Category: zerohedge

There is a glaring divergence between the performance of US equities and high-yield credit’s spread over investment-grade credit. As BofAML warns, “either HY rallies or stocks soon in a bit of trouble,” because the only pillar left to hold up the fragile un-bubble-like stock market – buybacks – will disappear if costs of funding start to surge (there’s always a limit to the leverage a credit cycle will bear). The more concerning aspect is that it appears investors are already rushing for the doors… as this week saw the largest HY outflows in over a year.

HY better rally soon – or stocks are in a bit of trouble…

As last week saw massive outflows from HY…

The biggest HY outflows since last summer’s Taper Tantrum as perhaps the professionals realize the repo market’s breakdown is something to worry about…

This week alone has seen major derisking in HY…

Simply put, the Fed can’t have it both ways – if they think HY credit is in a bubble then it directly implies costs of capital for stocks are too low and thus stock prices too high…

*  *  *

Just to be clear – this is not a “rotation” excuse from HY corporate bonds to stocks – the two assets are intricately exposed to exactly the same underlying business volatility on an idiosyncratic basis… if credit spreads start to widen (which they are) and the endless demand that has enabled massive issuance used for buybacks starts to weaken (which it is) then the hopes of this bubble ending well – as firms are forced to admit just how weak ‘real’ earnings are when unadjusted for shrink-floating manipulations…

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Wolf Richter   www.wolfstreet.com   http://ift.tt/Wz5XCn

Don’t let a good crisis go to waste – that appears to be the newest slogan of Russian President Vladimir Putin, as his approval rating in Russia soared from 54% a year ago to 83% now, matching the record of the data series in 2008, when he switched roles to become Prime Minister. The rating was, as Gallup put it, “likely propelled by a groundswell of national pride with the annexation of Crimea in March on the heels of the Sochi Olympic Games in February.”

By contrast, President Obama’s job approval rating in the US, according to Gallup’s daily tracker, languishes at a miserable 42%. Bad, but still head and shoulders above the most despised tax-and-retreat French President of the Fifth Republic, François Hollande, whose approval rating has finally stopped plunging once it got to about 20%.

But it’s not just Putin

Russian’s confidence in their military jumped to an all-time record of 78%, up from 65% a year ago, wowed perhaps by the military’s awe-inspiring performance in the Crimean debacle.

Confidence in the Russian government skyrocketed from 39% in 2013 to 64% now. And that at a time when the US Congress is mired down in a well-deserved or perhaps too generous job approval rating of 15% by the hapless American voters who just can’t seem to figure out how to throw the rascals out.

The crisis also has given the Russian government a boost overall: 73% of Russians believe their government is leading them in the right direction, a majority for the first time since 2008, when Putin left the presidency. Russians really do have confidence in him, and they miss him when he’s gone. Yet, their economic outlook, while up, remains crummy: only 35% see conditions getting better, but 19% see them deteriorating.

And even Russians’ confidence in the elections has soared, albeit from an abysmal 23% in 2013 to a somewhat less abysmal 39%. That’s more than double the terrible level of 2006 and 2007, during Putin’s first reign, when only 17% of the Russian were confident in the honesty of their elections. Well, OK, honest or not, but at least they got their Putin back.

Here is Putin’s all-around triumphant chart, where everything has soared since last year:

And what do Russians think about America?

Man! First the good news. For China, that is. The $400 billion holy-grail natural gas deal Russia inked with China, with money flowing one way and gas the other, and all the hope and hype that came along with it have endeared China to the Russians. Their approval rating of China jumped on cue, from 25% last year to 42% now. The fact that China had Russia in a vice when the final touches were put on the deal and was thus able to extract pricing that would be good only for China has been lost somewhat in the shuffle at home. But hey.

Instead of offering Russia some kind of holy-grail deal on energy, the EU and the US have engineered an ingenious sanction spiral that so far has done wonders. In return, Russians’ approval of the EU swooned from 21% to 6%, and of America from the already awful 16% to 4% (not a typo). The diametrically opposed movement of China and the US looks terrible:

But it might even be worse: Given the survey’s margin of error of ± 2.7 percentage points (at a 95% confidence level), the approval rating could actually be as low as 1.3%. That’s as close to zero as you can get in a survey!

So if our local heroes, Obama and Congress, with their phenomenally well-thought-out reactions to the fiasco in the Ukraine, are trying to win the hearts and minds of the Russian people so that they could apply some pressure on Putin (LOL), they have abysmally failed. And in regards to his standing in his country, Putin is once again grinning his wicket triumphant smile. So far for him – at least through the period when the survey was conducted – the crisis has been a flawless success.

Capital flight, particularly from the vast underground economy, is Russia’s most pressing economic problem. And Putin’s angle of attack has been, well, brutal in its own way. Read…. Sanction Spiral Hits London, Plays Into Putin’s Master Plan

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Following this morning’s farce of huge investor demand and then Bank of Portugal’s Costa ‘hoping’ for demand from investors willing to pile more money on losing money into Espirito Santo, it appears things have escalated rapidly…

• *ESPIRITO SANTO INTERNATIONAL SAYS IT CAN’T MEET OBLIGATIONS
• *ES INTERNATIONAL APPLIES FOR `CONTROLLED MANAGEMENT’ REGIME
• *ES INTERNATIONAL APPLIES FOR REGIME UNDER LUXEMBOURG LAW

The “controlled management” application is the equivalent of declaring a breakup or controlled bankruptcy process (as we explained here). ESI is the ultimate HoldCo in the Banco Espirito Santo family.

As Bloomberg reports,

Espirito Santo International, a holding company that’s part of Grupo Espirito Santo, requested to be placed under “controlled management” under Luxembourg law, co. says in statement.

 

ESI says can’t meet obligations, “due to a significant part of its debt maturing”: statement

 

“Once under this regime, all judicial actions by creditors are suspended to allow the implementation of an asset management and liquidation plan under a court’s control”: statement

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Submitted by Martin Armstrong of Armstrong Economics blog,

This idea that we live in a world where government cares about us is just the biggest propaganda ever. Everyone one will only pursue their own self-interest. The OECD has interesting come out and warned that if governments are unable to stop the transfer of wealth to a small financial elite, the displeasure of the dispossessed middle class could easily turn and go against the prevailing governmental systems. The OECD has claimed to have discovered the existence of a veritable “lumpenproletariat” in the supposedly rich Germany. Even though the systems attempt to provide citizens with bread and circuses in the traditional Roman style to keep them quiet, such  tactics they warn may have now become obsolete after the ultimate circus is over – the World Cup.

The problem with all of these studies is the look at class warfare and not at the consumption of government. They do not follow the breadcrumbs. What if you take everything from the elites? Who will start businesses to create jobs? Who will be left to take as government pensions keep ticking away. In Germany, it has now surpassed 50% of the average persons labor goes to taxes.

 

There are a host of books coming out all about just taxing the rich more ignoring reducing the cost of government. The German bestseller “The plunder of the world” presents just another socialist agenda arguing that the rich get richer even in times of crisis, while the consequences of a crisis are always carried by the lower-income groups and the middle class. It fails to explain that the rich get richer from investment, not wage income. This is an argument to effective tax investment substantially to even out the disparity? But who then creates the jobs that produce anything? Is it that those who invest unfairly make money when the others pay too much in taxes and do not invest? Anyone who thinks that these books are real must be insane. If you think for one second raising the taxes on the rich will mean your taxes will decline – good luck. In Germany, Tax Freedom Day has passed the 50% and even in Canada it is now June 9, 2014. In the United States it is April 21st for 2014.

 

In France, the magazine Challenges has determined that the richest Frenchmen saw their assets in 2013 rise by 15% since they benefit from the profits in foreign companies. There is no discussion that government consumes too much – EVER!

 

 

The consequences of unequal distribution of wealth in the world is becoming the tipping point argued and funded by governments to blame the rich – never government. Nobody seems to be doing the math that if you confiscate all that wealth you end up with communism with taxation and government just keeps growing until it consumes everything. We borrow with no intent of paying anything back and that about 70% of the national debts is all interest that built no schools, reduced nobody’s tax bills, and did nothing for the middle class. This is fairly consistent in all major countries. Governments are trying to push interest rates exceptionally lower to reduce their deficits exploiting the middle class creating a disincentive to save even for retirement when it pays next to nothing.

The OECD is now warning like Picketty that a growing gap between rich and poor will erupt into revolution – not that government is taxing too much. According to the words of the OECD Secretary General Jose Angel Gurria, the problem since the global financial and economic crisis has exacerbated massive. “In the first three years of crisis, inequality increased more than in the twelve years before, “he told the Business Week”. On average across OECD countries, the top 10% of the population now earn 9.5 times as much as the lowest 10% but fail to explain this is from investment. Inequality has grown by 35% because stock markets are rising to escape from the craziness of government. The higher they rise, the greater the disparity.

The OECD claims this is clearly felt in the USA more so than Europe omitting the fact that the disparity comes from investment not wages. They they compare that to Europe claiming there is no welfare state in Europe so somehow this is implied to be better. The OECD then highlights supposedly rich Germany as a dangerous development with a rising disparity stating this is “namely that it is a lumpenproletariat, a very poorly trained and poorly paid part of the Arbeiterschich.”

The argument now is the middle class civil unrest they know is coming is simply because they have not confiscated the wealth of the investors they call the financial elites. So if you invest and make any money, you are the new financial elites – sorry it is anyone who now invests. Michael Maier’s The plunder of the world is another book released to justify plundering the financial elites without actually identifying who they are. Sorry – it is you.

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“Costs” and “Consequences”… not only has US foreign policy enabled Vladimir Putin’s approval rating to surge to record highs but, perhaps more importantly, it has driven a massive wedge between the West and the rest…

It seems US “costs” are not affecting Russian support for their leader…

and dividing the world even more aggressively…

What does Obama think Putin is worried about?

h/t edwardnh via Gallup

Bonus Chart…

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Aside from a relentless barrage of deteriorating geopolitical updates almost on a daily basis, which have led even the “very serious thinkers” to pull up comparisons to the days just before World War I, it has been smooth sailing for global capital “markets” which merely continue to follow the path of least central bank balance sheet resistance. It is this relentless melt up which has seen what was once a market and is has for the past 5 years become a policy vehicle to boost confidence (for whom, it is unclear: the vast majority of the population no longer cares what rigged stocks do, as for the trickle down wealth effect, 5 years of deteriorating real incomes for the middle class have promptly put an end to that fable) alongside a slow-motion LBO of the entire S&P 500, as companies repurchase trillions of their shares using ultra-cheap credit, bask in the glow of complacency so vast even the Fed is openly warning against it.

It is in this context that at least one bank, has voiced an alarm against pervasive, record complacency (that no matter how bad things get, the Fed will step in a bail everyone out, in fact the worse things get the better) after UBS’ Stephane Deo released a paper titled “We are worried. We reduce risk – for now.“

The key excerpts from the report:

Firstly we are concerned about valuations. We show that equity markets are stretched (e.g., more than 80% of the S&P rally since last year is due to re-rating), but we also find that the fixed income market has become quite rich (we have been overweight European peripherals for more than a year on valuation grounds, we show that this argument no longer holds), and the same is true of the credit market. Second because capital has been flowing rapidly into risky assets, we document that argument and here too find evidence that the market might be ahead of itself. We read the market reaction last week to the Portuguese news as a sign that the market is indeed too complacent and could correct rapidly.

Why we are worried

As we wrote in the previous section we remain constructive on risky assets over the medium term. However we think it is now time to scale down risk. The canary in the coalmine this time was Portuguese: The issue last week with Banco Espírito Santo (BES) had large impact on a variety of asset classes over the world. This includes other Portuguese banks, but also wider range of asset like the all SX7E index, the sovereign spreads in Europe and it even had an impact on the VIX. The various reactions from these asset classes seem large unless the BES event hides something much bigger and is the start of a new systemic crisis. This is not our central case scenario. In a recent note Bosco Ojeda explains that genuine improvements have been accomplished in peripheral Europe and the return of systemic risk is unlikely. Rather we think the event tells us a story about market positioning and market pricing: we think the market is stretched (more on that immediately below). If this is true, the market is already pricing most of the potential good news and is prone to react to bad news.

The pricing argument

Let’s first look at pricing. We have argued that all the major stock markets are close to fair value. This is the case if we look for e.g. at our trend adjusted P/E, or if we look at our equity risk premium index. What is true though is that the recent momentum in markets is difficult to justify. The chart below shows that our economic surprise index has been very highly correlated with the S&P 500 until the beginning of last year. Since then the market has continued his rally with little fundamental improvement to support it. This divergence is becoming uncomfortably large.

And indeed, as we go to press, we get a helping hand from the Fed himself. The Fed said in a report that “valuation metrics in some sectors do appear substantially stretched, particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year.”

We also believe that the credit market is reaching tight levels. There are two additional characteristics of the credit market that worry us. First the quality of issuance has deteriorated as evidenced by a number of metrics: for instance the average rating of issuers has declined, the number of first-time issuers has increased, the number of payment in kind (PIK) clauses has surged, etc… Second the ratio between primary market issuance and secondary market daily turnover has greatly deteriorated, which is also a worrying sign. We have highlighted repeatedly in the past that the lack of liquidity in this market is a key issue for us and that it could prompt a sharp market over-adjustment.

* * *

Risk premium is the extra return investors demand to hold a risky asset above the return of a risk-free asset. Although excess return varies widely over time, particularly for equity, risk premium tends to be mean-reverting. This can either be estimated using expected cash flows as the rate that has to be added to the discount rate to back out current market prices. Or more simply we can look at historic excess returns.

In Figure 14 we can see the long-term excess returns of the assets in our portfolio against the excess return over the last year. The data have been sorted by return over the last year, and it is clear that the last year has been highly atypical. Equity, credit and listed real estate have had excess returns far above their long-term averages particularly in the UK and Europe. At the bottom of the bar graph volatility has been very low and the mid-term VIX futures index (SPVXMTR) has been losing value more quickly than usual.

It is interesting that some assets are broadly in line with their long-term average, such as US listed real estate, US high yield credit, and US Treasuries. The excess return of Asian listed real estate is actually below its long-term average. As a trading signal risk premium is very unreliable because it gives no sense of timing. But given the returns over the last year risk premia are certainly unfavourable.

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Originally posted at Economic Policy Journal,

When government gets involved in a sector, it distorts the sector. Corporations are not incentivized to strictly serve customers. This is now occurring in the healthcare sector–and is only going to get worse. A “cancer app” is an example of where medical personnel will play god to advance government and crony corporate interests instead of patient interests.

Robert Goldberg writes:

The latest innovation in cancer care isn’t a medical breakthrough but an app to ration new drugs. It’ll measure care in terms of what it costs health plans, instead of what it means for patients’ lives.

 

That it’s being developed under the auspices of the American Society for Clinical Oncology, or ASCO, the world’s leading oncology association, is a grim warning about the state of organized medicine.

 

The app will use an algorithm like those many health plans apply to limit access to innovative treatments. Wellpoint Inc., for one, measures cost-effectiveness by comparing the benefits, side effects and costs of various treatments for specific types of cancer. The ASCO app uses the same benchmarks…

 

The app’s biggest problem, though, is that it’s one-size-fits-all: It treats all patients as the same, ignoring the genetic variation in patient response that a new class of “targeted” cancer drugs will soon address.

 

Dig a bit deeper, and it’s clear that ]Dr. Lowell Schnipper, who heads ASCO’s Value in Cancer Care Task Force] and his allies have a more ideological motivation. He talks of limiting spending on new treatments as a way to make “the health-care system, not just the cancer system, more rational and just.”

 

And this line of thinking does away with the Hippocratic Oath. No longer is the doctor’s first obligation “to apply for the benefit of the sick, all measures that are required.” Instead, Schnipper believes three months of added life “is not a large enough benefit to trump the greater benefits to many that would have to be foregone to provide it.”

 

In fact, he regards the premium that Americans place on life as a character defect, observing, “Other cultures do not seem to view the postponement of death by a few months” the same way we do.

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While admitting that he has no evidence, Pentagon Press Secretary John Kirby offered his opinion in today’s press conference:

• *’STEADY, CONCERTED’ EFFORT PROVIDES ARMS TO SEPARATISTS: KIRBY
• *’STRAINS CREDULITY’ SA-11 FIRED WITHOUT RUSSIAN AID: KIRBY

But still no proof…

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Thanks to the capable carry-induced ramp in AUDJPY (and a helpful OPEX pile-on for VIX), US equity markets are surging this morning (Russell 2000 above yesterday’s highs?!) on the heels of the biggest short squeeze in over a month… SSDD…

We do note that the big tumble in shorts yesterday has now been fully retraced..

but AUDJPY seems unstoppable…

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Earlier, when we commented in the abnormality in the flight path of flight MH-17 we said that “perhaps before coming to “certain” conclusion about the involvement of this rebel or that, the key questions one should ask before casting blame, is why did the pilot divert from his usual flight plan, why did he fly above restricted airspace, and just what, if any instructions, did Kiev air control give the pilot in the minutes before the tragic explosion?” The simple answer would have come if Ukraine had merely released the Air Traffic Control recording from the tower and flight MH 17, something Malaysia did in the aftermath of the disappearance of flight MH 370, which at last check has still not been uncovered.

It now appears that answer will not be forthcoming because as the BBC reports “Ukraine’s SBU security service has confiscated recordings of conversations between Ukrainian air traffic control officers and the crew of the doomed airliner, a source in Kiev has told Interfax news agency.”

What happens to the recordings next is completely unknown. What is known is that any hope of getting an undoctored explanation why the plane flew as it did, or what the pilots may have seen or said in the moments before the explosion, is forever gone.

It also means that any hope of actually working with facts instead of emotional appeals, and getting to the bottom of the Malaysian airline tragedy, resides in what may be recorded by the black box, whose location right now is now exactly clear. From the Independent:

“Ukraine’s emergency services have found two black boxes at the crash site of the downed Malaysia Airlines flight MH17, the governor of eastern Ukraine’s Donetsk region has been quoted as saying.

 

“Two black boxes were found by our emergency services. I have no information on where these boxes are at the moment,” Kostyantyn Batovsky told the Interfax-Ukraine news agency.

 

Pro-Russian separatists in the region said on Thursday they had found one black box when the Malaysian airliner came down between Krasni Luch in Luhansk region and Shakhtarsk in the neighbouring region of Donetsk.

 

The Interfax-Ukraine news agency had claimed the first black box has been sent to Moscow for analysis, the BBC reported. The news agency now reports a second black box has been recovered at the crash site.

 

Russia’s Foreign Minister Sergei Lavrov has been quoted as saying Russia does not plan to take the “black box” flight recorders from downed Malaysia Airlines flight MH17 in territory held by pro-Russian separatists in eastern Ukraine,

 

However, separatist leader Aleksandr Borodai told the Associated Press: “No black boxes have been found … We hope that experts will track them down and create a picture of what has happened.”

 

A spokesman for the Emergencies Ministry in Kiev declined to comment on the report.

In other words, even more fact-free confusion and speculation which is just what a propaganda-based reporting system needs.

And so, just like in the case of flight MH-370, what actually happened with MH-17 may never be known.

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