Month: September 2016

When it comes to accounting conventions, the Fed and the BOJ differ in one major way: unlike the Federal Reserve, the BOJ counts its bond holdings at the purchase price, minus amortization costs. In the old days before NIRP this wasn’t an issue because with positive yields, it meant that with time, the value of any central bank bond purchases would accrete through maturity and never lead to a booked loss; however under NIRP, it means that the BOJ is purchasing hundreds of billions in bonds at prices that are so high they guarantee a loss, meaning that by maturity the central banks will face a cumulative loss on the face value of recent bond purchases.

From a purely accounting standpoint, it means that a gap has opened on the BOJ’s balance sheet, representing the difference between the book and face value of the central bank’s monetizations.

How big is the gap? According to Bloomberg as of August, the delta between the balance sheet and face value has ballooned to some 8.7 trillion yen, or $84 billion.

That “gap” is the difference between the 326.7 trillion yen in BOJ bond purchases at face value, and where they are marked on the balance sheet in August, or 335.4 trillion yen. That gap is 42% bigger than before the introduction of negative rates in January, and rapidly rising. At the end of the 2015 fiscal year on March 31, the gap between the two valuations was 6.4 trillion yen and the BOJ wrote down 874 billion yen, according to documents seen by Bloomberg. That was covered by the 1.29 trillion yen in coupon income the bank received that year. However, since the coupon of all current and future purchases are negligible, the BOJ will see limited future current income, and thus will have to resort to other means to plug the balance sheet gap.

“These numbers show the distortions of the BOJ’s current policies,” said Sayuri Kawamura, a senior economist at the Japan Research Institute in Tokyo. “The annual amortization losses are going to increase and consume the BOJ’s profits, and the risk is increasing that the bank’s financial stability will be shaken.”

As Bloomberg adds, “while not an immediate problem because the BOJ’s income can cover the losses, the widening gap raises questions about the sustainability of the central bank’s bond purchases, which Governor Haruhiko Kuroda has said could be expanded.”

The BOJ did not have much to say about this troubling decoupling which will eventually require the BOJ to plug the hole: Tadaaki Kumagai, a spokesman for the central bank, said “the BOJ releases half-yearly and yearly accounts,” while declining to comment further.

With the gap between the two valuations even larger now, it “would probably be a pretty safe bet” that the losses the BOJ will book for this fiscal year will increase from 2015, according to Naomi Fink, the chief executive officer of Europacifica Consulting. As Bloomberg puts it, “while when those losses may exceed its income is unknown, with the bank buying more high-price, low-income bonds, that time will probably come soon.” Fink said that under some scenarios, this could even happen this fiscal year.

How much losses can the BOJ absorb? The central bank currently has 2.69 trillion yen in a reserve to draw on to pay for bond losses.

“In preparation for an eventual exit from stimulus, the BOJ last year started adding to its reserves to guard against bond losses, but if profits decline, there’s a chance that they won’t be able to continue that,” Japan Research Institute’s Kawamura said. “It’s a pretty dangerous situation now, even before they start to exit.”

At the current pace it is virtually assured that the BOJ’s reserves will be depleted in the not too distant future. At that point the BOJ will have to approah the government to change legislation, allowing it to short up capital for future losses. How the market will respond to such an unprecedented central bank bailout is unknown.

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Via Dana Lyons' Tumblr,

The S&P 500 is on a rare streak of closes near a 52-week high; can this bull run continue or will gravity take over?

The recent, and ongoing, historically tight range in the stock market has been well documented. Over a month ago, we mentioned that the S&P 500 traded in its smallest 2-week range in history. A month later, the index has incredibly barely seen an expansion of that range. One aspect of this recent action that we detected, however, may be even more astonishing. It deals with the S&P 500′s streak of closing near a 52-week high. Specifically, every close since July 8 has been within 1% of a 52-week high. That streak of 39 days is the 2nd longest in the past 50 years.

 

Since 1950, this is just the 15th streak of 30 days or more closing with 1% of a 52-week high. The all-time record lasted an astonishing 84 days, from December 26, 1963 to April 24, 1964. The only streak longer than our current one since 1965 took place from March-May 1995, spanning 48 days. Here are all the streaks and their ultimate length in days:

6/7/1954      32
10/14/1958  32
12/15/1961  36
9/25/1963    33
4/24/1964    84
11/19/1965  47
2/17/1971    31
3/10/1972    30
12/15/1972  32
5/17/1995    48
12/15/1995  31
1/27/2004    31
10/31/2006  36
1/18/2011    32

If you are wondering what the S&P 500 has done following these streaks, there has generally been an initial jolt, followed by a resumption of the uptrend – at least in the near-term.

As the table shows, the streaks have typically ended with a bang with the median return on that day of -1.0%. After that initial hit, however, the index has tended to bounce back. The rest of the performance data on the table is measured from the close on the day the streaks ended so the numbers do not include the typically bad “day 1″. 2 weeks later, 12 of the 14 had positive returns and had nearly recouped the median day 1 loss. By 3 weeks, all but 1 (1961) showed positive returns and the median return had more than doubled up the day 1 loss.

After that, the returns were more or less in line with any average days. 3 of the streaks nearly marked longer-term tops as the S&P 500 was lower a year later (1961, 1965 & December 1972). The other 11 saw the index higher over the following 12 months, with negligible drawdowns over the subsequent 6 months.

How long will the current streak last? It’s impossible to say. Only 3 have ever lasted longer, with just 1 of them going past 48 days. What will happen to stocks once the streak ends? Obviously, that is impossible to know as well. However, the general pattern has been for the streak to end somewhat violently on the first day, then recover in the weeks following.

Time will tell how long this bull can levitate – and how far its riders will get tossed once it succumbs to gravity.

*  *  *

More from Dana Lyons, JLFMI and My401kPro.

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Setting the mood ahead of tomorrow’s “critical” for the Fed’s September rate hike decision payrolls report, moments ago, WSJ reported that Wal-Mart Stores plans to cut 7,000 back office positions around the country, a restructuring move that in addition to seeking to improve its efficiency, will drastically alter the layout of its workforce, which as recently as a year ago was delighted by WMT’s minimum wage price hikes.

WSJ reports that the country’s largest private employer is eliminating about 7,000 U.S. store accounting and invoicing positions over the next several months, jobs mostly held by long-term employees, often some of the highest paid hourly workers in stores. The retailer wants those employees working with shoppers, not in backrooms, say company executives. Centralizing or automating much of those tasks is more efficient, they say.

The jobs are coveted as a rare desk job in retail. “You are not running around the store on your feet all day,” and receive decent pay, says a Wal-Mart store accounting employee who earns about $13 an hour, or $27,000 a year. “Everybody wants to get in there. The jobs never open up,” says this person, who has worked at the store for nine years.

In an ironic twist, WSJ notes that the back office cuts to Wal-Mart’s 4,600 U.S. stores is a sign that retail workers face big changes as their employers spend heavily to compete with Amazon.com Inc. and grab foot traffic from other chains. What is ironic is that at least according to the BLS’ Arima X 13 seasonally adjusting and goalseeking model, retailers remain one the nation’s most aggressively hiring sectors in recent years.

The positions Wal-Mart is eliminating manage an individual store’s daily cash flow or process claims from manufacturers delivering goods directly to stores, among other tasks. Starting early next year, much of that work will be handled by a central office or new money-counting “cash recycler” machines in stores. Wal-Mart tested the change in about 500 stores earlier this year.

And with that behind us, we now eagerly look forward to tomorrow’s strong jobs report beat.

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At least during the press conference yesterday it appeared as though the meeting been Trump and Pena Nieto was viewed by both parties to be cordial, productive and mutually beneficial.  Both candidates expressed their mutual admiration for each other and their respective countries and listed off a couple of their thoughts on how to improve the relationship going forward. 

But, almost immediately, Pena Nieto seemingly began to buckle under criticism from his own people and walk back comments made earlier at the press conference.  First came the following tweet shortly after the meeting where Pena Nieto claims that "At the beginning of the conversation with Donald Trump, I made clear that Mexico will not pay for the wall."

Al inicio de la conversación con Donald Trump dejé claro que México no pagará por el muro.

— Enrique Peña Nieto (@EPN) August 31, 2016

 

Apparently Trump was not particularly swayed, saying that "Mexico will pay for the wall – 100%. They don't know it yet, but they're going to pay for it" at his speech last night in Arizona. 

Pena Nieto also took to the airwaves to calm the rising storm of people who disagreed with his decision to sit down with Donald Trump.  Per Reuters, Pena Nieto told one media outlet that Trump's policies could be a "huge threat to Mexico" and a threat that "must be confronted." 

"His policy stances could represent a huge threat to Mexico, and I am not prepared to keep my arms crossed and do nothing," Pena Nieto said. "That risk, that threat, must be confronted. I told him that is not the way to build a mutually beneficial relationship for both nations."

Meanwhile the "huge" Trump protests that were supposed to take place at Ángel de la Independencia seemingly fizzled with the following tweets suggesting that, despite the buzz, not that many people actually showed up. 

Protests against Trump's meeting With @EPN @CCTV_America #SrTrumpConTodoRespecto #QuePenaTrump http://pic.twitter.com/srgzatbnSL

— Valeria León (@Val_leon) August 31, 2016

Protestan frente al Ángel de la Independencia contra #TrumpEnMexico, #FueraTrumpFueraEPN. http://pic.twitter.com/mcDxR3kUQp

— Jazmín Bonilla (@GeIsomina) August 31, 2016

 

Of course, Vicente Fox took the opportunity to re-assert himself into the conversation by going on the air with Jorge Ramos to declare once again that he would not "pay for that fucking wall."  Fox also added in his conversation with Fusion, that Trump should "put his knees on the ground and pray to the Lady of Guadalupe first and then ask for forgiveness for the way he offended Mexicans, he offended you, Jorge Ramos, and he offended the migrants in the United States."  Well that seems highly unlikely to us but you never know unless you ask. 

EXCLUSIVE: @VicenteFoxQue stresses Mexico still won't pay for that 'f**king wall' https://t.co/OYLB7um3vK http://pic.twitter.com/IyYPNRQdn4

— AMERICA (@ThisIsAmerica) August 31, 2016

 

And finally, Univision anchor Jorge Ramos, who has been fairly open about his disdain for the Republican nominee, also chimed in with a tweet attacking Pena Nieto, saying "What a poor, lukewarm and fearful response by [Nieto] before Trump.  Where is the indignation to Trump's insults?"

Jorge Ramos rips Mexican president for not standing up to Trump https://t.co/QfEiCgeUtB http://pic.twitter.com/GOpKoaJzD1

— The Hill (@thehill) September 1, 2016

Qué respuesta tan pobre, tan tibia y tan temerosa de @epn frente a Trump. ¿Dónde está la indignación frente a los insultos de Trump?

— JORGE RAMOS (@jorgeramosnews) August 31, 2016

 

Meanwhile, the Washington Post pointed out that Trump seemingly benefited from the encounter while Pena Nieto "failed" due to the perception among the Mexican people that he "lacked strength." 

“He’s not going to convince anyone with his talk about building dialogue and bridges,” said Jose Antonio Crespo, a Mexico City political science professor. “If Trump wins, they’ll have to meet and work together, but for now, the annoyance and anger of the people about his speech prevails.”

 

“Trump benefited from this encounter,” he added. “The president failed, he lacked strength.”

According to the Washington Post, Pena Nieto's presidency has suffered of late with a recent poll putting his approval rating at 23%.  Once seen as a reformer, the president is now facing rising crime and a series of scandals.

Peña Nieto, once seen as a reformer who opened up Mexico’s oil sector to foreign investment, took on long-standing monopolies and proposed ambitious changes to the education system, has lost much of the momentum he had on taking office in late 2012. A recent poll in Mexico’s Reforma newspaper put his approval rating at 23 percent, the lowest in the two decades that the newspaper has been tracking presidential popularity.

 

The oil reform has yet to take off amid low global prices for petroleum. Mexico’s homicide rate declined early in his term but has risen again, jumping 16 percent in the first five months of this year over the same period last year.

 

And the president has been beset by scandals. One involved a favored government contractor who bought houses on behalf of Peña Nieto’s wife, who is a former TV star, and finance minister. Forty-three students from the state of Guerrero disappeared in 2014, and huge protests erupted when information emerged suggesting that they were captured and killed with the help of police.

 

Recently, Mexico’s human rights commission reported that 22 of 42 suspected drug cartel members killed at a ranch in Michoacan last year were allegedly executed by police and not killed in a gunfight as police had claimed. That contributed to the ousting of the head of the federal police this week.

Meanwhile Trump seemed to double down on his immigration policies last night in Arizona declaring that "anyone who has entered the United States illegally is subject to deportation, that is what it means to have laws and to have a country. Otherwise we don’t have a country.”

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Our report on Banco Popular Milano was released to clients in March and April of 2016 as part of the “Potential for a European Banking Collapse” series. This research is continuously being updated at Veritaseum Knowledge, including additional and other financial institutions along the way. Here is an excerpt from the report:

This is the Banco Popular Milano share price over the time period in question…

‘Nuff said! Click here to participate in Veritaseum Knowledge. We’ve compiled a list of six banks whom we believe the market has materially underestimated the risk of. Some of which are systemically relevant institutions with plenty of room to fall in terms of public equity pricing.

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Submitted by Wolf Richter via WolfStreet.com,

Utter insanity is turning south.

In Palo Alto, a small town of about 67,000 souls, including Facebook CEO Mark Zuckerberg, about an hour south of San Francisco, in the middle of Silicon Valley, and part of the 9 million people in the vast Bay Area, the median home value in July, according to Zillow, fell to $2.486 million.

That’s still up 103% from July 2011. These are not palaces. Median price means 50% cost more, 50% cost less. These are modest homes, in theory where the median household can settle down. Drop to $1 million, and you get the “million dollar shack.”

But the median price is up only 1.6% from July last year, and down 0.5% from the peak in April of $2.5 million, a tiny fraction really – “tiny fraction” in Palo Alto means $12,500.

The median listed price per square foot, at $1,357, is down 7% from June.

Prices started “plateauing” a year ago, which means they’re now heading south. Zillow, with its usual optimism, expects them to drop only another 0.3% over the next twelve months.

The 71 homes listed for sale on Zillow start with four 1-bedroom 1-bath condos of around 770 sq. ft. each, in the range of $540,000. Two of them have been on Zillow for 41 days, and two appeared 11 days ago. There are also 2 pre-foreclosure units, to be sold at auction, and one foreclosed 1-bedroom 1-bath condo.

It doesn’t take long to get into the median price range of $2.5 million, and there’s plenty, some of them with reduced prices, some of them on the market for over 150 days.

Then, at the top end of the pile is a 5,330 sq. ft. home listed for $17.5 million, on Zillow for 68 days so far.

If the price of the median home doubles over a period of five years, as they did in Palo Alto, it’s not because that median home has gotten to be twice as big or twice as nice, or whatever, but because the dollar has lost half its value with regards to this type of asset. It’s called asset price inflation.

Central banks have been very effective in creating asset price inflation. Stocks, bonds, commercial and residential real estate, etc. all have skyrocketed.

There are also consumer price inflation, producer price inflation, wage inflation etc., and in that regard, the dollar has been holding up better.

The median rent in Palo Alto is $5,800, which puts even San Francisco to shame. The Zillow Rent Index sits at $6,318, down about 3% from November last year. Like home prices, rents have plateaued with a southern bias.

So it’s a money suck. Which is fine when prices go up, and if you have an unlimited amount of money. But now that prices have hit a wall, and if you don’t have an unlimited amount of money, the money suck can get painful in a hurry.

People are already putting two and two together and are bailing out, including Kate Vershov Downing, who resigned from the Palo Alto Planning and Transportation Commission. Her letter of resignation, dated August 9, starts out this way:

This letter serves as my official resignation from the Planning and Transportation Commission. My family has decided to move to Santa Cruz. After many years of trying to make it work in Palo Alto, my husband and I cannot see a way to stay in Palo Alto and raise a family here. We rent our current home with another couple for $6200 a month; if we wanted to buy the same home and share it with children and not roommates, it would cost $2.7M and our monthly payment would be $12,177 a month in mortgage, taxes, and insurance. That’s $146,127 per year – an entire professional’s income before taxes. This is unaffordable even for an attorney and a software engineer.

It’s not a place for young people either, despite its Silicon Valley allure, unless they want to bunk down together and with their combined high salaries pack into a median house. “Hacker hotels,” they’re called. That’s fun, for a little while. And then? Bloomberg explains it this way:

Palo Alto lost 7% of its 18- to 44-year-old population in the 2000s, the only age group to show a decline, according to Census data cited in the city’s report. Those aged 45 to 64 grew by 19% and older than 65 increased 20%.

The power behind this rampant home price inflation? Maybe “tech.” But probably not anymore, given that tech salaries for most employees no longer suffice to live adequately in the town.

And foreign buyers looking to get their money out of harm’s way, and not caring about what price they pay? “Realty bus tours popular with Chinese and Indian buyers are a common sight, with purchases leading to unoccupied investment properties dubbed ‘ghost houses,’” as Bloomberg put it. But China is cracking down on money laundering. And the US government’s anti-money-laundering efforts recently stopped ignoring real estate. So foreign buyers too may be drying up, as the languishing prices indicate.

Many folks have suggested that Palo Alto needs more subsidized “affordable” housing – though that may not help much either, except make life even more expensive for the rest of them.

The real solution? As a matter of principle, I don’t give financial advice. But if I were out there giving financial advice and charging an arm and a leg for it, it would sound like this: “If you own a home in Palo Alto, sell it now.”

There has never been a more perfect time to sell, except perhaps earlier this year, but that train has departed. Cash out of this bubble while the cashing out is still good. Let someone else get stuck with the losses. Because a 30% loss on the median home of $2.5 million is a cool $750,000. And losses after such a breath-taking real estate bubble can exceed 50% without breaking a sweat.

If you rode up the gravy train from 2011, and doubled your money and made $1.2 million on your home, don’t let the market take that away from you. That’s what I’d say if I were selling financial advice, and then I’d send you a bill for an arm and a leg.

And for crying out loud, make sure you don’t buy again in Palo Alto because you would just plow your money back into the bubble. Move to downtown Detroit, which is getting cool again, and telecommute, while laughing all the way to the bank, every day. You wouldn’t be the first one to do it!

I get chills when insiders tell outsiders “not to panic.”

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