Stocks Are Dumping (Again); All Indices Red Post-Yellen

Not only is it deja vu all over again (again) but our warning this morning of reality of a virtual reality world coming unglued is all too real. Biotechs and Momos are at the lows of the day; Nasdaq and Russell 2000 are now down 3% post-Yellen and all major indices (including the IBM-sponsored Dow) are now in negative territory post-Yellen. Financials, ahead of tonight's CCAR, are also fading fast (catching down to their credit counterparts).

 

All major indices are red post-Yellen

 

As Biotechs re-collapse…

 

and Momos are fading fast…

 

And financials (as we said) are rolling over into the CCAR and catching down to credit…

 

We hate to say we told you so…

Despite today's pre-open ramp, which will be the 4th in a row, one wonders if biotechs will finally break the downward tractor beam they have been latched on to as the bubble has shown signs of cracking, or will the mad momo crowd come back with a vengeance – this too will be answered shortly.


    



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The Word from the Bundesbank

Dr.Andreas Dombret, a member of the executive board of the Bundesbank presented to a small group at the New York Stock Exchange earlier today.  

As a consummate central banker, Dombret stuck to his knitting and could not be tempted to stray from his message:  the situation in the euro area was improving, though complacency is a luxury that can still not be afforded.  Among the risks he cited were “reform fatigue” and the consequences of low interest rates, which could distort investment incentives.

Dombret spent some time explaining why the BBK (and the ECB) do not see a significant threat of deflation.  He cited three general reasons.  First, 2/3 of the drop in inflation, he says, is due to falling prices for energy and food.  Dombret argues there are exogenous factors and that their effects will likely be temporary.   This is a standard BBK/ECB line and begs  the question.   The ECB’s mandate is not core inflation and, in fact, headline inflation had previously been used to justify ECB rates hikes under Trichet.

Second, Dombret argued that the low inflation rates in the euro area as a whole partly reflects the adjustment process in the periphery.  We have anticipated such an argument.  Low inflation or even outright deflation in some crisis hit economies are wholly a favorable development.  It is what some have dubbed “an internal devaluation” rather than an external one.  In order to boost competitiveness, domestic prices in many peripheral countries have to fall.  This too begs the question.  The adjustment process in the periphery would not have to be as painful or deflationary, which exacerbates the pressure on debtors, if Germany would offset the austerity in the periphery with more accommodation.

Third, Dombret argues that deflation is not a significant risk because there is not a downward, self-reinforcing spiral in prices and wages.  Dombret, like other BBK and ECB officials, argue that long-term inflation expectations are anchored at a level close to the ECB’s definition of price stability (close to, but below 2%).  He dismissed the notion that the euro area was headed for Japanese-style lost decades.

I was able to ask Dr. Dombret about what Draghi had said recently about the euro’s strength (increasing the downside risk of inflation and growth) coupled with BBK President Weidmann’s comments yesterday about not ruling out QE.  I asked, along the lines I have written about recently, could the ECB take a page from the Swiss National Bank’s playbook and buy foreign bonds in QE.  Buying European bonds has been controversial (both Weber and Stark resigned over the previous bond purchases scheme, SMP) and potentially in violation of the ECB’s charter.  

Dombret refused to be tempted down the path I tried to lead him.  However, his argument was still quite revealing, even if untended.  First he said that it would be improper for any central banker to categorically to rule out actions.  Second, he said that even if the euro is at $1.40 there is not need for foreign exchange intervention.  Dombret essentially argued that, at some level, it could be necessary, but he of course would not speculate on where that level would be.  Third, he suggested as there is not need for QE; it would not be appropriate to discuss which assets could be bought if or when it would be necessary.

The take away message is that officials may be more relaxed than Draghi’s recent comments or the spin put on Weidmann’s comments would seem to have suggested.    While we have been inclined to look for some action from the ECB next week, Dombret’s comments suggest it is by no means a done deal.  That said, if the ECB stands pat, the market will have every incentive to push the euro higher, through the $1.40 level, fishing, as it were, for the ECB’s pain threshold.


    



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Russian Retaliation Continues? Government Dumps iPads, Switches To Samsung

A week after the White House appeared to shun Blackberry (and ignored Apple’s iPhones) as the WSJ reported it was testing Android-based smartphone replacements from LG and Samsung, it seems the Russians have the same idea. Whether this is another swing of the sanctions “boomerang” is unclear but ITAR-TASS reports that, because South Korean tablets have better information security, the Russian government is switching from iPads to Samsung. Communications Minister Nikiforov added this “isn’t related to politics.” We are sure…

 

Via Bloomberg,

South Korean tablets have better information security; Russian govt’s switch from iPad isn’t related to politics, Itar-Tass cites Communications Minister Nikolay Nikiforov as saying.

 

Samsung was first to certify products with Russia’s Federal Security Service, or FSB, state news wire reports, citing Samsung press service

 

 

Govt calling for greater scrutiny of foreign IT partners; no plans to ban or place sanctions on foreign high-tech products, state-run news service RIA Novosti says, citing Nikiforov

 

Nikiforov says comments by U.S. officials raise concerns of increased intelligence gathering, interception of digital information: RIA

Too bad Russia doesn’t make smartphones for the US to retaliate against…


    



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Highest Yield Since May 2011, Record Low Dealer Take Down, Make Today’s 5 Year Auction A Whopper

Following yesterday’s uninspiring 2 Year bond auction, today’s 5 Year issuance of $35 billion was a whopper. Because while it was known well in advance that today’s closing high yield of 1.715%, which priced through the When Issued of 1.732% by 1.7 bps, would be the highest since May 2011. However, the stunners were all within the internals. First, the Bid To Cover of 2.99 was the highest since September 2012, and an abrupt turn in the recent general downward trend in BTCs – who would have thunk that all it took for greater interest in US paper was higher yields . But it was the takedown where the real shockers lay.

To wit, while Directs were awarded 23.1% of the final allotment, the third highest ever, and below the 23.3% last seen in May of 2013, it was the surge in Indirects, which rose to an all time high of 50.9%, well above the 45.2% TTM average, meaning Dealers in turn had the lowest allotment on record as well, getting just 25.9% of the final auction which could make future monetization of this CUSIP by the Fed problematic. Altogether a great auction, even if PIMCO, which had been buying the 5 Year in recent months has gotten creamed on the snapback wider in the bucket, where as reported previously, the 5s30s curve is the flattest it has been in ages.


    



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Two Years Later, Larry Fink Confirms Zero Hedge Was Right

Exactly two years ago, on April 2, 2012, long before it became abundantly clear to even the most clueless CNBC hacks, we said that there will be no capex boom as long as corporate management teams abuse ZIRP (and yes, it is all the Fed’s fault as we further explained) to allocate capital, most of it courtesy of low-cost debt, by providing quick returns to activist investors through dividends and buybacks, instead of reallocating the funds to grow the company by investing in Capex (the latest proof of the unprecedented lack of capital spending growth increase came earlier today) and SG&A or at least M&A.

For those who many not remember, here is what we said:

… companies are now forced to spend the bulk of their cash on dividend payouts, courtesy of ZIRP which has collapsed interest income.

Which means far less cash left for SG&A, i.e., hiring workers, as temp workers is the best that the current “recovering” economy apparently can do. It also means far, far less cash for CapEx spending. Which ultimately means a plunging profit margin due to decrepit assets no longer performing at their peak levels, and in many cases far worse.” And while we have touched on Europe’s record aged asset base, we now get confirmation that, as expected, the same issues affect the US and Asia too, where Japan, not surprisingly, has the oldest average asset age. But there is more: as we suggested, courtesy of Fed intervention, which in turn shifts capital allocation equations, ever less cash is going into replenishing asset bases. The implications are that following the recent surge, corporate profits are set to plunge (no more terminations possible as most companies are already cutting into the bone) once the depreciation and amortization cliff comes, and the threshold of useful asset life is crossed.

Here is what average asset age looks like:

Now investing in CapEx is a traditional strategy for growing companies. This can be seen in the chart below, showing cash usage in Asia, es-Japan (which is much more like the US than any of its peers).

Asia is doing the right thing: it is investing proportionally the same amount of cash in CapEx as it has in the past. Alas, one can not say the same about the US:

When it comes to deploying excess cash, traditionally, the decision for CFOs and Treasurers has been to either put the money into Capex or into M&A. Here is how Goldman summarizes that decision three:

Organic growth (capex)…

  • Greater control
  • Keep corporate culture on place
  • Grow from lean base
  • Prevents overpayment or bidding war
  • Allows entry where others aren’t playing
  • Successful capex leads to greater outperformance vs sector (>30% outperformance, vs c.18% for successful acquirors)

…vs acquisitive growth (M&A)

  • Timely/ immediate access to growth
  • Early-mover advantage in new markets
  • Allows for a step-change in industry positioning
  • Less execution risk (but more integration risk?)
  • Ready-made brands
  • Acquire local knowledge, infrastructure and distribution networks
  • Opportunity to extract synergies

What is quite curious is that companies that grow via CapEx vs M&A, typically have far greater returns in future years, as can be seen on the chart below.

However, with debt financing effectively at zero cost these days, companies can prefund M&A using debt market access, thus making the IRR calculation skewed to prefer M&A. Unfortunately, none of the underlying problems go away, and the returns are still far lower for M&A compared to the now largely ignored CapEx growth.

And here we get to the second point of Fed pushing capital misallocation, namely dividends. The chart below shows the cash manager framework in its simplest format: in norm al times dividend payments are the last of management’s concerns, when there are little to no growth opportunities at the company’s growth hurdle rate available (remember this Apple in 1 year). In other words, it signals the end of the growth and the start of the stagnation phase.

Instead, what the Fed has done by crushing returns on interest-bearing instruments, is to force companies to pay ever greater dividends (hence push equity investors into the dividend bubble), because companies too realize that for US baby boomer investors/consumers to make up lost purchasing power shortfall, they need to get the cash from somewhere. And since the fascination with capital appreciation is now gone, the only option is dividend return.

Personal Interest Income:

Personal Dividend Income:

All this simply shows merely the most insidious way in which the Fed’s ZIRP policy is now bleeding not only the middle class dry, but is forcing companies to reallocate cash in ways that benefit corporate shareholders at the present, at the expense of investing prudently for growth 2 or 3 years down the road.

Then again, with the US debt/GDP expected to hit 120% in 3 years, does anyone even care anymore. The name of the game is right here, right now. Especially with everything now being high frequency this and that.

Anything that happens even in the medium-term future is no longer anyone’s concern. And why should it be: the Fed itself is telegraphing to go and enjoy yourself today, because very soon, everything is becoming unglued.

* * *

Two years later after we wrote this post, whose conclusion has been proven empirically by what has happened in the US economy where CapEx still refuses to pick up despite endless lies of some recovery that refuses to materialize except in talking head year-end bonuses, none other than the head of the world’s largest asset manager, BlackRock’s Larry Fink admits we were right all along.

From the WSJ:

In a shot across the bow of activist investors, BlackRock Inc. Chief Executive Laurence Fink has privately warned big companies that dividends and buybacks that activists favor may create quick returns at the expense of long-term investment.

 

In so doing, the head of the world’s largest money manager by assets lent his voice to a popular criticism of activist investors, even as his firm sometimes aligns with and may benefit from their efforts.

 

Many commentators lament the short-term demands of the capital markets,” Mr. Fink wrote in the letter reviewed by The Wall Street Journal, sent to the CEO of every S&P 500 company in recent days, according to BlackRock. “We share those concerns, and believe it is part of our collective role as actors in the global capital markets to challenge that trend.”

 

Mr. Fink doesn’t specifically mention in his letter activist hedge funds, which typically take stakes and push for corporate or financial changes, from management ousters to buybacks, dividends and spinoffs. Instead, he addresses a broader concern that markets and companies generally have become too vulnerable to short-term thinking. But the increasing clout of activists contributed to Mr. Fink’s decision to write the letter, people familiar with the matter said. New York-based BlackRock itself votes about a third of the time with dissident shareholders seeking corporate board representation, according to data from D.F. King & Co., a proxy-solicitation firm.

Don’t worry though: even this “complaint” is merely for purely theatrical reasons. As long as companies can lever up to the hilt and use the debt proceeds to fund dividends or stock buybacks (as we predicted they would in November 2012), and as long as the Fed keeps the cost of debt artificially low, nothing will stop management teams, many of whom also own stock in their companies, to lever up and provide quick gains to equityholders, while saddling the future growth of the company (and creditors) with the bill. Because one thing everyone somehow forgets, is that while companies have raised their cash to record levels, they have raised their debt to even recorder levels (as also explained before).

When Bernanke’s (because Yellen is merely an unwitting passenger at this point) bubble bursts, and when companie suddenly find themselves saddled with a debt load unseen ver before, that’s when people will finally take Zero Hedge’s 2012 warnings, and Larry Fink’s caution from two years later, seriously. As usual, by then it will be too late.


    



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Will The Backlash Against Facebook Be The Doom Of Its Acquisition Spree?

Spending your inordinately over-valued 'currency' on an ever-reaching (and increasingly over-valued) portfolio of dreams may have been the stuff of expanding multiples and social media stock-lovers; but for the creator of Minecraft (among the world's most popular games), Facebook's move to buy Oculus was the last straw. As WSJ reports, Markus Persson just cancelled his company's deal with Oculus explaining that he "did not chip in ten grand to seed a first investment round to build value for a Facebook acquisition."

As WSJ reports,

The ripples from Facebook’s deal to buy Oculus VR are spreading quickly.

 

Not long after news broke that the videogame-goggle company was getting acquired, the creator of one of the most popular videogames today said he was canceling an Oculus Rift project. Markus Persson, creator of “Minecraft,” said the company he founded, Mojang, was in talks to bring the game to Oculus before the Facebook deal.

 

Not anymore.

As Persson notes on his personal blog,

Facebook is not a company of grass-roots tech enthusiasts. Facebook is not a game tech company. Facebook has a history of caring about building user numbers, and nothing but building user numbers. People have made games for Facebook platforms before, and while it worked great for a while, they were stuck in a very unfortunate position when Facebook eventually changed the platform to better fit the social experience they were trying to build.

 

 

I have the greatest respect for the talented engineers and developers at Oculus. It’s been a long time since I met a more dedicated and talented group of people. I understand this is purely a business deal, and I’d like to congratulate both Facebook and the Oculus owners. But this is where we part ways.

It seems shareholders are agreeing today…


    



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The Anatomy Of Panic: How A Rumor Mutated Into A Three-Day Chinese Bank Run

Yesterday we showed the end result of what happens in a China, in which bankruptcy and default are suddenly all too real and possible outcomes for the country’s hundreds of millions of depositors, when the risk of losing all of one’s money held in an insolvent bank becomes all too real in “What A Bank Run In China Looks Like: Hundreds Rush To Banks Following Solvency Rumors.” Today, we look in detail at all the discrete elements that culminated with hundreds of Chinese residents lining up in front of a bank in Yancheng and rushing to withdraw their money only to find their money not available (at least until the regional government was forced to step in with a bail out to avoid an even greater panic).Why is this a useful exercise? Because since we will certainly see many more example of it in the near future, it pays to be prepared. Or least it certainly prevents one from losing all of their money…

This is what happened, and when it happened, it happened quick. From Reuters:

The rumour spread quickly. A small rural lender in eastern China had turned down a customer’s request to withdraw 200,000 yuan ($32,200). Bankers and local officials say it never happened, but true or not the rumour was all it took to spark a run on a bank as the story passed quickly from person to person, among depositors, bystanders and even bank employees.

 

Savers feared the bank in Yancheng, a city in Sheyang county, had run out of money and soon hundreds of customers had rushed to its doors demanding the withdrawal of their money despite assurances from regulators and the central bank that their money was safe.

 

The panic in a corner of the coastal Jiangsu province north of Shanghai, while isolated, struck a raw nerve and won national airplay, possibly reflecting public anxiety over China’s financial system after the country’s first domestic bond default this month shattered assumptions the government would always step in to prevent institutions from collapsing.

 

Rumours also find especially fertile ground here after the failure last January of some less-regulated rural credit co-operatives.

And since nothing beats a first person account here is just that, courtesy of Jin Wenjun who saw the drama unfold.

He started to notice more people than usual arriving at the Jiangsu Sheyang Rural Commercial Bank next door to his liquor store on Monday afternoon. By evening there were hundreds spilling out into the courtyard in front of the bank in this rural town near a high-tech park surrounded by rice and rape fields.

Bank officials tried to assure the depositors that there was enough money to go around, but the crowd kept growing.

In response, local officials and bank managers kept branches open 24 hours a day and trucked in cash by armoured vehicle to satisfy hundreds of customers, some of whom brought large baskets to carry their cash out of the bank.

Jin found himself at the bank branch just after midnight to withdraw 95,000 yuan for his friend from a village 20 kms (12 miles) away.

“He was uncomfortable. It was late and he couldn’t wait, so he left me his ID card to withdraw his cash,” Jin said.

By Tuesday, the crisis of confidence had engulfed another bank, the nearby Rural Commercial Bank of Huanghai.

“One person passed on the news to 10 people, 10 people passed it to 100, and that turned into something pretty terrifying,” said Miao Dongmei, a customer of the Sheyang bank who owns an infant supply store across the street from the first branch to be hit by the run.

Claiming to be a Yancheng resident, one user of Sina Weibo’s Twitter-like service repeated the story on Monday about the failed 200,000 yuan withdrawal, adding that “rumours are the bank is going bankrupt.”

When later contacted by Reuters online, he said he had heard the rumour from his mother when she came back from town. Huanghai and Jiangsu Sheyang banks declined to comment.

China’s banks are tightly controlled by the state and bank bankruptcies are virtually unheard of, so the crisis has baffled many outsiders.

Yet in Sheyang, fears of a bank collapse resonate.

In recent years, this corner of hard-strapped Jiangsu province has experienced a boom in the number of loan guarantee, or ‘danbao’, companies and rural capital co-operatives.

These often shadowy private financial institutions promised higher returns on deposits than banks, but many have since failed.

Qu Guohua, a spiky haired former migrant worker in his 50s, nearly lost 30,000 yuan in a credit guarantee scheme that went up in flames.

What saved him one day in January 2013 was a tip-off from a friend at a rural co-operative just down the street from the loan guarantee company where he had his money.

He told me the other one was going to go out of business and I better go get my money quick,” he said.

Qu managed to get his cash, but others behind him in line were not so lucky, he said.

That helps explain why lines formed so quickly once the rumours started circulating this week. Luck has it, he deposited the cash in a bank next door: Sheyang Rural Commercial Bank.

Banks are different than credit co-operatives and guarantee companies in that they are regulated by China’s banking watchdog and subject to strict capital requirements.

On Wednesday, officials’ painstaking efforts to drive that message home were in full swing.

Bank managers stacked piles of yuan behind teller windows in full sight of customers to try to reassure them that they had plenty of cash on hand. Local officials used leaflets, radio and television to try to calm nerves.

Near one of the troubled banks, a branch of the China Commercial Bank – one of China’s ‘Big Four’ state-owned banks – was running a ticker message on an electronic board over the entrance stating: “Sheyang Rural Commercial Bank is a legal financial organisation approved by the state, just like us”.

While small groups of depositors still gathered at several bank branches in and around this part of Yancheng, some arriving by motorbike, others by three-wheeled motor vehicles common in the Chinese countryside, there were signs that the banks’ efforts were bearing fruit.

Jin said he did not panic when the rumours were spreading and on Wednesday, like many others, he made a deposit.

Others, like Qu, are holding their nerve. On a visit to see his hospitalised daughter, he decided to nip into a local bank where he still has about 10,000 yuan – just for a look.

“I’m not nervous about my money in the bank. It’s protected by national law.

* * *

The same international law that “protected” the Cyprus banking system?

In the meantime, perhaps one should ask: why is it that people everywhere around the globe are so jittery, be it Chinese bank depositors, or E*trade baby high frequency “investors” in US stocks? Is it because everyone sense that fundamentally the system is more broke and insolvent than ever?

* * *

In short, the US has a stock market, which everyone knows is fake and manipulated, but as long as it keeps going higher, it is “safe” to put even more cash into epically overvalued equities. And since everyone is confident they can pull their money before everyone else does, the downswings are sharp and violent (and usually require the Plunge Protection Team to get involved and halt them), and in many ways a complete one-sided panic.

Just like in China. Only in China, instead of being stuck behind their computers, people actually have to go out on the street and withdraw their physical cash before everyone else does.

The problem, of course, is that once the lies and the illusions end, and they will, there will not be enough physical claims to satisfy everyone, be it due to a deposit or equity flight. Because in a fractional reserve system already stretched to the max and leveraged to record levels, one thing is certain: once the upward momentum dies, only devastation and guaranteed 90%+ losses for most, await.


    



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A First Look at a New Report on Crony Capitalism – Trillions in Corporate Welfare

One of the primary topics on this website since it was launched has been the extremely destructive and explosive rise of crony capitalism throughout the USA. It is crony capitalism, as opposed to free markets, that has led to the gross inequality in American society we have today. Cronyism for the super wealthy starts at the very top with the Federal Reserve System, which consists of topdown economic central planners who manipulate the money supply and hence interest rates for the benefit of the financial oligarch class. It then trickles down through lobbyist money into the halls of Washington D.C., and ultimately filters down to local governments and then the average person on the street gaming welfare or disability.

As such, we now live in a culture of corruption and theft that is pervasive throughout society. One thing that bothers me to no end is when fake Republicans focus their criticism on struggling people who need welfare or food stamps to survive. They have this absurd notion that the whole welfare system doesn’t start with the multinational corporations and Central Banks at the top. In reality, it is at the top where the cancer starts, and that’s where we should focus in order to achieve real change.

That’s where a new report from Open the Books on corporate welfare comes in. In a preview of the publication, the organization notes:

If Republicans are going to get truly serious about cutting government spending, they are going to have to snip the umbilical cord from the Treasury to corporate America.  You can’t reform welfare programs for the poor until you’ve gotten Daddy Warbucks off the dole. Voters will insist on that — as well they should.

So why hasn’t it happened? Why hasn’t the GOP pledged to end corporate welfare as we know it?

Part of the explanation is that too many have gotten confused about the difference between free-market capitalism and crony capitalism.

Federal_Contract_Spending_Spirals

And part of the problem is corporate welfare that is so well hidden from public view in the budget that no one has really measured how big this mountain of giveaway cash to the Fortune 500 really is. Finding out is like trying to break into the CIA.

continue reading

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Bursting Biotech Bubble Bounce Fades Fourth Day In A Row

It’s deja vu all over again in Biotech bubble land. For the 4th day in a row, and opening salvo of hope-fueled buying has faded quickly into a sea of red-faced selling as The Nasdaq Biotech Index holds down 13% from the highs at is 100-day-moving-average. Will 4th time be the charm for the revival of the bubble? or is today the break?

 

 

Charts: Bloomberg


    



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