another site
What is more confidence-inspiring in the Fed’s ability to manage the world and the continued dominance of the US Dollar as global reserve currency than a falling gold price… and when better to show that than FOMC meeting weeks… welcome to the centrally-planned world where the announcement of ongoing trillions in fiat dilution constantly crushes the price of undilutable money.
via Zero Hedge http://ift.tt/1qXlcUI Tyler Durden
The Yuan has weakened over 250 pips in early China trading. Trading at almost 6.22, we are now deeply into the significant-loss-realizing region of the world's carry-traders and Chinese over-hedgers. Morgan Stanley estimates a minimum $4.8bn loss for each 100 pip move. However, the bigger picture is considerably worse as the vicious circle of desperate liquidity needs are starting to gang up on Honh Kong real estate and commodity prices. For those who see the silver lining in this and construe all this as a reason to buy more developed world stocks on the premise that the money flooding out of China (et al.) will be parked in the S&P are overlooking the fact that the purchase price of these now-unwanted positions was most likely borrowed, meaning that their liquidation will also extinguish the associated credit, not re-allocate it.
While widening the trading bands keeps some semblance of rationality, this is anything but an orderly unwind of the world's largest carry trades:
How Much Is at Stake?
In their previous note, MS estimated that US$350 billion of TRF have been sold since the beginning of 2013. When we dig deeper, we think it is reasonable to assume that most of what was sold in 2013 has been knocked out (at the lower knock-outs), given the price action seen in 2013.
Given that, and given what business we’ve done in 2014 calendar year to date, we think a reasonable estimate is that US$150 billion of product remains.
Taking that as a base case, we can then estimate the size of potential losses to holders of these products if USD/CNH keeps trading higher.
In round numbers, we estimate that for every 0.1 move in USD/CNH above the average EKI (which we have assumed here is 6.20), corporates will lose US$200 million a month. The real pain comes if USD/CNH stays above this level, as these losses will accrue every month until the contract expires. Given contracts are 24 months in tenor, this implies around US$4.8 billion in total losses for every 0.1 above the average EKI.
Below we have tried to simplify what is happening as much as possible… (since there are many pathways into and out of all of these positions) to try and enable most to comprehend the problem
Virtuous circle… (last few years)
BUT what happens when one of these chains start to break? OR ALL OF THEM? (now!)
And then… (tomorrow)
Remember carry-traders are little more than sophisticated leveraged momentum players – so when the trend is no longer yopur friend, no amount of carry-arbitrage will cover MtM losses on the notional…
Arguing that the PBOC can defend the currency is moot (they clearly do not wish to); Arguing that the PBOC will manage liquidity via their huge FX reserves is moot (they have done so with the banks – who are awash with liquidity as noted by the low repo rates) – this is about forcing the shadow-banking system to shrink before the bubble becomes totally untenable… unfortunately, we suspect it already has…
via Zero Hedge http://ift.tt/1d1Pthv Tyler Durden
One of the primary drivers of the real estate bubble in the past several years, particularly in the ultra-luxury segment, were ultra wealthy Chinese buyers, seeking to park their cash into the safety of offshore real estate where it was deemed inaccessible to mainland regulators and overseers, tracking just where the Chinese record credit bubble would end up. Some, such as us, called it “hot money laundering”, and together with foreclosure stuffing and institutional flipping (of rental units and otherwise), we said this was the third leg of the recent US housing bubble. However, while the impact of Chinese buying in the US has been tangible, it has paled in comparison with the epic Chinese buying frenzy in other offshore metropolitan centers like London and Hong Kong. This is understandable: after all as Chuck Prince famously said in 2007, just before the first US mega-bubble burst, “as long as the music is playing, you’ve got to get up and dance.” In China, the music just ended.
But more so than mere analyses which speculate on the true state of the Chinese record credit-fueled economy, such as the one we posted earlier today in which Morgan Stanley noted that China’s “Minsky Moment” has finally arrived, we now can judge them by their actions.
Sure enough, it didn’t take long before the downstream effects of China’s sharp, sudden attempt to realign its runaway credit bubble, floated right back to the surface.
Cash-strapped Chinese are scrambling to sell their luxury homes in Hong Kong, and some are knocking up to a fifth off the price for a quick sale, as a liquidity crunch looms on the mainland.
Said otherwise, what goes up is now rapidly coming down.
Wealthy Chinese were blamed for pushing up property prices in the former British territory, where they accounted for 43 percent of new luxury home sales in the third quarter of 2012, before a tax hike on foreign buyers was announced.
The rush to sell coincides with a forecast 10 percent drop in property prices this year as the tax increase and rising borrowing costs cool demand. At the same time, credit conditions in China have tightened. Earlier this week, the looming bankruptcy of a Chinese property developer owing 3.5 billion yuan ($565.25 million) heightened concerns that financial risk was spreading.
“Some of the mainland sellers have liquidity issues – say, their companies in China have some difficulties – so they sold the houses to get cash,” said Norton Ng, account manager at a Centaline Property real estate office close to the China border, where luxury houses costing up to HK$30 million ($3.9 million) have been popular with mainland buyers.
Alas, as the recent events in China, chronicled in minute detail here have revealed, the “liquidity issues” of the mainland sellers are about to go from bad to much worse. As for Hong Kong, it may have been last said so long ago nobody even remembers the origins of the word but, suddenly, it is now a seller’s market:
Property agents said mainland Chinese own close to a third of the existing homes that are now for sale in Hong Kong – up 20 percent from a year ago. Many are offering discounts of 5-10 percent below the market average – and in some cases as much as 20 percent – to make a quick sale, property agents and analysts said.
Also known as a liquidation. And like every game theoretical outcome, he who defects first, or in this case sells, first, sells best. In fact, since panicked selling will only beget more selling, watch as prices suddenly plunge in what was until recently one of the most overvalued property markets in the world. And with prices still at nosebleed levels, not even BlackRock would be able to be a large enough bid to absorb all the slamming offers as suddenly everyone rushes to cash out.
The biggest irony: after creating ghost towns at home, the Chinese “uber wealthy” army is doing so abroad.
In a Hong Kong housing development called Valais, about 10 minutes drive from the Chinese border, real estate agents said that between a quarter and a half of the 330 houses are now on sale. At the development’s frenzied debut in 2010, a third of the HK$30-HK$66 million units were sold on the first day, with nearly half going to mainland China buyers.
Dubbed a “ghost town” by local media, the development built by the city’s largest developer, Sun Hung Kai Properties Ltd (0016.HK), is one of many estates in Hong Kong where agents are seeing an increasing number of Chinese eager to sell.
“Many mainland buyers bought lots of properties in Hong Kong when the market was red-hot three years ago,” said Joseph Tsang, managing director at Jones Lang LaSalle. “But now they want to cash in as liquidity is quite tight in the mainland.”
Perhaps our post from yesterday chronicling the crash of the Chinese property developer market was on to something. And of course, as also described in detail, should China’s Zhejiang Xingrun not be bailed out, as the PBOC sternly refuted it would do on Weibo, watch as the intermediary firms themselves shutter all credit, and bring the Chinese property market, both domestic and foreign, to a grinding halt (something he highlighted in our chart of the day).
Meanwhile, the selling rush is on.
In a nearby development called The Green – developed by China Overseas Land & Investment (0688.HK) – about one-fifth of the houses delivered at the start of this year are up for sale. More than half of the units, bought for between HK$18 million and HK$60 million, were snapped up by mainland Chinese in 2012.
Because so much changes in just over a year.
“Some banks were chasing them (Chinese landlords) for money, so they need to move some cash back to the mainland,” said Ricky Poon, executive director of residential sales at Colliers International. “They’re under greater pressure from banks, so they’re cutting prices.”
In West Kowloon district, an area where mainland Chinese bought up close to a quarter of the apartments in many newly-developed estates, some Chinese landlords are offering discounts on the higher-end, three- to four-bedroom apartments they bought just a few years ago.
This month, a Chinese landlord sold a 1,300 square foot (121 square meter) apartment at the Imperial Cullinan – a high-end estate developed by Sun Hung Kai in 2012 – for HK$19.3 million, 17 percent less than the original price. The landlord told agents to sell the flat “as soon as possible,” said Richard Chan, branch manager at Centaline Property in West Kowloon.
In the same area, a 645 square foot, 2-bedroom flat in the Central Park development was sold in just two days after the Chinese owner put it on the market at HK$6.5 million in what agents called the year’s best bargain – the cheapest price for a unit of its kind over the past year.
Don’t worry there will be many more bargains. Why? Because what was once a buying panic – as recently as months ago – has finally shifted to its logical conclusion. Selling.
“The most important thing for them is to sell as soon as possible,” Centaline’s Chan said. “In the past two weeks, those who were willing to cut prices were mainland Chinese. It is going to have some impact on the local property market, that’s for sure.”
Indeed. And once the Hong Kong liquidation frenzy is over, and leaves the city in a state of shock, watch as the great Chinese selling horde stampedes from Los Angeles, to New York, to London, Zurich and Geneva, and leave not a single 50% off sign in its wake.
The good news? All those inaccessible houses that were the domain of the ultra-high net worth oligarchs and criminals, will soon be available to the general public. Especially once the global housing bubble pops.
via Zero Hedge http://ift.tt/1owMA9X Tyler Durden
Submitted by Michael Snyder of The Economic Collapse blog,
What would you do if the Internet or the power grid went down for over a year? Our key infrastructure, including the Internet and the power grid, is far more vulnerable than most people would dare to imagine. These days, most people simply take for granted that the lights will always be on and that the Internet will always function properly. But what if all that changed someday in the blink of an eye? According to the Federal Energy Regulatory Commission's latest report, all it would take to plunge the entire nation into darkness for more than a year would be to knock out a transformer manufacturer and just 9 of our 55,000 electrical substations on a really hot summer day. The reality of the matter is that our power grid is in desperate need of updating, and there is very little or no physical security at most of these substations.
If terrorists, or saboteurs, or special operations forces wanted to take down our power grid, it would not be very difficult. And as you will read about later in this article, the Internet is extremely vulnerable as well.
When I read the following statement from the Federal Energy Regulatory Commission's latest report, I was absolutely floored…
"Destroy nine interconnection substations and a transformer manufacturer and the entire United States grid would be down for at least 18 months, probably longer."
Wow.
What would you do without power for 18 months?
FERC studied what it would take to collapse the entire electrical grid from coast to coast. What they found was quite unsettling…
In its modeling, FERC studied what would happen if various combinations of substations were crippled in the three electrical systems that serve the contiguous U.S. The agency concluded the systems could go dark if as few as nine locations were knocked out: four in the East, three in the West and two in Texas, people with knowledge of the analysis said.
The actual number of locations that would have to be knocked out to spawn a massive blackout would vary depending on available generation resources, energy demand, which is highest on hot days, and other factors, experts said. Because it is difficult to build new transmission routes, existing big substations are becoming more crucial to handling electricity.
So what would life look like without any power for a long period of time? The following list comes from one of my previous articles…
-There would be no heat for your home.
-Water would no longer be pumped into most homes.
-Your computer would not work.
-There would be no Internet.
-Your phones would not work.
-There would be no television.
-There would be no radio.
-ATM machines would be shut down.
-There would be no banking.
-Your debit cards and credit cards would not work.
-Without electricity, gas stations would not be functioning.
-Most people would be unable to do their jobs without electricity and employment would collapse.
-Commerce would be brought to a standstill.
-Hospitals would not be able to function.
-You would quickly start running out of medicine.
-All refrigeration would shut down and frozen foods in our homes and supermarkets would start to go bad.
If you want to get an idea of how quickly society would descend into chaos, just watch the documentary "American Blackout" some time. It will chill you to your bones.
The truth is that we live in an unprecedented time. We have become extremely dependent on technology, and that technology could be stripped away from us in an instant.
Right now, our power grid is exceedingly vulnerable, and all the experts know this, but very little is being done to actually protect it…
"The power grid, built over many decades in a benign environment, now faces a range of threats it was never designed to survive," said Paul Stockton, a former assistant secretary of defense and president of risk-assessment firm Cloud Peak Analytics. "That's got to be the focus going forward."
If a group of agents working for a foreign government or a terrorist organization wanted to bring us to our knees, they could do it.
In fact, there have actually been recent attacks on some of our power stations. Here is just one example…
The Wall Street Journal’s Rebecca Smith reports that a former Federal Energy Regulatory Commission chairman is acknowledging for the first time that a group of snipers shot up a Silicon Valley substation for 19 minutes last year, knocking out 17 transformers before slipping away into the night.
The attack was “the most significant incident of domestic terrorism involving the grid that has ever occurred” in the U.S., Jon Wellinghoff, who was chairman of the Federal Energy Regulatory Commission at the time, told Smith.
Have you heard about that attack before now?
Most Americans have not.
But it should have been big news.
At the scene, authorities found "more than 100 fingerprint-free shell casings", and little piles of rocks "that appeared to have been left by an advance scout to tell the attackers where to get the best shots."
So what happens someday when the bad guys decide to conduct a coordinated attack against our power grid with heavy weapons?
It could happen.
In addition, as I mentioned at the top of this article, the Internet is extremely vulnerable as well.
For example, did you know that authorities are so freaked out about the security of the Internet that they have given "the keys to the Internet" to a very small group of individuals that meet four times per year?
It's true. The following is from a recent story posted by the Guardian…
The keyholders have been meeting four times a year, twice on the east coast of the US and twice here on the west, since 2010. Gaining access to their inner sanctum isn't easy, but last month I was invited along to watch the ceremony and meet some of the keyholders – a select group of security experts from around the world. All have long backgrounds in internet security and work for various international institutions. They were chosen for their geographical spread as well as their experience – no one country is allowed to have too many keyholders. They travel to the ceremony at their own, or their employer's, expense.
What these men and women control is the system at the heart of the web: the domain name system, or DNS. This is the internet's version of a telephone directory – a series of registers linking web addresses to a series of numbers, called IP addresses. Without these addresses, you would need to know a long sequence of numbers for every site you wanted to visit. To get to the Guardian, for instance, you'd have to enter "77.91.251.10" instead of theguardian.com.
If the system that controls those IP addresses gets hijacked or damaged, we would definitely need someone to press the "reset button" on the Internet.
Sadly, the hackers always seem to be several steps ahead of the authorities. In fact, according to one recent report, breaches of U.S. government computer networks go undetected 40 percent of the time…
A new report by Sen. Tom Coburn (R., Okla.) details widespread cybersecurity breaches in the federal government, despite billions in spending to secure the nation’s most sensitive information.
The report, released on Tuesday, found that approximately 40 percent of breaches go undetected, and highlighted “serious vulnerabilities in the government’s efforts to protect its own civilian computers and networks.”
“In the past few years, we have seen significant breaches in cybersecurity which could affect critical U.S. infrastructure,” the report said. “Data on the nation’s weakest dams, including those which could kill Americans if they failed, were stolen by a malicious intruder. Nuclear plants’ confidential cybersecurity plans have been left unprotected. Blueprints for the technology undergirding the New York Stock Exchange were exposed to hackers.”
Yikes.
And things are not much better when it comes to cybersecurity in the private sector either. According to Symantec, there was a 42 percent increase in cyberattacks against businesses in the United States last year. And according to a recent report in the Telegraph, our major banks are being hit with cyberattacks "every minute of every day"…
Every minute, of every hour, of every day, a major financial institution is under attack.
Threats range from teenagers in their bedrooms engaging in adolescent “hacktivism”, to sophisticated criminal gangs and state-sponsored terrorists attempting everything from extortion to industrial espionage. Though the details of these crimes remain scant, cyber security experts are clear that behind-the-scenes online attacks have already had far reaching consequences for banks and the financial markets.
For much more on all of this, please see my previous article entitled "Big Banks Are Being Hit With Cyberattacks 'Every Minute Of Every Day'".
Up until now, attacks on our infrastructure have not caused any significant interruptions in our lifestyles.
But at some point that will change.
Are you prepared for that to happen?
We live at a time when our world is becoming increasingly unstable. In the years ahead it is quite likely that we will see massive economic problems, major natural disasters, serious terror attacks and war. Any one of those could cause substantial disruptions in the way that we live.
At this point, even NASA is warning that "civilization could collapse"…
A new study sponsored by Nasa's Goddard Space Flight Center has highlighted the prospect that global industrial civilisation could collapse in coming decades due to unsustainable resource exploitation and increasingly unequal wealth distribution.
Noting that warnings of 'collapse' are often seen to be fringe or controversial, the study attempts to make sense of compelling historical data showing that "the process of rise-and-collapse is actually a recurrent cycle found throughout history." Cases of severe civilisational disruption due to "precipitous collapse – often lasting centuries – have been quite common."
So let us hope for the best.
But let us also prepare for the worst.
via Zero Hedge http://ift.tt/1gIrQJY Tyler Durden
Red Meat
Wednesday on The
Independents (Fox Business Network, 9 p.m. ET, 6 p.m. PT)
usually means too many libertarians chasing too few segments.
Tonight is no different.
Kicking off the show is
Fox News double-host and
rejected Reason intern Greg Gutfeld (read our
interviews with him from
October 2009 and March
2013), talking about his spanking new book,
Not Cool: The Hipster Elite and Their War on You.
Then the Party Panel, consisting of “Progressive Messaging
Expert and all around good guy” Richard Fowler and beloved
Internet libertarian Julie Borowski of
FreedomWorks, talks about the social-issue split between Sen. Rand
Paul (R-Kentucky) and Sen. Ted Cruz (R-Texas), the Democratic
Party’s weak presidential bench, and NASA’s goofy study predicting
civilizational collapse.
The 18-year-old porn
actress, Duke University freshman, and self-described
libertarian
Belle Knox stops by for an interview. Foundation for Individual
Rights in Education President Greg Lukianoff comments on the
outrageous
case of a UC Santa Barbara Feminist Studies professor seizing
an anti-abortion protester’s sign, calling her a “terrorist,” then
pushing her. Other topics that may or may not come under discussion
include tequila, Hillary Clinton, Bronies, and March Madness
vasectomies.
Did you miss Kennedy’s insane interview with Akon last night?
Here it is:
from Hit & Run http://ift.tt/1eTJwOO
via IFTTT
"We never should have painted ourselves so deep in this QE corner in the first place," chides David Stockman, "because the whole predicate [of Fed policy] is false." The author of The Great Deformation holds nothing back in this brief 3-minute primer of everything is wrong with the American economic system (and the CNBC anchors definitely did not want to hear). "We are already at peak debt and forcing more into the economy didn't work," and won't work as is merely funds Wall Street's latest carry trade to nowhere and fiscal irresponsibility in Washington. Simply put, "the private credit channel of monetary transmission is busted," so the Fed is exploiting the only channel it has left – "the bubble channel."
"There is a massive bubble inflating on Wall Street"
It's hump-day, grab a wine cooler and listen to 3 minutes of almost uninterrupted truthiness
And here is David on The Keynesian Endgame…
Even the tepid post-2008 recovery has not been what it was cracked up to be, especially with respect to the Wall Street presumption that the American consumer would once again function as the engine of GDP growth. It goes without saying, in fact, that the precarious plight of the Main Street consumer has been obfuscated by the manner in which the state’s unprecedented fiscal and monetary medications have distorted the incoming data and economic narrative.
These distortions implicate all rungs of the economic ladder, but are especially egregious with respect to the prosperous classes. In fact, a wealth-effects driven mini-boom in upper-end consumption has contributed immensely to the impression that average consumers are clawing their way back to pre-crisis spending habits. This is not remotely true.
Five years after the top of the second Greenspan bubble (2007), inflation-adjusted retail sales were still down by about 2 percent. This fact alone is unprecedented. By comparison, five years after the 1981 cycle top real retail sales (excluding restaurants) had risen by 20 percent. Likewise, by early 1996 real retail sales were 17 percent higher than they had been five years earlier. And with a fair amount of help from the great MEW (measurable economic welfare) raid, constant dollar retail sales in mid-2005 where 13 percent higher than they had been five years earlier at the top of the first Greenspan bubble.
So this cycle is very different, and even then the reported five years’ stagnation in real retail sales does not capture the full story of consumer impairment. The divergent performance of Wal-Mart’s domestic stores over the last five years compared to Whole Foods points to another crucial dimension; namely, that the averages are being materially inflated by the upbeat trends among the prosperous classes.
For all practical purposes Wal-Mart is a proxy for Main Street America, so it is not surprising that its sales have stagnated since the end of the Greenspan bubble. Thus, its domestic sales of $226 billion in fiscal 2007 had risen to an inflation-adjusted level of only $235 billion by fiscal 2012, implying real growth of less than 1 percent annually.
By contrast, Whole Foods most surely reflects the prosperous classes given that its customers have an average household income of $80,000, or more than twice the Wal-Mart average. During the same five years, its inflation-adjusted sales rose from $6.5 billion to $10.5 billion, or at a 10 percent annual real rate. Not surprisingly, Whole Foods’ stock price has doubled since the second Greenspan bubble, contributing to the Wall Street mantra about consumer resilience.
To be sure, the 10-to-1 growth difference between the two companies involves factors such as the healthy food fad, that go beyond where their respective customers reside on the income ladder. Yet this same sharply contrasting pattern is also evident in the official data on retail sales.
* * *
That the consumption party is highly skewed to the top is born out even more dramatically in the sales trends of publicly traded retailers. Their results make it crystal clear that Wall Street’s myopic view of the so-called consumer recovery is based on the Fed’s gifts to the prosperous classes, not any spending resurgence by the Main Street masses.
The latter do their shopping overwhelmingly at the six remaining discounters and mid-market department store chains—Wal-Mart, Target, Sears, J. C. Penney, Kohl’s, and Macy’s. This group posted $405 billion in sales in 2007, but by 2012 inflation-adjusted sales had declined by nearly 3 percent to $392 billion. The abrupt change of direction here is remarkable: during the twenty-five years ending in 2007 most of these chains had grown at double-digit rates year in and year out.
After a brief stumble in late 2008 and early 2009, sales at the luxury and high-end retailers continued to power upward, tracking almost perfectly the Bernanke Fed’s reflation of the stock market and risk assets. Accordingly, sales at Tiffany, Saks, Ralph Lauren, Coach, lululemon, Michael Kors, and Nordstrom grew by 30 percent after inflation during the five-year period.
The evident contrast between the two retailer groups, however, was not just in their merchandise price points. The more important comparison was in their girth: combined real sales of the luxury and high-end retailers in 2012 were just $33 billion, or 8 percent of the $393 billion turnover reported by the discounters and mid-market chains.
This tale of two retailer groups is laden with implications. It not only shows that the so-called recovery is tenuous and highly skewed to a small slice of the population at the top of the economic ladder, but also that statist economic intervention has now become wildly dysfunctional. Largely based on opulence at the top, Wall Street brays that economic recovery is under way even as the Main Street economy flounders. But when this wobbly foundation periodically reveals itself, Wall Street petulantly insists that the state unleash unlimited resources in the form of tax cuts, spending stimulus, and money printing to keep the simulacrum of recovery alive.
Accordingly, the central banking branch of the state remains hostage to Wall Street speculators who threaten a hissy fit sell-off unless they are juiced again and again. Monetary policy has thus become an engine of reverse Robin Hood redistribution; it flails about implementing quasi-Keynesian demand–pumping theories that punish Main Street savers, workers, and businessmen while creating endless opportunities, as shown below, for speculative gain in the Wall Street casino.
At the same time, Keynesian economists of both parties urged prompt fiscal action, and the elected politicians obligingly piled on with budget-busting tax cuts and spending initiatives. The United States thus became fiscally ungovernable. Washington has been afraid to disturb a purported economic recovery that is not real or sustainable, and therefore has continued to borrow and spend to keep the macroeconomic “prints” inching upward. In the long run this will bury the nation in debt, but in the near term it has been sufficient to keep the stock averages rising and the harvest of speculative winnings flowing to the top 1 percent.
The breakdown of sound money has now finally generated a cruel endgame. The fiscal and central banking branches of the state have endlessly bludgeoned the free market, eviscerating its capacity to generate wealth and growth. This growing economic failure, in turn, generates political demands for state action to stimulate recovery and jobs.
But the machinery of the state has been hijacked by the various Keynesian doctrines of demand stimulus, tax cutting, and money printing. These are all variations of buy now and pay later—a dangerous maneuver when the state has run out of balance sheet runway in both its fiscal and monetary branches. Nevertheless, these futile stimulus actions are demanded and promoted by the crony capitalist lobbies which slipstream on whatever dispensations as can be mustered. At the end of the day, the state labors mightily, yet only produces recovery for the 1 percent.
via Zero Hedge http://ift.tt/1j5rJLY Tyler Durden
Submitted by Lance Roberts of STA Wealth Management,
In a recent note by Jeff Saut at Raymond James, he noted that valuations are cheap based on forward earnings estimates. He is what he says:
"That said, valuations are not particularly onerous with the P/E ratio for the S&P 500 (SPX/1841.13) currently trading around 15.2x this year’s bottom-up estimate of roughly $121 per share. Moreover, if next year’s estimates are anywhere near the mark of $137, the SPX is being valued at a mere 13.4x earnings."
As a reminder, it is important to remember that when discussing valuations, particularly regarding historic over/under valuation, it is ALWAYS based on trailing REPORTED earnings. This is what is actually sitting on the bottom line of corporate income statements versus operating earnings, which is "what I would have earned if XYZ hadn't happened."
Beginning in the late 90's, as the Wall Street casino opened its doors to the mass retail public, use of forward operating earning estimates to justify extremely overvalued markets came into vogue. However, the problem with forward operating earning estimates is that they are historically wrong by an average of 33%. The chart below, courtesy of Ed Yardeni, shows this clearly.
Let me give you a real time example of what I mean. At the beginning of the year, the value of the S&P 500 was roughly 1850, which is about where at the end of last week. In January, forward operating earnings for 2014 was expected to be $121.45 per share. This gave the S&P 500 a P/FE (forward earnings) ratio of 15.23x.
Already forward operating earnings estimates have been reduced to $120.34 for 2014. If we use the same price level as in January – the P/FE ratio has already climbed 15.37x.
Let's take this exercise one step further and consider the historical overstatement average of 33%. However, let's be generous and assume that estimates are only overstated by just 15%. Currently, S&P is estimating that earnings for the broad market index will be, as stated above, $120.34 per share in 2014 but will rise by 14% in 2015 to $137.36 per share. If we reduce both of these numbers by just 15% to account for overly optimistic assumptions, then the undervaluation story becomes much less evident. Assuming that the price of the market remains constant the current P/FE ratios rise to 18.08x for 2014 and 15.84x for 2015.
Of course, it is all just fun with numbers and, as I stated yesterday, this there are only three types of lies:
"Lies, Damned Lies and Statistics."
With the continued changes to accounting rules, repeal of FASB rule 157, and the ongoing torturing of income statements by corporations over the last 25 years in particular, the truth between real and artificial earnings per share has grown ever wider. As I stated recently in "50% Profit Growth:"
"The sustainability of corporate profits is dependent on two primary factors; sustained revenue growth and cost controls. From each dollar of sales is subtracted the operating costs of the business to achieve net profitability. The chart below shows the percentage change of sales, what happens at the top line of the income statement, as compared to actual earnings (reported and operating) growth."
"Since 2000, each dollar of gross sales has been increased into more than $1 in operating and reported profits through financial engineering and cost suppression. The next chart shows that the surge in corporate profitability in recent years is a result of a consistent reduction of both employment and wage growth. This has been achieved by increases in productivity, technology and offshoring of labor. However, it is important to note that benefits from such actions are finite."
This is why trailing reported earnings is the only "honest" way to approach valuing the markets. Bill Hester recently wrote a very good note in this regard in response to critics of Shiller's CAPE (cyclically-adjusted price/earnings) ratio which smoothes trailing reported earnings.
"More recently the ratio has undergone an attack from some widely-followed analysts, questioning its validity and offering up attempts to adjust the ratio. This may be a reaction to its new-found notoriety, but more likely it’s because the CAPE is suggesting that US stocks are significantly overvalued. All of the adjustments analysts have made so far imply that stocks are less overvalued than the traditional CAPE would suggest."
We feel no particular obligation defend the CAPE ratio. It has a strong long-term relationship to subsequent 10-year market returns. And it’s only one of numerous valuation indicators that we use in our work – many which are considerably more reliable. All of these valuation indicators – particularly when record-high profit margins are accounted for – are sending the same message: The market is steeply overvalued, leaving investors with the prospect of low, single-digit long-term expected returns. But we decided to come to the aid of the CAPE ratio in this case because a few errors have slipped into the debate, and it’s important for investors who have previously relied on this ratio to understand these errors so they can judge the valuation metric fairly. Importantly, the primary error that is being made is not even the fault of those making the arguments against the CAPE ratio. The fault lies at the feet of a misleading data series."
If I want to justify selling you an overvalued mutual fund or equity, then I certainly would try to find ways to discount measures which suggest investments made at current levels will likely have low to negative future returns. However, as a money manager for individuals in retirement, my bigger concern is protecting investment capital first. (Note: that statement does not mean that I am currently in cash, we are fully invested at the current time. However, we are not naive about the risks to our holdings.)
The following chart shows Tobin's "Q" ratio and Robert Shillers "Cyclically Adjusted P/E (CAPE)" ratio versus the S&P 500. James Tobin of Yale University, Nobel laureate in economics, hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs. The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets. Currently, the CAPE is at 25.41x, and the Q-ratio is at 1.01.
Both of these measures are currently at levels that suggest that forward stock market returns are likely to be in the low to single digits over the next decade. However, it is always at the point of peak valuations where the search for creative justification begins. Unfortunately, it has never "been different this time."
Lastly, with corporate profits at record levels relative to economic growth, it is likely that the current robust expectations for continued double digit margin expansions will likely turn out to be somewhat disappointing.
As we know repeatedly from history, extrapolated projections rarely happen. Therefore, when analysts value the market as if current profits are representative of an indefinite future, they have likely insured investors will receive a very rude awakening at some point in the future.
There is mounting evidence, from valuations being paid in M&A deals, junk bond yields, margin debt and price extensions from long term means, "exuberance" is once again returning to the financial markets. Again, as I stated previously, my firm remains fully invested in the markets at the current time. I write this article, not from a position of being "bearish" as all such commentary tends to be classified, but from a position of being aware of the "risk" that could potentially damage long term returns to my clients. It is always interesting that, following two major bear markets, investors have forgotten that it was these very same analysts that had them buying into the market peaks previously.
via Zero Hedge http://ift.tt/Oyof7a Tyler Durden
Much has been said about Yellen’s Freudian slip involving the “6 month” considerable period language, which as we pointed out earlier, is said to have been the catalyst that sent stocks sharply lower just after 3 pm when it was uttered. However, in reality all this statement suggests is a rate hike some time in mid-2015, half a year after when QE is said to have ended, which if one listens to the market experts, is what is supposed to be priced in (of course, what the experts won’t tell you is that the market wants its cake and endless liquidity injections by the Fed too). However, one thing that was far more unexpected and certainly remained unexplained by Yellen, is the curious case of the Fed dots, or the estimations by the individual committee members, of where they see rates at the end of 2016. What was surprising here was the sharp upward jump from 1.75% as of December to 2.25% currently.What is even more inexplicable, is that the Fed hiked its rate forecast even as it lowered its GDP projections for the next two years. Why? Not even Janet Yellen could answer that.
Some further thoughts from SocGen on this latest example of just how clueless the Fed is when it comes to the signals it sends about the future.
Had it not been for the dots, market participants probably would have interpreted today’s FOMC statement and Fed Chair Yellen’s press conference as sufficiently dovish. Yet, seeing the FOMC median rate forecast for the end of 2016 rise from 1.75% to 2.25% singlehandedly rendered all else irrelevant. Are markets justified in placing so much faith in the dots? After all, they are pre-determined ahead of the meeting, reflect the views of both voting and non-voting members and are not subject to a vote. While we question the erratic movement of the dots that seems disconnected from the FOMC’s economic projections, the dots do matter. After all, they reflect an unbiased and current view of what current and future voters see as the appropriate rate setting.
The curious drift of the dots
The big shocker today was not that the Fed abandoned its 6.5% unemployment rate threshold, but that is moved the dots, and not by an insignificant amount. The FOMC’s median fed funds rate forecast for the end of 2016 increased from 1.75% to 2.25%, with the end-of-2015 target now at 1% (up from 0.75%). The curious aspect was that this revision looks out of synch with the Committee’s economic projections which did not change materially since December. To be precise, participants reduced their average GDP forecast by 0.1% (to 3.1%) for this year and by 0.05% (to 2.75%) for 2016, but revised down their unemployment rate trajectory by about 0.2%. These revisions were accompanied by similar movements in long-term growth and unemployment estimates, suggesting little change in the Fed’s assessment of projected slack. As a result, the Committee’s inflation forecasts were largely unchanged.
So why the sudden shift in the dots? Even Yellen herself couldn’t explain it, replying that she can’t speak for “why people write down what they do”. Instead, she tried to downplay the upward drift, saying that it was only modest and underscoring that the FOMC was still projecting a large undershoot relative to the prescribed fed funds rate. For clarification, the dots represent forecasts brought to the meeting by all participants, both voting and non-voting. They are effectively decided ahead of the meeting. As such, Yellen doesn’t have any control of the dots and they are not explicitly decided or coordinated by the Committee. In this context, today’s move looks genuinely unintentional.
Despite Yellen’s best efforts to downplay the dots, markets have taken them to heart and repriced 2016 fed funds futures by 25 basis points. Are they right to do so? Probably. While we question the erratic movement of the dots (see chart 1), they do reflect the latest view of all current and future voters about the appropriate level of the fed funds rate. More importantly, the drift was not caused by one or two outliers but rather by a lot of reshuffling in the middle (see chart 2). Therefore it seems to reflect a real change in the underlying view about the appopriate policy setting.
Forward guidance enters vague territory
In what was largely overshadowed by the dots, the FOMC did take a significant step in overhauling its forward guidance. As expected, the Committee abandoned all economic thresholds and replaced them with qualitative guidance. The timing of the liftoff in the fed funds rate will now depend on “measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments”. That’s as vague as it gets. The Committee does provide two additional pieces of information by (1) suggesting that rates will be at zero for “a considerable time after the asset purchase program ends”; and (2) promising that it will keep rates below levels viewed as normal even after employment and inflation are near mandate-consistent levels. In other words, the Fed still promises to undershoot on rates, or overshoot on the amount of stimulus for a long time to come and by a wide margin. This was the message that Yellen tried to push very strongly during the press conference, but convincing the markets may take more effort on her part.
Erratic dot movements + vague guidance = more rate volatility
One of the outcomes of today’s shift to qualitative guidance will be increased volatility in rate expectations between FOMC meetings. Market participants clearly base their expectations for the fed funds target on the dots, and forward guidance is supposed to tell them how the dots will change in response to the data. Unfortunately, the new language provides very little information in that regard. And, the erratic and unexplained movement of the dots themselves does not help either. The next set of projections will be published in June, and until then, we are all flying with limited visibility.
In retrospect, perhaps it is a good thing the Fed no longer is providing forward guidance – if anything, it likely would have both bonds and stocks soaring to all time highs at the same time, on two completely contradictory yet parallel indicators about the future state of the economy, in what is becoming a glaring example of just how horrible the Fed is at not only predicting the future, but telegraphing how it plans to get there.
via Zero Hedge http://ift.tt/1lQwYww Tyler Durden
If we need the government to
pave the roads, then how come government can’t actually seem to
pave the roads?
It’s a question to ask a lot in California, where citizens pay
significant amounts of taxes, and yet the roads are often
disasters. On the state level, the Reason Foundation notes, California
spends more per mile than the national average for its highway
system, yet ranks near the bottom of the list for road
conditions.
On the local level, residents may see the same problems. Los
Angles has high state and local taxes (sales tax in the city is
9
percent) and yet more than a third of the streets in the city’s
streets are get failing grades for road repair (the Los Angeles
Times has an interactive map here).
What’s the solution to the problem? Not shifting resources and
rethinking priorities, obviously. Los Angeles just needs
more taxes! From the Los Angeles Times:
One year after Los Angeles voters rejected a sales tax increase,
the City Council is looking at trying again — this time by tying
the money to the repair of the city’s deteriorating network of
streets.Two high-level City Hall policy advisors recommended Tuesday
that lawmakers place a half-cent tax hike on the November ballot
that would generate $4.5 billion over 15 years. The proceeds, they
said, would pay to fix the most severely damaged roads and
sidewalks.Passage of a tax could add momentum to Mayor Eric Garcetti’s
“back to basics” campaign, which focuses on upgrading basic
services. The proposal also could help city leaders resolve a
potentially costly disability rights lawsuit filed by wheelchair
users who say buckled sidewalks block their access.
That last tax that failed required a simple majority. This one
would require a two-thirds majority to pass, so to say its chances
are as rough as pushing a stalled car up one of the city’s
pothole-covered hills is an apt if rather labored simile. Why
should anybody trust the city would spend its current revenue for
road repairs when it’s not currently spending its revenue for road
repairs?
Jack Humphreville, who writes about L.A.’s budget for the
website CityWatch, said city elected officials have used money that
should have gone to road repairs to fund excessive employee
salaries and benefits. “They were grossly negligent over the last
two decades in maintaining our infrastructure,” Humphreville
said.Gary Toebben, president of the Los Angeles Area Chamber of
Commerce, said his organization is concerned about the burden a new
tax could place on businesses and consumers. Toebben said he also
wanted to know whether the Metropolitan Transportation Authority
would pursue a separate sales-tax hike for transit services in
2016. “If you keep adding taxes, eventually you reach a point where
people say that’s just too much,” he said.
And let’s not forget, the city encouraged voters to pass a
referendum that caps the number of legal medical marijuana shops in
town and is planning to
shut hundreds of potential taxpaying businesses down.
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Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Rather than deal forthrightly with the reality that unrealistic promises made to their employees cannot be honored, local government has pursued a strategy of legalizing looting.
The gradual erosion of civil liberties, legal rights and government ethics are connected: our rights don't just vanish into thin air, they are expropriated by government: Federal, state and local. Though much is written about the loss of civil liberties at the Federal level, many of the most blatantly illegal power grabs are occurring in local government.
This expropriation is under the radar of the average citizen because the process slowly chips away the fundamentals of legality and justice: bit by bit, due process and the rights of the individual have been eroded by state and local governments until the fundamental Constitutional protections simply cease to exist.
When local government looting is legalized, the entire system is illegal. Here are three recent examples of blatantly illegal looting by local governments.
First up: privatizing the collection of traffic fines and probation to create a modernized debtor's prison. We turn to The Nation for the story:
The Town That Turned Poverty Into a Prison Sentence Most states shut down their debtors’ prisons more than 100 years ago; in 2005, Harpersville, Alabama, opened one back up.
What happened to Ford in the small town of Harpersville was tangled and unconstitutional– but hardly unique. Similar tales have been playing out in more than 1,000 courts across the country, from Georgia to Idaho. In the face of strained budgets and cuts to public services, state and local governments have been stepping up their efforts to ensure that the criminal justice system pays for itself. They have increased fines and court costs, intensified law enforcement efforts, and passed so-called “pay-to-stay” laws that charge offenders daily jail fees. They have also begun contracting with “offender-funded” probation companies like JCS, which offer a particularly attractive solution—collection, at no cost to the court.
Harpersville’s experiment with private probation began nearly ten years ago. In Alabama, people know Harpersville best as a speed trap, the stretch of country highway where the speed limit changes six times in roughly as many miles. Indeed, traffic is by far the biggest business in the town of 1,600, where there is little more than Big Man’s BBQ, the Sudden Impact Collision Center and a dollar store.
In 2005, the court’s revenue was nearly three times the amount that the town received from a sales tax, Harpersville’s second-largest source of income. Fines had become key to Harpersville’s development, but it proved difficult to chase down those who did not pay. So, that year, Harpersville decided to follow in the footsteps of other Alabama cities and hire JCS to help collect.
It was a system of extraction and coercion so flagrant that Alabama Circuit Court Judge Hub Harrington likened it to a modern-day “debtors’ prison.”
Her fines for the three charges added up to $2,922, court papers show. Ward sentenced her–and others who said they couldn’t pay their full fines that day– to probation. Once a means of allowing convicted offenders to stay out of jail on the condition of good behavior, probation had now become a court-sanctioned tool for debt collection.
Burdette reported to the JCS office in nearby Childersburg, where she paid her probation officer $100. Of that, $45 went toward her fine, $10 toward a one-time “start-up fee,” and the last $45 went to JCS as a monthly fee for service.
Next up: illegal search and seizure under the pretext of traffic violations. As if "driving while black" isn't bad enough, now "driving with cash" is pretext enough to be stripped of your rights and your property stolen by local government:
Lawsuits over cash seizures settled in Nevada
Tan Nguyen of Newport, Calif., and Michael Lee of Denver said in lawsuits filed in U.S. District Court in Reno they were stopped last year on U.S. Interstate 80 near Winnemucca about 165 miles east of Reno under the pretext of speeding. They said they were subjected to illegal searches and told they wouldn't be released with their vehicles unless they forfeited their cash.
The lawsuits claimed the cash seizures were part of a pattern of stopping drivers for speeding as a pretext for drug busts in violation of the Constitution.
Nguyen was given a written warning for speeding but wasn't cited. As a condition of release, he signed a "property for safekeeping receipt," which indicated the money was abandoned or seized and not returnable. But the lawsuit says he did so only because Dove threatened to seize his vehicle unless he "got in his car and drove off and forgot this ever happened."
"He wasn't charged with anything. He had no drugs in his car. The pretext for stopping him was he was doing 78 in a 75," John Ohlson told KRNV-TV. "It's like Jesse James or Black Bart," he told AP in an interview last week.
The district attorney's statement said both men were stopped legally and that "every asset that was seized pursuant to those stops was lawfully seized."
Exhibit # 3: guilty until proven innocent: State of California seizes cash from "suspected" tax evaders with no evidence, no court action, no recourse. I have documented in detail how the jackboot of the State of California has pressed on the necks of thousands of law-abiding citizens whose only crime was moving out of California.
The State of California presumes anyone moving out of the state who still has a source of income in California–for example, a few dollars of interest earned on a bank account–owes California income tax on all their presumed income, even if they have filed income tax returns in another state.
If this isn't the acme of illegal seizure and denial of basic rights, i.e. presumed innocent until proven guilty, then what is?
Here is one reader's account of how this legal looting works: I wrote about this inWelcome to the United States of Orwell: Law-Abiding Taxpayers Are Treated as Criminals While the Real Criminals Go Free (March 27, 2012).
I received a letter last year that we owed the state of California's Franchise Tax Board $90,000 for taxes in the year 2008.We replied to the Franchise Tax board in a similar manner as RT stating that:
— Did not reside in California in 2008
— Did not file a State income tax return in California in 2008
— Did not have any outstanding tax issues with California in 2008
— Did no business in California in 2008
— Owned no property in California in 2008
The CA Franchise Tax board responded by putting a lien on us in the state – fortunately, our banks and assets have no business in CA or I am certain our accounts would have been robbed as well.
After a great deal of uncertainty and angst, I found an accountant in CA who advised us that we needed to file a complete CA tax return for 2008 even though we did not owe any tax. We filed the return and received a response that we owed the state $625 to cover the State's collection fees. We paid the fee and within two weeks received a "refund" check for the $625.
On reflection, we felt as if we had been "held up" by some powerful gangsters and if it had not been for an honest tax accountant we would have suffered much financial damage.
In other words, honest taxpayers are reduced to begging the predatory state of California to return their own money. Meanwhile, the bagmen for the local government thieves, Wells Fargo and Bank of America, among others, get to keep the $100 fee they charged the taxpayer for stealing their money. If this isn't Orwellian, then what do you call it? "Legal"? If this is legal, legality has lost all meaning.
For more on the blatantly illegal seizures of cash from people who aren't even residents of California and who filed income tax returns in another state, please read:
Welcome to the Predatory State of California–Even If You Don't Live There (March 20, 2012)
The Predatory State of California, Part 2 (March 21, 2012)
Just as pernicious as outright looting is the growing dependence of local government on fines and related rip-offs. Correspondent Joel M. recently submitted this article which features New York City officials whining that the recent snow storm deprived them of sorely needed revenues from parking fines.
Costs Have Piled Up Along With the Snow of a Difficult Winter (NYT.com)
"If the winter was costly for individuals, it was even more so for municipalities. The snow triggered repeated suspensions of New York City’s alternate-side-of-the-street parking rules, delighting car owners but costing the city an average of $270,000 a day in potential fines, officials said. That added up to $4.3 million during a three-week stretch in February alone, money that would have gone to help pay for city services, including the fire and police forces, city officials said."
Everyone who believes local government is "here to fill potholes and help disadvantaged people" needs to wake up and ask what kind of government we have when due process has been replaced with "legal" looting. Is local government focused on serving citizens or on funding public employee pensions and healthcare benefits?
The erosion of ethics of those in government service is as pernicious as the rise of legal looting. Let's be honest, shall we? Those in local government tasked with collecting all these forms of legal looting are "just doing my job," but how many protest the process? How many public employee unions are outraged by the legal looting that fills the coffers of their pension funds?
For context, government employees constitute about 15% of the employed workforce in the U.S.: 22 million out of 142 million. Unlike the other 85%, their employer can legalize looting on their behalf.
Local government spending has soared for decades.
So has local government debt.
Promises were made to local government employees by craven, bought-and-paid-for politicos that cannot possibly be honored in a stagnating economy with widening wealth inequality. But rather than deal forthrightly with that reality, local government has pursued a strategy of legalizing looting.
From the point of view of the hapless tax donkeys and debt-serfs being looted, this strategy boils down to a stark threat: Pay Our Pensions Or We'll Throw You in Jail.
Here's the deal: government is supposed to serve the people, not the insiders. Please read the above news stories; can anyone claim that legalized looting is OK because the "ends" (public services) justify the "means" (legalized looting)? How many public employees care about where the money that funds their paycheck, pension and healthcare benefits comes from?
Maybe public employees should start caring about where the money is coming from, because taxation approved by elected officials or direct voter approval is one thing, and legalized looting is another. If you don't care that your pay/pension/benefits may be partly funded by legalized looting, perhaps you should start caring.
Remember that we (the general public) can't pull you over and "legally" steal your cash, nor can we order Wells Fargo to go into your bank account and "legally" steal your money without court review, evidence of wrongdoing or recourse. We can't award private collection agencies the powers reserved for representative government and rig the probation system into a cash cow that benefits us.
Please don't trot out the "good German" excuse: I only take orders. You're the ones who are pulling the levers of the legalized looting machine; us tax donkeys and debt-serfs are on the receiving end. Given that special interests own the state legislatures, the tax donkeys and debt-serfs have only three choices: opt out, move out or stop paying, and fill your modern debtors' prisons to the brim.
via Zero Hedge http://ift.tt/1hDev3A Tyler Durden