Tag: finance

The last time the housing bubble popped, the “frontier” marginal market of Las Vegas was the first harbinger of what was about to come. It is that again, and as real estate expert Mark Hanson explains, “Las Vegas housing demand has crashed.” This is hardly an auspicious sign for the rest of the epically reflated housing market which as we have been tirelelessly pointing out for the past two years, has not recovered, but has merely had its 4th dead cat bounce on the back of i) the implicit bank subsidy of foreclosure stuffing, ii) money laundering by “all cash” foreign buyers using the NAR’s anti-money laundering exemption loophole, and iii) private equity zero cost of credit REO-to-Rent programs which are now in their last days.

From Mark Hanson: Lost Vegas

Las Vegas housing demand has crashed.  “Crash”…there is no other word to use.  This is not hyperbole.  “Crashed” is absolutely the appropriate word to use here given sales are suddenly the weakest levels since Armageddon 2009.  I mean come on…sales at the same pace as when the stock market was in the midst of one of the greatest plunges in history speaks loudly…at least to me.  Volume precedes price.

Supply is surging in Vegas with “months-supply” back to nearly 7 months (over 7 for condos), and at 2010/11 levels.  There certainly is NO LACK OF SUPPLY in this market.  And ponder about this for a minute…and apply it to all these other “investor-centric” regions around the nation.  That is, in Vegas there are 10s of thousands of single-family houses being readied for rent by new-era “investors”.  This flood of freshly rehabbed “for rent” supply will competes at some level with resale and builder “for sale” supply.  Even if it competes at a factor of .4, then Las Vegas “normalized” month’s supply could right now be back to a year.

Lastly, houses are as expensive on a monthly payment basis — and relative to the income needed to qualify for a loan — then they were at the peak of the bubble in 2006.  But, this is a fact masked over for the past year by the plethora of all-cash buyers who are not governed by employment, income and safe & sound mortgage lending requirements.  Like Sacramento, Phoenix, regions in the Inland Empire, and a dozen other “hot” real estate markets around the nation — that, “not”-coincidentally are the regions in which private and new-era “investors” swarmed with cash regularly paying 10% to 20% over appraised value / list price using flawed cap rate models as a guide — when the stimulus go-go juice ran out this market hit a literal “brick wall” the size of 2007.

With house as expensive on a monthly payment basis than they were in 2007, when this market turns back towards “organic” being the incremental demand driver (people that can only buy as much house as their job, earnings, and mortgage qualifications dictate) serious double-digit percent points of house price downside will occur.  That’s in the process of happening now.

The next year in Vegas could easily bring a 50% retracement of the past two years historic annualized gains, which to all the investor models predicting 10% appreciation in perpetuity, will feel like a crash.

So, question is, what businesses are levered to the past couple of years of resale house volume momentum and energy?  Those are the stocks that will shock the most amount of people in 2014.  Companies levered to Existing Sales typically feel trend changes two to three quarters afterward meaning Q1/Q2 will usher in a hard downshift — especially relative to Q1/Q2 2013 when volume was going parabolic — since 2008 and the period following the expiration of the Homebuyer Tax Credit.

November Existing Sales/Supply Stats

Demand plunging

Sales…

• down 17% MoM
• down 20% YoY
• down 32% from peak summer
• down 33% from Nov 2011, down 24% from Nov 2010, and down 45% from Nov 2009
• lowest sales volume since Jan 2009

Supply Soaring

• Highest “months supply” metric since 2011
• SFR at 6.5 months, up 11% YoY
• Condo at 7.4 months, up 23% YoY

Item 1)  Las Vegas November House Sales down 20% YoY and at their lowest levels since Jan 2009

Item 2)  Broken out, Condo are performing slightly better but sales are still at 2009 lows.

Item 3)  Month’s supply surging…back to 2010/11 levels

Item 4)  It costs the same per month and requires the same monthly income today to buy the Nov median priced house as in 2006 at the bubble peak.

If that was a bubble then…

h/t Doug Kass

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/vs7mjxBfrsw/story01.htm Tyler Durden

• Wall Street Exhales as Volcker Rule Seen Sparing Market-Making (Reuters)
• GM to End Manufacturing Down Under, Citing Costs (WSJ)
• U.S. budget deal could usher in new era of cooperation (Reuters)
• Ukraine Police Back Off After Failing to Stop Protest (WSJ)
• First Walmart, now Costco misses (AP)
• Dan Fuss Joins Bill Gross Shunning Long-Term Debt Before Taper (BBG)
• China New Yuan Loans Higher Than Expected (WSJ)
• China bitcoin arbitrage ends as traders work around capital controls (Reuters)
• Blackstone’s Hilton Joins Ranks of Biggest Deal Paydays (BBG)
• Europe sketches plan to close troubled banks (Reuters)
• Madoff Planned Everything, Cried Before Arrest, Jury Told (BBG)
• US and Japan differences stall Pacific Rim trade deal (FT)
• FDIC Details Bailout Plans Without Taypayer Funds (WSJ)
• China cuts more red tape, paves way for NDRC slim-down (Reuters)

 

Overnight Media Digest

WSJ

* House and Senate negotiators, in a rare bipartisan act, announced a budget agreement Tuesday designed to avert another economy-rattling government shutdown and to bring a dose of stability to Congress’s fiscal policy-making over the next two years.

* The U.S. government’s first major auction of wireless airwaves since 2008 has speculators panning for gold. After years of complaining about the need for more airwaves, none of the major carriers have signed up. Instead, the January auction is crowded with people who don’t own networks but are hoping to cash in on a scarce asset.

* Discovery Communications Inc is considering a bid for Food Network majority owner Scripps Networks Interactive Inc said a person familiar with the matter, signaling that a consolidation wave among television channel owners may be on its way.

* Massachusetts gambling regulators set the table Tuesday for another public vote on whether the Suffolk Downs thoroughbred track near Boston’s Logan Airport can proceed with efforts to land a $1 billion resort-casino.

* U.S. gun sales are slowing from their recent torrid pace. Smith & Wesson Holding Corp said late Tuesday that its profit in the three months ended Oct. 31 fell 20 percent from the year-earlier quarter as sales rose just 2 percent. That follows rival Remington Outdoor Co’s forecast a day earlier for sales growth between about 34 percent and 37 percent for 2013, slowing from the 51 percent surge in the first nine months of this year.

* Thermal-coal prices may be running out of steam as Asian power producers wind down purchases after a period of pre-winter stockpiling and an underlying supply glut reasserts itself.

* Jon Brod, a veteran AOL Inc executive who co-founded the company’s Patch network of local news sites, is expected to leave AOL early next year to join a startup, according to a person familiar with the matter.

* Entergy Corp’s plan to shed its electricity-transmission business hit a wall on Tuesday when regulators in Mississippi rejected the transfer of the big utility’s transmission assets to another company.

* After three years of seizing market share from Chinese rivals, foreign auto makers are starting to take it from each other. Ford Motor Co, Volkswagen AG and Hyundai Motor Co are poised to end the year with significant market-share gains in the world’s No. 1 auto market, having been quick to meet demand for sport-utility vehicles and new models tailored to Chinese tastes.

* U.S. natural-gas production hit its highest level since at least 2009 in November, according to a government report released Tuesday, and domestic production is expected to grow in 2014.

 

FT

Royal Bank of Scotland’s finance director of just 10 weeks, Nathan Bostock, has resigned to become deputy chief executive of Santander UK.

Mining Giant BHP Billiton said it would invest $4 billion a year in its U.S. shale business, which it expects to generate $3 billion of cash annually by the end of the decade.

FirstGroup has received a letter from one of its biggest shareholders, urging the British bus and rail operator to sell its U.S. businesses in order to pay down debt.

Tesco Bank has laid out plans to enter the current account market within months, a move that will restrain its profit growth for the next few years.

3i Group’s global head of healthcare is to leave the London-listed investment group after 12 years to raise his own fund.

 

NYT

* Mid- to high-end fashion brands are finding themselves as acquisition targets. In the latest deal, private equity firm Leonard Green & Partners agreed on Tuesday to buy Lucky Brand Jeans from the Fifth & Pacific Companies, the clothier formerly known as Liz Claiborne, for about $225 million.

* The United States and 11 other Pacific Rim nations said they would not complete a sweeping deal to reduce trade barriers by their own end-of-year deadline.

* The European Parliament on Tuesday approved a rescue plan for the European Union’s system for trading carbon-emission credits. The lawmakers hope to revive prices for carbon credits, which have been so low that the system is creating few incentives for smokestack industries to cut back on their emissions of greenhouse gases.

* New York State’s top prosecutor is investigating why American cellphone carriers have yet to embrace anti-theft software on Samsung smartphones, raising questions about possible coordination among the biggest carriers.

* Two weeks after naming a new chief executive, Walmart announced on Tuesday that David Cheesewright, president of several overseas divisions, would soon take on all of the company’s international operations.

* A new congressional report criticizes the federal government for awarding tens of billions of dollars in contracts to companies even though they were found to have violated safety and wage laws and paid millions in penalties. Issued on behalf of the Democratic senators on the Health, Education, Labor and Pension Committee, the report cited examples over the past six years.

* Wholesale businesses increased their inventories in October by the most in two years as their sales rose sharply, encouraging signs for economic growth in the final three months of 2013. Wholesale inventories grew 1.4 percent in October, the Commerce Department rep
orted Tuesday.

* Advertising, journalism and technology continue to converge. The latest example: Vice Media’s acquisition of Carrot Creative, a digital agency that creates apps, websites and games for media companies and brands. In its new home, Carrot will experiment with ways to distribute Vice’s editorial content. The agency will also focus on building digital initiatives for brands that work with Vice.

* The Supreme Court heard arguments on Tuesday in a knotty environmental case over how to hold states responsible for air pollution that drifts across their borders and causes harm in downwind states.

 

Canada

THE GLOBE AND MAIL

* Millions of visitors to Canada would be charged a new fee under a proposed electronic security screening plan. The federal government is soliciting public comment on the plan to introduce online travel applications as a part of the sweeping perimeter security pact with the United States.

* As British Columbia Mines Minister Bill Bennett heads to Ottawa this week to make an impassioned pitch for the proposed New Prosperity copper-gold mine near Williams Lake, he is facing questions about his government’s rejection of another, smaller open-pit project in a different part of the province.

Reports in the business section:

* Canada Goose Inc, the wildly successful company behind the ubiquitous high-end parka, has sold a majority stake to U.S. private equity giant Bain Capital in a move that allows it to aggressively push into new markets in the United States and overseas in places such as South Korea.

* A wave of Canadian companies has shifted into job-cut mode as competitive pressures, weaker commodity prices and the perception Canada is a costly place to do business dent confidence.

* Talisman Energy Inc said on Tuesday that it has reached a deal to sell its stake in a pipeline in Colombia, although at a lesser price than some analysts expected the company to fetch. Talisman will sell its 12 percent interest in the Ocensa pipeline for $595 million.

NATIONAL POST

* Ontario Power Generation immediately fired three executives on Tuesday following the release of a damning auditor-general report accusing the utility of unnecessarily driving up electricity prices through rampant nepotism, high labor costs and one of the province’s most generous public-sector pension plans.

* Toronto’s budget chief, Frank Di Giorgio, wants to cut all home buyers a break on the municipal land transfer tax at the expense of those trying to break into the real estate market for the first time.

FINANCIAL POST

* Air Canada said on Tuesday that it would be expanding its relationship with Air Georgian by awarding its regional affiliate several new U.S. cross-border routes that were previously flown by Chorus Aviation Inc.

* The threat to Canada’s financial stability has eased for the first time in two years, but risks are never far away. A resurgent domestic housing market and large consumer debt, aided by still-tantalizingly low interest rates, remain major concerns to government and monetary officials.

* Intense lobbying by senior Canadian officials including federal Finance Minister Jim Flaherty and former Bank of Canada governor Mark Carney has successfully blunted far-reaching implications for the country’s largest banks from the biggest overhaul of financial regulation in the United States since the Great Depression.

 

China

CHINA SECURITIES JOURNAL

– China should phase out “aggressive” fiscal policy, said a commentary in the paper. The consequences of such measures include a high long-term budget deficit, coupled with high risk hidden local debts, it said.

CHINA BUSINESS NEWS

– China’s GDP growth is estimated to hit 7.5 percent next year, according to a survey of industry experts polled by the paper. Most predictions were within the range of 7 to 7.5 percent, while some estimates came in between 7.8 percent and 8 percent.

SHANGHAI DAILY

– Shanghai plans to build a small reservoir on the Taipu River to supply water to five of the city’s districts, after tests on the Huangpu River showed standards failed to reach national levels for tap water resources. Water from the Taipu reservoir will supply Shanghai’s Qingpu, Jinshan, Songjiang, Minhang and Fengxian districts.

CHINA DAILY

– China is using the annual Central Economic Work Conference as a platform from which to launch reforms focused on sustainable growth, said a commentary in the paper. The country can no longer afford to pursue the growth-at-all-costs economic model as it has meant the sacrifice of the environment and improvement in people’s livelihoods for fast expansion, it said.

PEOPLE’S DAILY

– China should unswervingly adhere to and develop socialism with Chinese characteristics, said a commentary in the paper that acts as the party’s mouthpiece. Such commitment will lead to national revival and achieve dreams of glory for this generation of Chinese, it said.

 

Britain

The Telegraph

RBS FINANCE CHIEF NATHAN BOSTOCK QUITS AFTER JUST 10 WEEKS

Nathan Bostock, who was appointed finance director at RBS on Oct. 1, is to join Santander, as deputy chief executive.

FIRSTGROUP INVESTOR SANDELL PUSHES FOR U.S. BUSINESS SPLIT

An activist investor with a stake in FirstGroup has called on the bus and rail operator to boost shareholder value by more than 50 percent through a split from its U.S. businesses.

FORMER ASDA EXECUTIVE GIVEN TOP WALMART JOB

A former Asda executive has been handed one of the biggest jobs in the retail industry after being named chief executive of Walmart International. David Cheesewright, who is British, will run Walmart’s 6,200 stores outside the US from February 1.

ARCHBISHOP OF CANTERBURY SUMMONS BIG SIX ENERGY BOSSES TO DISCUSS PRICE RISES AND FUEL POVERTY

The Archbishop of Canterbury has summoned the bosses of the Big Six energy companies to a private meeting on Wednesday to discuss fuel poverty and rising energy prices.

CARPETRIGHT WARNS OF ‘VERY VOLATILE’ UK ECONOMY

The flooring retailer Carpetright says trading in the UK remains “very volatile” despite signs that the economy is recovering.

The Guardian

FOXTONS ESTATE AGENT GAINS PROMOTION TO FTSE 250 INDEX

Foxtons, the estate agent that Londoners love to hate but cannot do without, is set to join the ranks of Britain’s leading companies on Wednesday when it is promoted to the FTSE 250 index.

TESCO PUTTING UP PRICES FASTER THAN ANY OTHER UK GROCER, CLAIMS ANALYST

Tesco’s UK strategy has been slammed in an outspoken note by a U.S. stockbroker that claims the retailer has put up prices faster than any other British grocer while its non-food ranges are more expensive than those at John Lewis.

The Times

CLOSING HEATHROW ‘WOULD COST 250,000 JOBS’

The closure of Heathrow in favour of a new hub airport to the east of London would cost up to 250,000 jobs and turn the most prosperous region outside the capital into an economic wasteland, a report claims.

MORTGAGE LENDERS RELAX RULES DESPITE BUBBLE FEAR

Banks and building societies have begun to relax their mortgage lending standards in an early sign that a bubble may be building in the housing market.

The Independent

BANK’S MARK CARNEY DEFIES DOOMSTERS ON THE ECONOMIC OUTLOOK FOR THE WEST

Fears that advanced economies, including Britain, might have entered a phase of “secular stagnation” were rejected last night by the Bank of England Governor, Mark Carney.

 

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

3M Company (MMM) upgraded to Buy from Neutral at Nomura
Boise Cascade (BCC) upgrad
ed to Buy from Neutral at Goldman
Charles River Labs (CRL) upgraded to Market Perform from Underperform at Raymond James
Children’s Place (PLCE) upgraded to Outperform from Market Perform at FBR Capital
Demand Media (DMD) upgraded to Market Perform from Underperform at JMP Securities
Dentsply (XRAY) upgraded to Buy from Neutral at Goldman
FirstEnergy (FE) upgraded to Neutral from Sell at Goldman
Groupon (GRPN) upgraded to Outperform from Market Perform at Wells Fargo
ITC Holdings (ITC) upgraded to Buy from Hold at Deutsche Bank
NanoString (NSTG) upgraded to Outperform from Neutral at RW Baird
Qualcomm (QCOM) upgraded to Buy from Neutral at Citigroup
Radware (RDWR) upgraded to Outperform from Market Perform at Wells Fargo
Sprouts Farmers Markets (SFM) upgraded to Neutral from Underperform at BofA/Merrill

Downgrades

Avanir (AVNR) downgraded to Neutral from Buy at Mizuho
BlackBerry (BBRY) downgraded to Sell from Neutral at Citigroup
Enzymotec (ENZY) downgraded to Underperform from Buy at BofA/Merrill
LabCorp (LH) downgraded to Hold from Buy at Canaccord
MeadWestvaco (MWV) downgraded to Underperform from Market Perform at BMO Capital
Owens-Illinois (OI) downgraded to Neutral from Buy at Goldman
Tortoise Energy (TYG) downgraded to Underperform from Neutral at BofA/Merrill
W.R. Grace (GRA) downgraded to Neutral from Outperform at RW Baird

Initiations

3D Systems (DDD) initiated with a Buy at Jefferies
ARC Group (ARCW) initiated with a Buy at Brean Capital
Access Midstream (ACMP) initiated with a Buy at Goldman
Atlas Pipeline Partners (APL) initiated with a Neutral at Goldman
Avis Budget (CAR) initiated with a Hold at Deutsche Bank
Brocade (BRCD) initiated with a Sell at Citigroup
C.H. Robinson (CHRW) initiated with a Hold at KeyBanc
CST Brands (CST) initiated with a Neutral at Citigroup
Ciena (CIEN) initiated with a Neutral at Citigroup
Cisco (CSCO) initiated with a Sell at Citigroup
Corning (GLW) initiated with a Neutral at Citigroup
Cott Corp. (COT) initiated with a Neutral at Goldman
Crosstex Energy LP (XTEX) initiated with a Neutral at Goldman
DCP Midstream (DPM) initiated with a Buy at Goldman
eHealth (EHTH) initiated with a Buy at Jefferies
EQT Midstream Partners (EQM) initiated with a Buy at Goldman
Ericsson (ERIC) initiated with a Neutral at Citigroup
ExOne (XONE) initiated with a Buy at Jefferies
F5 Networks (FFIV) initiated with a Buy at Citigroup
FactSet (FDS) initiated with a Neutral at Credit Suisse
Garmin (GRMN) initiated with a Neutral at Citigroup
Gartner (IT) initiated with an Outperform at Credit Suisse
Hertz (HTZ) initiated with a Buy at Deutsche Bank
IHS Inc. (IHS) initiated with a Neutral at Credit Suisse
Infoblox (BLOX) initiated with a Neutral at Citigroup
Juniper (JNPR) initiated with a Neutral at Citigroup
MarkWest Energy (MWE) initiated with a Buy at Goldman
McGraw Hill Financial (MHFI) initiated with an Outperform at Credit Suisse
Merit Medical (MMSI) initiated with a Buy at Noble Financial
Moody’s (MCO) initiated with an Outperform at Credit Suisse
Motorola Solutions (MSI) initiated with a Neutral at Citigroup
Nielsen (NLSN) initiated with an Outperform at Credit Suisse
Nokia (NOK) coverage assumed with a Buy at Citigroup
Overstock.com (OSTK) initiated with a Neutral at B. Riley
Polycom (PLCM) initiated with a Neutral at Citigroup
Rambus (RMBS) initiated with a Neutral at Citigroup
Regency Energy Partners (RGP) initiated with a Neutral at Goldman
Riverbed (RVBD) initiated with a Buy at Citigroup
Southcross Energy Partners (SXE) initiated with a Sell at Goldman
Stratasys (SSYS) initiated with a Buy at Jefferies
Summit Midstream (SMLP) initiated with a Neutral at Goldman
Targa Resources Partners (NGLS) initiated with a Neutral at Goldman
USA Compression (USAC) initiated with a Neutral at Goldman
Verisk Analytics (VRSK) initiated with a Neutral at Credit Suisse
Voxeljet (VJET) initiated with a Hold at Jefferies
Western Gas Equity (WGP) initiated with a Buy at Goldman
Western Gas Partners (WES) initiated with a Buy at Goldman

HOT STOCKS

HP (HPQ) CEO told CNBC doesn’t expect headwinds from macroeconomic environment in FY14
Home Depot (HD) sees meeting operating margin target one year earlier
Scripps Networks (SNI) surged after Variety reported Discovery (DISCA) weighing bid
GM (GM) to halt manufacturing in Australia by 2017
MasterCard (MA) announced 10-for-1 stock split, 83% dividend increase, $3.5B buyback
RadioShack (RSH) closed new five-year financing totaling $835M
Cameron (CAM) increased share repurchase authorization by $750M
Twitter (TWTR) said can now share, view photos via direct message
Salem Communications (SALM) acquired Twitter (TWTR) curation site, Twitchy.com
Northstar Realty (NRF) announced plan to spin-off asset management business
H&R Block (HRB) CEO Cobb said making progress with bank divestiture
Celanese (CE) to close two European manufacturing facilities

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Phototronics (PLAB), Smith & Wesson (SWHC)

Companies that missed consensus earnings expectations include:
Joy Global (JOY), Miller Energy (MILL), Dominion Diamond (DDC), Mitcham Industries (MIND), H&R Block (HRB)

Companies that matched consensus earnings expectations include:
Peregrine (PPHM)

NEWSPAPERS/WEBSITES

• A broad new government rule, the so-called Volcker rule approved by five financial regulatory agencies, to limit risk-taking by Wall Street, will force banks to rethink virtually every aspect of their trading activities, setting the stage for more tumult at the largest U.S. financial institutions, the Wall Street Journal reports
• Legislative proposals to study whether videogames are linked to real-life violence or mental health—prompted by a rash of mass shootings—have stalled amid a campaign by the industry (MSFT, SNE, NTDOY) to quash the efforts, according to lobbying records and lawmakers, the Wall Street Journal reports
• General Motors (GM) said it would stop making cars in Australia by 2017 due to high costs and a cripplingly strong currency, fueling fears Toyota Motor (TM) will follow suit and put the entire local autos industry at risk, Reuters reports
• Europe’s second highest court upheld a decision today by EU regulators clearing Microsoft’s (MSFT) $8.5B takeover of Skype in 2011, rejecting a challenge by Cisco Systems (CSCO), Reuters reports
• Fed officials are renewing a debate over cutting interest paid to banks on excess reserves, a move aimed at convincing investors that tapering its bond-buying isn’t the same as tightening its monetary policy, Bloomberg reports
• Blackstone Group (BX), which has put $1B of equity this year into Asian real estate, says it’s poised for more deals in the region as maturing funds sell assets and banks retreat amid new regulations, Bloomberg reports

SYNDICATE

Allison Transmission (ALSN) sells 12.5M shares for selling stockholders
American Midstream Partners (AMID) files to sell 2.4M common units for partners
Amicus Therapeutics (FOLD) files to sell 19.28M shares of common stock for holders
Autohome (ATHM) 7.82M share IPO priced at $17.00
Cell Therapeutics (CTIC) files to sell 15.67M shares of common stock for holders
Exa Corp. (EXA) files to sell $75M in common stock for holders
Gevo (GEVO) files to sell stock units, convertible senior notes, warrants
HomeAway (AWAY) files to sell 5.5M shares of common stock
Teekay (TK) files to sell 5.7M shares of common stock for holders
TravelCenters (TA) 6.5M share Secondary priced at $9.25

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/jfkyv3Se9DQ/story01.htm Tyler Durden

Contrary to some expectations, the budget deal has done absolutely nothing to push global markets or US futures higher which was to be expected: markets are no longer driven by fundamentals but by such things as carry pairs which signal monetary policies. Sure enough, as a result of the strength in the Yen, overnight markets have reacted with a mixture of cautiousness and optimism. On the cautious side, Asian equities are down across the board which can at least be partially attributed to nervousness at the prospect of a December Fed taper. If Congress passes the budget over the next few days, the probability of a taper next week increase at the margin, given that we have lower fiscal uncertainty (and higher spending) over the next two years. Losses in equities are being led by the Nikkei (-0.7%) and the Hang Seng (-1.3%). Asian credit shows no sign of taper nervousness this morning with the Asia IG index 4bp tighter and high beta EM names such as Indonesia trading firmer (5yr CDS -10bp). 10yr UST yields are unchanged at 2.80% and the US dollar is slightly stronger against the major crosses. The Hang Seng China Enterprises index is down 2.3% ahead of the results of China’s central economic work conference which is expected to end tomorrow and may set a number of economic targets for 2014.

In European trade, equities are seen mainly up across the board with the exception of the FTSE MIB. In terms of fixed income markets, outperformance has been observed in Spanish bonds after being supported by domestic buying, with a tightening in the 5y and 10y SP/GE spread. Furthermore, this morning also saw a Schatz auction which had a lower bid-to-cover ratio of 1.7, compared to the previous of 2.2. From an FX perspective, the USD index has risen after going through the 61.2% fib level taken from the highs seen in the November rally.

The only events due today in the US include the usual US weekly mortgage applications (up 1% this week compared to a -12.8% drop last week) and the monthly US budget statement estimated to post a $140 billion budget deficit. There will be no other major data releases across Europe or the US.

 

Overnight news bulletin from Bloomberg and RanSquawk

• US Representative Ryan said he and Senator Murray reached an agreement on the US budget deal and that the deal would reduce the deficit without raising taxes and would avoid a government shutdown in January.
• Looking ahead for the session there is a relatively light macroeconomic calendar with the release of the DoE inventories and a US 10y note auction.
• Today also sees the FTSE Quarterly rebalance which is due after-market where Vedanta Resources is set become the third miner to be demoted from the FTSE-100 index this year and is expected to be replaced by the recently privatised Royal Mail.
• Treasuries steady, 10Y yield at 2.80% before U.S. sells $21b of the securities; yield 2.81% in WI trading after drawing 2.75% in November.
• Congressional negotiators are touting a U.S. budget accord that will ease the automatic spending cuts for the next two years, remove the risk of a government shutdown and cut the deficit by $23b
• Wall Street banks avoided their worst fears of the Volcker rule after regulators crafted the ban on speculative trading to leave market-making operations intact
• China’s stocks fell as investors speculated the government may cut growth targets at an economic policy meeting this week
• European Union finance ministers headed toward a showdown with the bloc’s parliament over a bank-failure fund as they struggled to put together a blueprint for their leaders to agree upon next week
• Royal Bank of Scotland Group Plc said Nathan Bostock resigned two months after becoming chief financial officer as Britain’s biggest government-owned lender struggles to return to profit
• Ukrainian activists swarmed into central Kiev, reclaiming the center of anti-government protests after an overnight police raid that left dozens injured
• Sovereign yields lower. EU peripheral spreads narrow. Asian stocks fall, Shanghai down 1.5%, European stocks mixed, U.S. equity index futures decline. WTI crude little changed, gold falls, copper gains

 

US Event Calendar

• 7:00am: MBA Mortgage Applications, Dec. 6 (prior -12.8%)
• 11:00am: POMO – Fed to purchase $1.25b-$1.75b in 2036-2043 sector
• 1:00pm: U.S. to sell $21b 10Y notes in reopening
• 2:00pm: Monthly Budget Statement, Nov., est. -$140b Central Banks

Market Re-Cap from RanSquawk

In European trade, equities are seen mainly up across the board with the exception of the FTSE MIB, which is being lead lower by Mediolanum following a share placement, with DiaSorin also seeing losses as they are set to be removed from the FTSE MIB. In terms of sector specific movements, basic materials are the only sector in the red following an ebbing lower in gold prices after the recent rally. This move has also been exacerbated by reports that Vedanta Resources is set become the third miner to be demoted from the FTSE-100 index this year. In terms of fixed income markets, outperformance has been observed in Spanish bonds after being supported by domestic buying, with a tightening in the 5y and 10y SP/GE spread. Furthermore, this morning also saw a Schatz auction which had a lower bid-to-cover ratio of 1.7, compared to the previous of 2.2. From an FX perspective, the USD index has risen after going through the 61.2% fib level taken from the highs seen in the November rally. Looking  ahead for the session there is a relatively light macroeconomic calendar with the release of the DoE inventories and a US 10y note auction.

Asian Headlines

Asian-Pacific GDP growth is set to rise in 2014, according to an S&P report.

The Chinese government will likely maintain its targets of 7.5% for growth and 3.5% for inflation next year, according to Barclays.

S&P says India’s rating may come under pressure if parliament elections show hung result, new government unable to implement reforms.

Goldman Sachs says China’s state-owned enterprise reform may reverse stock underperformance.

EU & UK Headlines

Finance ministers from the biggest euro-zone countries reached a political understanding on SRM, but the final signoff will have to wait until next week.

Single Resolution Mechanism (SRM) board to be responsible for banks under direct ECB supervision and some cross border banks, according to a draft paper.

BoE’s Andy Haldane, head of financial stability, has called for a revival in the market for bundled-up debt in Britain.

French Non-Farm Payrolls (Q3 F) Q/Q -0.1% vs Exp. -0.1% (Prev. -0.1%)
French Current Account Balance (Oct) M/M -2.1bln vs Prev. -3.9bln (Rev. -3.6bln)

German CPI (Nov F) M/M 0.2% vs Exp. 0.2% (Prev. 0.2%)
German CPI (Nov F) Y/Y 1.3% vs Exp. 1.3% (Prev. 1.3%)

Italy PM Letta says is to aim for 1% economic growth in 2014 and 2% in 2015.

Germany sold EUR 4.38bln of 0% 2015 Schatz, bid/cover 1.7, prev. 2.2 (yield 0.21%, prev. 0.10%) and retention of 12.4% (Prev. 19.4%).

US Headlines

US Representative Ryan said he and Senator Murray reached an agreement on the US budget deal and that the deal would reduce the deficit without raising taxes and would avoid a government shutdown in January. US Senator Murray also commented, stating the the budget deal covers 2 years and added that extending unemployment aid isn’t part of the accord. The deal which is expected be voted on by Congress later this week also spurred comments from US President Obama who called the deal a good first step and that the budget pact clears path for critical investments. Obama further stated that the accord breaks the cycle of crisis-driven decisions but that it doesn’t incl
ude everything he’d like.

US Senate vote on confirming Janet Yellen to head Federal Reserve likely next week according to a Senior Democratic aide.

S&P forecasts the US economy expanding 2.6% next year, which is down from a prior forecast of 3.1%. S&P said it lowered it’s forecast for US GDP growth in light of additional sequester spending cuts in 2014 and also commented that low inflation in US means the Fed will likely taper its asset purchases slowly.

Equities

In European trade, equities are seen mainly up across the board with the exception of the FTSE MIB, which is being lead lower by Mediolanum following a share placement, with DiaSorin also seeing losses as they are set to be removed from the FTSE MIB. In terms of sector specific movements, basic materials are the only sector in the red following an ebbing lower in gold prices after the recent rally. This move has also been exacerbated by reports that Vedanta Resources is set become the third miner to be demoted from the FTSE-100 index this year, with the FTSE Quarterly rebalance due after-market. In terms of other stock news this morning, HSBC Holdings have agreed to sell its entire 8.0% shareholding in Bank of Shanghai to Banco Santander with the transaction expected to complete during first half of 2014.

FX

From an FX perspective, the USD index has risen after going through the 61.2% fib level taken from the highs seen in the November rally, which has translated through into GBP/USD which is currently trading near the lows for the session. Furthermore, EUR/GBP is currently trading just below the 0.8400 handle and therefore could see some further movement in the pair during today’s session. NZD is still one of the underperformers for the session following overnight news that Fonterra maintained its 2013/2014 Farmgate milk price forecast at NZD 8.30/kg vs. some expectations of a hike, which pressured the currency as New Zealand exports around 90% of its dairy products.

Commodities

US API Crude Oil Inventories (Dec 6) W/W -7500k vs. Prev. -12400k
– Cushing Crude Inventory (Dec 6) W/W 693k vs. Prev. -58k
– Gasoline Inventories (Dec 6) W/W 6270k vs. Prev. -119k
– Distillate Inventory (Dec 6) W/W 1180k vs. Prev. 540k

The IEA monthly oil report raised forecasts for global oil demand growth by 145,000bpd to 1.2mln bpd for 2013 and by 110,000bpd to 1.2mln bpd for 2014. They see persistent upside risks to oil from both supply and demand sides of the market. This follows OPEC’s crude oil supply falling in November for a fourth straight month by 160,000bpd to 29.73mln bpd, led by losses in Libya. The IEA also stated that making room for Iran, after years of sanctions could be a challenge for other oil producers as non-OPEC supply rises.

North Korea has begun to sell large amounts of gold to China in a bid to tide over its economic crisis, according to multiple sources familiar with the nations affairs. Furthermore, according to South Korean government data, North Korea holds about 2,000 tons of gold reserves worth at least USD 8bln.

China refined copper production at 654,803 tonnes in November vs 637,958 tonnes in October

– China refined lead production at 386,973 tonnes in November vs 432,710 tonnes in October

Credit Suisse says gold’s modest rally is a chance to start new shorts.

* * *

DB’s Jim Reid concludes the event recap:

Yesterday was certainly a day that could have done with a bit of a touch-up to make it more exciting although news of a budget deal way after the US close is an important story. The interaction between the budget deal and markets is complicated though as many feel the Fed are more likely to taper if a deal is reached so these negotiations are not easy to interpret from the macro side. The deal was announced by Senate Budget Committee chair Patty Murray and House Budget Committee chair Paul Ryan. The terms of the 2 year agreement will set spending levels at $1.012 trillion for fiscal 2014, reversing a two-year decrease in spending, and increasing slightly to $1.014 trillion in fiscal 2015. The 2 year budget increases spending by $63bn compared with sequester spending levels. An extension of long-term jobless benefits, sought by Democrats, wasn’t included in the budget package. The cost of the near-term spending increases will be offset by spending cuts and tax increases over the next decade including $12.6bn higher security fees for airline passengers, $8bn in higher fees for federal insurance of private pensions, $6bn in reduced payments to student-loan debt collectors and $3bn saved by not completely refilling the nation’s strategic petroleum reserves. Another $12 billion of savings will come from reduced contributions to federal pensions, split evenly between military retirees and new civilian workers who start after Jan. 1. This last measure is a strong point of contention amongst Democrats (Washington Post).

The budget deal now goes to the House and Senate for approval. According to the WaPo, the House could stage a vote as soon as Thursday before they officially adjourn for the year on Friday. The Senate will vote before adjourning next week. There is no guarantee that the deal will be approved by both houses, though last night’s announcement did provide a rare display of bipartisanship on Capitol Hill. The level of spending increases and decade-long savings measures are relatively small at $63bn and $85bn respectively which may favour the odds of getting it approved by Congress. For the fiscal conservatives, the budget outlines a net $22bn in savings over the next decade but one could argue that the magnitude of spending cuts are fairly immaterial over a ten year time frame. For the liberals, the deal replaces sequester-level spending cuts, but approves spending at much lower levels than the Democrats had sought earlier in the year. If a deal is approved by Congress, it will likely avoid a government  shutdown in mid-January (and for the next two fiscal years), and would bode well for the next debt ceiling debate which is due early next year.

As mentioned above the interaction between the budget deal and markets isn’t likely to be straightforward. Indeed, overnight markets have reacted with a mixture of cautiousness and optimism. On the cautious side, Asian equities are down across the board which can at least be partially attributed to nervousness at the prospect of a December Fed taper. If Congress passes the budget over the next few days, the probability of a taper next week increase at the margin, given that we have lower fiscal uncertainty (and higher spending) over the next two years. Losses in equities are being led by the Nikkei (-0.7%) and the Hang Seng (-1.3%). Outside of Asian equities, risk sentiment is a little firmer with S&P500 futures up 1pt or 0.1%. Asian credit shows no sign of taper nervousness this morning with the Asia IG index 4bp tighter and high beta EM names such as Indonesia trading firmer (5yr CDS -10bp). 10yr UST yields are unchanged at 2.80% and the US dollar is slightly stronger against the major crosses. The Hang Seng China Enterprises index is down 2.3% ahead of the results of China’s central economic work conference which is expected to end tomorrow and may set a number of economic targets for 2014.

Outside of the US budget, it was a fairly dull day but we did note that the 800+ page Volcker rule text had little impact on banks – perhaps because of the long lead time to implementation (mid 2015).. This month’s Eurogroup/ECOFIN meeting ended inconclusively with no agreement on a Single Resolution Mechanism for banks but an additional meeting has been scheduled for 18th December, which is the eve of the next EU Leaders Summit. Finance ministers are also considering approving the creation of a common resolution fund that would become a last-resort fund after a transition period of 10-years.

Turning to the day ahead, Italian prime minister Enrico
Letta is expected to hold a confidence vote in parliament to confirm support for his reform agenda. Letta is expected to win the vote. The usual US weekly mortgage applications and the monthly US budget statement are the highlights on the data calendar. There will be no other major data releases across Europe or the US.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/KTzbFDoVisE/story01.htm Tyler Durden

Submitted by Shannon Tiezzi of The Diplomat,

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Absni7IQT54/story01.htm Tyler Durden

Earlier, Deutsche Bank’s iconoclast Jim Reid dared to point out the painfully obvious: that something has drastically changed since the Great Financial Crisis (what that “something” is, is clear to all those whose year end bonus does is not contingent on never pointing out the printerphant in the room). This time around, instead of looking back, he looks forward, to the year 2014, and brings up the two questions nobody dares to ask: i) what happens if 2014 is the year when the recession can no longer be delayed, and ii) how will the Fed, already having doubled down on every last “bullet” in its arsenal, use monetary policy to provide a burst of growth when even $85 billion in flow per month is no longer enough…

From Deutsche Bank’s Jim Reid

The curveball for 2014 – A US recession

One topic no-one is really discussing is a US recession in 2014. We should start to at least consider the risk given the maturity of this cycle. By the end of 2013 this expansion will be 54 months old which is longer than the average of 39 months (median 30) since data started to be compiled on US business cycles in 1854. The average in the 100 years since the Fed was formed in 1913 is 50 months (median 42). This cycle is now the seventh-longest of the 34 cycles since 1854. Economists will explain that recessions don’t die of old age but because of imbalances that they might argue are not yet present. However consensus never forecasts a recession in advance so one has to find other ways to help us identify the end of the cycle. Across most other regions, business cycles have shortened post the GFC with many economies experiencing a dip into negative territory again sometime between 2011 and 2013 after the recovery in 2009 and 2010. A lack of policy flexibility (fiscal and monetary) post crisis is our main explanation. The US has just about escaped this due to extraordinary monetary and fiscal stimulus. However with both likely on the retreat at the same time in 2014 it’s prudent to acknowledge the already mature length of this cycle.

So the most obvious driver of financial markets in 2014 does seem likely to be how the Fed, the global economy and the market manage to handle the question of the QE taper. Whether the ECB need to implement negative deposit rates or introduce QE will also be a big driver. However experience teaches us that it’s not usually the obvious theme that ends up dominating in the following 12 months.

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“The attitudes toward cannabis are shifting rapidly,” says a former DEA-agent-turned-pot-growing-company-lawyer, adding that “the potential social and financial returns are enormous.” As ironic as that maybe, perhaps it is why Uruguay has just become the first nation in the world to allow its citizens to grow, buy and smoke marijuana. As Reuters reports, the pioneering government-sponsored bill establishes state regulation of the cultivation, distribution and consumption of marijuana and is aimed at wresting the business from criminals. “Our country can’t wait for international consensus on this issue,” said one politician as demand is rising globally as the following chart shows…

 

DEA Agent becomes Pot-growing-firm lawyer… (via The Atlantic):

Patrick Moen is a 36-year-old former supervisor at the U.S. Drug Enforcement Agency, where, until recently, he led a team based in Portland that fought methamphetamine and heroin traffickers. 

 

Now, he is embarking on a career change. A rather dramatic one.  The Wall Street Journal reports today in a delightful article that Moen has become the in-house lawyer at Privateer Holdings Inc., “a private-equity firm that invests solely in businesses tied to the budding legal marijuana industry.”

 

In other words, the revolving door between business and government just made an unexpected, and very druggy, turn.

 

…

 

“The potential social and financial returns are enormous,” Moen told the Journal said of his new business. “The attitudes toward cannabis are shifting rapidly.”

 

Indeed they are.

As Uruguay appears to show (via Reuters):

Uruguay’s Senate is expected to pass a law on Tuesday making the small South American nation the world’s first to allow its citizens to grow, buy and smoke marijuana.

 

The pioneering government-sponsored bill establishes state regulation of the cultivation, distribution and consumption of marijuana and is aimed at wresting the business from criminals.

 

Cannabis consumers would be allowed to buy a maximum of 40 grams (1.4 ounces) each month from state-regulated pharmacies as long as they are over the age of 18 and registered on a government database that will monitor their monthly purchases.

 

Uruguayans would also be allowed to grow up to six plants of marijuana in their homes a year, or as much as 480 grams (about 17 ounces). They could also set up smoking clubs of 15 to 45 members that could grow up to 99 plants per year.

 

The bill, which opinion polls show is unpopular, passed the lower chamber of Congress in July and is expected to easily pass the Senate on the strength of the ruling coalition’s majority.

 

…

 

“Our country can’t wait for international consensus on this issue,” Senator Roberto Conde of the governing Broad Front left-wing coalition

 

Rich countries debating legalization of pot are also watching the bill, which philanthropist George Soros has supported as an “experiment” that could provide an alternative to the failed U.S.-led policies of the long “war on drugs.”

 

…

 

“This development in Uruguay is of historic significance,” said Ethan Nadelmann, founder of the Drug Policy Alliance, a leading sponsor of drug policy reform partially funded by Soros through his Open Society Foundation.

 

“Uruguay is presenting an innovative model for cannabis that will better protect public health and public safety than does the prohibitionist approach,” Nadelmann said.

But who is “using” the most…

 

 

So USA is #1 in something!!

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/6WabS7vqY6w/story01.htm Tyler Durden

“The attitudes toward cannabis are shifting rapidly,” says a former DEA-agent-turned-pot-growing-company-lawyer, adding that “the potential social and financial returns are enormous.” As ironic as that maybe, perhaps it is why Uruguay has just become the first nation in the world to allow its citizens to grow, buy and smoke marijuana. As Reuters reports, the pioneering government-sponsored bill establishes state regulation of the cultivation, distribution and consumption of marijuana and is aimed at wresting the business from criminals. “Our country can’t wait for international consensus on this issue,” said one politician as demand is rising globally as the following chart shows…

 

DEA Agent becomes Pot-growing-firm lawyer… (via The Atlantic):

Patrick Moen is a 36-year-old former supervisor at the U.S. Drug Enforcement Agency, where, until recently, he led a team based in Portland that fought methamphetamine and heroin traffickers. 

 

Now, he is embarking on a career change. A rather dramatic one.  The Wall Street Journal reports today in a delightful article that Moen has become the in-house lawyer at Privateer Holdings Inc., “a private-equity firm that invests solely in businesses tied to the budding legal marijuana industry.”

 

In other words, the revolving door between business and government just made an unexpected, and very druggy, turn.

 

…

 

“The potential social and financial returns are enormous,” Moen told the Journal said of his new business. “The attitudes toward cannabis are shifting rapidly.”

 

Indeed they are.

As Uruguay appears to show (via Reuters):

Uruguay’s Senate is expected to pass a law on Tuesday making the small South American nation the world’s first to allow its citizens to grow, buy and smoke marijuana.

 

The pioneering government-sponsored bill establishes state regulation of the cultivation, distribution and consumption of marijuana and is aimed at wresting the business from criminals.

 

Cannabis consumers would be allowed to buy a maximum of 40 grams (1.4 ounces) each month from state-regulated pharmacies as long as they are over the age of 18 and registered on a government database that will monitor their monthly purchases.

 

Uruguayans would also be allowed to grow up to six plants of marijuana in their homes a year, or as much as 480 grams (about 17 ounces). They could also set up smoking clubs of 15 to 45 members that could grow up to 99 plants per year.

 

The bill, which opinion polls show is unpopular, passed the lower chamber of Congress in July and is expected to easily pass the Senate on the strength of the ruling coalition’s majority.

 

…

 

“Our country can’t wait for international consensus on this issue,” Senator Roberto Conde of the governing Broad Front left-wing coalition

 

Rich countries debating legalization of pot are also watching the bill, which philanthropist George Soros has supported as an “experiment” that could provide an alternative to the failed U.S.-led policies of the long “war on drugs.”

 

…

 

“This development in Uruguay is of historic significance,” said Ethan Nadelmann, founder of the Drug Policy Alliance, a leading sponsor of drug policy reform partially funded by Soros through his Open Society Foundation.

 

“Uruguay is presenting an innovative model for cannabis that will better protect public health and public safety than does the prohibitionist approach,” Nadelmann said.

But who is “using” the most…

 

 

So USA is #1 in something!!

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/6WabS7vqY6w/story01.htm Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

If you understand the difference between the first pair of shoes and the 25th, you understand why America’s debt-dependent consumer economy is doomed.

Yesterday I explained Why We’re Stuck with a Bubble Economy:

Now that interest rates are near-zero and mortgage rates are rising from historic lows, there is no more juice to be squeezed from low rates. Asset bubbles always burst, destroying collateral and rendering borrowers and lenders alike insolvent.

Without organic demand from rising real income and new households with good-paying jobs and low levels of debt, the consumer-debt based economy stagnates. This has left the economy dependent on serial asset bubbles that create phantom collateral that can support new debt, albeit temporarily.

The other critical dynamic is the marginal utility of additional consumption in a debt-dependent consumer economy. In an economy in which 49% of all residents (156 million people out of a total population of 317 million) receive a direct transfer of cash or cash-equivalent benefit from the central government, and millions of these people also receive cash and/or benefits from state and local governments (49% of Americans Get Government Benefits), poverty is relative rather than absolute for the vast majority of Americans.

The American economy is highly dependent on consumption. Household consumption accounts for about 35% of developing economies’ activity–roughly half of America’s 70% consumption economy.

As noted yesterday, with the earned income of the lower 90% of wage earners stagnant for four decades, America has enabled consumption by leveraging income and collateral into ever-rising mountains of debt.

The problem with debt, of course, is that it accrues interest, and that paying interest reduces the amount of income left to spend on consumption.

In this way, depending on debt to finance consumption is akin to the snake eating its own tail: at some point, the cost of servicing the debt reduces the income available to be spent on additional consumption to zero. Additional consumption becomes impossible without asset bubbles to temporarily enrich the households that own assets or “helicopter drops” of interest-free cash into household checking accounts.

This is how we have reached the point that a majority of U.S. households live paycheck to paycheck, as earnings are eaten up by essential bills and debt service.

Given that the majority of Americans already enjoy a considerable array of consumer goods and services, the only way to fuel more consumption is to entice consumers into buying more of what they already own or buy a replacement for a perfectly usable good or service. Let’s illustrate the concept of marginal utility with shoes.

To those with no shoes at all (a common enough occurrence in the 1930s Great Depression), the utility of one pair of shoes is extremely high: the utility (i.e. the benefits) resulting from owning that one pair of shoes is enormous.

Now consider an aspirational-consumer (i.e. someone striving to look wealthier and more successful than they really are) of the upper-middle class: this consumer might own several dozen pairs of shoes, and his/her problem is finding space for more shoes.

The retailer attempting to persuade this consumer to buy a 25th pair of shoes must overcome the diminishing utility (i.e. marginal utility) of yet another pair of shoes. This is accomplished by offering a “deal you can’t pass up” or appealing to the always pressing need to jettison last year’s style in favor of this year’s “new thing.”

Here’s the critical point of this dynamic: to the consumer who already owns so much stuff that he has to rent a storage facility to store all the surplus goods, the utility of any additional purchase is low. In practical terms, the utility has declined to the thrill of the initial purchase and the initial wearing/use of the new item. Beyond that, it’s just another pair of shoes in the closet.

To the manufacturer/retailer/government dependent on more sales for survival, the value of the first pair of shoes sold and the 25th pair sold are the same. The manufacturer/retailer needs to sell more shoes just to stay in business, and the government living off sales and other consumption-generated taxes also needs more sales.

In an economy in which most people have the essentials of life–i.e. the first pair of shoes with the highest utility–all consumption beyond replacing a hopelessly broken essential is of marginal utility.

An additional $1 of debt adds the same burden to the household whether it is spent on the first pair of shoes or the 25th pair. Taking on debt might make sense for the first pair of shoes, or the first bicycle, but it makes increasingly less sense for each additional pair of shoes or replacement bicycle: the debt piles up but the utility derived from the purchase is increasingly marginal.

The $3,000 I could spend on a replacement bike for the perfectly serviceable bicycle I bought used 15 years ago for $150 is of marginal utility; the better-quality parts and lighter frame, etc.–all the benefits that would flow from spending $3,000 for a “better, more modern” bike are extremely marginal to me, even though I put well over 1,000 miles a year on my bike. All those improvements are too modest to matter. This is the essence of marginal utility.

If you understand the difference between the first pair of shoes and the 25th, and the increasing diversion of income to interest payments that results from debt-based consumption, then you understand why America’s debt-dependent consumer economy is doomed.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Eazwd_9MNbM/story01.htm Tyler Durden

BlackRock said there is a 20% risk that world events could go badly wrong, either because the eurozone acts too late to head off deflation or because of a chain reaction as the Fed starts to wind down stimulus in earnest. As The Telegraph notes, BlackRock’s risk indicator  is almost as high as it was just before the dotcom bust. “The ratio of the two is the key. High valuations combined with low volatility can make for a lethal mix. This market gauge sounded the alarm well before the Great Financial Crisis.” Furthermore, the largest asset manager in the world warns, “troubling trends of growing inequality and weak wage growth, bring into question the sustainability of profit margins.” What is good for investors is corrosive for societies, hardly tenable equilibrium.

 

Via The Telegraph,

BlackRock, the world’s biggest investor, has warned that central banks are poised to tighten monetary policy in the Anglo-Saxon countries and China, advising clients to be ready to pull out of global stock markets at any sign of serious trouble.

 

…

 

The group said in its 2014 Investment Outlook that investors have “jumped on the momentum train, effectively betting yesterday’s strategy will win again tomorrow”, but vanishing liquidity could leave them trapped if the mood changes. “Beware of traffic jams: easy to get into, hard to get out of,” it said.

 

…

 

the global system is still in the doldrums and far from achieving sustainable recovery. “The eurozone, Japan and emerging markets are all trying to export their way out of trouble. Who is going to buy all this stuff? The maths does not work. Not everybody’s currency can fall at once,”

 

…

 

BlackRock’s risk indicator – measuring “enterprise value” against earnings, adjusted for volatility – is almost as high as it was just before the dotcom bust. “The ratio of the two is the key. High valuations combined with low volatility can make for a lethal mix. This market gauge sounded the alarm well before the Great Financial Crisis,” it said.

BlackRock said there is a 20pc risk that world events could go badly wrong, either because the eurozone acts too late to head off deflation or because of a chain reaction as the US Federal Reserve starts to wind down stimulus in earnest.

 

…

 

the eurozone is “stuck in a monetary corset”, failing to generate the nominal GDP growth of 3pc to 5pc needed for economies to outgrow their debt burdens.

 

…

 

BlackRock said the profit share of GDP has soared to a modern-era high of 12pc of GDP, while the workers’ share has collapsed from 66pc to 57pc in one decade. “This speaks to troubling trends of growing inequality and weak wage growth, and brings into question the sustainability of profit margins.”

There is a 25pc chance that the world navigates these reefs and achieves a “growth break-out”. Even if that happens it will not help stocks, and will be “bad for bonds”. The Goldilocks outcome for markets is another year of feeble growth, buttressed by central bank largesse that leaks into asset bubbles. What is good for investors is corrosive for societies, hardly tenable equilibrium.

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