Month: August 2018

Authored by Michael Snyder via The Economic Collapse blog,

If the U.S. economy is really doing so well, then why is homelessness rising so rapidly?

As the gap between the rich and the poor continues to increase, the middle class is steadily eroding.  In fact, I recently gave my readers 15 signs that the middle class in America is being systematically destroyed.  More Americans are falling out of the middle class and into poverty with each passing day, and this is one of the big reasons why the number of homeless is surging.  For example, the number of people living on the street in L.A. has shot up 75 percent over the last 6 years.  But of course L.A. is far from alone.  Other major cities on the west coast are facing similar problems, and that includes Seattle.  It turns out that the Emerald City has seen a 46 percent rise in the number of people sleeping in their vehicles in just the past year…

The number of people who live in their vehicles because they can’t find affordable housing is on the rise, even though the practice is illegal in many U.S. cities.

The number of people residing in campers and other vehicles surged 46 percent over the past year, a recent homeless census in Seattle’s King County, Washington found. The problem is “exploding” in cities with expensive housing markets, including Los Angeles, Portland and San Francisco, according to Governing magazine.

Amazon, Microsoft and other big tech companies are in the Seattle area.  It is a region that is supposedly “prospering”, and yet this is going on.

Sadly, it isn’t just major urban areas that are seeing more people sleeping in their vehicles.  Over in Sioux Falls, South Dakota, many of the homeless sleep in their vehicles even in the middle of winter…

Stephanie Monroe, managing director of Children Youth & Family Services at Volunteers of America, Dakotas, tells a similar story. At least 25 percent of the non-profit’s Sioux Falls clients have lived in their vehicles at some point, even during winter’s sub-freezing temperatures.

“Many of our communities don’t have formal shelter services,” she said in an interview. “It can lead to individuals resorting to living in their cars or other vehicles.”

It is time to admit that we have a problem.  The number of homeless in this country is surging, and we need to start coming up with some better solutions.

But instead, many communities are simply passing laws that make it illegal for people to sleep in their vehicles…

A recent survey by the National Law Center on Homelessness and Poverty (NLCHP), which tracks policies in 187 cities, found the number of prohibitions against vehicle residency has more than doubled during the last decade.

Those laws aren’t going to solve anything.

At best, they will just encourage some of the homeless to go somewhere else.

And if our homelessness crisis is escalating this dramatically while the economy is supposedly “growing”, how bad are things going to be once the next recession officially begins?

We live at a time when the cost of living is soaring but our paychecks are not.  As a result, middle class families are being squeezed like never before.

A recent Marketwatch article highlighted the plight of California history teacher Matt Barry and his wife Nicole…

Barry’s wife, Nicole, teaches as well — they each earn $69,000, a combined salary that not long ago was enough to afford a comfortable family life. But due to the astronomical costs in his area, including real estate — a 1,500-square-foot “starter home” costs $680,000 — driving for Uber was a necessity.

“Teachers are killing themselves,” Barry says in Alissa Quart’s new book, “Squeezed: Why Our Families Can’t Afford America” (Ecco), out Tuesday. “I shouldn’t be having to drive Uber at eight o’clock at night on a weekday. I just shut down from the mental toll: grading papers between rides, thinking of what I could be doing instead of driving — like creating a curriculum.”

Home prices are completely out of control, but that bubble should soon burst.

However, other elements of our cost of living are only going to become even more painful.  Health care costs rise much faster than the rate of inflation every year, food prices are becoming incredibly ridiculous, and the cost of a college education is off the charts.  According to author Alissa Quart, living a middle class life is “30% more expensive” than it was two decades ago…

“Middle-class life is now 30% more expensive than it was 20 years ago,” Quart writes, citing the costs of housing, education, health care and child care in particular. “In some cases the cost of daily life over the last 20 years has doubled.”

And thanks to the trade war, prices are going to start going up more rapidly than we have seen in a very long time.

On Tuesday, we learned that diaper and toilet paper prices are rising again…

Procter & Gamble said on Tuesday that it was in the process of raising Pampers’ prices in North America by 4%. P&G also began notifying retailers this week that it would increase the average prices of Bounty, Charmin, and Puffs by 5%.

P&G is raising prices because commodity and transportation cost pressures are intensifying. The hikes to Bounty and Charmin will go into effect in late October, and Puffs will become more expensive beginning early next year.

I wish that I had better news for you, but I don’t.  We are all going to have to work harder, smarter and more efficiently.  And we are definitely going to have to tighten our belts.

Many middle class families are relying on debt to get them from month to month, and consumer debt in the United States has surged to an all-time high.  But eventually a day of reckoning comes, and we all understand that.

The U.S. economy is not going to be getting any better than it is right now.  So it is time to be a lean, mean saving machine, because it will be important to have a financial cushion for the hard times that are ahead of us.

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All eyes will be on Tesla’s earnings after the close today, and considering the fiasco that was last quarter’s earnings call, all ears too.

One person who will surely be following closely is prominent Tesla short David Einhorn, who told investors that the rally in Tesla shares, which he is short, turned into heavy losses at his Greenlight Capital fund and dedicated a portion of his latest letter to investors yesterday to discuss the Musk’s increasingly bizarre antics:

The most striking feature of the quarter is that Elon Musk appears erratic and desperate. During the quarter Mr. Musk:

• Attacked an analyst for asking “boring bonehead questions” on the quarterly conference call;
• Hung up on the head of the National Transportation Safety Board;
• Assailed the media for the audacity to report that Tesla’s customers crash while using “autopilot”;
• Accused an internal whistleblower of “sabotage”;
• Appeared to paint the tape with trivial insider purchases; and
• Went on a tweetstorm calling for “the short burn of the century.”

The market preferred this bravado much more than say, GM’s actual accomplishments. TSLA soared 29% during the quarter and was our second biggest loser.

Einhorn also famously said that he is “happy that his Model S lease ended (there were growing problems with the touchscreen and the power windows) and is excited to get the Jaguar IPACE, which has gotten excellent reviews” and continued the criticism: “The Model S residual values are falling. Meanwhile, the Model 3 initially received lukewarm reviews, and the raft of bad publicity is probably having a negative impact on the brand.”

Naturally, Musk could not let Einhorn’s jab go without response, responding early this morning on Twitter: “Tragic. Will send Einhorn a box of short shorts to comfort him through this difficult time.”

Tragic. Will send Einhorn a box of short shorts to comfort him through this difficult time.

— Elon Musk (@elonmusk) August 1, 2018

Then, in another odd comment, just hours before the Tesla earnings call, Musk followed up with another odd tweet, saying that “some of best classic @Atari games coming as Easter eggs in Tesla V9.0 release in about 4 weeks. Thanks @Atari!“

In any case, with TSLA stock having recently fallen into a bear market and having lost key upside momentum, the stakes are high for everyone… but more so than ever for the shorts.

As of this moment, Tesla is the most heavily shorted U.S., and according to a Reuters analysis, short-sellers could see a nearly $850 million loss or gain, depending on the direction of the post-earnings stock move. The electric carmaker, which is burning cash at an unprecedented pace and struggling to turn a profit, is a favorite target for shorts with about 35 million shares, or roughly 28% of Tesla’s free float, currently sold short, pegging the short interest at $10.53 billion, according to S3 Partners.

Furthermore, as we noted moments ago, Q2 earnings season has been extremely volatile for reporting companies, especially for tech names, which has seen the biggest negative reaction despite what have generally been strong earnings.

And Tesla will be no exception: based on the price of weekly Tesla options contracts set to expire on Friday, traders in the options market expect the shares to swing by about 8% after the company reports results.

A move of that magnitude to the upside would mean that short-sellers would rack up about $842.6 million in on-paper losses, while they would make as much in on-paper gains if the share reaction is negative, according to S3 data.

And just like its fanatical fans, Tesla shorts have proven to be extremely tenacious: headed into the results, short-sellers, who suffered a lot of pain in the second-quarter as Tesla shares soared 29% , helped by encouraging production-related news, have shown little inclination to tweak their bets on the carmaker.

“There has been virtually no net change in shares shorted in over a week,” said Ihor Dusaniwsky, head of research at S3 in New York.

“Although short-sellers’ conviction in Tesla’s longer term performance is solid with no significant short covering since the end of June when Tesla hit its year-to-date highs, I haven’t seen a rush to short more shares in anticipation of weak results,” he said.

As Reuters adds, Tesla’s post-earnings reaction will also decide whether short-sellers, who are down $170.9 million in mark-to-market losses for 2018, turn a profit or go $1 billion in the red.

Analysts expect Tesla to report revenue of $3.921 billion, up from $2.79 billion a year ago, and a loss of $2.92 per share, according to Thomson Reuters data. But all eyes will be on the cash burn, the debt and non-GAAP profitability: any upside surprises here, and the shorts will be in for a world of pain.

Finally, while there has been little movement in the number of equity shorts, with the recent launch of trade in Tesla CDS, bond traders are increasingly betting the company will default in the coming years, with the CDS surging to a contract high yesterday, implying a 43% probability of default in the next 5 years.

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“Everyone is entitled to their own opinion, far be it from me to say otherwise,” notes former fund manager and FX trader Richard Breslow, but as far as the dollar is concerned – it’s going higher, he contends.

Via Bloomberg,

As true as it is that differences of opinion are what “makes markets”, I find the avalanche of analysts arguing for an imminent move lower in the dollar confounding. The most you can say is the jury is out. Both technically and fundamentally. To say otherwise strikes me as arguing without the facts being in evidence. Rhetoric can be an effective form of argument. It may even be borne out by future results, but “Leap of Faith” isn’t something that really belongs in the pluses or minuses side of the ledger when settling on a trading strategy.

The dollar has been doing a lot of nothing for the last couple of months. It will break out at some point. But patience actually is a virtue when the range-trading opportunities continue to present marvelous possibilities.

The charts are difficult to read but if you were forced to say something, they would actually give a passing nod to a higher not a lower dollar. There is a better argument to be made that the DXY, and certainly the EUR/USD, are tracing out potential pennant formations favorable to the currency.

If I were looking for signs of a directional move, devoid of a lot of the cross-currency noise, I’d put a yellow Post-it on the bottom of my screen with the range for the euro versus the dollar set on June 14. We seem trapped within it. That’s when President Mario Draghi surprised a bulled-up market for euros by the extent of his dovishness post the ECB’s rate-setting meeting. I like it as a marker because you will be put on notice somewhat ahead of levels a lot of people are looking at.

One thing we do know for sure is that the Fed is in the process of raising rates and both the ECB and BOJ again made it clear, in the last week, no matter how wishfully you want to spin it, that they are on hold for the next year at least. Global growth is indeed growing, but by any measure the U.S. is outstripping Europe and Japan. People keep telling me that all the good news is already built into the dollar’s value and when, not if, growth differentials narrow markets will realize the error of their current ways. I’ve got news, those forecasts aren’t a secret.

And those expecting for the Fed to start tacking dovish are misreading what Chairman Powell meant by “for now”. He’s a pragmatist, not a zealot.

The phrase “secular decline” gets bandied about a lot. As in the dollar will resume its move lower driven by greater forces…I’m hard-pressed to see any secular decline but should it even exist you would have gone broke many times over waiting for it to bail out your positions. In any case, DXY has spent the majority of the last three years above its 20-year average price.

The weekly CFTC positioning data is also used as a warning sign of an imminent squeeze.

Maybe yes, maybe no, but those are short-term phenomena. Yes, the net dollar longs are the largest since mid-January, but if you look at the disaggregated data versus individual currencies, it would be hard to argue that it is reckless. Was Brexit sorted out and no one told me?

It is getting harder and harder to know what will be potential safe haven currencies or whether or not they will be needed. Yesterday all was happy-on trade. Today not so much. It’s a known unknown is the best you can say.

Where’s the dollar going? We will see. But as recent experience has shown, only time will really tell and living in the moment has its advantages.

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One week ago, Morgan Stanley issued a report looking at the size of moves across all asset classes in the environment of declining market liquidity, and found that “It’s not your imagination, large moves are becoming more common in the market.” Today, in what appears to be a follow up from Goldman Sachs, the bank uses Morgan Stanley’s verbiage almost verbatim and writes that “No – it’s not your imagination – earnings day moves are getting bigger.“

As Goldman writes, there has been a lot of focus on US stock moves this earnings season (with FB, TWTR and NLSN all down >20% in the past week), but the bank points out that this is not an isolated phenomenon, and the wide moves post earnings are observed across most companies.

In a note by derivatives strategist John Marshall, earnings day moves have continued their trend of increasing so far this quarter, and the first-day reactions in single stocks to quarterly results have been exceptionally pronounced: at an average 3.9%, up-or-down swings for the 252 S&P 500 stocks that have reported so far, are up from an absolute average move of 3.2% in the last eight quarters, and 3.3% in the last four.

In fact, as shown in the charts below, post-earnings moves for Q2 reporters have hit the greatest absolute amplitude on record, and more than 50% higher than the long-term average of 2.4% over the past 15yrs and reflects both the low  level of market-wide volatility in recent months (implying low non-earnings day moves) and an increase in the magnitude of moves on results – so far this earnings season absolute moves have been 4.1% on average

“This is a sign that the strong economic environment and accelerating inflation trends has reduced the earnings visibility for company management teams and covering analysts” Marshall writes, and adds that “this increases the instance of surprises and drives larger stock moves.”

Another factor behind the confusion is that, according to Bloomberg, “while U.S. GDP expanded at the fastest rate in four years in the second quarter, the risk of a global trade war and a Chinese slowdown was also building.”

In a separate Goldman note, the bank notes that while tech stocks have seen the biggest declines on earnings, despite solid beats…

… -some of the biggest earnings season gainers have been Value stocks, rebounding after prolonged underperformance.

Goldman also notes that its Value factor just had its best L-S weekly performance since March, and adds that “whilst some of the rebound maybe due to macro drivers, it seems that earnings relief may be an additional factor driving some of the more unloved Value stocks.”

Are earnings reactions just another manifestation of the growth-to-value rotation we discussed recently, where the market is increasingly disenchanted with the former, and increasingly looking toward the latter?

Curiously, this record kneejerk reaction to earnings comes at a time when a record number of companies are beating estimates. Last week we noted that according to Factset calculations, some 83% of reporters have beet earnings expectations.

Is the market’s response an indication that it’s all downhill from here, especially with growing rumors of a recession either in 2020, or even 2019?

A final curiosity: while stock reactions have been volatile and sharp in both directions, Bloomberg calculates that they have, ironically, canceled each other out, and on average, shares of S&P 500 companies have risen just 0.6% a day after reporting. Industrial firms – i.e. value – have done the best, rising 2.5%, while Tech stocks suffered the biggest declines, as traders increasingly look to tiptoe out of “growth.”

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The initial reaction to what appears to be a hawkish-tilted Fed statement is dollar weakness, bond and gold gains…

The biggest mover for now is the dollar… lower…

Bond yields are inching lower…

Gold is rising and stocks are undecided…

September rate hike odds rose from 80% to 92%.

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The 9th Circuit Court of Appeals ruled 2-1 on Wednesday that a San Francisco Judge went too far last April with a nationwide injunction against President Trump’s January Executive Order, which would withhold funding from “sanctuary” cities and counties. The panel, however, agreed that Trump may not withhold funding from San Francisco or Santa Clara County for limiting their cooperation with immigration enforcement officials. 

Majority on divided three-judge Ninth Circuit panel affirms grant of summary judgment invalidating the withholding of federal grants to sanctuary cities but vacates nationwide injunction: You can access today’s ruling of the U.S. Court of Appeals for the https://t.co/gjkrzHYwEg

— Howard Bashman (@howappealing) August 1, 2018

The panel (1) affirmed the district court’s grant of summary judgment in favor of the City and County of SanFrancisco and the County of Santa Clara in an action challenging Executive Order 13,768, “Enhancing PublicSafety in the Interior of the United States,” which directed the withholding of federal grants to so-called sanctuary jurisdictions; (2) vacated a nationwide injunction. -9th Circuit

“Given the absence of specific findings underlying the nationwide application of the injunction, the panel vacated the nationwide injunction and remanded for reconsideration and further findings,” the panel ruled. 

While we agree that the district court was correct to enjoin the Administration from enforcing § 9(a) against the Counties, the present record is not sufficient to support a nationwide injunction. We therefore vacate the injunction and remand for careful consideration by the district court.

Read the ruling below:

President Trump blasted Judge William H. Orrick’s April, 2017 ruling which accused him of overstepping his authority – saying in a statement at the time “Once again, a single district judge – this time in San Francisco – has ignored federal immigration law to set a new immigration policy for the entire country.” 

The city of San Francisco argued that the executive order violated the Constitution by “effectively trying to commandeer state and local officials to enforce federal immigration law,” wrote the New York Times. The city estimated that it stood to lose over $1 billion in federal funding as a result of the EO, while nearby Santa Clara said it would lose around $1.7 billion – or more than a third of its revenue. 

In short, while the 9th circuit agreed with San Francisco and Santa Clara that Trump’s Executive Order reached beyond his authority, they found that Orrick’s ruling could not be applied nationwide. 

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Expectations were for a snoozefest from The Fed today, reassuring market participants that all is well, inflation is well managed and there will be two more rate hikes in 2018 (there was a 1% chance of hike today, a 80% chance of a hike in Sept, and 66% chance of Dec hike in addition). Despite The Atlanta Fed’s model now forecasting 4.9% for Q3, The Fed was likely to play down the 4.1% growth in Q2 with the word “solid” critical to watch, and how much will The Fed continue to play down the collapsing yield curve.

*  *  *

The Fed chose unanimously to keep rates unchanged, continuing to expect “gradual rate hikes” but upgraded its view of the economy from “solid” to “strong.”

Here are the Key Takeaways from the latest Fed decision, according to Bloomberg:

• Economic activity is “rising at a strong rate,” an upgrade from prior wording of “solid rate”

• Most of the minor wording changes are mark-to-market in the first paragraph’s economic assessment

• Job gains “have been strong,” and household spending and business fixed investment “have grown strongly”

• Both headline and core inflation remained “near 2 percent”

• “Further gradual increases” repeated as expected policy path

• Risks to the outlook still “appear roughly balanced”

• Decision unanimous, with George voting as an alternate for San Francisco vacancy

*  *  *

The Fed has a lot of work to do to convince markets that its rate-trajectory is going to happen. The market is slightly unconvinced for 2018, completely non-believing for 2019 and see rate cuts more likely in 2020…

Since The Fed hiked rates in June, Gold has been monkeyhammered, the dollar is modestly higher with the Dow and Long Bond approximately unch…

With 10Y yields having round-tripped back to the same level as at the June hike…

*  *  *

Full Redline below:

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