Wall Street Responds To China's QE: Beijing Finds Lack Of Faith Disturbing

China warns "the outside world doesn't get it, we do," in a statement related to the "stealth QE" they unleashed yesterday, noting investorsd "do not realize that today's Chinese economy is moving towards "new normal" in the process," and "need to accept the volatility of economic data," during this transition. Crucially, PBOC adviser Chen Yulu clarifies what Western central banks simply cannot grasp: "Hoping for stimulus policies in the face of increased economic pressure is short-sighted and does no good to long-term economic development," warning investors should not expect "strong stimulus." Wall Street is less than exuberant about the liquidity injection, as the impact on real economy may be limited due to lenders' risk aversion.

As Xinhua reports,

China should stick to prudent monetary policy even as its economy faces “relatively large” downward pressure, Xinhua reports, citing PBOC adviser Chen Yulu.

  • China should not cut interest rate as long as it can avoid it, Chen says
  • China has plenty of fine-tuning tools to maintain M2 growth at about 13%
  • China shouldn’t adopt “strong stimulus,” Chen says
  • China has targeted RRR cut, open market operation tools
  • Chen hopes China can introduce deposit insurance by year-end

Calls for stimulus policies including interest rate cuts following negative economic data suggest a lack of faith in China’s reform efforts, Xinhua News Agency said in an unsigned commentary in Chinese yday.

  • Hoping for stimulus policies in face of increased economic pressure is short-sighted and does no good to long-term economic development: Xinhua
  • China has enough tolerance and policy tools to deal with economic slowdown: Xinhua

And Wall Street, while happy it happened in the short-term, is less sanguine about the impact in the future… (via Bloomberg)

PBOC’s reported liquidity injection is aimed at addressing seasonal swings in cash availability, while impact on real economy may be limited as lenders turn risk-averse, analysts say.

Haitong Securities:

  • Monetary easing is moving in the “wrong direction”; quantitative easing so far this year has yet to bring down borrowing costs
  • PBOC should still lower interest rates to spur investment and consumption

UBS:

  • PBOC is likely preempting a seasonal surge in demand for cash, especially since recent increase in FX inflows has been poor despite record trade surpluses; may also aim to buffer negative impact from recent CBRC rule on deposit deviation
  • Liquidity provided to five big commercial banks that are less constrained by loan-deposit ratios would make it easier to increase credit supply across the board
  • Interest rate on standing lending facility likely in 3.5%-4% range
  • Liquidity injection may have little impact on continued property downturn, excessive industrial capacity and weak business outlook

Barclays:

  • Targeted easing measures since June provide PBOC more flexibility and control in managing monetary conditions and offering short-term liquidity, but impact on real economy and targeted sectors is limited
  • Measures may not arrest growth moderation; still sees rate cut inevitable in coming quarters, likely 4Q 2014-1Q 2015

China Merchants Bank:

  • Given rising risk-aversion among lenders, liquidity injection may not motivate them to lend
  • SLF may be authorities’ last attempt to test new policy measure instead of easing via conventional tools; if it fails to achieve expected results, they may introduce more broad-based easing
  • Rate cut would be a more effective tool; will also provide more stable environment for reform

Citic:

  • Move avoids being too aggressive in easing while funding support may come from likely jump in fiscal spending in December when SLF expires
  • Tenor of SLF means money more likely to be invested in bonds rather than off-balance-sheet lending
  • Rate cut may not be good option; limited rate tool means cut to current benchmark rate may trigger outflow of liquidity from banking sector

Guosen Securities:

  • Move may be aimed at providing liquidity before end-Sept. IPOs and likely seasonal cash squeeze; use of SLF instead of reverse repos shows PBOC wants to avoid sending a “too-loose” signal in its monetary stance
  • Putting cash into big lenders’ pockets is a way of pushing commercial banks not to hoard cash; big banks are likely to buy more long-end bonds to help push down funding costs

Nomura:

  • Size of injection equivalent to broad-based RRR cut of 50 bps, and this is the first time PBOC has used SLF since Feb.

BofA:

  • “A slew” of other easing and stimulus measures may be announced in coming weeks, likely including lowering mortgage rates and easing the loan-to-deposit ratio
  • Chances of universal RRR cut or rate reduction have shrunk, especially given a Xinhua article saying that calls for a rate cut suggest a lack of trust in reforms
  • If news of injection confirmed, bonds may rally and swap curve will go down, especially front end
  • While this injection is bigger than the SLF conducted in the first quarter of 340b yuan, considering upcoming IPOs and the national holiday, the immediate liquidity impact may not be as big as it seems

Credit Agricole CIB:

  • Targeted measures may be capping rates, and impact is likely to be seen more at front end of swaps, while any reaction on tenors beyond two-year may not be sustained
  • CNY repo-IRS curve is likely to steepen across 1-2 year or 1-3 year segments

*  *  *
As Chen concludes:

"Strong regulatory reform + clever" policy model is becoming the new normal in China's economy to maintain the development of "stabilizers" to achieve China's promised steady growth, pro-reform, structural adjustment, benefit people's livelihood.

*  *  *
It appears Iron Ore prices are not buying the exuberance…




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Zane Kesey and the New Merry Pranksters’ Acid(-Free) Tests

A technicolor dream bus called “Furthur”
captained by a man named Kesey is zigzagging across the country.
It’s no coincidence that exactly 50 years ago, a nearly identical
magic trip took place.

Zane Kesey is the son of American literary and cultural icon,
Ken Kesey, who participated in early government tests with
psychoactive drugs like LSD, wrote the powerfully
anti-establishment novel One Flew Over the Cuckoos
Nest
, and then gathered on a busload of folks who called
themselves Merry Pranksters and travelled the country experimenting
with drugs, playing avant-garde music, and spreading love and
mischief. Kesey and his gang were integral bodies in the
constellation of American counterculture, whizzing around and often
colliding with Beatnik-era survivors like Neal Cassidy, budding
writers like Hunter Thompson, groups like the Hells Angels, and
yet-unknown bands like The Grateful Dead.

Zane, who has the same mountain man frame and infectious smile
as his father, thinks a lot of that stuff was pretty cool, so this
May he launched a Kickstarter campaign and raised more than enough
funds to do the trip again. Wearing an electric-blue zebra-stripe
carnival-prize pimp hat and a day-glo-splattered jumpsuit, he
rolled into the college town of Kent, Ohio this Monday and
explained his aim:

On the surface we’re doing the 50th anniversary trip
and just going out and doing a bus trip and having fun, but deeper
down we’re setting out to see what that seed has blossomed into and
how much of the ’60s is still out there and whether it’s thrived or
shriveled on the vine and so far we’re seeing a lot of really good
stuff.

The nutshell of the ’60s and almost what made it fall apart is
[the idea that] all you need is love. And if you got everyone on
that same page it would be a beautiful world. Not everybody got on
that page. I’d still like to get everybody on that page.

Another part of the goal is to raise interest and money for a
long-delayed restoration project of the original Furthur bus (there
are several), to preserve that piece of American history. He and
his pranksters stop in cities for jam band shows, play some music
of their own, and sell blotter paper. Zane makes it clear, the
paper is just art. It’s drug free and so is the bus.

He’s never had a taste for LSD and says that although drugs can
be liberating, they were not an unequivocally positive feature of
the movement his father started. “It’s really important for us not
to have that in the trip. And ‘don’t do drugs’ is not necessarily
our message. As long as you do all the steps you did before, you
dress up crazy and act crazy and have psychedelic music and lights
and everybody’s having fun, it can be just as much fun.”

His intrepid fellow travelers seem to agree. They range in age
from “Pinky,” who just turned 21, to some older souls who almost
certainly qualify for Social Security. Brendan, who says he’s “an
outlaw in spirit” just joined the bus this week, claims he traveled
all the way from Iraq to part of the fun. All decked out in hippie
and raver attire, they enjoy having dance parties going down the
highway.

Asked about their best experiences so far on this journey, many
said they couldn’t single any out.

“Every day is the most interesting day with the pranksters,”
says Matt, who serves as documentarian for the trip. “They’re going
to be friends for life.” For him, “a big part of the message is
showing that we can go even further in another 50 years” in terms
of developing music, the arts, and the freedom to be “outgoing and
creative and not caring what people think about you.”

They’re warm, if elusive, individuals. Some of them like
“Thumpah” go by their prankster nickname instead of their given
name. He wants to “prank at free will and allow people to think
that which isn’t really is, but at the same time in very humorous
gesture.” Far out.

Scotty, a.k.a. “Dontcha Know,” says one of their favorite
recurring is to tell someone who looks rather serious, “Hey, you
dropped something.” The person looks down. “Oh, you dropped your
smile!”

“I hate seeing people all depressed and driving in their boring
cars and going to their boring jobs and thinking we have to be on
this path. It doesn’t have to be like that.” says a young woman
named Enthusiastic. She’s a 7th grade teacher and wants
to “show kids that they can change the future” by “taking back our
freedom and really using it. Making new music, exploring new ideas.
Going further forever.”

It’s a tall order to capture and recreate the energy, optimism,
and absurdist humor that shaped American counterculture 50 years
ago, but today’s pranksters come at with a palpably genuine
attitude, and they do succeed.

The tour is making stops in Maine and Rhode Island, and then
they’re heading, rumor has it, for a stop in San Francisco before
parking the bus back on the Kesey property in Oregon.

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Zane Kesey and the New Merry Pranksters' Acid(-Free) Tests

A technicolor dream bus called “Furthur”
captained by a man named Kesey is zigzagging across the country.
It’s no coincidence that exactly 50 years ago, a nearly identical
magic trip took place.

Zane Kesey is the son of American literary and cultural icon,
Ken Kesey, who participated in early government tests with
psychoactive drugs like LSD, wrote the powerfully
anti-establishment novel One Flew Over the Cuckoos
Nest
, and then gathered on a busload of folks who called
themselves Merry Pranksters and travelled the country experimenting
with drugs, playing avant-garde music, and spreading love and
mischief. Kesey and his gang were integral bodies in the
constellation of American counterculture, whizzing around and often
colliding with Beatnik-era survivors like Neal Cassidy, budding
writers like Hunter Thompson, groups like the Hells Angels, and
yet-unknown bands like The Grateful Dead.

Zane, who has the same mountain man frame and infectious smile
as his father, thinks a lot of that stuff was pretty cool, so this
May he launched a Kickstarter campaign and raised more than enough
funds to do the trip again. Wearing an electric-blue zebra-stripe
carnival-prize pimp hat and a day-glo-splattered jumpsuit, he
rolled into the college town of Kent, Ohio this Monday and
explained his aim:

On the surface we’re doing the 50th anniversary trip
and just going out and doing a bus trip and having fun, but deeper
down we’re setting out to see what that seed has blossomed into and
how much of the ’60s is still out there and whether it’s thrived or
shriveled on the vine and so far we’re seeing a lot of really good
stuff.

The nutshell of the ’60s and almost what made it fall apart is
[the idea that] all you need is love. And if you got everyone on
that same page it would be a beautiful world. Not everybody got on
that page. I’d still like to get everybody on that page.

Another part of the goal is to raise interest and money for a
long-delayed restoration project of the original Furthur bus (there
are several), to preserve that piece of American history. He and
his pranksters stop in cities for jam band shows, play some music
of their own, and sell blotter paper. Zane makes it clear, the
paper is just art. It’s drug free and so is the bus.

He’s never had a taste for LSD and says that although drugs can
be liberating, they were not an unequivocally positive feature of
the movement his father started. “It’s really important for us not
to have that in the trip. And ‘don’t do drugs’ is not necessarily
our message. As long as you do all the steps you did before, you
dress up crazy and act crazy and have psychedelic music and lights
and everybody’s having fun, it can be just as much fun.”

His intrepid fellow travelers seem to agree. They range in age
from “Pinky,” who just turned 21, to some older souls who almost
certainly qualify for Social Security. Brendan, who says he’s “an
outlaw in spirit” just joined the bus this week, claims he traveled
all the way from Iraq to part of the fun. All decked out in hippie
and raver attire, they enjoy having dance parties going down the
highway.

Asked about their best experiences so far on this journey, many
said they couldn’t single any out.

“Every day is the most interesting day with the pranksters,”
says Matt, who serves as documentarian for the trip. “They’re going
to be friends for life.” For him, “a big part of the message is
showing that we can go even further in another 50 years” in terms
of developing music, the arts, and the freedom to be “outgoing and
creative and not caring what people think about you.”

They’re warm, if elusive, individuals. Some of them like
“Thumpah” go by their prankster nickname instead of their given
name. He wants to “prank at free will and allow people to think
that which isn’t really is, but at the same time in very humorous
gesture.” Far out.

Scotty, a.k.a. “Dontcha Know,” says one of their favorite
recurring is to tell someone who looks rather serious, “Hey, you
dropped something.” The person looks down. “Oh, you dropped your
smile!”

“I hate seeing people all depressed and driving in their boring
cars and going to their boring jobs and thinking we have to be on
this path. It doesn’t have to be like that.” says a young woman
named Enthusiastic. She’s a 7th grade teacher and wants
to “show kids that they can change the future” by “taking back our
freedom and really using it. Making new music, exploring new ideas.
Going further forever.”

It’s a tall order to capture and recreate the energy, optimism,
and absurdist humor that shaped American counterculture 50 years
ago, but today’s pranksters come at with a palpably genuine
attitude, and they do succeed.

The tour is making stops in Maine and Rhode Island, and then
they’re heading, rumor has it, for a stop in San Francisco before
parking the bus back on the Kesey property in Oregon.

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“If it was wrong not to protect the consulate in Benghazi, then it’s wrong not to protect the consulate in Erbil.”

In an interview with Nick Gillespie, Sen. Rand Paul (R-Ky.)
explains why he supports limited military action in Iraq:

While the beheadings of U.S. citizens James
Foley and Steven Sotloff
 are a factor, he says, Paul is
especially insistent that protecting the U.S.
consulate in Erbil
, Iraq is a major cause for ongoing concern.
Erbil is near Mosul, a city overrun by ISIS with relative ease, he
says, and it’s of paramount importance that the United States
protect its diplomatic personnel in Iraq.

“If it was wrong not to protect the consulate in Benghazi, then
it’s wrong not to protect the consulate in Erbil,” he says.

In the same conversation, Paul also reiterates his commitment to
congressional authorization of all warmaking, the need to stay out
of Syria, and why Middle Eastern countries must be the ones who
bear the biggest burden in defeating ISIS.

View this article.

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"If it was wrong not to protect the consulate in Benghazi, then it's wrong not to protect the consulate in Erbil."

In an interview with Nick Gillespie, Sen. Rand Paul (R-Ky.)
explains why he supports limited military action in Iraq:

While the beheadings of U.S. citizens James
Foley and Steven Sotloff
 are a factor, he says, Paul is
especially insistent that protecting the U.S.
consulate in Erbil
, Iraq is a major cause for ongoing concern.
Erbil is near Mosul, a city overrun by ISIS with relative ease, he
says, and it’s of paramount importance that the United States
protect its diplomatic personnel in Iraq.

“If it was wrong not to protect the consulate in Benghazi, then
it’s wrong not to protect the consulate in Erbil,” he says.

In the same conversation, Paul also reiterates his commitment to
congressional authorization of all warmaking, the need to stay out
of Syria, and why Middle Eastern countries must be the ones who
bear the biggest burden in defeating ISIS.

View this article.

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Is Constitution Day Constitutional?

I don’t agree with everything in Dahlia Lithwick’s
Constitution Day column
, but I agree about this:

"Well, why can't we just make a law against flag burning?" "Because that law would be unconstitutional. But if we change the Constitution—" "Then we could make all sorts of crazy laws!" "Now you're catching on!"You say you’ve never heard of
Constitution Day™, a federally mandated holiday. Well, that is
probably because it’s only been a federally mandated holiday since
2004, when Sen. Robert C. Byrd of West Virginia invented it in much
the same fashion that all of our greatest national festivals have
come about: He tucked it into a massive appropriations bill. The
relevant rider of the Omnibus Spending Bill of 2004 amended Title
36 of the United States Code (Patriotic and National Observances,
Ceremonies, and Organizations) by substituting “Constitution Day”
for “Citizenship Day.”

Constitution Day commemorates the signing of the U.S. Constitution
on Sept. 17, 1787, and also celebrates “all who, by coming of age
or naturalization, have become citizens.” The law itself provides
that all educational institutions receiving federal funds—which
means virtually all of them—must offer up some sort of educational
program about the Constitution. It also requires that the head of
every federal agency offer each employee educational and training
materials about the Constitution on that day. If Constitution Day
falls on a weekend, as it did in 2005, 2006, and 2011, it is
observed on the contiguous weekday.

Now, mandating the nationwide teaching of the document that
protects the most fundamental American freedoms may itself be
unconstitutional, as Nelson
Lund
and the
Heritage Foundation noted back in 2006
. But, of course, that is
just one of those idiosyncratic things that makes the holiday so
special.

If you follow the Heritage and Lund links, you’ll see
strict-constructionist arguments of a sort that Slate
writers do not usually endorse. I’m not complaining; it’s just odd
that this, of all possible issues, is where the site would find
room for those ideas. I suspect Lithwick just couldn’t resist the
#SlatePitch contrarianism of suggesting Constitution Day is
unconstitutional.

Whether or not she’s right about the legal question, I don’t
think federal education mandates are a good idea. In this case, the
mandate has the additional problem of being confusingly vague,
especially since “all educational institutions receiving federal
funds” is an awfully broad category. And that leads us to my
favorite detail in Lithwick’s article: “In 2005, when the law
first went into effect, massage schools and cosmetology programs
evidently flew into a collective panic over how to meet its
requirements.”

Bonus link: From the Yes, Libertarians Like To Argue
About Things You Thought Were Settled files, here is
Reason‘s 1987 debate, “Did
the Constitution Betray the Revolution?

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A. Barton Hinkle: We Need More Innocence Commissions

According to a study published in the journal of
the National Academies of Sciences, more than two-thirds of all the
innocent people on death row have yet to be exonerated.

Civil libertarians and liberals justifiably find this
outrageous. Conservatives should, too. After all: For every
innocent person sitting behind bars, there’s a guilty perp walking
around free, laughing his head off at the sap who took the fall for
him—and the boneheads who made it happen. What’s the solution? It
would be a good start, argues A. Barton Hinkle, if every state
followed the lead of North Carolina and established its own
Innocence Inquiry Commission. It’s time to start righting the
wrongs of our broken criminal justice system.

View this article.

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One of the most innovative cities in the world [you’ll never guess]

Madeline Night One of the most innovative cities in the world [you’ll never guess]

September 17, 2014
Talca, Chile

[Editor’s Note: This is the first in a multi-part series on some of the top Startup ecosystems in the world]

When Chris D. came up with a great idea for his startup he was already thinking outside the box.

But his innovation didn’t stop there. His thought process extended far beyond the business idea into WHERE to best execute his plan.

He was already established in New York. And had he followed the conventional wisdom, that’s where he would have set up shop.

But then again, doing things differently and better than others is the hallmark of a great entrepreneur.

Comparing costs, lifestyle, and entrepreneurial environments, he found that by leaving the country he could have stronger opportunities and a better work environment for half the cost.

And it was anything but a sacrifice.

Trading in a tiny flat in Manhattan, he and his co-founder were able to rent a 6-bedroom penthouse apartment, complete with a pool, gorgeous views, and a maid.

Yes you read that right, a maid.

Honestly, what could be better for focusing on your big idea than not having to think about cooking and cleaning?

Bootstrapping your startup is definitely a lot of work, but that doesn’t mean it can’t be fun while you do it.

And it’s not just about your lifestyle, but the business environment as well.

The goal isn’t of course to find just the cheapest place in the world to live. You also want to find a place where you can start a business quickly and easily, and where there is low taxation and availability of the talent you need.

It’s great that a number of cities around the world are hotly competing to become the next Silicon Valley.

In the process, they are creating excellent and exceptionally welcoming environments for new businesses.

They want you to start your business there, so they are going out of their way to entice entrepreneurs with better working spaces and greater access to mentorship and capital.

This is exactly what’s happening in Medellín, Colombia, which is where Chris chose to launch his startup. (Surprise!)

Named by the Wall Street Journal as the most innovative city in the world in 2012, Medellín has so much to offer budding entrepreneurs.

People are coming from around the world to be a part of Medellin’s environment of openness and opportunity, enhancing these aspects even further.

And the Colombian government is actively making it easier foreigners to live and work in the city, and to encourage business and entrepreneurship as well.

Medellin’s startup ecosystem now consists of numerous incubators, co-working spaces, and networking events.

And supplementing the vibrant nightlife and social scene of Medellín, you can keep busy with regular events specifically designed for entrepreneurs, hosted weekly by groups like CoffeeGrid and the Medellin Entrepreneurship Society.

Both domestic and international ventures that come to the city can dive in to this strong network of entrepreneurs.

And if accepted to an incubation program, foreigners can benefit even further from the available mentors and facilitated access to VC funding.

Why spend your time fighting upstream, struggling to cover expenses and to get noticed in a far more saturated arena?

There are better, more innovative ways to make it happen.  After all, that’s what startups are all about.

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Homebuilder Sentiment Soars To 9 Year High (Mortgage Apps 14-Year Low)

Despite lagging mortgage applications and home sales, homebuilder sentiment surged for the 4th month in a row to 59 (against expectations of 56) to its highest since November 2005. Prospective Buyer Traffic (hope) soared to 47. The South region rose dramatically as Midwest fell. The disconnect between hard data in the housing market and soft survey guesses by the homebuilders grows ever wider…

 

First this…

 

4th beat in a row to Nov 2005 highs…

 

Midwest lost the lead to the South…

 

Of course, We’ve seen this before…

 

Charts:Bloomberg




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Not All That It Seems

Submitted by Lance Roberts of STA Wealth Management,

Once again the world awaits the Janet Yellen’s post-FOMC meeting press conference. It is almost like the old “Batman” series with Adam West when they would get to the end of the show and leave you with a “cliffhanger:”

“It’s a questionably unquestionable situation…
Are the markets prepared for a shocking answer…
Will Janet Yellen announce the final end to QE? Or electrify the bulls with more accommodation?
Can Yellen’s eloquent elocution energize the markets…or will she magnetize the bears?
Tune in next time Fed fans…Same Fed time…Same Fed channel”

While we wait in breathless anticipation for the next clue, I do find it interesting there is a rising belief that things have returned to some level of normalcy. As I noted yesterday, the bullish mantra is alive and well, and analysts have all turned their eyes skyward with price targets reaching as high as 2800 for the S&P 500 as noted by Jeffrey Saut at Raymond James:

Since 1989 the S&P 500’s earnings have grown by 6.15% annually. Extrapolating that into 2020 implies earnings of $183.36 (see chart on the next page). Using the historical median P/E ratio of 15.5x yields a price target of 2842 in 2020.

Estimated-Earnings-Growth-091514

While the technical trends remain firmly intact, which confirms the bullish trend and encourages portfolios to be more heavily tilted towards equities at the current time, there are certainly some underlying issues that are concerning. Here are a couple worth noting.

Artificial Drivers

According to the Wall Street Journal:

“Companies are buying their own shares at the briskest clip since the financial crisis, helping fuel a stock rally amid a broad trading slowdown. Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008."

Stock-Buybacks-091614

"The growth in buybacks comes as overall stock-market volume has slumped, helping magnify the impact of repurchases. In mid-August, about 25% of non-electronic trades executed at Goldman Sachs Group Inc., excluding the small, automated, rapid-fire trades that have come to dominate the market, involved companies buying back shares. That is more than twice the long-run trend, according to a person familiar with the matter.

 

Companies with the largest buyback programs by dollar value have outperformed the broader market by 20% since 2008, according to an analysis by Barclays.”

This is something that I addressed a while back in “4 Tools Of Corporate Profitability.” While analysts have ballyhooed over surging corporate profits, they have come at a great expense to the average worker. Those profits, driven initially by massive cost cutting and then stock buy backs, are artificial in nature and why prosperity for the bottom 80% of the economy has remained elusive.

Wages-Profits-Ratio-091614

[Note: While corporate profit “margins” rose in the second quarter to new all-time highs, it is interesting to note that corporate profits did NOT.]

The primary issue with both cost cutting and share repurchases is that they are both “finite” in nature. With the ability to cut costs primarily exhausted and share repurchases showing signs of slowing; the primary question for market bulls will be the driver for profit margins in the months ahead? If you were hoping for global growth, you might be a disappointed.

China and Europe Stumble

It is important to note that roughly 40% of domestic corporate profits are derived from the major global trading partners of Japan, China and the Eurozone. It should not be surprising, particularly in today’s globally interlinked economies, that no country can remain an “island” indefinitely. Yet, it is currently believed the the U.S. can remain "decoupled" from the rest of the world.

From Business Insider:

China-Economy-091614-2

“Let's do a quick fly-around of all the disappointing metrics.

  • Analysts expected industrial production to rise 8.8%, but it came in at 6.9%. That's down from 9.0% print in July.
  • Retail sales rose 11.9% instead of 12.1% as expected and 12.2% in July.
  • Fixed-asset investment was up 16.5% versus 16.9% expected and 17.0% previously.

All of this spells trouble, and here's some more: Housing sales were 11% year over year through January to August, versus a 10.5% drop in the first seven months of the year. According to Bloomberg economist Tom Orlik, that slowing in the housing market has been the main driver of all of this discontent.”

More importantly, according to Reuters:

“China's foreign direct investment fell to a low not seen in at least 2-1/2 years in August, underscoring the challenges to growth facing the world's second-biggest economy.

 

The weak investment data came as China's economic growth appears to be hitting a soft patch after a bounce in June, with indicators ranging from imports to industrial output and investment all pointing to sluggish activity.”

Considering that China is a large user of domestic exports, and a large provider of imports (particularly for you Apple product iFans), the weakness underscores real global economic activity.

However, it is not just China that is struggling but the Eurozone as well. The Eurozone is the single largest trading par
tner of the U.S., so it is very important to keep an eye on what is happening there. France, Italy and Spain, among others, have been struggling ever since the financial crisis, however, Germany has been a strong leader and the primary support to Eurozone’s stability.

It now appears that Germany’s “Wirtschaftswunder,” or economic miracle, is coming to an end, via Reuters:

“In recent weeks, the economy that proud German politicians have taken to describing as a ‘growth locomotive’ and ‘stability anchor’ for Europe, has been hit by a barrage of bad news that has surprised even the most ardent Germany skeptics.

 

The big shocker came on Thursday, when the Federal Statistics Office revealed that gross domestic product (GDP) had contracted by 0.2 percent in the second quarter.”

Dislocations between the U.S. economy and that of the Eurozone have occurred in the past but did not last long.

GDP-US-EuroZone-081414

Therefore, either the Eurozone will find the source of a strong economic rebound or the U.S. is going to see slower growth in the months ahead. Currently, it is the latter that is most probable.

The Extinction Of Bears

Despite evidence that global weakness is mounting, the bullishness on Wall Street is at record levels.

As I wrote last week:

"It is a bad sign for the market when all the bears give up. If no-one is left to be converted, it usually means no-one is left to buy.” – Pater Tenebrarum

That quote got me thinking about the dearth of bearish views that are currently prevalent in the market. The chart below shows the monthly level of bearish outlooks according to the Investors Intelligence survey.

Bearish-Sentiment

The extraordinarily low level of "bearish" outlooks combined with extreme levels of complacency within the financial markets has historically been a "poor cocktail" for future investment success. 

It is an interesting time in which we live. The financial media has no concern of negative outcomes, Wall Street has growth priced in that has never occurred in history, and there is NO expectation of a recession built into any forward assumptions. We have indeed discovered financial “Utopia,” or at least that is what is currently believed. I can only conclude with quote from Benjamin Graham via John Hussman:

“During the latter stage of the bull market culminating in 1929, the public acquired a completely different attitude towards the investment merits of common stocks… The answer was, first, that the records of the past were proving an undependable guide to investment; and, second, that the rewards offered by the future had become irresistibly alluring.

 

An alluring corollary of this principle was that making money in the stock market was now the easiest thing in the world. It was only necessary to buy ‘good’ stocks, regardless of price, and then to let nature take her upward course. The results of such a doctrine could not fail to be tragic.”  –  Benjamin Graham & David L. Dodd, Security Analysis, 1934




via Zero Hedge http://ift.tt/1o34DTH Tyler Durden