild and unchecked repo market, and specifically re-re-rehypothecation, which allows one bank to reuse the same ‘asset’ countless times, and allow it to appear in numerous balance sheets.

The proposed rules target a practice where one bank buys an asset from another and sells it back at a higher price after an agreed period.

The reason why China is suddenly concerned about shadow banking is that it has exploded as a source of funding in recent years:

Mid-sized Chinese banks got 23 percent of their funding and capital from the interbank market at the end of 2012, compared with 9 percent for the largest state-owned banks, Moody’s Investors Service said in June. The ratings company forecast a further increase in non-performing loans as weaker borrowers find it hard to refinance.

And while we are confident Chinese financial geniuses will find ways to bypass this attempt to curb breakneck credit expansion in due course, in the meantime, Chinese liquidity conditions are certain to get far tighter.

This is precisely the WSJ reported overnight, when it observed that yields on Chinese government debt have soared to their highest levels in nearly nine years amid Beijing’s relentless drive to tighten the monetary spigots in the world’s second-largest economy. “The higher yields on government debt have pushed up borrowing costs broadly, creating obstacles for companies and government agencies looking to tap bond markets. Several Chinese development banks, which have mandates to encourage growth through targeted investments, have had to either scale back borrowing plans or postpone bond sales.”

This should not come as a surprise in the aftermath of the recent spotlight on China’s biggest tabboo topic of all: the soaring bad debt, which is the weakest link in the entire, $25 trillion Chinese financial system (by bank assets). So while the Fed endlessly dithers about whether to taper, or not to taper, China is very quietly moving to do just that. Only the market has finally noticed:

The slowing pace of bond sales from earlier in the year is reviving worries of reduced credit and soaring funding costs that were sparked in June, when China’s debt markets were rattled by a cash crunch.

 

The rise in borrowing costs and shrinking access to credit could undercut the recent uptick in China’s economy that global investors in stock, commodity and currency markets have cheered. Wobbly growth in China could undermine economic recovery in the rest of the world.

 

“If borrowing costs don’t fall in time, whether the real economy could bear the burden is a big question,” said Wendy Chen, an economist at Nomura Securities.

 

Chinese bond yields are rising amid a lack of demand among the big banks, pension funds and other institutional money managers, analysts say. These investors, traditionally the heavyweights in China’s bond market, have seen their funding costs rise in tandem with interbank lending rates, which are controlled by China’s central bank. The country’s bond market is largely closed to foreign investors.

 

The yield on China’s benchmark 10-year government bond was at 4.65% Monday, down from 4.71% Friday. Last Wednesday’s 4.72% was the highest since January 2005, according to data providers WIND Info and Thomson Reuters. The record is 4.88% set in November 2004. Bond yields and prices move in opposite directions.

 

“The recent sharp rise in bond yields was mostly due to worsening funding conditions and growing expectations for a tighter monetary policy as Beijing seeks to deleverage the economy,” said Duan Jihua, deputy general manager at Guohai Securities.

 

As government-bond yields have risen, the average yield on debt issued by China’s highest-rated companies rose to 6.21% as of Friday—the highest since 2006, when WIND Info began compiling the data.

In conclusion, it goes without saying that should China suddenly be hit with the double whammy of regulatory tightening in both shadow and traditional funding liquidity conduits, that things for the world’s biggest and fastest creator of excess liquidity are going to turn much worse. We showed as much yesterday:

If the Chinese liquidity spigot – which makes the Fed’s and BOJ’s QE both pale by comparison – is indeed turned off, however briefly, then quietly look for the exit doors.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/BaaUyN4AYc4/story01.htm Tyler Durden

As we showed very vividly yesterday, while the world is comfortably distracted with mundane questions of whether the Fed will taper this, the BOJ will untaper that, or if the ECB will finally rebel against an “oppressive” German regime where math and logic still matter, the real story – with $3.5 trillion in asset (and debt) creation per year, is China. China, however, is increasingly aware that in the grand scheme of things, its credit spigot is the marginal driver of global liquidity, which is great of the rest of the world, but with an epic accumulation of bad debt and NPLs, all the downside is left for China while the upside is shared with the world, and especially the NY, London, and SF housing markets. Which is why it was not surprising to learn that China has drafted rules banning banks from evading lending limits by structuring loans to other financial institutions so that they can be recorded as asset sales, Bloomberg reports.

Specifically, China appears to be targeting that little-discussed elsewhere component of finance, shadow banking. Per Bloomberg, the regulations drawn up by the China Banking Regulatory Commission impose restrictions on lenders’ interbank business by banning borrowers from using resale or repurchase agreements to move assets off their balance sheets. Banks would also be required to take provisions on such assets while the transactions are in effect. Ironically, it may be that soon China will be more advanced in recognizing the various exposures of shadow banking than the US, which is still wallowing under FAS 140 which allows banks to book a repo as both an asset and a liability. 

Recall from a Matt King footnote in his seminal “Are the Brokers Broken?”

Quite apart from the fact that FAS 140 contradicts itself (with paragraph 15 (d) making borrowed versus pledged transactions off balance sheet, and paragraph 94 making them on balance sheet, a topic complained about by many broker-dealers immediately after its issue), there seems to be little consensus as to who is the borrower and who is the lender. As far as we can tell, terms like ‘borrower’ and ‘lender’ are used in exactly the opposite sense in the accounting regulations relative to standard market practice. The description above follows common market practice. The accounting documents seem to refer to this the other way around, a source of confusion commented upon in some of the accounting literature

So while in the US one may be a borrower or a lender at the same time courtesy of lax regulatory shadow banking definition (depending on how much the FASB has been bribed by the highest bidder), in China things will very soon become far more distinct:

The rules would add to measures this year tightening oversight of lending, such as limits on investments by wealth management products and an audit of local government debt, on concerns that bad loans will mount. The deputy head of the Communist Party’s main finance and economic policy body warned last week that one or two small banks may fail next year because of their reliance on short-term interbank borrowing.

 

“China’s banks and regulators are playing this cat-and-mouse game in which the banks constantly come up with new gimmicks to bypass regulations,” Wendy Tang, a Shanghai-based analyst at Northeast Securities Co., said by phone. “The CBRC has no choice but to impose bans on their interbank business, which in recent years has become a high-leverage financing tool and may at some point threaten financial stability.”

Cutting all the fluff aside, what China is doing is effectively cracking down on the the wild and unchecked repo market, and specifically re-re-rehypothecation, which allows one bank to reuse the same ‘asset’ countless times, and allow it to appear in numerous balance sheets.

The proposed rules target a practice where one bank buys an asset from another and sells it back at a higher price after an agreed period.

The reason why China is suddenly concerned about shadow banking is that it has exploded as a source of funding in recent years:

Mid-sized Chinese banks got 23 percent of their funding and capital from the interbank market at the end of 2012, compared with 9 percent for the largest state-owned banks, Moody’s Investors Service said in June. The ratings company forecast a further increase in non-performing loans as weaker borrowers find it hard to refinance.

And while we are confident Chinese financial geniuses will find ways to bypass this attempt to curb breakneck credit expansion in due course, in the meantime, Chinese liquidity conditions are certain to get far tighter.

This is precisely the WSJ reported overnight, when it observed that yields on Chinese government debt have soared to their highest levels in nearly nine years amid Beijing’s relentless drive to tighten the monetary spigots in the world’s second-largest economy. “The higher yields on government debt have pushed up borrowing costs broadly, creating obstacles for companies and government agencies looking to tap bond markets. Several Chinese development banks, which have mandates to encourage growth through targeted investments, have had to either scale back borrowing plans or postpone bond sales.”

This should not come as a surprise in the aftermath of the recent spotlight on China’s biggest tabboo topic of all: the soaring bad debt, which is the weakest link in the entire, $25 trillion Chinese financial system (by bank assets). So while the Fed endlessly dithers about whether to taper, or not to taper, China is very quietly moving to do just that. Only the market has finally noticed:

The slowing pace of bond sales from earlier in the year is reviving worries of reduced credit and soaring funding costs that were sparked in June, when China’s debt markets were rattled by a cash crunch.

 

The rise in borrowing costs and shrinking access to credit could undercut the recent uptick in China’s economy that global investors in stock, commodity and currency markets have cheered. Wobbly growth in China could undermine economic recovery in the rest of the world.

 

“If borrowing costs don’t fall in time, whether the real economy could bear the burden is a big question,” said Wendy Chen, an economist at Nomura Securities.

 

Chinese bond yields are rising amid a lack of demand among the big banks, pension funds and other institutional money managers, analysts say. These investors, traditionally the heavyweights in China’s bond market, have seen their funding costs rise in tandem with interbank lending rates, which are controlled by China’s central bank. The country’s bond market is largely closed to foreign investors.

 

The yield on China’s benchmark 10-year government bond was at 4.65% Monday, down from 4.71% Friday. Last Wednesday’s 4.72% was the highest since January 2005, according to data providers WIND Info and Thomson Reuters. The record is 4.88% set in November 2004. Bond yields and prices move in opposite directions.

 

“The recent sharp rise in bond yields was mostly due to worsening funding conditions and growing expectations for a tighter monetary policy as Beijing seeks to deleverage the economy,” said Duan Jihua, deputy general manager at Guohai Securities.

 

As government-bond yields have risen, the average yield on debt issued by China’s highest-rated companies rose to 6.21% as of Friday—the highest since 2006, when WIND Info began compiling the data.

In conclusion, it goes without saying that should China suddenly be hit with the double whammy of regulatory tightening in both shadow and traditional funding liquidity conduits, that things for the world’s biggest and fastest creator of excess liquidity are going to turn much worse. We showed as much yesterday:

If the Chinese liquidity spigot – which makes the Fed’s and BOJ’s QE both pale by comparison – is indeed turned off, however briefly, then quietly look for the exit doors.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/BaaUyN4AYc4/story01.htm Tyler Durden