Category: zerohedge

In order to appeal to their target demographics, the smart people in the marketing department at Obamacare central have provided us with such wonders as kegstanding “bros” and easy-women. However, the following clip – which almost defies description – shows just how desparate (or clueless) the administration has become, as a #GetCovered promo turns dirty-dancing-meets-twerking as Richard Simmons and an unknown male assailant begin to…well just watch…

 

 

As a painful reminder – if one were needed – fitsnews notes that: 

In case you’re wondering, Covered California received $43 million worth of federal grant money last year to “educate targeted audiences about the subsidy programs available to them and to motivate consumers and small businesses to be part of obtaining health insurance.”

Thanks taxpayer for funding this orgy of eye-gouging hell…we will never be able to un-see that!

(on a different note, who else thinks Richard Simmons looks like David Darst?)

It’s funny because you never see them together?

 

h/t Will

via Zero Hedge http://ift.tt/19APeIt Tyler Durden

In order to appeal to their target demographics, the smart people in the marketing department at Obamacare central have provided us with such wonders as kegstanding “bros” and easy-women. However, the following clip – which almost defies description – shows just how desparate (or clueless) the administration has become, as a #GetCovered promo turns dirty-dancing-meets-twerking as Richard Simmons and an unknown male assailant begin to…well just watch…

 

 

As a painful reminder – if one were needed – fitsnews notes that: 

In case you’re wondering, Covered California received $43 million worth of federal grant money last year to “educate targeted audiences about the subsidy programs available to them and to motivate consumers and small businesses to be part of obtaining health insurance.”

Thanks taxpayer for funding this orgy of eye-gouging hell…we will never be able to un-see that!

(on a different note, who else thinks Richard Simmons looks like David Darst?)

It’s funny because you never see them together?

 

h/t Will

via Zero Hedge http://ift.tt/19APeIt Tyler Durden

The IMF has reported that its resident respresentative in Afghanistan – 60-year-old Wabel Abdallah – is among the 15 people killed in a coordinated assault at a Kabul restaurant by the Taliban. The upscale taverna is well-known to be frequented by foreigners and ex-pats. As Reuters reports, Abdallah had been leading the IMF’s office in the Afgan capital since 2008 and IMF Managing Director Christine Lagarde said “this is tragic news, and we at the fund are all devastated.”

 

Via BNO,

A resident representative of the International Monetary Fund (IMF) was among at least fourteen people killed on Friday during a coordinated assault on an upscale restaurant popular with foreigners in the Afghan capital of Kabul, the Fund confirmed.

 

“We have just learned that our dear colleague and friend Wabel Abdallah, our Resident Representative in Afghanistan, was killed in an attack at a restaurant in Kabul in which many people were killed,” said IMF Managing Director Christine Lagarde. “This is tragic news, and we at the Fund are all devastated.”

 

Lagarde added: “Our hearts go out to Wabel’s family and friends, as well as the other victims of this attack.”

 

Wabel Abdallah, 60, was a Lebanese national who was appointed Resident Representative in June 2008. He joined the Fund from the Central Bank of Lebanon in 1993, and has held various IMF positions, particularly posts relating to IMF activities and operations in the Middle East.

As AFP reports, this appears coordinated…

It was another friendly evening at the Taverna du Liban restaurant in Kabul, with Afghans and foreigners enjoying the generous helpings of food when a blast exploded outside and gunmen burst in, intent on killing everyone they could find.

 

…

 

The Taverna was one of the few social venues in Kabul where locals and foreigners mixed with ease, enjoying its Lebanese staples such as hummus, falafel, shawarma kebabs and bakhlava dessert.

 

…

 

One cook recalled his dramatic escape from the carnage.

 

“I was sitting with my friends in the kitchen when an explosion happened and smoke filled the kitchen,” kebab cook Abdul Majid told AFP while being treated for leg fractures in a nearby hospital.

 

“A man came inside shouting and he started shooting. One of my colleagues was shot and fell down. I ran to the roof and threw myself to the neighbouring property.”

 

The restaurant’s wide range of customers included Afghan businessmen, government officials, foreign diplomats, development consultants and aid workers.

Of course, the assumption is that this is a random attack on an ex-pat and foreigner frequented taverna and not a more specific targeted attack on the people that really pull the strings all over the world. We can only hope that the Greeks don’t get any ideas…

 

However, as Bloomberg reports, it seems more targeted…

A suicide bomber blew himself up outside a Kabul restaurant filled with foreigners and affluent Afghans, while two gunmen snuck in through the back door and opened fire Friday in a brazen dinnertime attack that killed 16people, officials said.

 

The Taliban claimed responsibility within an hour of the attack against La Taverna du Liban, part of a stepped-up campaign of violence against foreign and government interests to send a message that the militants are not going anywhere as the U.S.-led coalition winds down its combat mission at the end of the year.

 

The bombing served as a reminder that although militant violence in the capital has dropped off in recent months, insurgents remain capable of carrying out attacks inside the most heavily guarded areas.

via Zero Hedge http://ift.tt/19APdnX Tyler Durden

Via Walter J. Zimmermann Jr. of United-ICAP,

"Sooner or later everyone sits down to a banquet of consequences."

– Robert Louis Stevenson

Main Points

1. History is written as much by the unforeseen consequences of key events as by the events themselves. We prefer not to think in these terms, but history clearly reveals that the adverse consequences of well intended efforts often have a much more dramatic and lasting impact than the original efforts themselves.

2. In fact history suggests a law of adverse consequences where the more insistent and forceful the well intended effort, the more dramatic, powerful and harmful the blowback. In simple terms, attempts to force the world to improve have always ended badly.

3. This law of adverse consequences is a very common phenomena in medicine and is known by the euphemism of ‘side effects’. Adverse drug reactions to prescribed medications are the fourth leading killer in America, right after heart disease, cancer, and stroke. However this expression of the law of unintended consequences gets even less press than its expressions in human history. Neither is a popular topic.

4. One could easily write several volumes of history focused exclusively on the unwelcome repercussions from otherwise well-intended efforts. However as this is a subject that we would all rather avoid I suspect it would be a very difficult book to market.

5. Instead of a book I have opted for two pages of examples. The present situation strongly suggests that the high risk of unexpected blowback from current economic policies are much more deserving of our full attention than the past history of unwelcome consequences.

6. QE has already created what is arguably the most bullish market sentiment in history. And that extreme bullish sentiment has already driven most stock indices to new all time highs. So now would be a good time for some sober reflections on what could go wrong.

7. One sector that seems dangerously poised to go badly wrong are the junk and emerging bond markets. What will happen when Treasuries start yielding the same rates as previously issued junk debt? A massive exodus will happen. Junk bonds and emerging market debt will become a disaster area.

8. We already know how wildly successful Fed stimulus has been at creating speculative bubbles. Fed inflated bubbles that have already burst include a Dot-Com bubble, a credit bubble, a real estate bubble, and a commodity market bubble. The biggest bubble of them all is still inflating. That would be this stock market bubble.

9. There are now fewer banks than ever before in modern history. And the biggest banks are larger than ever before in history. The war against ‘too big to fail’ was lost before it began. Fewer, bigger banks means a more fragile financial system.

10. The worst of the bullish sentiment extremes of previous major stock market peaks have all returned. Analysts are positively gushing with ebullience. There is a competition to see who can come up with the highest targets for the various stock indices. No one sees any downside risk. All are confident that the Fed can and will fix anything. This is a situation ripe for adverse consequences. This is a market where blowback will be synonymous with blind-sided. No one will prepare for what they cannot see coming.

Comparing Costs: Major US Wars versus Quantitative Easing

The chart above suggests that the magnitude of the Federal Reserve economic stimulus program is only comparable to previous major war efforts. The dollar costs plotted here bears that out.

War Costs

All of the war costs on the previous page were taken from one report dated 29 June 2010. That report was prepared by Stephen Dagget at the Congressional Research Service. I adjusted his numbers to 2013 dollars. You can find his report in PDF format on-line. However some further comments may be useful here.

Civil War

The Civil War number combines the Northern or Union costs and the Southern or Confederate costs. In 2011 dollars the price of waging the war for the Union was $59.6 billion dollars and $20.1 billion for the Confederacy. I simply added these two numbers and then converted to 2013 dollars.

Post 9/11 Wars

Here I combined the costs of the Persian Gulf war, and Iraq war, and the war in Afghanistan into one category and then adjusted to 2013 dollars.

Sending a Man to the Moon

I thought it would be interesting to compare the costs of sending a man to the moon to the costs of QE. Most references to the cost of putting a man on the Moon only cite the Apollo project. But of course that is very wrong. Apollo arose from Gemini which grew out of Mercury. So for the true cost of sending a man to the Moon I included all costs for the Mercury missions, the Gemini program, the Lunar probes, the Apollo capsules, the Saturn V rockets, and the Lunar Modules. I relied on numbers gathered from NASA by the Artemis Project. I then converted those costs to 2013 dollars.

World War II versus Quantitative Easing

WW II

World War II transformed the United States from a sleepy agricultural enterprise into the world’s dominant economic super-power, and defeated both Nazi Germany and Imperial Japan at the same time. It may seem entirely callous to calculate US Dollar costs for a war that claimed 15,000,000 battle deaths, 25,000,000 battle wounded, and civilian deaths that exceeded 45,000,000 but there is a point to this exercise.

The second world war defeated the strategy of geographical conquest through militarism as a national policy. Of course WW II had it’s own undesirable blowback as anything on this gigantic a scale would. However it seems pretty clear that replacing fascism and militarism with democracy was a step of progress for mankind.

WW II and QE

Since the 1950’s many have argued that it took World War II to pull the world out of the Great Depression. As a life-long student of the Great Depression Bernanke must be aware of this debate. In terms of the dollar amounts involved, World War Two is the only project comparable in size to QE. So it seems reasonable to assume that Bernanke’s goal here is to have QE fulfill the economic role of a World War Three; a war-free method of pulling the world out of the Great Recession. However human history suggests that the sheer magnitude and forced nature of the QE program all but ensures serious, unexpected and adverse consequences.

Learning from History

I am not bearish on the human race. When I read history I see things getting better. When I read history I find the slow replacement of brutality with compassion. When I read history I find the long term trend to be the replacement of centralized authority with local self-determination. And I find that every single effort to fight these long term trends has failed. And as history continues to unfold the efforts to fight these trends tends to fail more quickly, more dramatically, and more decisively.

There is an ancient Chinese proverb that states “Plan too far ahead and nature will seem to resist.” That aphorism definitely resonates with my experience and observations. If there is something inherent in the flow of time that unfolds an improvement in the human condition, then there is also something in the nature of things that resists the application of force, whether well intended or not.

If all of the above is an accurate accounting of things, then the key issue for policy makers is finding the fine line that separates supporting the natural flow of human evolution from attempting to force change. The former will help while the later will end badly. The question today has to do with Quantitative Easing. Is QE a gentle nurturing of economic evolution or is it the next doomed attempt to force things to get better? The QE program is so enormous, and relentless, and insistent, that I fear it is the later. And if QE is a huge attempt to force the economy to improve, than we had better start bracing for the blowback.

QE: the blowback to come

What kind of blowback should we prepare for? The lesson of history is that trying to force things to get better does not merely create unwelcome repercussions. It does not merely slow the pace of natural evolution. Attempts to enforce a certain outcome always appears to create the opposite effect. We do not find a law of adverse consequences. We find a law of opposite impacts.

Let us review the sample examples from the previous charts. Every effort to jam an ideology or a plan down the throat of the world only creates the opposite of the intended effect. I would maintain that this is one of the few lessons from history that can be relied on.

If the Federal Reserve is trying to force feed us prosperity then the inevitable blowback will be adversity. If the Fed is trying to compel the most dramatic economic recovery in history, then the blowback may well be the deepest depression in history. If the Fed is trying to enforce confidence and optimism then the blowback will be fear and despair. If the Fed is trying to force consumers to spend then the blowback will be a collapse in consumer confidence.

I sincerely hope that I am completely wrong here, that I am missing something, that there is a flaw in my logic. However until I can locate such a flaw I must trust the technical case for treating this Fed force-fed rally in the stock market as something that will end badly.

Here's how it plays out…

 

 

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

Via Walter J. Zimmermann Jr. of United-ICAP,

"Sooner or later everyone sits down to a banquet of consequences."

– Robert Louis Stevenson

Main Points

1. History is written as much by the unforeseen consequences of key events as by the events themselves. We prefer not to think in these terms, but history clearly reveals that the adverse consequences of well intended efforts often have a much more dramatic and lasting impact than the original efforts themselves.

2. In fact history suggests a law of adverse consequences where the more insistent and forceful the well intended effort, the more dramatic, powerful and harmful the blowback. In simple terms, attempts to force the world to improve have always ended badly.

3. This law of adverse consequences is a very common phenomena in medicine and is known by the euphemism of ‘side effects’. Adverse drug reactions to prescribed medications are the fourth leading killer in America, right after heart disease, cancer, and stroke. However this expression of the law of unintended consequences gets even less press than its expressions in human history. Neither is a popular topic.

4. One could easily write several volumes of history focused exclusively on the unwelcome repercussions from otherwise well-intended efforts. However as this is a subject that we would all rather avoid I suspect it would be a very difficult book to market.

5. Instead of a book I have opted for two pages of examples. The present situation strongly suggests that the high risk of unexpected blowback from current economic policies are much more deserving of our full attention than the past history of unwelcome consequences.

6. QE has already created what is arguably the most bullish market sentiment in history. And that extreme bullish sentiment has already driven most stock indices to new all time highs. So now would be a good time for some sober reflections on what could go wrong.

7. One sector that seems dangerously poised to go badly wrong are the junk and emerging bond markets. What will happen when Treasuries start yielding the same rates as previously issued junk debt? A massive exodus will happen. Junk bonds and emerging market debt will become a disaster area.

8. We already know how wildly successful Fed stimulus has been at creating speculative bubbles. Fed inflated bubbles that have already burst include a Dot-Com bubble, a credit bubble, a real estate bubble, and a commodity market bubble. The biggest bubble of them all is still inflating. That would be this stock market bubble.

9. There are now fewer banks than ever before in modern history. And the biggest banks are larger than ever before in history. The war against ‘too big to fail’ was lost before it began. Fewer, bigger banks means a more fragile financial system.

10. The worst of the bullish sentiment extremes of previous major stock market peaks have all returned. Analysts are positively gushing with ebullience. There is a competition to see who can come up with the highest targets for the various stock indices. No one sees any downside risk. All are confident that the Fed can and will fix anything. This is a situation ripe for adverse consequences. This is a market where blowback will be synonymous with blind-sided. No one will prepare for what they cannot see coming.

Comparing Costs: Major US Wars versus Quantitative Easing

The chart above suggests that the magnitude of the Federal Reserve economic stimulus program is only comparable to previous major war efforts. The dollar costs plotted here bears that out.

War Costs

All of the war costs on the previous page were taken from one report dated 29 June 2010. That report was prepared by Stephen Dagget at the Congressional Research Service. I adjusted his numbers to 2013 dollars. You can find his report in PDF format on-line. However some further comments may be useful here.

Civil War

The Civil War number combines the Northern or Union costs and the Southern or Confederate costs. In 2011 dollars the price of waging the war for the Union was $59.6 billion dollars and $20.1 billion for the Confederacy. I simply added these two numbers and then converted to 2013 dollars.

Post 9/11 Wars

Here I combined the costs of the Persian Gulf war, and Iraq war, and the war in Afghanistan into one category and then adjusted to 2013 dollars.

Sending a Man to the Moon

I thought it would be interesting to compare the costs of sending a man to the moon to the costs of QE. Most references to the cost of putting a man on the Moon only cite the Apollo project. But of course that is very wrong. Apollo arose from Gemini which grew out of Mercury. So for the true cost of sending a man to the Moon I included all costs for the Mercury missions, the Gemini program, the Lunar probes, the Apollo capsules, the Saturn V rockets, and the Lunar Modules. I relied on numbers gathered from NASA by the Artemis Project. I then converted those costs to 2013 dollars.

World War II versus Quantitative Easing

WW II

World War II transformed the United States from a sleepy agricultural enterprise into the world’s dominant economic super-power, and defeated both Nazi Germany and Imperial Japan at the same time. It may seem entirely callous to calculate US Dollar costs for a war that claimed 15,000,000 battle deaths, 25,000,000 battle wounded, and civilian deaths that exceeded 45,000,000 but there is a point to this exercise.

The second world war defeated the strategy of geographical conquest through militarism as a national policy. Of course WW II had it’s own undesirable blowback as anything on this gigantic a scale would. However it seems pretty clear that replacing fascism and militarism with democracy was a step of progress for mankind.

WW II and QE

Since the 1950’s many have argued that it took World War II to pull the world out of the Great Depression. As a life-long student of the Great Depression Bernanke must be aware of this debate. In terms of the dollar amounts involved, World War Two is the only project comparable in size to QE. So it seems reasonable to assume that Bernanke’s goal here is to have QE fulfill the economic role of a World War Three; a war-free method of pulling the world out of the Great Recession. However human history suggests that the sheer magnitude and forced nature of the QE program all but ensures serious, unexpected and adverse consequences.

Learning from History

I am not bearish on the human race. When I read history I see things getting better. When I read history I find the slow replacement of brutality with compassion. When I read history I find the long term trend to be the replacement of centralized authority with local self-determination. And I find that every single effort to fight these long term trends has failed. And as hi
story continues to unfold the efforts to fight these trends tends to fail more quickly, more dramatically, and more decisively.

There is an ancient Chinese proverb that states “Plan too far ahead and nature will seem to resist.” That aphorism definitely resonates with my experience and observations. If there is something inherent in the flow of time that unfolds an improvement in the human condition, then there is also something in the nature of things that resists the application of force, whether well intended or not.

If all of the above is an accurate accounting of things, then the key issue for policy makers is finding the fine line that separates supporting the natural flow of human evolution from attempting to force change. The former will help while the later will end badly. The question today has to do with Quantitative Easing. Is QE a gentle nurturing of economic evolution or is it the next doomed attempt to force things to get better? The QE program is so enormous, and relentless, and insistent, that I fear it is the later. And if QE is a huge attempt to force the economy to improve, than we had better start bracing for the blowback.

QE: the blowback to come

What kind of blowback should we prepare for? The lesson of history is that trying to force things to get better does not merely create unwelcome repercussions. It does not merely slow the pace of natural evolution. Attempts to enforce a certain outcome always appears to create the opposite effect. We do not find a law of adverse consequences. We find a law of opposite impacts.

Let us review the sample examples from the previous charts. Every effort to jam an ideology or a plan down the throat of the world only creates the opposite of the intended effect. I would maintain that this is one of the few lessons from history that can be relied on.

If the Federal Reserve is trying to force feed us prosperity then the inevitable blowback will be adversity. If the Fed is trying to compel the most dramatic economic recovery in history, then the blowback may well be the deepest depression in history. If the Fed is trying to enforce confidence and optimism then the blowback will be fear and despair. If the Fed is trying to force consumers to spend then the blowback will be a collapse in consumer confidence.

I sincerely hope that I am completely wrong here, that I am missing something, that there is a flaw in my logic. However until I can locate such a flaw I must trust the technical case for treating this Fed force-fed rally in the stock market as something that will end badly.

Here's how it plays out…

 

 

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

Just before New Year’s Day, as we previously reported, Russia’s city of Volgograd, located in close proximity to Sochi where the Winter Olympics begin in a few weeks, was rocked by two powerful suicide bombings, the first of which took place in its train station – one of Russia’s largest. At least 14 people were killed. Yesterday, footage released by Lifenews.ru shows the suicide bomber as he approaches the train station, and then explodes as he crosses the metal detectors. Up close and personal, not for the faint of heart.

h/t @Stalingrad_Poor

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

Submitted by Lance Roberts ( @lanceroberts ) of STA Wealth Management,

Earlier this week I posted a piece entitled "The Coming Market Meltup And 2016 Recession" which discussed the collision of the Presidential and Decennial market cycles.  In that post I stated:

"The decennial pattern is certainly suggesting that we take advantage of any major correction in 2014 to do some buying ahead of 2015.  As shown in the chart above, there is a very high probability (83%) that the 5th year of the decade will be positive with an average historical return of 21.47%."

While the article was based around the historical statistical data, it got me to thinking about the average investor and where they are currently positioned in the markets today.  More importantly, what are some of the risks that could derail the previous analysis.  This is the basis for the things I am going to "Ponder This Weekend."

1) Howard Marks – Getting Lucky via OakTree Capital Management

Howard Marks is a must read by anyone.  His insights are always intellectual and insightful, and his latest missive is no exception as he focuses on the role of luck in everything from the life one leads to investing.  The most interesting part of his discussion was the focus on the inefficiency of the markets and why it is different now.  Here is the key excerpt:

"The efficient market hypothesis is compelling…as a hypothesis. But is it relevant in the real world? (As Yogi Berra said, 'In theory, there is no difference between theory and practice, but in practice there is.') The answer lies in the fact that no hypothesis is any better than the assumptions on which it's premised.

 

I believe many markets are quite efficient…But I also believe some markets are less efficient than others. Not everyone knows about them or understands them. They may be controversial, making people hesitant to invest. They may appear too risky for some. They may be hard to invest in, illiquid, or accessible only through locked-up vehicles in which some people can't or don't want to participate. Some market participants may have better information than others…legally. Thus, in an inefficient market there can be mastery and/or luck, since market prices are often wrong, enabling some investors to do better than others.

 

It's hard to prove efficiency or inefficiency. Among other reasons, the academics say it takes many decades of data to reach a conclusion with 'statistical significance,' but by the time the requisite number of years have passed, the environment is likely to have been altered. Regardless, I think we must look at the changes listed above and accept that the conditions of today are less propitious for inefficiency than those of the past. In short, it makes sense to accept that most games are no longer as easy as they used to be, and that as a result free lunches are scarcer. Thus, in general, I think it will be harder to earn superior risk-adjusted returns in the future, and the margin of superiority will be smaller.

 

People often ask me about the inefficient markets of tomorrow. Think about it: that's an oxymoron. It's like asking, 'What is there that hasn't been discovered yet?' The markets are greatly changed from 25, 35 or 45 years ago. The bottom line today is that there's little that people don't know about, understand and embrace.

 

How, then, do I expect to find inefficiency? My answer is that while few markets demonstrate great structural inefficiency today, many exhibit a great deal of cyclical inefficiency from time to time. Just five years ago, there were lots of things people wouldn't touch with a ten-foot pole, and as a result they offered absurdly high returns. Most of those opportunities are gone today, but I'm sure they'll be back the next time investors turn tail and run.

Markets will be permanently efficient when investors are permanently objective and unemotional. In other words, never. Unless that unlikely day comes, skill and luck will both continue to play very important roles."

As I said, the entire piece is a must read.

2) The Financial Fire Next Time by Dr. Robert Shiller

In my post discussed above while discussed the probability of an advance into 2016, I also stated that:

"While the historical evidence suggests that 2014 will see a buying opportunity going into 2015, it is important to remember one simple phrase that is too often forgotten by the "bullish crowd:"

'Past Performance Is No Guarantee Of Future Results.'

There are plenty of reasons that the market could lapse into a far bigger correction sooner than the historical evidence would otherwise suggest.  Such an event would not be the first time that an "anomaly" in the data has occurred."

This was the key point discussed by Robert Shiller:

"If we have learned anything since the global financial crisis peaked in 2008, it is that preventing another one is a tougher job than most people anticipated. Not only does effective crisis prevention require overhauling our financial institutions through creative application of the principles of good finance; it also requires that politicians and their constituents have a shared understanding of these principles…

 

One of our discussants, Joseph Tracy of the Federal Reserve Bank of New York (and co-author of Housing Partnerships), put the problem succinctly: 'Firefighting is more glamorous than fire prevention.' Just as most people are more interested in stories about fires than they are in the chemistry of fire retardants, they are more interested in stories about financial crashes than they are in the measures needed to prevent them. That is not a recipe for a happy ending."

 3) Beer Googles by Richard Fisher via Dallas Federal Reserve

Today, I want to muse aloud about whether QE has indeed put beer goggles on investors and whether we, the Fed, can pass the camel of massive quantitative easing through the eye of the needle of normalizing monetary policy without creating havoc.

 

When money available to investors is close to free and is widely available, and there is a presumption that the central bank will keep it that way indefinitely, discount rates applied to assessing the value of future cash flows shift downward, making for lower hurdle rates for valuations. A bull market for stocks and other claims on tradable companies ensues; the financial world looks rather comely.

 

Market operators donning beer goggles and even some sober economists consider analysts like Boockvar party poopers. But I have found myself making arguments similar to his and to those of other skeptics at recent FOMC meetings, pointing to some developments that signal we have made for an intoxicating brew as we have continued pouring liquidity down the economy's throat.

 

Among them:

 

• Share buybacks financed by debt issuance that after tax treatment and inflation incur minimal, and in some cases negative, cost; this has a most pleasant effect on earnings per share apart from top-line revenue growth.

• Dividend payouts financed by cheap debt that bolster share prices.

• The "bull/bear spread" for equities now being higher than in October 2007.

• Stock market metrics such as price-to-sales ratios and market capitalization as a percentage of gross domestic product at eye-popping levels not seen since the dotcom boom of the late 1990s.

• Margin debt that is pushing up against all-time records.

• In the bond market, investment-grade yield spreads over "risk free" government bonds becoming abnormally tight.

• "Covenant lite" lending becoming robust and the spread between CCC credit and investment-grade credit or the risk-free rate historically narrow.

And then there are the knock-on effects of all of the above. Market operators are once again spending money freely outside of their day jobs. An example: For almost 40 years, I have spent a not insignificant portion of my savings collecting rare, first-edition books.  Like any patient investor in any market, I have learned through several market cycles that you buy when nobody wants something and sell when everyone clamors for more.

I want to make clear that I am not among those who think we are presently in a 'bubble' mode for stocks or bonds or most other assets. But this much I know: Just as Martin knew by virtue of his background as a noneconomist who had hands-on Wall Street experience, markets for anything tradable overshoot and one must be prepared for adjustments that bring markets back to normal valuations."

4) When Will Corporate Profit Margin Contract via Pragmatic Capitalist

The key bullish argument for a continued rise in the stock market is continued expansion of corporate earnings.  In history, analysts have consistently overshot earnings estimates by roughly 33% while never forecasting a reversion of earnings or margins.   Cullen Roche made a good point relative to the reversion process.

"But this isn't a question of if.  It's a question of when.  Profit margins will mean revert at some point.  But they could also stay high for many years and you could miss huge gains like 2013 waiting for the mean reversion to actually occur."

"One thing we know is that recessions are devastating for corporations.  And they're not only devastating for corporations, they're often devastating for markets.  In the last 60 years all of the year over year 30%+ declines in the S&P 500 have occurred inside of a recession.  In other words, outlier tail risk type returns tend to occur inside of a recession.  And if we look at profit margins we find something similar.  They almost always contract inside of a recession or within a few months of a recession."

5)  Half In U.S. Wary Of Investing by Gallup

I thought this poll from Gallup was interesting.  The rally in the markets over the last 5 years has often been dubbed the "most hated rally" because individual investors stayed out.

"Half of Americans say investing $1,000 in the stock market right now would be a bad idea, even though the Dow Jones Industrial Average and Standard & Poor's 500 index have recently hit record highs. Forty-six percent of Americans say investing $1,000 in the stock market would be a good idea."

"Despite a Dow closing record high of 16,576 this past New Year's Eve, and an average that has stayed well above 16,000 throughout January, Americans appear skittish about pouring money into what appears to be a bull market, according to a Gallup poll conducted Jan. 5-8. In January 2000, when the Dow was at a then-record high of 11,500, Americans were much more likely to say investing in the stock market was a good idea than they are today. A record-high 67% of Americans that month said investing was a good idea."

This recent poll jumped out at me because it really speaks to two things about individual investors today:

1. They have been so financially destroyed by the previous two bear markets that they have lost trust in the financial markets and advisors who so poorly guided them, and/or;
2. This is that complacency period (as in 2004-2006) before the final "mania phase" sets in.

The Gallup poll is an interesting when juxtaposed to the American Association of Individual Investors survey which I discussed recently in "Charts Every Market Bull Should Consider" as shown below:

What are you "pondering" this weekend? 

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

JPY crosses were in charge of stocks again today – and not in a good way – as a sideways market gave way to weakness late on as Goldman released part two of their market-bashing research. With the dramatic help of AXP and V (78 of the Dow's 41 points!), the Dow was the only index green today and managed to close just green on the week. Since the taper, Homebuilders have tumbled from heroes to almost zeroes (+1.5% from +6.5% at year-end in spite of the big drop in TSY yields in recent weeks) with Healthcare outperforming (+5.5%). Away from stocks, things were also escalating rapidly this afternoon. Treasury yields limped lower all day then dropped notably starting around 1445ET with 30Y -5bps on the week (and 5s30s at 212bps – the flattest term structure in 4 months). The USD rose on the day (up 0.75% on the week) led by EUR weakness (JPY was relatively stable). Despite the USD strength, gold and silver closed green on the week (+0.25% and+0.7% respectively) but WTI crude led the way up 1.5% on the week at $94.10. Despite valiant efforts to VIX-slam the market higher into the close, the S&P closed red and VIX +0.6vols higher on the week at 12.7%

 

Interestingly, stocks flip-flopped around the European close/POMO between USDJPY and AUDJPY/EURJPY… caught down to it by the close…

 

Year-to-date, the Dow is the underperformer but the last hour or so today saw the other major indices pressing aggressively lower…

 

On the week, the NASDAQ and Russell closed green, Dowsmall green, and S&P and Trannies lower…

 

Since the taper, there has been some notable rotation across sectors with homebuilders the most notable…

 

Credit markets dropped the hint early that all was not well in equity land…

 

As did VIX…

 

US Treasuries rallied almost non-stop since the post-inflation data spike on Wednesday (with a mini spike higher in yields this morning) – 5s30s are now at 4-month flats and 2s10s at 6 week flats…

 

With 30Y bond yields at their lowest in over 2 months…

 

The USD rose notably on the week (JPY was unch – irnoically the same as stocks…) – led by EUR weakness (and that smack down in AUD on the back of dreadful jobs data)…

 

Despite that USD strength, commodities all closed green on the week…

 

 

Charts: Bloomberg

Bonus Chart: The Treasury curve flatteniung is being ignored for now by the banks (where's my NIM?) but dragging builders lower…

via Zero Hedge http://ift.tt/1axdBF2 Tyler Durden

JPY crosses were in charge of stocks again today – and not in a good way – as a sideways market gave way to weakness late on as Goldman released part two of their market-bashing research. With the dramatic help of AXP and V (78 of the Dow's 41 points!), the Dow was the only index green today and managed to close just green on the week. Since the taper, Homebuilders have tumbled from heroes to almost zeroes (+1.5% from +6.5% at year-end in spite of the big drop in TSY yields in recent weeks) with Healthcare outperforming (+5.5%). Away from stocks, things were also escalating rapidly this afternoon. Treasury yields limped lower all day then dropped notably starting around 1445ET with 30Y -5bps on the week (and 5s30s at 212bps – the flattest term structure in 4 months). The USD rose on the day (up 0.75% on the week) led by EUR weakness (JPY was relatively stable). Despite the USD strength, gold and silver closed green on the week (+0.25% and+0.7% respectively) but WTI crude led the way up 1.5% on the week at $94.10. Despite valiant efforts to VIX-slam the market higher into the close, the S&P closed red and VIX +0.6vols higher on the week at 12.7%

 

Interestingly, stocks flip-flopped around the European close/POMO between USDJPY and AUDJPY/EURJPY… caught down to it by the close…

 

Year-to-date, the Dow is the underperformer but the last hour or so today saw the other major indices pressing aggressively lower…

 

On the week, the NASDAQ and Russell closed green, Dowsmall green, and S&P and Trannies lower…

 

Since the taper, there has been some notable rotation across sectors with homebuilders the most notable…

 

Credit markets dropped the hint early that all was not well in equity land…

 

As did VIX…

 

US Treasuries rallied almost non-stop since the post-inflation data spike on Wednesday (with a mini spike higher in yields this morning) – 5s30s are now at 4-month flats and 2s10s at 6 week flats…

 

With 30Y bond yields at their lowest in over 2 months…

 

The USD rose notably on the week (JPY was unch – irnoically the same as stocks…) – led by EUR weakness (and that smack down in AUD on the back of dreadful jobs data)…

 

Despite that USD strength, commodities all closed green on the week…

 

 

Charts: Bloomberg

Bonus Chart: The Treasury curve flatteniung is being ignored for now by the banks (where's my NIM?) but dragging builders lower…

via Zero Hedge http://ift.tt/1axdBF2 Tyler Durden

“US profits are growing, companies have underinvested and have no choice but to spend more on CapEx, and corporations have much less debt than they did during the crisis thanks to a massive cash build up.”

These are the generic go to explanations by soundbite, talking heads for why the US recovery is gaining traction with US corporations, if not so much Joe Sixpack, and why companies are still cheap. There is one problem: they are all wrong.

As SocGen’s Andrew Lapthorne shows conclusively, “US profits are not growing, companies are over not underinvesting (they may in fact have overinvested), and corporates are carrying more (not less) net debt than they were in 2009. It would appear that many believe the opposite to be true, yet corporate report and accounts data seems to say otherwise.” But hey- stocks are at record highs, right, and the market is never wrong (except when it is), so who cares. Indeed “Thank goodness equities went up in 2013, otherwise it might have been a rather depressing year.”

Here is what else SocGen uncovered:

• When it comes to having a market view there are typically (at least) two sides to every argument. When it comes down to the state of US quoted sector profits and balance sheets there should be little argument, but even here there is a great debate, and several viewpoints with which we do not entirely agree.
• First is the notion that profits growth accelerated in the US last year. Yes, the pro-forma figures from popular providers such as I/B/E/S show EPS growth of around 6-7%, but pro-forma figures are whatever you wish them to be. Reported earnings growth slowed to almost zero in 2013 and EBIT is largely where it stood at the beginning of 2012.
• Capital expenditure growth, the great hope for 2014, slowed throughout 2013 as did cash flow growth and sales growth. However, capex as a proportion of sales is at elevated (not depressed) levels. Why would a company step up investment when faced with contracting margins and lacklustre demand? Surely sales and profit growth recoveries lead investment and not the other way around?
• US corporates do indeed hold lots of cash, which is currently at record levels, but they also hold record levels of debt. Net debt (so discounting those massive cash piles) is 15% above the levels seen in 2008/09. The idea that corporates are paying down debt is simply not seen in the numbers. What is true is that deleveraging has occurred through the usual mechanism of higher asset prices (no doubt an aim of central bank policy). This is the painless form of deleveraging. It is also the most temporary, for a simple pull-back in equities and rise in volatility will put the problem back on centre stage

US profits growth stalled in 2013

When looking at profit growth most people tend to quote pro-forma earnings numbers from the likes of Bloomberg and I/B/E/S which show 12 month forward or trailing EPS to have grown by around 7% over the past year, consistent with the figures you see in our Global Market Arithmetic product, which are based on I/B/E/S supplied data.

However, a better profit series comes from MSCI, which has earnings data going back to 1970 for most major indices. This definition of earnings is not as harsh as the S&P earnings definition incorporated into the likes of Robert Shiller’s CAPE, but neither is it as overly generous as the pro-forma numbers supplied by I/B/E/S. To give you an example of the difference, during the 2009 profit slump S&P core earnings fell peak-to-trough by 92%, MSCI defined earnings fell by 55% and I/B/E/S pro-forma earnings fell by 36%.

As we show above, not only are MSCI reported profits barely growing but the gap in the growth rate between these numbers and the pro-forma numbers is widening, with the proforma number considerably more optimistic. This is a phenomenon that often precedes a more significant profit slump. It is also an indication that the quality of earnings is deteriorating. Based on MSCI reported figures, earnings are no longer growing.

Of course even these MSCI figures have been flattered by a reduction in the share count plus lower interest rates and tax charges. If we look at overall growth in earnings before interest and tax, or indeed gross cash flow, we find that neither has really moved for the last couple of years. It would appear then, that at an aggregate level, most profit growth is the result of astute financial engineering rather than improving cash flow – yet another sign of a tired, long in the tooth, profit cycle.

Corporates are overspending relative to sales

Another, perhaps surprising conclusion also to be seen from US report and accounts data is that US corporates are not underspending when it comes to capital expenditure and, in fact, relative to sales they may be overspending! The following chart shows overall capex to sales ratios for the US ex-financials. Rather than being depressed, what we see is that capex levels versus sales are relatively elevated. If anything it would appear from this data that capex levels are too high – not too low – as many are saying.

Indeed, if we look at the evolution of capital expenditure and cash flow growth, we see that we have already been through a long period of substantial capex growth and capex growth has exceeded cash flow growth for some time. Importantly, just as cash flow growth is slowing so too is capex growth and, in the absence of a pick-up in demand, it may continue to do so in an effort to preserve those precious high margins and profitability.

So why are corporates complaining about the lack of investment opportunities and opting largely to engage in share buybacks instead? As has been the case in Japan, we’d argue that the problem is not a lack of desire to invest, but anemic demand reflected in very low sales growth. After all, corporates did step up capital expenditure post the financial crisis only to then be confronted with a lackluster economic recovery. If the demand isn’t there why invest? And, of course, with credit abundant there are easier ways to boost asset prices, so why not pursue those instead?

US companies are carrying far more net debt than in 2007

Another curiosity is this notion that US companies have substantially reduced their debt pile and are therefore cash rich. The latter is indeed true. Cash and equivalents are at historically high levels, but rarely do those who mention the mountains of corporate cash also discuss the massive increase in debt seen over the last couple of years. In fact, debt levels have been growing to such an extent that net debt (i.e. excluding the massive cash pile) is 15% higher than it was prior to the financial crisis.

In summary: 2013 was a year of weakening cash flow growth, lower profit growth,
deteriorating earnings quality, and corporates pilling on the debt –
again! Well at least equities were up strongly last year, otherwise you
might be feeling rather bearish.

So several counterfactual points: US corporates saw profit growth slow to almost zero last year and on an EBIT basis it has been flat for some time now. Earnings quality, rather than improving is actually deteriorating, as indicated by the increasing gap between official and pro-forma EPS numbers. As a consequence, following a long period of overspending and in the absence of a strong pick-up in demand, corporates will have to spend less and not more. Finally, as a consequence of such anemic growth, corporates have been gearing up their balance sheets in an effort to sustain EPS momentum via the continuing use of share buybacks. With markets up substantially in 2013 executing those share buybacks has become increasingly expensive. Little wonder companies have to borrow so much to continue executing them. So as the Q4 numbers roll in we’ll be looking for evidence of increasing earnings manipulation, greater leverage and for signs that the capex cycle might be improving.

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