Archives for September 2013

Shut Happens

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

It's 12:01am, do you know where your government is?

  • *WHITE HOUSE BUDGET OFFICE DIRECTS AGENCIES TO BEGIN SHUTDOWN
  • *U.S. GOVERNMENT SHUTS DOWN FOR FIRST TIME IN 17 YEARS

S&P Futures are 1677, 10Y yield 2.65%, WTI $101.96, Gold $1329.00 – let's see where we open tomorrow…

 

Full Statement from The White House:

MEMORANDUM FOR THE HEADS OF EXECUTIVE DEPARTMENTS AND AGENCIES

FROM: Sylvia M. Burwell, Director

SUBJECT: Update on Status of Operations

This memorandum follows the September 17,2013, Memorandum M-13-22, and provides an update on the potential lapse of appropriations.

Appropriations provided under the Consolidated and Further Continuing Appropriations Act, 2013 (P.L. 113-6) expire at 11:59 pm tonight. Unfortunately, we do not have a clear indication that Congress will act in time for the President to sign a Continuing Resolution before the end of the day tomorrow, October 1, 2013.

Therefore, agencies should now execute plans for an orderly shutdown due to the absence of appropriations. We urge Congress to act quickly to pass a Continuing Resolution to provide a short-term bridge that ensures sufficient time to pass a budget for the remainder of the fiscal year, and to restore the operation of critical public services and programs that will be impacted by a lapse in appropriations.

Agencies should continue to closely monitor developments, and OMB will provide further guidance as appropriate. We greatly appreciate your cooperation and the work you and your agencies do on behalf of the American people.

Now it's getting serious…

CHART OF THE DAY: A Government Shutdown Is No Reason To Be Selling Stocks

CHART OF THE DAY: A Government Shutdown Is No Reason To Be Selling Stocks

By ROB WILE at Business Insider

Stocks are tumbling today, and some pundits are blaming the impending U.S. government shutdown.

But this wouldn't be the first time the government shut down. In fact, the stock market actually rallied during past shutdowns.

Below is the chart for the S&P 500 showing what happened in the double-barreled shutdown that started November 14-17, 1995 and then resumed December 16,1995 -January 5, 1996.

"Counter-intuitively the S&P 500 rose during both shutdowns, up 1.83% and 0.06%, respectively," noted Oppenheimer's John Stoltzfus. "Curiously enough a difference of opinion on the first shutdown was tied to issues that included Medicare premiums. The second shutdown was linked to a seven-year budget plan proposed by the White House"

"Post the second shutdown the S&P 500 rallied some 10.52% from January 10th through February 12th 1996," he added.

No reason to panic.

stocks government shutdowns

Oppenheimer

JPMORGAN’S TOM LEE: The Government Shutdown Is Not A Reason To Sell Your Stocks

JPMORGAN'S TOM LEE: The Government Shutdown Is Not A Reason To Sell Your Stocks

BMATTHEW BOESLER, of Business Insider

Tom Lee

Bloomberg TV

A government shutdown appears imminent, but it's no reason to sell stocks, says JPMorgan chief U.S. equity strategist Tom Lee in a note to clients titled "Not a thesis killer, and not a reason to sell."

"Overall, markets have been down 0.2% from the start of a shutdown until the end, with the longer the shutdown, generally the worse that markets perform," says Lee. "70% of the time (12 of 17 times), stocks gained from the start of the shutdown to 30 days later (up 0.6% on average) — most of the selling took place ahead of the shutdown."

Lee expands on his argument that the bulk of the government shutdown-related selling has already taken place:

Is this discounted? The 2.5% decline into the shutdown (since 9/18 highs) ranks this as the 3rd worst since ‘76. The bulk of declines seem to come prior to the shutdown itself with equities falling a median 0.4% in the 15 days going into the shutdown (see Figure 1). Since peaking at 1725 on 9/18, the S&P 500 is down 2.5%, ranking this as the 3rd worst decline into a government shutdown — the two others being 10/82 and 10/84 (1 day and 3 days, respectively) with 3% declines each. In 1982 (per media sources), it looks like Congress simply missed a deadline to vote on a new spending bill and in 1984, a new spending bill was held up due to various packages being attached to the bill. The average performance of equities into a shutdown, since '76, is a gain of 0.4% (15 days prior to the shutdown date).

Notably, during the two years where stocks fell sharply into the shutdown (‘82 and ‘84), equities gained 11% and 3%, respectively (start of shutdown to 30 days later). Does this suggest that we have seen the worst of the selling? It is not clear, since this shutdown is only the first showdown with the debt ceiling still an open issue. In other words, investors are likely to sit on the sidelines longer.

"We would be buyers of major weakness, even acknowledging investors need to be sidelined. We do not expect to see long-term damage to the economy from a shutdown (particularly one lasting less than 7 days) and most investors tend to agree," says Lee. "However, the issue is the negative impact on P/E multiple from the 'Washington discount' — this is a lingering risk, but as shown on Fig 1, stocks ultimately shrug off a shutdown. The bulk of the selling, for most years, has already taken place and thus, we would remain steady buyers of equities."

Lee has a year-end S&P 500 price target of 1775. Today, the index closed at 1681, so Lee's forecast implies an additional 5.6% upside for stocks over the next three months. 

S&P 500 in government shutdowns

J.P. Morgan, Bloomberg, Congressional Research Service (CRS Report RS20348: Federal Funding Gaps: A Brief Overview: www.fas.org

 

Note: 1) Budget authority expired at the end of the day indicated. 2) Full days are counted according to CRS methodology; beginning after the final day on which budget authority was available and ending the day before the funding gap was terminated due to enactment of a CR or other appropriations act. 3) The 9/30/84 to10/3/84 and 10/3/84 to 10/5/84 Shutdowns are treated as one event for market return calculation purposes.

Strawberry Fields Forever; Is a Higher Minimum Wage Really the Answer? To What?

Courtesy of Mish.

Japan Times reports the Latest Robot can Pick Strawberry Fields Forever

Fruits of ingenuity: Agricultural machinery maker Shibuya Seiki and the National Agriculture and Food Research Organization demonstrate a robot that can pick ripe strawberries at the annual Auto-ID and Communication Expo at the Tokyo Big Sight convention center Wednesday. | AFP-JIJI

The device, unveiled Wednesday, can pick a piece of fruit every eight seconds by using three cameras to determine which strawberries are ready to pick. A mechanized arm then darts out to snip each one free and place it into its basket.

The 2-meter robot moves on rails between rows of strawberries, which in Japan are usually grown in elevated greenhouse planters.

It “calculates the degree of ripeness from the color of the strawberry, which it observes with two digital cameras,” said Mitsutaka Kurita, an official at Shibuya Seiki, the developer of the machine.

“It also uses the images from the two cameras to calculate the distance from the target, then approaches the strawberry it is aiming at,” he said.

A third camera takes a detailed photo of the fruit, which it uses for the final calculation before moving in to snip it.

Strawberry farming is highly labor-intensive, requiring 70 times the work of rice farming and twice that of tomatoes and cucumbers, according to the National Agriculture and Food Research Organization, which helped develop the robot.

The robot will go on sale early next year for about ¥5 million. Strawberries are available all year round in Japan and typically fetch ¥500 for a small basket.

Forever?

In his December 2012 Outlook, Pimco’s Bill Gross also wrote Strawberry Fields – Forever? It’s worth a recap now.

Continue Here

10 Terms Investment Pros Use to Raise Money

10 Terms Investment Pros Use to Raise Money

Courtesy of Joshua Brown, The Reformed Broker

You are easily dazzled by words that sound more sophisticated than they really are.

You are totally aware of this – and yet you remain susceptible.

Using hundred-dollar words where a five-dollar word will do is a time-honored, traditional selling tactic on Wall Street and in the hedge fund / asset management world as well.

Wall Street knows that you already want to buy, but it also knows that you won't make a purchase decision merely because it feels good. It knows that you must first satisfy yourself that you've read up on the specs and the technical details. This is a psychological trick the willing buyer plays on his or herself so that the decision can be rationalized by facts, not just feelings.  And in order for this process to take place, there must be what seems like high-level terminology in the mix.

Here are ten words or terms that are proven wallet-openers even if (or especially if) the potential customer has no idea what they mean:

10. Risk Parity – "Well, parity means balance, and risks should be balanced, so…okay!" This is a fancy way of talking about a portfolio allocation structured not by asset class weightings but by risk weightings. Since most of a portfolio's risks come from stocks, the typical risk parity strategy will own a higher proportion of bonds but will leverage them to amp up the yields or potential upside. This doesn't work so well when a portfolio's source of volatility switches from stocks to bonds themselves, but I don't want to ruin anyone's fantasies of reward without risk.

9. Delta-hedging – "Yes, sir. I definitely want all my deltas to be hedged. Gotta be careful with those deltas." Delta, in this case, can be described as the difference between the expected value of a security from its actual value in the markets. When a corporation issues warrants, convertible bonds, preferreds and stocks, there will often be mispricings between how these securities relate to each other, aka deltas, which can be hedged by selling one instrument against a long position in another. This is big boy stuff, for pros only. If this is what you think is necessary for your retirement portfolio, you're probably already in big trouble.

8. Smart Beta – "Duh, if it's smart, it's gotta be better than that plain old dumb beta. More please!" There's not really any such thing as "smart" beta, there is just beta (raw market performance). But there are smarter ways to index a portfolio which do outperform raw market performance – passive portfolios consisting of higher book-to-market value, higher earnings growth, etc typically crush a traditional cap-weighted index over decades. This so-called "smart" style of indexing typically works well thanks to the small-cap and value bias present whenever one uses factors to weight stocks as opposed to just "who has the highest valuation" like the S&P 500. But it can cost more than it's worth – and it usually does.

7. Institutional-class – "Not too shabby! Look at me moving up the world! I'm institutional-class now!" This is the investment biz equivalent of putting a wristband on a girl at the club and having the bouncer walk her behind the velvet ropes of the VIP section. Bottle service begins and the aphrodisiac properties of exclusivity  take effect immediately.

6. Absolute Return – "F*ck yeah I absolutely want returns! Absolutely!" Benchmark-agnostic strategies that seek to gain no matter what the markets are doing around them are highly popular in a flat- to down-tape. Try talking someone off the ledge, however, when you've only made them 7% on an absolute returns strategy while the S&P is galloping up 10% a quarter.

5. Upside Capture – "Yes! I want to capture upside! Daddy! Mummy! I want it now! Capture it for me!" Unfortunately, the term  typically refers to the fact that the strategy is not getting all of the potential gains a given market has to offer, it is only seeking to capture a portion of the upside. Which is fine, but don't think of the wordcapture as having an aggressive connotation in this context.

4. Uncorrelated – "Yay! Uncorrelated! I've always been worried about my correlations." Well, fine, diversification is great, and having assets that do not necessarily move together is what proper portfolio construction is all about. But lest we forget, nobody wants to be uncorrelated to a bull market, number one. And number two, in a panic – a la 2008 – everything you once thought was uncorrelated becomes re-correlated in a hurry. Stocks, bonds, large, small, sovereign, corporate, international, domestic, commodities, VC, PE, etc. Non-correlation can't always shield you from the worst the market has to offer.

3. Market-Neutral – "Yes! Neutralize my enemies for me, BlackRock!" Be careful what you wish for, are you absolutely certain you want to be neutrally-postured against a market that goes up on an annual basis 75% of the time? Do you want a net-zero exposure to a market that has never had a single rolling twenty-year period of negative returns? This type of thing may make sense for an institutional investment mandate carrying hyper-specific objectives, but does that characterize your situation?

2. Tail Risk Protection – "Hell yes I want my tail protected! Why wouldn't I?" Okay, great. Of course you do – everyone does, especially on the heels of a huge crisis. But the key to keep in mind is that these types of major adverse events rarely occur in close proximity to each other, even though the Recency Effect makes everyone feel as though "the next shoe to drop" is just around the corner. So ask yourself how much opportunity cost is involved with protecting that tail, and how much actual cost? Are you expending hundreds and hundreds of basis points each year on long-dated put options and eating into your potential upside?

1. Intrinsic – "Oooooooooo, intriiiiiinsiiiiic…" The word intrinsic is, as Kenny Powers would say, the ultimate panty-dropper. Nine out of ten investors don't know what the word intrinsic means but twelve out of ten are impressed if it appears in the name or description of a fund or strategy. The actual definition, when used in concert with a word like value, means that the truth worth of a given thing is embedded within that thing, the implication being that it will eventually be brought out. For example, despite the gooky makeup and horrible clothing Charlize Theron wore to play a female truckstop serial killer in the 2003 film 'Monster', there is an intrinsic hotness that she possesses, which was virtually impossible to disguise.

I'll tell you the single most intrinsic aspect of investing – one that cannot be disguised for long by any fancy jargon or technical terminology: The less you do, and the less it costs you to do it, the better off you are. Not just financially, but mentally and spiritually as well.

Demand-driven inflation remains elusive in Japan

Demand-driven inflation remains elusive in Japan

Courtesy of Sober Look

Japan's National Statistics Bureau published the latest inflation figures last week. As expected, prices continue to rise, presumably lifting the nation from its prolonged cycle of deflationary pressures.
 

Source: Statistics Bureau

But as discussed earlier, prices are generally not rising due to stronger domestic demand – which is what the nation really needs. Instead a large portion of price increases is generated by weaker yen and costlier imports. And that could undermine consumer confidence.

Reuters: – Some analysts expect core consumer inflation to exceed 1 percent by the end of this year mostly on rising energy and food prices. That may weigh on personal consumption, which would also feel the pain from an expected sales tax hike in April. 

"The rise in prices of daily necessities is negative for household sentiment and consumption," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute in Tokyo.

Source: Statistics Bureau

On the other hand prices on many domestically manufactured products (such as household appliances) as well as domestic services continue to fall.
 

Source: Statistics Bureau

The problem with domestic demand continues to be negative real wage growth. You can't have sustainable inflation without rising household incomes. And serious labor reform may be the only way to correct that trend (see post).

Reuters: – Economics Minister Akira Amari said it was too early to declare an end to deflation, stressing that wages and prices excluding energy costs had to rise more. 

"Japan is in the process of emerging from prolonged deflation," Amari told a news conference on Friday. 

"An exit from deflation will become distant if we're seeing cost-push inflation, wherewages aren't catching up with rising prices," he said.

SoberLook.com

Eurozone’s falling excess reserves – is another round of LTRO required?

Eurozone's falling excess reserves – is another round of LTRO required?

Courtesy of Sober Look

The euro area banking system excess reserves are continuing to decline – touching the lowest level since 2011.
 

Just to put this in perspective, the chart below shows excess reserves in the US. With the Fed continuing to pump liquidity into the system, these swelled above $2.3 trillion last week – a new record.
 

The reason the Eurozone reserves are declining has to do with the area's banks gradually repaying what they have borrowed from the Eurosystem via MRO and LTRO loans.
 

Source: ECB

Some economists view this decline in excess reserves as an indication of tighter monetary conditions in the Eurozone. They point to weak consumer credit growth and a severe contraction in corporate lending.
 

YoY change in loans to euro area households (source: ECB)

 

YoY change in loans to euro area companies (source: ECB)

A few economists have called for Mario Draghi to offer up another round of LTRO lending or lower the rates on MRO (short-term) loans in order to boost excess reserves. The thought is for the ECB to follow the Fed's and the BOJ's lead at the October meeting and expand its balance sheet.

Such action however is unlikely at the next meeting. Certainly if these declining excess reserves push up rates, the ECB will have to act. But the central bank does not have the Fed's dual mandate and is not as focused on the Eurozone's dangerously high unemployment levels. Instead Draghi will concentrate on forward guidance of maintaining low overnight rates for the foreseeable future. The ECB will want to keep the LTRO tool in its back-pocket in case the crisis flares up again. After all, there is a nonzero risk of the German Constitutional Court ruling against the OMT program (ECB's commitment to directly purchase government bonds of periphery nations). Other issues, such as political uncertainty in Italy (see post), could potentially reignite the crisis as well.

For now Draghi will want to see if the Eurozone's credit markets can begin to "heal" themselves. The members of the Governing Council are following a number of business surveys which seem to point to stabilization in the area periphery nations.
 

Source: Econoday

If however lending volumes do not show a visible improvement in the next few months, another LTRO program could be in the works at a later date.

Bloomberg: – Frederik Ducrozet, an economist at Credit Agricole CIB in Paris says an LTRO is unlikely until December. The central bank could boost its forward guidance by putting a definite end date for loans at a particular cost, by issuing an LTRO with a fixed rate, he said. The previous loans were charged at the average of the ECB benchmark over the maturity.

‘‘A properly-designed LTRO would have the potential to kill several birds with one stone by enhancing forward guidance, keeping excess liquidity higher for longer, and further boosting the use of collateral from small businesses,’’ Ducrozet said.

ECB officials including Executive Board member Benoit Coeure have played down the short-term likelihood of a new round of long-term loans, saying that while it remained an option, it hasn’t been specifically discussed. The ECB’s Governing Council convenes in Paris on Oct. 2 for its monthly rate-setting meeting.

SoberLook.com

Why We’re Ungovernable, Part 8: Washington Shuts Down, Rome Falls

Courtesy of John Rubino.

This week both Italy and the US saw their ruling coalitions splinter. First Italy:

Italy’s Coalition Teeters as Berlusconi Allies Walk Out

Italian Prime Minister Enrico Letta’s government teetered on the verge of collapse after allies of former leader Silvio Berlusconi, led by Deputy Premier Angelino Alfano, said they planned to quit the cabinet.

The nation’s leaders stopped short of dissolving the five-month-old administration, invoking procedure and scheduling a meeting between Letta and President Giorgio Napolitano today for about 6 p.m. in Rome.

Berlusconi, 77, said he will push for snap elections, while Letta plans a confidence vote in parliament on Oct. 1 or 2 to seek a new majority. Napolitano, 88, said dissolving parliament would be a last resort, Ansa reported.

Letta’s government has been torn apart by legal troubles facing Berlusconi, whose criminal tax-fraud conviction subjects him to expulsion proceedings in parliament. Letta needs 24 votes in the Senate to secure a new majority without Berlusconi, Corriere Della Sera reported. To do so, the premier must win over opposition lawmakers or convince members of Berlusconi’s People of Liberty party to abandon their leader.

“Everything suggests that the coalition is compromised,” Federico Santi, an analyst with Eurasia Group, said in an e-mail. “The most likely outcome is early elections, but the timing would be uncertain.”

Political turmoil has plagued Italy, the world’s third-biggest debtor after the U.S. and Japan, throughout the euro financial crisis. Markets have calmed since European Central Bank President Mario Draghi’s July 2012 promise to protect the single currency.

Berlusconi, forced out as prime minister in 2011, brought down his successor, Mario Monti, in December 2012. The fragmented parliament elected in February has been incapable of enacting a program to pull Italy from its two-year recession.

Now the US:

Republicans’ Shutdown Fight Exposes Simmering Civil War

An intraparty tug-of-war, largely confined to campaign primaries during the past three years, is exposed on the national stage as Republicans challenge each other on tactics as a government shutdown looms, coming as early as tomorrow.

“The circus created the past few days isn’t reflective of mainstream Republicans — it projects an image of not being reasonable. The vast majority of Republicans are pretty level-headed and are here to govern,” said Representative Michael Grimm, a New York Republican.

“This is a moment in history for our party to, once and for all, put everything on the table. But at some point we’re going to come together and unify,” Grimm said, adding that the “far-right faction” of the party “represents 15 percent of the country, but they’re trying to control the entire debate.”

It’s a civil war that has beset the party before, as base activists grow impatient with established leaders they claim have grown complacent in the anti-government fight. The results can be unpredictable, perhaps more so this time given that it’s taking place 13 months before the next election.

Goldwater ’64

The rise of Barry Goldwater in 1964 as the Republican presidential nominee ended in the landslide election of Democratic President Lyndon Johnson. A revolt led by Newt Gingrich, then a Georgia congressman, culminated in the 1994 Republican takeover of the U.S. after 40 years in the minority.

Gingrich, who became House speaker, and his majority prompted the 1995-96 partial government shutdowns, which dimmed the party’s approval ratings and fueled the re-election of President Bill Clinton.

“This is a battle that has been under way slowly since 2010 and is now coming to a head,” said David Redlawsk, a political science professor at Rutgers University in New Brunswick, New Jersey. “This is part of a bigger question about what that party is going to be. That may have major repercussions in another year.”

The fight in Congress today is between members who want to avoid the fate of Gingrich’s majority and those convinced that conditions have changed to their advantage.

Health Law

“I’ve been elected to fight for the people back home, wherever that takes us,” said Representative Mark Meadows, a North Carolina Republican. “We’re united in our efforts to do all we can to avert a shutdown. We’re trying to offer a compromise.” Meadows said the health-care law “is not ready for prime time.”

The tactics of a group of Republicans are causing angst among some established party leaders and fundraisers who worry that the infighting is obscuring what could otherwise be a winning political moment.

Fundraiser’s Concern

“I fully understand where the Tea Party and like-minded people are coming from, that Obamacare is a tragically flawed law and it’s not good for the country, but I would also have to add that shutting down the government is not a good for the country,” said Fred Malek, a Republican fundraiser.

High Stakes

House Speaker John Boehner of Ohio has less pressure to exert on members than outside groups urging confrontation, Schnur added. “Boehner can take away a committee assignment — these groups can take away their jobs,” Schnur said.

Keith Appell, a consultant whose clients include Tea Party-aligned groups, said “if they cave again they’re looking at multiple primaries in the spring and their base sitting home in the fall, in a base election. Caving is not an option.”

 

Some thoughts
From a US point of view, it might seem a little insulting to be compared to Italy’s corrupt old-world dystopia. But our situations are actually pretty similar. Italy is just further along.

Once a country settles on a dominant ideology like socialism or militarism, the major parties lose the ability to hold their internal coalitions together because their ideas and beliefs don’t differ meaningfully from those of other major parties. So the factions inside each big party that don’t like the dominant theme splinter off into smaller, sometimes highly-eccentric parties. Each election then becomes an exercise in rebuilding the old coalition.

That’s Italy’s current situation (but not just Italy’s; see what’s happening in Germany). All the major parties pretty much agree that the government should do everything and control everyone, so there are numerous smaller parties built around peripheral issues. The coalition building takes place between rather than within parties, as the most popular party tries to attract enough smaller groups to make a functional majority. When this fails, the government falls. It doesn’t matter why the Italians are arguing (I don’t actually know an am sure it’s trivial). The point is that their disagreement can collapse the government.

In the US, because the two big parties still appear to represent different worldviews and policies, the various subgroups (lawyers, public sector workers, military personnel, libertarians, businesspeople, immigrants, etc.) mostly remain inside one party or the other. But as the two parties coalesce around a single set of policies that include ever-higher government spending, never-ending foreign intervention, and unlimited domestic spying, big sections of the Republican coalition are increasingly appalled at what they’re being asked to sign off on.

Libertarians, for instance, are being asked to allow the government to borrow trillions of dollars more – when they don’t believe in government borrowing as a concept – to fund a range of domestic and foreign policies that in their opinion shouldn’t exist in the first place. Religious conservatives, meanwhile, are being asked to fund a health care law with provisions they find offensive along with a growing list of other disturbing social and economic policies.

Each group has begun to wonder if keeping the big tent standing is worth the price. It appears that a significant part of the House of Representatives has decided that it’s not and has, in effect, withdrawn from the party and decided to force the government to live within its means.

So in effect the US is going through something very similar to Italy, where a crucial part of the governing coalition has taken its ball and gone home. But the Italians have the advantage of being used to dealing with coalitions that dissolve and re-coalesce every few years. For the US this might be uncharted territory, and while it will no doubt be resolved in favor of the dominant set of policies, it will be repeated, with ever-greater amplitude, until the republican party fragments and the libertarians, Tea Partiers and fundamentalists form smaller parties in which they’re comfortable.

The same thing will happen to the democrats as soon as they’re out of power, when those in favor of the surveillance state and those against it realize that their differences are fundamental and irreconcilable.

This sets the stage for a “freedom coalition” that will make US politics interesting again.

 

The previous articles in this series can be found here:

Why We’re Ungovernable

Why We’re Ungovernable, Part 2: Battle Lines

Why We’re Ungovernable, Part 3: Gridlock and the Fiscal Cliff

Why We’re Ungovernable, Part 4: Hollande’s Short Honeymoon

Why We’re Ungovernable, Part 5: Japan Would Be Manageable If Only

Why We’re Ungovernable, Part 6: Here Comes the Debt Ceiling

Why We’re Ungovernable, Part 7: Italy Does Chaos With Style

 

 

Visit John’s Dollar Collapse blog here >

Record $217 Billion Corporate Bond Issuance in September; Verizon Leads the Way With Largest Bond Deal Ever at $49 Billion

Courtesy of Mish.

Corporations are scrambling to raise cash to complete buyouts or simply because they can. Barron’s reports September Sees Record $217 Bln Corporate Bond Issuance

September isn’t completely finished just yet and it’s already produced a record $217 billion in U.S. corporate bond issuance, an 18% bump from the previous single-month record, according to Janney Montgomery Scott. The secondary market fed off the activity of the primary market, translating to $394 billion in total trading, about 70% of which was in investment grade credits.

Five days ago Bloomberg reported Verizon and Sprint Lead Record Month for U.S. Bond Issuance.

Sales of corporate bonds in the U.S. reached an all-time high this month, with phone companies Verizon Communications Inc. and Sprint Corp. leading offerings of about $193.7 billion.

Verizon issued $49 billion on Sept. 11 in the biggest corporate bond deal ever while Overland Park, Kansas-based Sprint raised $6.5 billion on Sept. 4 in the largest high-yield sale since 2008, according to data compiled by Bloomberg. Offerings broke the previous monthly record of $177.3 billion set in September 2012.

Following the Fed’s surprise decision to leave the program untouched, yields on the Bank of America Merrill Lynch U.S. Corporate & High Yield Index dropped to a six-week low of 4.05 percent yesterday.

“Issuers are saying ‘let’s strike now because we have the wind at our back,’” Timothy Cox, executive director of debt capital markets at Mizuho Securities USA Inc. in New York, said in a telephone interview. “There’s no reason to wait.”

Yields from the most creditworthy to the riskiest U.S. borrowers declined from a 15-month high of 4.37 percent on Sept. 5, index data show. Yields touched an unprecedented low of 3.35 percent on May 2.

Largest Bond Deal Ever

Also consider Verizon Raises $49 Billion in Largest Corporate-Bond Sale.

Verizon Communications Inc. (VZ) sold $49 billion of bonds in eight parts in the biggest company debt offering ever.

The second-biggest U.S. telephone carrier issued fixed-rate debt with maturities ranging from three to 30 years as well as two portions of floating-rate securities, according to data compiled by Bloomberg.

The deal, which is about the size of all outstanding obligations of the Slovak Republic, is helping to fund New York-based Verizon’s buyout of partner Vodafone Group Plc. (VOD)’s 45 percent stake in the largest and most profitable U.S. wireless carrier, Verizon Wireless. The sale is more than double the previous issuance record of $17 billion from Apple Inc. sold in April.

The 30-year securities, the biggest corporate bond ever issued, traded as high as 107.6 cents on the dollar as of 1:12 p.m. in New York from an issue price of 99.883 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The bubble in corporate bonds is massive. And it’s one of the things that has helped lift the stock market as well.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com  

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Record $217 Corporate Bond Issuance in September; Verizon Leads the Way With Largest Bond Deal Ever at $49 Billion

Courtesy of Mish.

Corporations are scrambling to raise cash to complete buyouts or simply because they can. Barron’s reports September Sees Record $217 Bln Corporate Bond Issuance

September isn’t completely finished just yet and it’s already produced a record $217 billion in U.S. corporate bond issuance, an 18% bump from the previous single-month record, according to Janney Montgomery Scott. The secondary market fed off the activity of the primary market, translating to $394 billion in total trading, about 70% of which was in investment grade credits.

Five days ago Bloomberg reported Verizon to Sprint Lead Record Month for U.S. Bond Issuance.

Sales of corporate bonds in the U.S. reached an all-time high this month, with phone companies Verizon Communications Inc. and Sprint Corp. leading offerings of about $193.7 billion.

Verizon issued $49 billion on Sept. 11 in the biggest corporate bond deal ever while Overland Park, Kansas-based Sprint raised $6.5 billion on Sept. 4 in the largest high-yield sale since 2008, according to data compiled by Bloomberg. Offerings broke the previous monthly record of $177.3 billion set in September 2012.

Following the Fed’s surprise decision to leave the program untouched, yields on the Bank of America Merrill Lynch U.S. Corporate & High Yield Index dropped to a six-week low of 4.05 percent yesterday.

“Issuers are saying ‘let’s strike now because we have the wind at our back,’” Timothy Cox, executive director of debt capital markets at Mizuho Securities USA Inc. in New York, said in a telephone interview. “There’s no reason to wait.”

Yields from the most creditworthy to the riskiest U.S. borrowers declined from a 15-month high of 4.37 percent on Sept. 5, index data show. Yields touched an unprecedented low of 3.35 percent on May 2.

Largest Bond Deal Ever

Also consider Verizon Raises $49 Billion in Largest Corporate-Bond Sale.

Verizon Communications Inc. (VZ) sold $49 billion of bonds in eight parts in the biggest company debt offering ever.

The second-biggest U.S. telephone carrier issued fixed-rate debt with maturities ranging from three to 30 years as well as two portions of floating-rate securities, according to data compiled by Bloomberg.

The deal, which is about the size of all outstanding obligations of the Slovak Republic, is helping to fund New York-based Verizon’s buyout of partner Vodafone Group Plc. (VOD)’s 45 percent stake in the largest and most profitable U.S. wireless carrier, Verizon Wireless. The sale is more than double the previous issuance record of $17 billion from Apple Inc. sold in April.

The 30-year securities, the biggest corporate bond ever issued, traded as high as 107.6 cents on the dollar as of 1:12 p.m. in New York from an issue price of 99.883 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The bubble in corporate bonds is massive. And it’s one of the things that has helped lift the stock market as well.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com  

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CSX Corp: Weighing Efficiency Against Risks

Courtesy of www.fastgraphs.com.

In true monopoly board game fashion, CSX Corporation (CSX) – based in Jacksonville, FL – is one of the nation’s leading transportation suppliers.  Operating about 21,000 railroad miles in 23 eastern states and Canada, CSX has access to over 70 ports along the Atlantic and Gulf Coasts. In turn, roughly two-thirds of the American population lives within CSX’s operating territory.

It should be relatively apparent that a railroad possesses significant barriers to entry – after all, you or I couldn’t just start a rail business overnight; even if we already owned strings of multi-state real estate.  However, if a potential investment notion for CSX isn’t readily observable yet, perhaps the following example will hit you like a ton of bricks.

On CSX’s website you can find a “Carbon Calculator” which provides a comparison between CSX trains and the applicable alternatives. For instance, if you wanted to move 10,000 tons of bricks from Columbus, OH to Jacksonville, FL (a 904 mile trek) it would take 127 rail cars and release 216 tons of CO2 emissions to transport the shipment. Which, when taken out of context, seems like pretty large figures.

However, the calculator also compares these numbers to a comparable shipment using an alternative source. For instance, CSX indicates that this same shipment would have taken 714 trucks to complete, all-the-while emitting 939 tons of CO2 emissions; or approximately 723 more tons of CO2 emissions. Said differently, the emissions savings is the equivalent to the yearly electricity use of 80 homes, 140 acres of pine forests absorbing carbon or the gas emissions for 129 passenger vehicles for the year. Even if you’re not an environmentalist, it isn’t difficult to identify a substantial advantage.

Of course this environmental moat also carries over to the financial side of things as well. Railroads provide the lowest cost option amongst shipments without waterway connections, not to mention their considerable fuel-efficiency benefit over trucks. Further, the probability of increased competition is unlikely at best – replicating the current systems is near impossible.

Yet that’s not to say that CSX doesn’t come without risks. For one thing, railroads require huge yearly capital expenditures. It is true that they’re not ripping up the tracks every few years, but simply maintaining them is surely burdensome. Beyond that railroads are subject to the swings of the economy. For CSX this means concerns about coal demand and being able to adjust to an intermodal model. In addition to the basic throws of the business, railroads also face two somewhat unique obstacles: natural disasters and regulation. Taken collectively, CSX faces perhaps as many risks as opportunities. Yet given its quasi-monopolistic nature with few competitors and strong efficiency, this railroad might still provide an interesting investment thesis.

10 Years of Growth

CSX has grown earnings (orange line) at a compound rate of 18.8% since 2004, resulting in a 26+ billion dollar market cap. In addition, CSX’s earnings have risen from $0.35 per share in 2004, to today’s forecasted earnings per share of approximately $1.80 for 2013.  Further, CSX has been paying a steady dividend (pink line) and has been able to increase this payout for that last 9 years.

For a look at how the market has historically valued CSX, see the relationship between the price (black line) and earnings of the company as seen on the Earnings and Price Correlated F.A.S.T. Graph below.

Here we see that CSX’s market price previously began to deviate from its justified earnings growth; starting to become undervalued during the most recent recession and coming back to fair value a year or two later. Today, CSX appears undervalued in relation to both its historical earnings and relative valuation.

In tandem with the strong earnings growth, CSX shareholders have enjoyed a compound annual return of 17.4% which correlates closely with the 18.8% growth rate in earnings per share. A hypothetical $10,000 investment in CSX Corp on 12/31/2003 would have grown to a total value of $47,715.87, without reinvesting dividends. Said differently, CSX shareholders have enjoyed total returns that were roughly 3 times the value that would have been achieved by investing in the S&P 500 over the same time period. It’s also interesting to note that an investor would have received approximately 2.6 times the amount of dividend income as the index as well. 

But of course – as the saying goes – past performance does not guarantee future results. Thus while a strong operating history provides a fundamental platform for evaluating a company, it does not by itself indicate a buy or sell decision. Instead an investor must have an understanding of the past while simultaneously thinking the investment through to its logical, if not understated, conclusion.

In the opening paragraphs a variety of opportunities and risks were described. It follows that the probabilities of these outcomes should be the guide for one’s investment focus.  Yet it is still useful to determine whether or not your predictions seem reasonable. 

Twenty-eight leading analysts reporting to Standard & Poor’s Capital IQ come to a consensus 5-year annual estimated grow rate for CSX of 10.7%. In addition, CSX is currently trading at a P/E of 14.4, which is inside the “value corridor” (defined by the orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, CSX’s valuation would be $44.97 at the end of 2018, which would be a 13.2% annualized rate of return including dividends. A graphical representation of this calculation can be seen in the Estimated Earnings and Return Calculator below.

Now it’s paramount to remember that this is simply a calculator. Specifically, the estimated total return is a default based on the consensus of the analysts following the stock. The consensus includes the long-term growth rate along with specific earnings estimates for the next two upcoming years. Further, the dividend payout ratio is presumed to stay the same and grow with earnings. Taken collectively, this graph provides a very strong baseline for how analysts are presently viewing this company. However, a F.A.S.T. Graphs subscriber is also able to change these estimates to fit their own thesis or scenario analysis.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk treasury bonds. Comparing an investment in CSX to an equal investment in a 10 year treasury bond, illustrates that CSX expected earnings would be 4.3 times that of the 10 Year T-Bond Interest. This comparison can be seen in the 10-year Earnings Yield Estimate table below.

Finally, it’s important to underscore the idea that all companies derive their underlying value from the cash flows (earnings) that they are capable of generating for their owners. Therefore, it should be the expectation of a prudent investor that – in the long-run – the likely future earnings of a company justify the price you pay. Fundamentally, this means appropriately addressing these two questions: “in what should I invest?” and “at what time?” In viewing the past history and future prospects of CSX we have learned that it appears to be a strong company with reasonable upcoming opportunities. However, as always, we recommend that the reader conduct his or her own thorough due diligence.

Disclosure:  No position at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. 

Please click here to read more articles at FastGraphs.com.

Buying VMI on Weakness

Buying VMI on Weakness

By Dr. Paul Price of Market Shadows 

We took advantage of a five-day pullback and added 28 shares of Valmont Industries (VMI) to our Virtual Value Portfolio late today.

Our cash reserves and open positions now reflect this new addition to our portfolio. See full details here. 

Screen Shot 2013-09-30 at 3.28.13 PM

Here are comments that were previously made, added to this new post:

To Paul from Brian:

Why would you choose not to add to the March 14 135 PUT for $7 (bid price. Mark is $8.4 if we could get that) at this point? With the current PUT you have, in the worst case scenario the basis could be lowered to $128.40.

Or do you mainly want to take advantage of the dip?

Thanks,
Brian M

To Brian from Paul:

This portfolio is strictly a [virtual] long-only, stock and cash account.
I missed getting shares of VMI in this portfolio when it came down about a month ago. I did not want to miss a second chance to own the shares outright.

Market Shadows’ Put Selling portfolio already is short one contract for the VMI March expiration date. Exposure to two contracts would make us too unbalanced versus our other put positions due to VMI’s high absolute share price.

 

Daily Reading

What's Going On In The Financial Markets?

"October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February." Mark Twain

Is October particularly treacherous? Not really.  In October: Into the Wild, Joshua Brown shows that October is a wild, highly volatile months. Besides being a good month for crashes, it is often a bear-killer. And as Joshua notes, "For shorter-term traders, October should offer some phenomenal opportunities to trade the vol they've been denied for so long. "

Speaking of volatility, John Rubino suggest buying it, if you're a trader and want some action. In Time to Buy Volatility, Again, he notes he likes VXX as a simple way to play a spike in volatility. 

King World News interviews James Grant.  James laments that the Fed ignores the old saying "silence is golden" and notes that the Fed members can't stop talking–to the detriment of investors, the Fed's credibility and to our paper and faith-based monetary system. 

John Hussman argues that the stock market is not only overpriced but at the richest 1% levels seen since the late-1990’s market bubble. That makes those of us invested in equities "Sitting Ducks."

Bill Boner at Acting Man asks investors if they're feeling lucky: "Gamblers do not walk away from 100%-a-year gains. They stay at the table… and go right to the end… from the blow-off to the blow-up." Are you ready?

Also at Acting Man discusses Italy's mounting woes in Italy Comes Back into Focus. The situation is currently relatively tranquil but it might not take much to become quite unpleasant.

For more on Italy, Mish Shedlock writes about the upcoming vote in Berlusconi Faces Party Revolt; Collapse of Italian Government Hangs in Balance; Rush For Votes is On.

Lee Adler makes the case that the housing bubble is not ready to pop in More Housing Data Says Bubble Will Rage On, Fed Will Never Learn. ZIRP (Zero Interest Rate Policy) is constraining supply because the low interest rates decrease selling incentive. According to Lee, "The first signs that the price rise is coming to an end will be a drop in sales volume or a material increase in supply, or both."

redfinprice

 (Chart by Lee Adler)

 

Berlusconi Faces Party Revolt; Collapse of Italian Government Hangs in Balance; Rush For Votes is On

Courtesy of Mish.

Late last week, former prime minister Silvio Berlusconi ordered five ministers to resign from Italy’s government. They did, and as a result, current prime minister Enrico Letta’s coalition government is on the verge of collapse.

Mr Berlusconi, leader of the centre-right Forza Italia party, said the resignations were a response to the government’s decision on Friday to increase in sales tax from next month.

Mr Letta, prime minister, rejected Mr Berlusconi’s explanation as an “enormous lie”, and called the decision “mad and irresponsible and aimed exclusively at covering up his personal affairs” – a reference to Mr Berlusconi’s criminal conviction for tax fraud which is likely to lead to a ban on holding public office.

Beppe Grillo, the comic-activist leader of the movement, who has ruled out supporting a government led by the Democrats, on Saturday night called for snap elections. But his autocratic style of leadership and a purge of several parliamentarians who refused to toe Mr Grillo’s line have fuelled speculation that the Democrats might just be able to put the numbers together to form an alternative majority, including centrists led by former prime minister Mario Monti. Equally it is not clear whether all Mr Berlusconi’s MPs will remain loyal to their billionaire leader of the past two decades who turns 77 this weekend and is facing a year of house arrest or performing community service.

Mr Napolitano, who holds the constitutional power to dissolve parliament, has repeatedly expressed his opposition to holding snap elections. But if Mr Letta’s government were to fall and no alternative majority was in sight, then Italy could be faced with the unprecedented and extremely worrying prospect of staging elections before the end of the year at the risk of derailing the 2014 budget.

Rush For Votes is On

Today the rush for votes is on. Berlusconi, who has a long history of winning close votes may have overplayed his hand this time and Berlusconi faces party revolt over coalition collapse.

“Who is not with me is out,” declared a headline in Monday’s Il Giornale, a Milan daily owned by the Berlusconi family, as the former prime minister arrived in Rome to ensure party unity ahead of a crucial senate vote expected late on Wednesday.

The numbers game has begun in earnest as Enrico Letta, centre-left prime minister, prepares to address both houses of parliament in a last-ditch effort to keep his government in office after Mr Berlusconi pulled his five ministers out of their five-month-old coalition at the weekend.

Mr Letta’s Democrats control the lower house but alone they are 54 votes short of an absolute majority in the senate following last February’s deadlocked elections. With the likely support of leftist allies, four recently appointed life senators and 20 centrists led by former prime minister Mario Monti, that deficit is reduced to a dozen or so.

Mr Letta is openly banking on wooing disaffected members of Mr Berlusconi’s Forza Italia party after all five ministers perfunctorily ordered to resign by Mr Berlusconi publicly expressed their misgivings and then slammed Il Giornale for running a front-page editorial that came close to accusing them of betrayal.

Although few doubt Mr Berlusconi’s powers of persuasion and his tenacity, the prospect of their 77-year-old leader being banned from holding public office and serving one year under house arrest, or performing community service, has reinforced the sense that the centre-right is entering a post-Berlusconi era.

The nannycrats in Brussels do not want snap elections because it opens up all kinds of budget battles.

The vote is going to be close. And the closer it is, the more pressure president Napolitano will apply on a few holdouts to sway the election.

Italy 10-Year Bond Yield

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The Accumulation of Phantom Wealth

Retirement Nightmare

Courtesy of , Acting Man

It is widely known that Americans on average have saved very little, and in many cases actually nothing, for their retirement. Here are a few examples of studies looking at retirement savings: one recent study found that 50% of US citizens have saved precisely zero for their retirement. We quote:

“The youngest and the poorest are the least likely to be putting money aside. Fifty-six percent of all 18- to 34-year-olds are not saving at all for retirement, according to the study. In addition, just 23 percent of Americans earning less than $50,000 per year contributed at least $2,500 to their retirement accounts over the past year.

[…]

At the same time, many younger Americans simply cannot afford to start saving for retirement. Just one in two recent college graduates have full-time jobs, according to a study by Rutgers released on Thursday. And the average debt burden of twenty-somethings is $45,000, according to a recent study by PNC Bank.

That financial insecurity lasts throughout the lives of many. Forty-three percent of all American households are one crisis away from poverty, according to a recent study — meaning saving for retirement is all but impossible.”

It is of course not particularly surprising that the poorest strata of society are the ones that find it nigh impossible to accumulate savings. They are the main victims of the incessant monetary inflation practiced in the modern-day fiat money regime (it is therefore rather mystifying that it is the political left that is usually most vocal in pleading for more inflation by the Fed; this can probably be ascribed to economic ignorance). These are the people who are the last to receive newly created money (if they receive it at all), by which time prices have already been bid up. They cannot profit from asset inflation, as they don't own any assets to begin with. As a result, they keep losing ground in real terms. In fact, it is a good bet that the percentage of the population that actually profits from inflation is exceedingly small – likely no more than 5% to 10%. Ironically it is also the group that needs these profits the least, since it is already the richest stratum of society.

Another study notes:

“A new report paints a rather grim assessment of how prepared we are for retirement. "The Retirement Savings Crisis: Is it Worse Than We Think?" from the Washington, D.C.-based National Institute on Retirement Security, says the typical American family has only "a few thousand dollars" saved for retirement.

"We have millions of Americans who have nothing saved for retirement," says Diane Oakley, executive director of the NIRS. "We have 38 million working-age households who do not have any retirement assets."

For people 10 years away from retirement, the median savings is $12,000. "Of the people between 55 and 64, one third haven't saved anything for retirement," Oakley says.

Bankrate conducts a regular survey asking Americans about their personal 'financial security', and its results are not particularly encouraging either. The financial security index is just about at the 100 level which is the demarcation between declining and increasing financial security:

Aug2013FinSecIndex

Bankrate's financial security index is declining again after briefly popping above the 100 level for a few months this year – via Bankrate.

We know of course that this sorry state of affairs is not exactly big news. The reason why we mention it is because it is such a contrast to what other statistics claim about the wealth of the citizenry and the economy's ability to produce wealth.

Orwellian Statistics

Even while the above plays out and many observers note that the government's unfunded liabilities are somewhere in the stratosphere, which means that people without savings will have to rely on a social security system that may become insolvent in a not too distant future, the government regularly reports that things are not just perfectly fine, but getting better.

It does so by regularly altering the statistics it publishes, allegedly to add to their precision. According to these 'more precise' statistics, there haven't been any noteworthy price increases for decades, in spite of the money supply growing by more than 1,000% over the past 30 years, and data describing economic output are continually altered to show how everything is getting better and better by putting a monetary value on things that actually have no market price. There are for instance 'imputations': as an example, banks charge no fees for checking accounts in order to attract customers. These fees that are not charged, are then added to 'income' by the government, by assigning an imaginary dollar value to them.

When the government recently altered GDP calculations, which resulted in the addition of the economic output of all of Belgium to US GDP, it started counting a number of intangibles as well. Some of these additions to output are truly absurd. For instance, pensions that companies are promising to pay in the future are now added to GDP. No-one knows if they will ever be paid of course, since companies can go bankrupt, can alter their pension plans, and are in any event lugging grievously underfunded pension plans around (estimates vary, but all the numbers are in the trillions). A recent study found that in spite of the stock market rally, the underfunding problem has grown; the plans of S&P 500 companies alone  are underfunded by nearly $1.6 trillion:

“The cumulative liability among defined benefit pension plans sponsored by companies in the benchmark Standard and Poor's 500 index increased to $1.56 trillion in 2012 from $1.38 trillion the year before, outpacing the growth in assets.”

Moreover, what value to put on these promised future payments is attended by considerably uncertainty, as it is unknowable what the purchasing power of money will be at these future dates. Recall that the US money supply has grown by more than 230% since the year 2000 alone. The full impact on money's purchasing power very likely has yet to arrive.

We should note here that it is certainly true that 'R&D' has value (another item that is now added to GDP). An argument can certainly be made that intangible capital adds considerably to long term economic growth. Unless protected by patents, knowledge is a non-rivalrous good: it is free, like the air we breathe. And yet, its application in production processes can serve to increase output in the long run. In a way this is similar to the effect described by Hayek, who noted that investments in certain stages of the capital structure can also affect the returns in stages of the capital structure that produce complementary goods. However, the idea that any of this can be measured is crazy.

In fact, it seems to make no sense to add it to those things for which money prices are paid, and simply making up imaginary dollar values to do so. Not to mention the fact that what precisely is added in terms of imputations, R&D, or whatever other intangibles the government's statisticians have identified as worthy for inclusion, is completely arbitrary. The money prices that are paid for the products that have been produced with the help of both tangible and intangible capital already fully reflect the value buyers put on such goods or services. Why should additional numbers be made up out of whole cloth and be added on top?

When the government calculates the IT spending to be added to GDP, it employs hedonic indexing to determine the 'real' value of such spending. The result are imaginary numbers of stunning proportions. We illustrated the effect with an example in a previous post on the Reinhart-Rogoff study, in which we discussed in more detail what a nonsensical number GDP generally is. Let us quote the example again:

“In Q2 of 2003, actual spending on computers increased by $6.3 billion, from $$76.3 billion to $82.6 billion. If simply 'every monetary transaction' were added to GDP, then this is the number that would have been added, and thereafter it would have been massaged by the 'deflator'. If not for hedonic indexing, that is. Before we tell you, try to guess how big an increase in spending on computers the government actually added to GDP in this instance. Was it 20% larger? 30%? Maybe even 50%? Hold on to your hat.

The number added by government to GDP instead of the $6.3 billion in actual additional spending was $38.2 billion. In other words, almost $32 billion in completely imaginary money that no-one ever spent or received, with the total number used by the government amounting to more than 6 times the actual spending growth was used for the calculation of 'real GDP'. It should probably be renamed 'unreal GDP'.

One could easily throw a 'growth' party with such methods in the middle of a depression.” 

To some extent we can even understand the argument for hedonic indexing, which attempts to put a value on quality changes. But what these arithmetic acrobatics ultimately demonstrate is the complete futility of trying to generate meaningful aggregate economic statistics.

Giant Overnight Imaginary Wealth Creation

We have now learned that the government has decided that US citizens have actually become wealthier by $3 trillion overnight. Don't try to spend all that new-found wealth all at once though, unless you can find someone who accepts imaginary dollars for real goods. That is what you would have to accomplish if you wanted to actually spend it.

Via Zerohedge:

“As today's release of the Fed's very much revised Flow of Funds report confirmed, US households as of this moment are wealthier by over $3 trillion, just because the re-definition of the Pension Fund line item, which is no longer counted as "Reserves" but the broader "Entitlements."

End result: whereas Americans last quarter had net worth of $70.3 trillion, as a result of this revision, they now have $73.5 trillion. Revisionist Definition wealth for everyone!”

Apparently this addition of $3 trillion in imaginary wealth is a follow-on effect of the above discussed inclusion of the value of pension promises in GDP. The result is that the leverage of households now looks far smaller than it actually is.

Readers may have noticed that there has never been a change in definitions or statistical methodologies that is making things look worse. For instance, improvements in quality are counted – declines in quality never are. The effect of monetary inflation on prices has been defined away with so many tricks, that the measurement has become utterly meaningless for the vast bulk of the population (the price effects of inflation are different for different strata of society, depending on what goods they mainly spend their money). If the government were still using the same methodology to calculate 'consumer price inflation' it employed in the early 1980s, economists would now be discussing why we are in stagflation.

And so it is not surprising that mere promises are suddenly regarded as actual wealth. The only problem is that this wealth does not exist. This brings us back to the retirement savings problem. The problem with the aggregate of household assets and liabilities the Fed publishes is precisely that it is an aggregate – it contains the assets of the top few percent of the population that own the bulk of the wealth (and can thank the Fed profusely for helping it to attain this exalted position with its policy of constant inflation – which in yet another Orwellian twist has been misnamed the 'price stability policy').

For the remaining population this statistic is completely meaningless. It's only purpose as far as we can tell is to make the government's economic policies look better. We suspect that is the purpose of most of these statistical mirages that have been created over the years.

Interview with James Grant

Listen to an excellent interview with James Grant by King World News here >

Silence is golden. The Fed members, ignoring that rule, can't seem to stop talking. They cause risk and volatility. The Fed is ruining its own credibility and diminishing the faith in our paper-based, faith-based monetary system. 

Daily Reading

Daily Reading 

“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” Mark Twain

Is October particularly treacherous? Not really.  In October: Into the Wild, Joshua Brown shows that October is a wild, highly volatile months. Besides being a good month for crashes, it is often a bear-killer. And as Joshua notes, “For shorter-term traders, October should offer some phenomenal opportunities to trade the vol they’ve been denied for so long. “

Speaking of volatility, John Rubino suggest buying it, if you’re a trader and want some action. In Time to Buy Volatility, Again, he notes he likes VXX as a simple way to play a spike in volatility. 

King World News interviews James Grant.  James laments that the Fed ignores the old saying “silence is golden” and notes that the Fed members can’t stop talking–to the detriment of investors, the Fed’s credibility and to our paper and faith-based monetary system. 

John Hussman argues that the stock market is not only overpriced but at the richest 1% levels seen since the late-1990’s market bubble. That makes those of us invested in equities “Sitting Ducks.”

Bill Boner at Acting Man asks investors if they’re feeling lucky: “Gamblers do not walk away from 100%-a-year gains. They stay at the table… and go right to the end… from the blow-off to the blow-up.” Are you ready?

Also at Acting Man discusses Italy’s mounting woes in Italy Comes Back into Focus. The situation is currently relatively tranquil but it might not take much to become quite unpleasant.

For more on Italy, Mish Shedlock writes about the upcoming vote in Berlusconi Faces Party Revolt; Collapse of Italian Government Hangs in Balance; Rush For Votes is On.

Lee Adler makes the case that the housing bubble is not ready to pop in More Housing Data Says Bubble Will Rage On, Fed Will Never Learn. ZIRP (Zero Interest Rate Policy) is constraining supply because the low interest rates decrease selling incentive. According to Lee, “The first signs that the price rise is coming to an end will be a drop in sales volume or a material increase in supply, or both.”

redfinprice

 (Chart by Lee Adler)

 

The JP Morgan apologists of CNBC

CNBC cannot see beyond shareholder value in its evaluation of a CEO. Alex Pareen on CNBC brings up JPM's series of violations, enormous fines, and bad PR, and claims that JPM is simply too big in its current form to be well managed from all perspectives (not merely stock price). Defending Jamie Dimon, Maria Bartiromo makes fun of the NY Times and calls the government's enforcements of regulations a "witchhunt."  (Video below)

Joshua Brown: "Many TV journos live in a bubble with regard to Jamie Dimon. I believe this is because he's so charming, handsome and accomplished that it's impossible for them to see the size of the fines or the sheer quantity of the bank's transgressions."

The JP Morgan apologists of CNBC

I don’t know which producer at CNBC had the genius idea of asking Alex Pareene on to discuss Jamie Dimon with Dimon’s biggest cheerleaders, but the result was truly great television. What’s more, as Kevin Roose says, it illustrates “the divide between the finance media bubble and the normals” in an uncommonly stark and compelling manner.

The whole segment is well worth watching, but the tone is perfectly set at the very beginning:

Maria Bartiromo: Alex, to you first. Legal problems aside, JP Morgan remains one of the best, if not the best performing major bank in the world today. You believe the leader of that bank should step down?

Alex Pareene: I think that any time you’re looking at the greatest fine in the history of Wall Street regulation, it’s really worth asking should this guy stay in his job. In any other industry — I can’t think of another industry. If you managed a restaurant, and it got the biggest health department fine in the history of restaurants, no one would say “Yeah, but the restaurant’s making a lot of money. There’s only a little bit of poison in the food.”

This is a very strong point by Pareene — and it’s a point which was well taken by Barclays. When the UK bank was fined $450 million last year for its role in the Libor scandal, its CEO duly resigned. After all, a $450 million fine is prima facie evidence that the CEO really isn’t in control of his bank.

But $450 million is a rounding error with respect to the kind of fines that Dimon is now talking about paying — $4 billion, $11 billion, $20 billion, who knows where this will stop. Tim Fernholz has a good roundup of all the various things that JP Morgan is in trouble for; Libor manipulation is at #5 on his list of seven oustanding investigations — on top of another four settled investigations….

Keep reading here >

 

Does Wall Street Have Primary Dealers or Primary Stealers?

Courtesy of Pam Martens.

Maria Bartiromo, CNBC Host, On Meet the Press, September 15, 2013

On September 15, 2013, CNBC’s Maria Bartiromo appeared on NBC’s Meet the Press to reminisce on the five-year anniversary of the Wall Street crash. After host David Gregory remarked that only 14 percent of Americans had a positive view of Wall Street, Bartiromo donned her vintage Wall Street p.r. hat and reframed the problem:

Bartiromo: “We need to get beyond the conversation of is Wall Street evil, are the bankers evil and causing pain; and toward the conversation of, how do you create sustainable economic growth? That will answer the issue of inequality. Because with growth comes jobs.”

There are three structural reasons we can’t get past the conversation that Wall Street is evil — the first being that it is evil under its current form and the public is reminded of just how evil on a weekly basis with the revelation of its ever more ingenious crimes, like over-charging by 80 times for electricity, withholding aluminum off the market and driving up the price of canned beer and soda, or selling investments designed to fail to unwary investors.

An equal obstacle to changing the subject is that nothing in the Dodd-Frank financial reform legislation has slimmed down these banks or separated them from using insured deposits in their illegal wealth transfer schemes – moving wealth from our pockets to theirs. In fact, three of Wall Street’s worst actors, JPMorgan Chase, Bank of America, and Citigroup, now control a combined $2.539 trillion in domestic deposits in their FDIC insured subsidiaries, a stunning 41 percent of all 6,940 U.S. banks’ holdings.

Bartiromo’s simplistic platitude that job creation will repair the income and wealth gap in America ignores the structural monster of Wall Street: the mislabeled free market is itself the primary obstacle blocking any hope of leveling the playing field in terms of wealth creation, income equality, or economic growth.

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Who and What Are To Blame for Uncle Sam’s Imminent Shutdown?

Courtesy of Larry Doyle.

With the government mere hours away from an imminent shutdown, I commented over the weekend that a small proprietor would not run his hot dog stand in such a fashion.

Yet here we sit — with Uncle Sam sticking his mitt ever deeper into our pockets — faced with the prospect that the puppets in Washington on both sides of the aisle are incapable of managing our affairs not only to avoid a shutdown but to actually run things in a professional fashion.

So the questions beg: will Washington ever be able to regain a degree of statesmanship in running our country; are we to be faced with this same sort of pathetic gamesmanship every year; do they even really care? 

From my standpoint, the ongoing “game of political chicken” on display currently is indicative of a corrupted body politic and a nation in fiscal and political decline.

This may make for interesting political theater, but it is no way to run a country; although pols on both sides who line their own pockets with real and subtle payoffs find themselves conflicted when forced to address their lowest priorities, those being the interests of the general public.

Might the Dems in Congress offer to repeal their own special treatments/kickback/payoffs so as not to be subject to Obamacare as a means of averting this shutdown?

To those who visit here, I ask you, “Who and what are to blame for Uncle Sam’s imminent shutdown?”

Larry Doyle

Please pre-order a copy of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, that will be published by Palgrave Macmillan on January 7, 2014.

For those reading this via a syndicated outlet or receiving it via e-mail or another delivery, please visit the blog and comment on this piece of ‘sense on cents’.

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

Spain’s Retail Sales Fall 4.2%, 38 Consecutive Negative Months

Courtesy of Mish.

Somewhere along the line the economic situation in Spain will bottom, but there are no real signs yet that a recovery is underway.

Courtesy of El Confidencial, via translation, please consider Retail sales fell by 4.2% and totaling 38 months in negative

Retail trade sales fell by 4.2% in August compared with the same month in 2012, expanding by 2.5 points year July’s decline of 1.7%.  The National Statistics Institute (INE) reports  38 months of consecutive annual decreases.

Employment in the retail sector fell by 1.9% in the eighth month of the year, two percentage points less than in July, with declines in all modes of distribution. The largest decreases were scored small chains and department stores, where employment contracted by 4.7% and 3.7%, respectively.

Retail sales fell in August in 15 autonomous communities. The largest annual declines occurred in Castilla y León (-9.2%), Basque Country (-8%) and Aragon (-7.7%), while only Balearics managed to increase its sales, with increases of 3 , 2% and 2.7%, respectively.

Employment in retail trade decreased by 13 communities during the eighth month of 2013, mainly in Madrid (-5.7%), Castilla y Leon (-3.6%) and Murcia (-3.1%). The only the recorded progress Balearic Islands and Valencia, with increases of 1%, 0.9% and 0.7%, respectively, while La Rioja remained unchanged in their occupancy.

The Spanish government has been talking recovery for several months, so where is it?

Eventually there will be a positive month or more, but after this decline, it will hardly constitute “recovery”

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

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October: Into the Wild

October: Into the Wild

Courtesy of 

sickpumpkin[1]

If you've never before heard the below famous quote by Mark Twain, consider its almost supernatural prescience along with its sardonicism:

"October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February."

Twain said that a hundred years ago or so – far before it was actually true. Had he chosen to begin with October randomly? Or had T.H. White's Merlin and Archimedes zoomed backward past his epoch and whispered in his ear?

Either way, October is famous for being a wild month for stocks, some of the most historic crashes in history have taken place upon its playing field. Jeff Hirsch at Stock Trader's Almanac has the data (emphasis mine):

October has a dreadful history of market crashes such as in 1929, 1987, the 554-point drop on October 27, 1997, back-to-back massacres in 1978 and 1979, Friday the 13th in 1989 and the 733-point drop on October 15, 2008. During the week ending October 10, 2008, Dow lost 1,874.19 points (18.2%), the worst weekly decline in our database going back to 1901, in point and percentage terms.

But as much as we'd like to fret, we must also keep in mind that October has had the magical ability to serve as inflection point in times of market stress. Not that it applies this year, with our 20% S&P gain headed into the month, but in the 37 years between 1928 and 2011 in which the S&P ran into October negative on the year, they've turned around in all but 8 instances. Yes, October deserves it's reputation for being crashtastic – but it has also earned a rep as a time for turnarounds, too.

Here's the Almanac again: "But October has also been a turnaround month—a 'bear killer'. Twelve post-WWII bear markets have ended in October: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002 and 2011."

We don't know, of course, whether or not the market will end this October higher or lower, but we do know it to be the most volatile month of the year. CXO Advisory looked at seasonal patterns of volatility and put together this great chart encompassing the 1990-2011 period to demonstrate the spasmodic nature of the October Vix:

VIX-VIX-range-seasonality

And if October is normally volatile, this month should be no different, especially given the fiscal fight that's already underway. Despite the fact that history has shown the impact of these types of government flare-ups to be muted (chart here), this does not stop people from reacting.

Crash month, bear killer, last 30-day period before the "best six months" (Nov-April), month of volatility and of inflection points – call it what you will.

For shorter-term traders, October should offer some phenomenal opportunities to trade the vol they've been denied for so long. For investors, the key is to not mistake volatility for risk – a classic mistake made over and over again, an emotionally-driven cognitive blind-spot that is routinely exploited by the purveyors of expensive products on Wall Street.

Wild market action does not require wild investor re-action, in fact it is just the opposite that will most likely see us through.

Tesla: What Would Peter Lynch Say?

Courtesy of www.econmatters.com.

By EconMatters

Our post last night highlighting our view and what BofA thinks of Tesla (Nasdaq: TSLA) seems to have stirred up a fire storm of reader comments at Seeking Alpha (in case you missed our post, catch it here).  Then we thought it’d be interesting to see how Tesla would be valued via this Peter Lynch Chart below from Guru Focus.

Peter Lynch was the fund manager for the Magellan Fund of Fidelity Investments from 1977 to 1990. Under his management, Magellan’s asset went from $18 million in 1977 to $14 billion in 1990 averaging a 29.2% annual return.

In his book, “One Up on Wall Street“, Lynch detailed some techniques he used to find winning stocks:

“A quick way to tell if a stock is overpriced is to compare the price line to the earnings line. If you bought familiar growth companies…..when the stock price fell well below the earnings line, and sold them when the stock price rose dramatically above it, the changes are you’d do pretty well.”   

Peter Lynch Fair Value is calculated based on Lynch’s famous rule of thumb: He is willing to buy a growth company at a P/E multiple that is equal to its growth rate.  Since Tesla’s “beat expectation” earnings are still negative, the Peter Lynch Fair Value thus is a whopping -$31.5.

Ok, ’nuff said, no wonder institution investors are cashing out.    


Please click here to read more articles at EconMatters.

More Government Shutdown Hype

Courtesy of Mish.

The AP comments How budget showdowns could squeeze the US economy. The story is nearly all hype. Let’s take a look.

Q. What exactly will happen within the next days and weeks?

A. The most urgent deadline is for Congress and the White House to agree to keep funding the government after the current budget year ends Monday. Otherwise, some of the government would have to shut down. The House and Senate are considering bills to fund the government past the deadline. But House Republicans want to cut off funding for President Barack Obama’s health care law as a condition of passing the spending measure. Senate Democrats and the White House have balked. Unless one side essentially blinks, a partial shutdown of the government will occur.

Mish: That is accurate so far.

Q. What about the federal borrowing cap? First of all, what is it?

A. It’s a legal limit on how much debt the government can pile up. The government accumulates debt two ways: It borrows money from investors by issuing Treasurys. And it borrows from itself, mostly from Social Security revenue.

Mish: It’s important to note there is no social security fund whatsoever. Every penny and then some has been borrowed and spent. Here comes the hype.

Q. What if Congress can’t agree to raise the cap in time?

A. It could be disastrous. No longer authorized to borrow, the government would have to pay its bills only out of the revenue it gets from taxes and fees. This would force the government to immediately slash spending by 32 percent, the Bipartisan Policy Center estimates. Most analysts think the government would delay paying each day’s bills until it had accumulated enough money to pay them all.

Even worse, the government could miss interest payments on Treasurys, triggering a first-ever default by the U.S. government. U.S. Treasurys are held by banks, governments and individuals worldwide. Ultimately, a prolonged default could lead to a global financial crisis.

At the same time, Social Security and other benefit payments would be delayed. Government contractors might not be paid and would likely lay off workers. Paychecks for military personnel could be delayed.

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