Month: June 2014

While the growth of China's ghost cities of entirely derelict and unlived-in residential real estate have become anathema; the story of the nation's 'if we build it they will come' commercial real estate bubble has been less exposed but is no less incredible. As Bloomberg reports, China’s project to build a replica Manhattan is taking shape against a backdrop of vacant office towers and unfinished hotels, underscoring the risks to a slowing economy from the nation’s unprecedented investment boom. Stunningly, the development has failed to attract tenants since the first building was finished in 2010 leaving one commercial real estate investor to proclaim, "Investing here won’t be better than throwing money into the water… There will be no way out – it will be very difficult to find the next buyer."

 

China's own Big Apple may be rotting from the core. A new central business district modeled after New York City is going up in Tianjin…but the nation's slowing economy is exacerbating the risks from its unprecedented credit binge…and that's putting China's Manhattan project in jeopardy. Bloomberg TV's China Correspondent Stephen Engle reports.

As Bloomberg explains,

The skyscraper-filled skyline of the Conch Bay district in the northern port city of Tianjin has none of a metropolis’s bustle up close, with dirt-covered glass doors and construction on some edifices halted. The area’s failure to attract tenants since the first building was finished in 2010 bodes ill across the Hai River for the separate Yujiapu development, which is modeled on New York’s Manhattan and remains in progress.

“Investing here won’t be better than throwing money into the water,” Zhang Zhihe, 60, said during a visit to the area last week from neighboring Hebei province to look at potential commercial-property investments. “There will be no way out — it will be very difficult to find the next buyer.”

This is slowing growth dramatically as the realisation of building stuff that no one wants is not sustainable…

Tianjin, a city of 14.7 million people whose center is about 125 kilometers (78 miles) southeast of Beijing’s, saw its economic growth cool to 10.6 percent in the first quarter of 2014 from a year earlier, from 17.4 percent in full-year 2010, compared with a moderation in national expansion over the same period to 7.4 percent from 10.4 percent. An annual pace of 10.6 percent would be the weakest for Tianjin since 1999.

CHART

And Default risk is mounting…

“Both the central and local governments clearly know that a big slump in the property market will significantly magnify financial system risks, and they know it’s a delicate balance,” said Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. The government will try to do everything to ensure an “orderly de-leveraging,” Liu said.

As the streets remain deserted… Ghost offices…

 

Rather ominously Stephen Green, head of Greater China research at Standard Chartered Plc in Hong Kong concludes,

“There will have to be a reckoning,” as sales of bonds by local-government vehicles to repay bank loans are just “buying time,” he said. “The people will pay” for it through bank bailouts, recapitalization with public money or inflation.

But apart from that… and the residential real estate bubble.. and the commodsity financing ponzi scheme… and the promise of no major stimulus… we are sure China wil have a soft landing.

via Zero Hedge http://ift.tt/1pYyu3l Tyler Durden

Submitted by David Stockman of Contra Corner,

The economic releases of the past few days are putting the lie to the Keynesian escape velocity myth. The latter is not just around the corner – and 2014 is now virtually certain to mark the fifth year running when the boom predicted by Wall Street economist at the beginning of the year fizzled as actual results unfolded.

In that context, yesterday’s punk number on personal consumption expenditures during May was the inflection point. Not only did American consumers not come bounding out of their winter ice caves as predicted by virtually every “sell side” economist, the number actually embodied a case of groundhog economics. That is, the May constant dollar PCE (personal consumption expenditure) print of $10.881 trillion suggested that consumers went back into hibernation! It was nearly the same as that during frigid February and actually below the March level of $10.916 trillion. Stated differently, the American consumer is dropping, not shopping, and the winter weather—-that surprising thing called snow and cold—had nothing to do with it.

So this is the time to call out the Wall Street amen chorus. Its impudent insistence that the Fed’s mad money printing campaign is the magic elixir that will revive the main street economy has gone altogether too far.

In that context, a bubblevision guest on Wednesday dismissed the shocking Q1 GDP shrinkage as stale news that reflected events……well,100 days ago! Only in a world were Wall Street stock peddlers masquerading as economists think the world turns on the weekly maneuvers and word clouds of the Fed could 100 days ago be considered irrelevant ancient history.  But the young man in question—-one Dan Greenhaus, chief investment strategist of BTIG—-had an even more preposterous point. Based on the sentiment surveys and other factoids, he had divined that the negative Q1 number reflected January and February results and that the US economy had strongly rebounded in March.

In other words, he had done what amounted to an intra-quarter seasonal adjustment and explained away the following true facts. There have been 265 quarterly GDP prints since 1947; only 18 of these posted a number below the -2.9% recorded for Q1; and in only one of these 18 deeply down quarters was the US economy not in recession. To spot a four-week run rate of sunshine economics hidden in that 13-week stretch of badly slumping activity is surely evidence of too much time at the Kool-Aid dispenser.

Here is the more sober take on the matter. After two months, Q2 real PCE is running at $10.889 trillion, and is therefore clocking in at a 1.2% annualized rate of gain on Q1. Moreover, even if June’s nominal PCE prints at a 0.8% monthly gain—-a rate that has not been realized in years—-Q2 real PCE would still come in well below 2%. And since the Keynesian case requires consumers to come screaming out of the blocks pulling the 70% of GDP accounted for by PCE behind them, the distinct possibility exists that Q2 results will come in below 3%. That means that by mid-2014 the US economy will have barely attained the level posted for Q4 2013.

After all, there are no signs that the other components of Q2 GDP are on any kind of tear. Housing starts are actually below Q1 after two months. Likewise, real fixed business investment has been decelerating over the last few quarters—and there is no indication of a reversal. Likewise, quarter-to-date global trade data offer no hope of a sudden boom in US exports; nor has there been any evident acceleration of government sector consumption and investment. Even if inventory accumulation picks up, there are only three quarters in the last 45 that have added more than 2.0% to the quarterly GDP print.

The truth is, the “consumer is back” narrative is getting pretty tiresome because it is belied by the facts. The May print, for example, reflected only a 1.8% real PCE gain over May 2013. And delving further back into the so-called recovery, it is obvious that real consumer spending growth has been decelerating, not fixing to explode. Thus, the Y/Y gain in May 2013 was 1.9%, and that compared to 2.4% the prior year, and 2.6% the year before that (i.e. the years ending in May 2010). Overall, real PCE has expanded at a only a 1.2% annual rate since its cyclical peak in the spring of 2008.

 

That trend rate is in the sub-basement of modern history. During the prior six-year cycle, for example, real PCE had expanded at a 2.5% rate from the October 2001 peak—or by more than double the rate of the current cycle.

 

Moreover, the latter had the benefit of the Fed’s last push of US households into the stratosphere of peak debt. And it cannot be emphasized enough that era is over. Real PCE growth, therefore, is a function of wage and salary income growth, and it is evident that that latter is not happening. Indeed, the Fed’s wealth effects policy is undoubtedly having a perverse effect.  Corporate boards and CEOs are being rewarded for stock buybacks and restructuring charges.  So they borrow more and hire less.

The Household Leverage Ratio Is Still Off The Charts – Click to enlarge

The truth of the matter is that we are now living on borrowed time. Shortly, we will enter month 61 of the current so-called recovery, meaning that the present cycle is already long-in-the-tooth compared to the 55 months average of 10 cycles since 1949. Yet there are two headwinds that the Kool-Aid drinkers constantly deny.

First, even CPI inflation is back in the two percent zone and possibly accelerating.  That means that real wage and salary incomes are stalling, as is now the case on a year-on-year basis.

Secondly, even the tepid recovery of PCE that we have had—-was achieved at the expense of drawing down the household savings rate to nearly rock-bottom levels, as shown below. Why in the world do Keynesian think that an aging population will defer saving for retirement indefinitely? More importantly, why would monetary policy be designed to punish savers with zero deposit rates for seven years running?

The answer is self-evident. The Wall Street hockey sticks are designed to elicit bullish impulses on main street. Zero interest rates are designed to prop-up risk asset markets—-so that the sheep can once again be led to the slaughter.

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While Marc Faber has said “I will never sell my gold,” he also noted “I like the idea of Bitcoin,” and the battle between the ‘alternative currencies’ continues. The following infographic provides a succinct illustration of the similarities and differences between gold and bitcoin.

 

Please include attribution to www.jmbullion.com with this graphic.

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Jeff Deist, of The Mises View, explains how the Fed has created a perilous landscape in which there is no ‘honest’ pricing left – everything has been distorted. As David Stockman exclaimed, “The system we have now is one in which the Fed decides, through a Politburo of planners sitting in Washington, how much liquidity is necessary, what the interest rates should be, what the unemployment rate should be, and what economic growth should be.”

 

 

As Stockman concludes,

“There is no honest pricing left at all anywhere in the world, because central banks everywhere manipulate and rig the price of all financial assets. We can’t even analyze the economy in the traditional sense anymore, because so much of it depends not on market forces,m but on the whims of the people at the Fed.”

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Despite exuberant Services and Manufacturing PMIs, Bloomberg’s index of CEO sentiment remains stagnant near 2014 lows as April’s hope for Q2 has faded into ‘more of the same’ by June. As Bloomberg’s Rich Yamarone points out, in reality (in spite of all the hope), the second quarter is drawing to a close and it was a rough one for corporate America, with CEOs citing “slower growth in household income overall”, “the recovery remains fragile, especially for customers on a budget”, and perhaps most concerning, “whether or not this softness in store traffic is representative of a permanent sea change in customer behavior or a temporary phenomenon is hard to tell at this stage.”

 

CEO Sentiment remains flat…

 

As can be seen here…

Darden Restaurants [DRI] Earnings Call 6/20/14: “We think about the industry’s maturation. There are a number of things that are driving that. Certainly, slower growth in the boomer population age 50 to 60 and that’s where dining out frequency is the highest, has always been the highest. Slower growth in household income overall; increased competition, not only within full service dining, but also with the emergence of attractive new segments, new dining segments like fast casual and elevated innovation within traditional quick service.”

Sonic Corp. [SONC] Earnings Call 6/23/14: “We did encounter some unexpected commodity cost pressures during the quarter. In particular, lime prices hit a record high during the quarter more than four times their normal price…Beef, cheese and ice cream mix continue to experience significant cost pressures. We have contracted for our ice creams needs at the end of the quarter but continue to pay market prices for cheese in roughly one-half of our ground beef formula, so some uncertainty remains.”

Kroger [KR] Earnings Call 6/19/14: “From an economy and customer shopping behavior, we are seeing strong positive indicators in shopping behavior. Our customers have exhibited less cautious spending behavior, for example. Consistent with the rise in consumer confidence index in May, our own customer research tells us that more customers perceive the economy to be in recovery. While it is obviously welcome news, the recovery remains fragile, especially for customers on a budget.”

Pier 1 Imports [PIR] Earnings Call 6/19/14: “Although our online sales for the quarter were outstanding, overall, the quarter did not unfold as we planned. Store sales and profitability were disappointing, impacted by soft traffic and a higher level of promotional activity than we anticipated. Whether or not this softness in store traffic is representative of a permanent sea change in customer behavior or a temporary phenomenon is hard to tell at this stage.”

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Paul Warburg – the oft-cited ‘father of the Federal Reserve’ – pushes back on those who see him as favoring the issue of ‘fiat money’… No one, he writes, “has given more time and energy to “the fight for sound money,” adding a warning that “all direct connection between the government and the banking business is undesirable.” We suspect Warburg would be turning in his grave at the oligarchy he unleashed…

 

 

h/t @RudyHavenstein

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We noted previously the comedic melt-up in stocks in the last few minutes of the day but away from the simple-to-see shenanigans in VIX and the major equity indices, Nanex shows a massive number of stocks experienced a stunning coordinated WTF moment at 1550ET… unrigged?

Not enough riggedness in the major indices…?

 

Take a look under the covers… (via Nanex)

On Friday, June 27, 2014 at 15:50:00 – 143 stocks suddenly moved at least 2% (with some exceeding 10%) in just a few seconds. There were 678 stocks that moved 1/2 of a percent or more.  This explosion of trading activity dwarfed even the closing seconds of the day, when the annual Russell Reconstitution process occurred (changing of symbols in the Russell Indexes).

1. Each line represents one of 678 stocks that moved 0.5% or more.

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2. Same chart as above, but color coded by reporting exchange.
Note the many green lines after 16:00 when the market closes. These are dark pool trades which were reported late.

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3. Each line represents one of the 143 Stocks that moved 2% or more in a few seconds at 15:50:00. Value scale shows percent change from 15:50:00.

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4. Zooming in closer (27 seconds) we can see there were several waves of explosive activity.

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5. Chart shows about 5 seconds of time.

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Did someone make a dark pool angry?

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Submitted by Lance Roberts of STA Wealth Management,

"Ah, is it just me or does anybody see
The new improved tomorrow isn't what it used to be
Yesterday keeps comin' 'round, it's just reality
It's the same damn song with a different melody

 

The market keeps on crashin'
Tattered jeans are back in fashion
'Stead of records, now it's MP3s
I tell you one more time with feeling
Even though this world is reeling
You're still you and I'm still me
I didn't mean to cause a scene
But I guess it's time to roll up our sleeves

 

The more things change, the more they stay the same."

 

Bon Jovi

This week's "Things To Ponder" is focused on things that, in my opinion, far too many individuals are ignoring. Bob Farrell once wrote that "when all experts and forecasts agree; something else is bound to happen." Today, that is the case as much as it ever was. Despite rising geopolitical risks, weak economic data, deteriorating fundamentals and softer internals – the overwhelming belief is "equities are the only game in town."

Of course, we have seen this mentality many times in past history whether it was 1929, 1987,2000 or 2007. While ever market peak was different, there were all the same. 

Once portfolios are invested, riding the "bull market" wave is the easy part. What the majority of analysts and media forget is that as an investor I do not need information telling me why the market is going up. I am already invested. What I need is information that helps me identify when the wave will crest. Today, I wanted to share some things I will be reading and thinking about over the weekend that we should at least be considering in regards to managing potential portfolio risk.

1) The Beginning Of The End Of The Bull Market? by Mark Hulbert via WSJ Marketwatch

"Few paid attention a couple of weeks ago when the government announced that corporate profitability had declined markedly last quarter.

 

Yet future historians may eventually look back and pinpoint that report as the beginning of the end of this aging bull market. That’s because the first-quarter’s decrease could signal the long-awaited return to historically average profitability levels. If so, the stock market will have to struggle mightily just to keep its head above water over the next five years.

 

Once we make these assumptions, calculating the stock market’s return over the next five years becomes a matter of simple math. The picture isn’t pretty: Its five-year return, annualized, is minus 2.8%."

2) Ultra-Easy Monetary Policy Could Be The Medicine That Kills by Katy Barnato via CNBC

"'Monetary accommodation, to the point of ignoring the stresses and strains of financial stability and what they mean for asset markets and credit markets, is something that needs to be seriously rethought,' the Stephen Roach, Yale lecturer and former chairman of Morgan Stanley Asia told CNBC.

 

'As long as the Fed remains as widely accommodative as a $4.25-4.50 trillion dollar-balance sheet would suggest, there is good reason to question the Fed's commitment to financial stability and there is good reason to believe that we could, in the not too distant future, find ourselves in another mess'"

This concern echoed that of Wilbur Ross, who is also concerned of the potential "bubble" in sovereign debt.

"I've felt for some time that the ultimate bubble, when we look back a few years from now, is going to be sovereign debt, both U.S. and other, because it's way below any sort of reversion to the mean of interest rates,"

3) What We Can Learn From The History Of Interest Rates by Market Anthropology

"We believe that where a complicated market becomes even more so, is when one considers  1.) the relative extreme in yields that was reached at the end of last year, 2.) the uniqueness of the capital markets relative to what the Fed has provided over the past five years; and 3.) the rear-view proximity, density and casualties in participants memories to the spectrum of financial bubbles and crises from LTCM to GFC."

"Although a contraction in the US equity markets has so far failed to materialize, we do expect one to gain traction as the Fed steps further away from their extraordinary measures this fall. Similar to expectations in the mid to late 1940's, we anticipate that investors will continue to support the Treasury market even in the face of inflation – as the broader underlying skepticism of their collective anxieties will finally be realized when equity market conditions pivot lower without extraneous assistance."

4) Q2 Buyback Announcements Lowest In 7 Quarters by Cullen Roche via Pragmatic Capitalist

"'Stock buyback announcements in the second quarter are on track to be the lowest in seven quarters,' said David Santschi, Chief Executive Officer of TrimTabs.  'Buybacks in June have sunk to just $11.5 billion, the lowest level since May 2012.'

 

'The sharp slowdown in buybacks is a negative sign for the U.S. stock market,' Santschi said.  'Share repurchases are the main way companies reduce the float of shares. Perhaps fewer companies like what they see when they look into the future.'

 

TrimTabs explained that the decline in buybacks is not the only cautionary sign for U.S. equity investors. Merger activity has skyrocketed, while companies are selling new shares at the fastest pace since last autumn. 'Our liquidity indicators aren’t as positive for U.S. equities as they were a month ago,' said Santschi.  'While the bull market isn’t necessarily ending, investors should be more cautious on the long side.'"

Also Read: Why Corporate Executives Love Stock Buybacks via Harvard Business Review

 

 

5) Annotated History Of Global Volatilityvia ZeroHedge

"The decline in economic and asset market volatility this year from already low levels in 2013 has been striking, which as Markus Brunnermeier states, means 'the whole system is more prone to a financial crisis when measured volatility is low, which tends to lead to a build-up of risk in the background – the so-called 'volatility paradox'.

"When measured market volatility is low, people feel empowered to take on more leverage and more liquidity mismatch, which leaves the whole system more prone to sharp movements. This dynamic occurred during the 'Great Moderation.' During that period, fundamental and asset volatility was generally low and market participants took on much more leverage."

In The "Wash, Rinse, Repeat" Category: My Credit Score Is Terrible…I'm Surprised They'd Give Me So Much Credit

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