Archives for September 2014

Bill Gross Quits PIMCO, Which He Co-Founded, Joining Janus

[ZH wonders if Gross's exit implies that El-Erian may be back as PIMCO's CEO.]

Submitted by Tyler Durden.

After co-founding PIMCO in 1971, Bill Gross has called it quits…


“I look forward to returning my full focus to the fixed income markets and investing, giving up many of the complexities that go with managing a large, complicated organization,” said Mr. Gross.

Janus stock is +20% on the news. 40% now!)


and PIMCO's parent Allianz is tumbling (dragging the DAX red)


and has crashed DAX

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Gross co-founded PIMCO in 1971…

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Full Statement:

William H. Gross Joins Janus Capital

Janus Capital Group Inc. (NYSE: JNS) today announced that William H. Gross, world-renowned fixed income investor, will be joining Janus Capital Group. He will manage a recently launched Janus Global Unconstrained Bond Fund and related strategies, and will join Myron Scholes, Ph.D., and other members of the Janus team focused on global asset allocation. Mr. Gross’ employment will be effective September 29, 2014 and he will begin managing the Janus Global Unconstrained Bond Fund and related strategies effective October 6, 2014.

Mr. Gross will be based in a new Janus office to be established in Newport Beach, California and will be responsible for building-out the firm’s efforts in global macro fixed income strategies. His concentration on such strategies will be separate and complementary to Janus’ existing and highly successful credit-based fixed income platform, built under the leadership of Janus’ Fixed Income Chief Investment Officer, Gibson Smith.

“Bill Gross has an exemplary track record with decades of success and he will offer an exceptional approach to navigating today’s increasingly risky markets with a focus on macro, unconstrained strategies. His involvement provides Janus a unique opportunity to offer strategies and products that are highly complementary to those already managed by our credit-based fixed income team,” said Richard M. Weil, Chief Executive Officer of Janus Capital Group. “With Bill leading our global macro efforts and Gibson our credit-based fixed income team, I am confident Janus will be able to meet the needs of virtually any client.”

“I look forward to returning my full focus to the fixed income markets and investing, giving up many of the complexities that go with managing a large, complicated organization,” said Mr. Gross. “I chose Janus as my next home because of my long standing relationship with and respect for CEO Dick Weil and my desire to get back to spending the bulk of my day managing client assets. I look forward to a mutually supportive partnership with Fixed Income CIO Gibson Smith and his team; they have delivered excellent results across their strategies, which deserve more attention.”

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Attributable to Dick Weil, Janus Chief Executive Officer

We are extremely proud to welcome Bill Gross, an investment industry icon, to Janus. His  arrival at Janus will provide the firm with a very unique opportunity to offer global macro fixed income strategies and products that are highly complementary to the very successful credit-driven fixed income franchise that we have built out over the last decade under the leadership of Gibson Smith. In fact, we are pleased that investors will have immediate access to Bill’s expertise as he takes the reigns of the recently launched Janus Global Unconstrained Bond Fund. Additionally, as we continue to address the needs of our clients, Bill will join Nobel Laureate Myron Scholes, Ph.D., Ashwin Alankar, Ph.D., and other members of the Janus team focused on the expansion of our global asset allocation business.  Today’s announcement is another major step forward in our efforts to attract the most sophisticated and proven talent in order to meet the real and evolving needs of our clients.

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Bill Gross Statement:

"For most of my career, I have been privileged to be associated with one of the most successful investment management firms ever — Pacific Investment Management Company (PIMCO). Today, with a mixture of excitement and sadness, I am announcing that I have decided to join Janus Capital Group and end my association with PIMCO. It was not without great thought and deliberation over quite some time that I decided to begin this next chapter. During my time at PIMCO we accomplished a great deal, managing now over 2 trillion dollars of global assets with a track record of very significant value added that has generated tens of billions of dollars to individual, corporate, and sovereign client portfolios. But now, after having spent considerable time serving in senior management, it is a time for me to reduce executive and people management responsibilities at a larger firm and focus on the pure aspects of portfolio management at a smaller one. Janus is the right fit at the right time in my career – and my life.

I am honored to be welcomed by Janus Capital Group, which is headed by former PIMCO managing director/COO Dick Weil. At Janus, in a new Newport Beach office, a simpler yet still intense career lies ahead of me to be able to assist individuals and other investors in their needs for above market returns in an increasingly risky market environment. In particular, I greatly respect the fixed income investment philosophy of Janus, which is consistent with my belief: value added consistent with the protection of principal.

I have been fortunate to have had a great run at PIMCO, and I am looking forward to be able to continue this run with Janus.

I sincerely wish all of my friends and associates at PIMCO much future success. It has been an honor to have worked at PIMCO these many years."

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Let's hope Gross' timing is not this bad…

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How long before El-Erian is back as CEO?


Carmen Segarra: Secretly Tape Recorded Goldman and New York Fed

Courtesy of Pam Martens.

The Trading Desk at the New York Fed Has Speed Dials to Wall Street Firms and Bloomberg Terminals

The Trading Desk at the New York Fed Has Speed Dials to Wall Street Firms (Photo from Educational Video Released by the Federal Reserve)

Jake Bernstein has a financial blockbuster up today at ProPublica on the secret tape recordings made inside the New York Fed and Goldman Sachs by bank examiner turned whistleblower, Carmen Segarra, who was fired by the New York Fed after she refused to change her examination findings on Goldman Sachs.

Segarra is one gutsy bank examiner and lawyer: according to the article, she went to the Spy Store, bought a tiny microphone, and proceeded to tape record two of the most powerful financial institutions in the world — 46 hours worth of tapes.

Read our past coverage of the Carmen Segarra story and the deeply conflicted New York Fed at these links:

Blowing the Whistle on the New York Fed and Goldman Sachs

The Carmen Segarra Case: Welcome to New York, Wall Street and McJustice

Continue Here

“Major Risk Should the Market Drop”: BofA on Fresh Record Low in NYSE Investor “Net Worth”

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

While we have argued previously that looking at NYSE margin debt in isolation is quite meaningless for two simple reasons: i) in the New Normal hedge funds and algos, not retail and certainly not traders on "lit" venues like the NYSE but instead in dark pools, are the marginal traders, and ii) the relevant trading leverage is obtained from the "shadow banking" and repo markets, not plain vanilla margin debt from exchange clerks, monthly NYSE trading stats do provide some sense of just how levered the individual investor is, and what it may portend for the market should there be a selloff. Which is why we were not surprised to see that based on August data, the trend has continued: while NYSE margin debt rose once again, from $460 billion to $463 billion, just shy of the record set in February when it hit $466 billion and well above the previous bubble peak, it is the investor "Net Worth", or Net Free Credit as some call it: the difference of total free credit + cash balances and margin debt, that for the second consecutive month sank to a fresh record low of ($183) billion.

Why is this important? Here is BofA's just released explanation:

Risk: NEW LOW for Net free credit at -$183b is major risk should the market drop


Net free credit [ZH: aka "investor net worth"] is free credit balances in cash and margin accounts net of the debit balance in margin accounts. Net free credit dropped to -$183b and moved to a new low below the prior record of -$178b in February. This measure of cash to meet margin calls remains at an extreme low or negative reading below the February 2000 low of $-129b. The risk is if the market drops and triggers margin calls, investors do not have cash and would be forced to sell stocks or get cash from other sources to meet the margin calls. This would exacerbate an equity market sell-off.

Which, incidentally, is why the NY Fed can not afford a sell-off, as what would start as a contained modest drop of 1, 2, 3% or thereabouts, will promptly cascade into a full blown rout as uber-margined investors, who are trading now almost entirely on credit, get their margin yanked from under them as their equity accounts are wiped out. Which should also explain why after yesterday's "rout" which pushed stocks a whopping 2% below their all time highs, things should be quickly back to their low-volume, USDJPY-driven levitating normal.

Grossly Distorted Procedures: Mish Proposes to Raise GDP Calculation

Courtesy of Mish.

Here's the question of the day: Does GDP stand for Gross Domestic Product or Grossly Distorted Procedures?

One of the reasons I ask is the latest push by countries to include prostitution and drugs sales in GDP calculations.

From the preceding link, the WSJ reports …

The U.K. could add as much as $9 billion to the value of its GDP by including prostitution and about $7.4 billion by adding illegal drugs, by one estimate, enough to boost the size of its economy by 0.7%. Not to be outdone, Italy will include smuggling as well as drugs and prostitution.

Other nations in Europe are also poised to fall in line with a European Union call to standardize and broaden GDPs. The EU is following a "best practices" directive laid out in 2008 by the United Nations.

Best Practices Directive

The "best practices" push is on to count sex, except in France (where perhaps it would send GDP soaring to unbelievable heights).

Yet, no one counts people raising their own vegetables, a genuine product.


As long as we are counting prostitution, why not count consensual sex? What about sex between husbands and wives? What about teen sex?

Isn't the product the same? Are we counting products and services or not?

If husbands did not get sex from their wives, wouldn't some of them pay to get sex elsewhere?

Continue Here

5 U.S. Banks Each Have More Than 40 Trillion Dollars In Exposure To Derivatives

Roulette Wheel - Public Domain

When is the U.S. banking system going to crash?  I can sum it up in three words.  Watch the derivatives.  It used to be only four, but now there are five "too big to fail" banks in the United States that each have more than 40trillion dollars in exposure to derivatives. 

Today, the U.S. national debt is at a grand total of about 17.7 trillion dollars. 40 trillion dollars is almost unimaginable.  And unlike stocks and bonds, these derivatives do not represent "investments" in anything.  They can be incredibly complex, but essentially they are just paper wagers about what will happen in the future.  Derivatives trading is not too different from betting on baseball or football games.  Trading in derivatives is basically just a form of legalized gambling, and the "too big to fail" banks have transformed Wall Street into the largest casino in the history of the planet. 

The pain will be enormous when this derivatives bubble bursts (and surely it will).

If derivatives trading is so risky, then why do our big banks do it?


The "too big to fail" banks run up enormous profits from their derivatives trading.  According to the New York Times, U.S. banks "have nearly $280 trillion of derivatives on their books" even though the financial crisis of 2008 demonstrated how dangerous they could be…

American banks have nearly $280 trillion of derivatives on their books, and they earn some of their biggest profits from trading in them. But the 2008 crisis revealed how flaws in the market had allowed for dangerous buildups of risk at large Wall Street firms and worsened the run on the banking system.

The big banks have sophisticated computer models which are supposed to keep the system stable and help them manage these risks.

But all computer models are based on assumptions.

And all of those assumptions were originally made by flesh and blood people.

When a "black swan event" comes along such as a war, a major pandemic, an apocalyptic natural disaster or a collapse of a very large financial institution, these models can often break down very rapidly.

For example, the following is a brief excerpt from a Forbes article that describes what happened to the derivatives market when Lehman Brothers collapsed back in 2008…

Fast forward to the financial meltdown of 2008 and what do we see? America again was celebrating. The economy was booming. Everyone seemed to be getting wealthier, even though the warning signs were everywhere: too much borrowing, foolish investments, greedy banks, regulators asleep at the wheel, politicians eager to promote home-ownership for those who couldn’t afford it, and distinguished analysts openly predicting this could only end badly. And then, when Lehman Bros fell, the financial system froze and world economy almost collapsed. Why?

The root cause wasn’t just the reckless lending and the excessive risk taking. The problem at the core was a lack of transparency. After Lehman’s collapse, no one could understand any particular bank’s risks from derivative trading and so no bank wanted to lend to or trade with any other bank. Because all the big banks’ had been involved to an unknown degree in risky derivative trading, no one could tell whether any particular financial institution might suddenly implode.

After the last financial crisis, we were promised that this would be fixed.

But instead the problem has become much larger.

When the housing bubble burst back in 2007, the total notional value of derivatives contracts around the world had risen to about 500 trillion dollars.

According to the Bank for International Settlements, today the total notional value of derivatives contracts around the world has ballooned to a staggering 710 trillion dollars ($710,000,000,000,000).

And of course the heart of this derivatives bubble can be found on Wall Street.

What I am about to share with you is very troubling information.

I have shared similar numbers in the past, but for this article I went and got the very latest numbers from the OCC's most recent quarterly report.  As I mentioned above, there are now five "too big to fail" banks that each have more than 40 trillion dollars in exposure to derivatives…

JPMorgan Chase

Total Assets: $2,476,986,000,000 (about 2.5 trillion dollars)

Total Exposure To Derivatives: $67,951,190,000,000 (more than 67 trillion dollars)


Total Assets: $1,894,736,000,000 (almost 1.9 trillion dollars)

Total Exposure To Derivatives: $59,944,502,000,000 (nearly 60 trillion dollars)

Goldman Sachs

Total Assets: $915,705,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $54,564,516,000,000 (more than 54 trillion dollars)

Bank Of America

Total Assets: $2,152,533,000,000 (a bit more than 2.1 trillion dollars)

Total Exposure To Derivatives: $54,457,605,000,000 (more than 54 trillion dollars)

Morgan Stanley

Total Assets: $831,381,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $44,946,153,000,000 (more than 44 trillion dollars)

And it isn't just U.S. banks that are engaged in this type of behavior.

As Zero Hedge recently detailed, German banking giant Deutsche Bank has more exposure to derivatives than any of the American banks listed above…

Deutsche has a total derivative exposure that amounts to €55 trillion or just about $75 trillion. That’s a trillion with a T, and is about 100 times greater than the €522 billion in deposits the bank has. It is also 5x greater than the GDP of Europe and more or less the same as the GDP of… the world.

For those looking forward to the day when these mammoth banks will collapse, you need to keep in mind that when they do go down the entire system is going to utterly fall apart.

At this point our economic system is so completely dependent on these banks that there is no way that it can function without them.

It is like a patient with an extremely advanced case of cancer.

Doctors can try to kill the cancer, but it is almost inevitable that the patient will die in the process.

The same thing could be said about our relationship with the "too big to fail" banks.  If they fail, so do the rest of us.

We were told that something would be done about the "too big to fail" problem after the last crisis, but it never happened.

In fact, as I have written about previously, the "too big to fail" banks have collectively gotten 37 percent larger since the last recession.

At this point, the five largest banks in the country account for 42 percent of all loans in the United States, and the six largest banks control 67 percent of all banking assets.

If those banks were to disappear tomorrow, we would not have much of an economy left.

But as you have just read about in this article, they are being more reckless than ever before.

We are steamrolling toward the greatest financial disaster in world history, and nobody is doing much of anything to stop it.

Things could have turned out very differently, but now we will reap the consequences for the very foolish decisions that we have made.

Future Bull

Outside the Box: Future Bull

By John Mauldin

In a conversation this morning, I remarked how rapidly things change. It was less than 20 years ago that cutting-edge tech for listening to music was the cassette tape. We blew right past CDs, and now we all consume music from the cloud on our phones. Boom. Almost overnight.

A lot has changed about the global economy and politics, too. Things that were unthinkable only 10 years ago now seem to be reality. What changes, I wonder, will we be writing about a few years from now that will seem obvious in hindsight?

In today’s Outside the Box, my good friend David Hay of Evergreen Capital sends us a letter written from the perspective of a few years in the future. I find myself wishing that some of the more hopeful events he foresees will come true, and my optimistic self actually sees a way through to such an outcome. In that future, I will join David as a bull. But the path that he proposes to take to that more optimistic future is not one that most investors will enjoy, so on the whole it’s a very sobering letter and one that should make all of us think.

I’m back from San Antonio, where I spent four enjoyable days with my friends and participants at the Casey Research Summit. I tried to attend as many of the conference sessions as I could, and I intend to get the “tapes” for some of the ones I missed.

I did a lot of video interviews while in San Antonio, too. And finished up a major documentary. Mauldin Economics will be making all of these available very soon. It’s hard to recommend one interview over another, but Lacy Hunt is just so smart. And with no further remarks let’s turn it over to David Hay and think about how the next few years will play out. Have a great week.

Your wishing his crystal ball was clearer analyst,

John Mauldin, Editor
Outside the Box

By David Hay
Twitter: @EvergreenGK

“Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong.”

– Economist and historian Niall Ferguson

Future bull.  Let me admit up front that this EVA has been rolling around in my mind for quite awhile. Its genesis may be directly related to the fact that I’ve been desperately yearning to write a bullish EVA – besides on Canadian REITs or income securities that get trounced by the Fed’s utterances. In other words, I want to return to my normal posture of being bullish on the US stock market.

It wasn’t long ago, like in 2011, that clients were chastising me for believing in what I formerly referred to as “the coiled spring effect.” By this I meant that corporate earnings had been rising for over a decade, and yet, stock prices were much lower than they there were in 1999. Consequently, price/earnings ratios were compressed down to low levels, though certainly not to true bear market troughs. My belief was that stocks were poised for an upside explosion once the inhibiting factors, primarily extreme pessimism on the direction of the country, were removed. I even remember one long-time client dismissing my “Buy America” argument on the grounds that in my profession I had to be bullish (regular EVA readers know that is definitely not the case!).

Well, a funny thing happened to my “coiled spring effect” – namely, it became a reality. Additionally, the upward reaction was much stronger than I envisioned. But what really caught me by surprise was that it played out with virtually no improvement on the “extreme pessimism on the direction of the country” front. Perhaps I’m wrong, but I don’t think there has ever been a rally that has taken stocks to such high valuations (time for my usual qualifier – based on mid-cycle profit margins, not the Fed-inflated ones we have today) concurrent with such pervasive fears America is on the wrong track.

Undoubtedly, the pros among you who just read that last sentence are thinking: “That’s great news! All that pessimism will keep this market running. We’re not even close to the peak.” Not so fast, mon amis (and amies)! We’re not talking market pessimism here. As numerous EVAs have documented, US investors are as heavily exposed to stocks as they have ever been, other than during the late 1990s, when stocks bubbled up to valuations that made 1929 look restrained.

Further, please check out the chart below from still-bullish Ned Davis regarding investment advisor sentiment.  The bearish reading is the lowest since the fateful year of 1987, while bulled-up views are in the excessively optimistic zone.  (See Figure 1.)

It is my contention that there are currently millions of fully-invested skeptics. They aren’t bullish long-term – in fact, they believe the underlying fundamentals are alarming (with the usual perma-bull exceptions) – but they feel compelled by the lack of competitive alternatives to remain at their full equity allocation. Disturbingly, professional investors are increasingly doing so even with money belonging to retired investors who need both cash flow and stability.

Okay, with all that history out of the way, let’s go the other direction  – into the future, to a time several years from now, when conditions are nearly the polar opposite of where they are today.

The Evergreen Virtual Advisor (EVA)

November, 201???

At long last, reforms! Do you remember back in 2014 when the stock market was as hot as napalm? When it just never went down? When millions believed the Fed could control stock prices by whipping up a trillion here and a trillion there?

Looking back from the vantage of today, it all seems so obvious. We should have known better than to believe that the S&P 500 had years more of appreciation left in it after having already tripled by the fall of 2014 from the 2009 nadir. The warning signs were there. But, before we rehash what went wrong, let’s focus on the upside of what some are calling “The Great Unwind” – the hangover after years and years of the Fed recklessly driving asset prices to unsustainable heights.

First of all, let me start with what I think is the biggest positive of all:  the end of the central banks’ era of omnipotence. While that might sound like a major negative, you may have noticed that with the crutch of binge-printing taken away, our nation’s leaders are finally getting around to implementing reforms that should have been enacted years ago. The history of our country is that we are energized by crises, and the latest is no exception. Our most recent financial convulsions have galvanized a bipartisan coalition to attack an array of long-festering problems that have hobbled our country since the start of the millennium.

Arguably, the most important was the recently enacted tax reform legislation. Skeptics believed the US could never move toward the type of simple tax system that has long been used in countries like Singapore, Hong Kong, and even Estonia. It took the realization by both parties that lower tax rates with almost no deductions would actually produce more revenue. Moreover, the elimination of incalculable and massive “friction costs” for millions of businesses and individuals, trying to adhere to and/or game that beastly labyrinth known as the tax code, is quickly catalyzing real economic growth. This is in contrast to the 2010 to 2014 counterfeit version that rolled off the Fed’s printing press.

By 2014, the US was ranked a lowly 32nd out of 34 countries in terms of tax fairness and efficiency. Yet, now, thanks to last year’s drastic tax reform, US corporations are no longer fleeing in droves to other countries, using such tax dodges as inversions (buying out foreign companies and assuming their country of corporate citizenship to access lower tax rates). They have even begun to repatriate their trillion or so of offshore profits since the formerly onerous tax rate of 35%, the highest in the developed world, has been reduced. And, thanks to the eradication of the aforementioned legalized tax dodges, corporate tax receipts are actually beginning to rise sharply, despite the fact that our economy is in the early stages of recovering from the latest recession.

As we all know, the rationalization of our national business model involves much more than even the essential aspect of tax code simplification. At long last, meaningful tort reform has been enacted. No longer will the rule of lawyers be allowed to dominate the rule of law. The enormous, but insidiously hidden, costs of a subsector of the legal system whose chief mission is to squeeze unjustifiable sums from the private sector is finally being reined in.

Similarly, regulatory overkill is also being addressed by the very entity that created this monster in the first place: the government itself. Absurd, overlapping, and often conflicting directives that hobbled the most essential element of the private sector – small businesses – have been abolished, replaced by a much simpler and unified set of rules.

Even America’s dysfunctional and wasteful healthcare system is being revamped using rational economic solutions, rather than by piling on more incomprehensible rules, requirements, and panels. Consumers can now easily compare prices among service providers thanks to technology as instituted by for-profit providers. Along with significantly improved visibility, they also now have far greater control over how their healthcare dollars are spent.  Medical outlays are now in a decided downtrend.

Incredibly, Congress is actually beginning to behave like a representative of the people rather than an ATM dispensing taxpayer money to the most politically connected. The intense implosions of the multiple bubbles the Fed intentionally inflated triggered a backlash of voter ire toward its legislative enablers. Since then, we’ve seen a dramatic House – and Senate – cleaning. This new “coalition of the thinking” is now following the proven path to recovery that numerous countries – such as Germany, Sweden, and Canada – blazed when their economic and financial systems hit previous roadblocks. As in those nations, moving away from excessive socialism, while simultaneously supporting the business community, rather than vilifying and hindering it, is already beginning to elevate America out of its long stagnation.

Collectively, these sweeping reforms are as dramatic as those seen in the 1980s and promise to unleash a growth boom equally as powerful as the ones that followed those overhauls. Yet, despite these dramatic and highly promising changes, investors remain hunkered down in their bomb shelters.

Fool me once, fool me twice, fool me thrice!  After the third devastating bear market since 1999, investor hostility toward stocks has reached a level unseen since the 1970s. Far too many were lured in by the last up-leg of the great bull market that started in the depths of pessimism in March of 2009. As the market resolutely climbed higher and higher, even beyond the five-year length of most bull cycles, millions of investors succumbed to either greed or complacency.

Indicative of the feverish conditions prevailing then—despite the widely disseminated myth that it was the most hated bull market of all time—headlines like those shown below, and graphics such as the one above, began to dominate the financial press.

Remarkably, at least to me, investors once again ignored warnings from the savviest savants, almost all of whom had waxed cautious about the tech and housing manias: Bob Shiller, Jeremy Grantham, Rob Arnott, John Mauldin, Seth Klarman, and John Hussman. As the esteemed Mohamed El-Erian had prophetically written in June of 2014, “In their efforts to promote growth and jobs, central banks are trading the possibility of immediate economic gains for a growing risk of financial instability later.”

Conversely, Janet Yellen didn’t do her legacy any favors by uttering these words in July, 2014: “Because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical.” At the time, I was pretty sure she would come to regret that statement as much as Ben Bernanke did his equally ill-advised assurances back in 2007 that the problems in sub-prime mortgages were contained. Based on how fragile the “resilient financial system” turned out to be, I’ll say no more.

It did surprise me that despite having called out those previous bubbles, as well as several others including the 2008 blow-offs in commodities and Chinese stocks, I received such intense resistance from other professionals and even clients. After awhile, I was getting so much push back I started to feel like the nose of a commercial airliner being readied for take-off.

Ignorance wasn’t bliss. Another aspect of the late stages of the last bull market was how many investment professionals – who should have known better – dismissed Robert Shiller’s namesake P/E. To clarify, Shiller believes (as did Warren Buffett’s mentor, Ben Graham) that the stock market needs to be valued based on normalized earnings, not bottom- or top-of-the cycle profits. Despite the unassailable logic of this approach, a legion of perma-bulls repeatedly sought to discredit Shiller and his valuation methodology. Some even went so far as to deride his process as “Shiller Snake Oil,” notwithstanding Dr. Shiller’s Nobel Prize and, more meaningfully in my view, the fact that he had forewarned of both the tech and housing bubbles – unlike almost all of those throwing stones at him back in 2014.

The main criticism from those who were “hatin’ on” Shiller in 2014 was that his P/E had produced only two buy signals over a 25-year period. This was a valid critique but it missed an essential point: Despite the reality that the stock market from 1990 to 2014 traded at valuations far higher than it had in any previous quarter-century timeframe, the Shiller P/E accurately predicted future returns. In other words, when the Shiller P/E was very elevated – like in the late 1990s, 2007, and 2014 (so far) – stocks went on to generate extremely disappointing future returns (it also did so in decades going all the way back to the 1920s but this was not the era that the Shiller debunkers were criticizing). The graphic on the next page vividly illustrates this fact, even though it was created before the most recent bear market further underscored the danger of ignoring high Shiller P/Es. (See Figure 2.)

It also shocked and dismayed me at the time how many contortions Wall Street strategists, and even money managers, performed in order to dismiss concerns about the extreme variability of earnings. Somehow charts like the one below from Capital Economics were blown-off despite (or, perhaps, because) it so clearly highlighted the tendency of corporate profits to return back down to the long-term trend-line of nominal GDP growth, with stocks closely following. As we all now know, this time wasn’t different. (See Figure 3.)

The legions of market cheerleaders also ignored the heavy reliance on profits from the financial sector, a notoriously unstable source of earnings. This proved to be a disaster in 2007 and, unsurprisingly, was again once the Fed’s “Great Levitation” fell victim to gravitational forces. (See Figure 4.)

Even David Rosenberg, one of the few economists who saw the housing debacle coming, but who briefly flirted with drinking the Fed-spiked bubble-aid in 2014, noted that 60% of earnings growth from 2010 through 2013 came from share buy-backs. He calculated that the market’s “organic” P/E, backing out the influence from share repurchases, was over 20, even prior to normalizing for peak profit margins. Additionally, the reality that corporations buy the most stock at high prices, and the least at low prices, was forgotten – another costly oversight. (See Figure 5, above.)

It was also overlooked during this era of Fed-induced euphoria, that low interest rates – so often cited by bulls as a justification for lofty P/Es – historically coincided with lower earnings multiples. (See Figure 6.)

As Japan and Europe have repeatedly shown over the last two decades, when low interest rates are a function of chronic economic stagnation, P/Es actually contract, not expand. The fact that the latest recession has reduced America’s anemic 1.8% annual growth rate since 2000 to even lower levels is a key reason why stocks have been thrashed over the last couple of years, despite interest rates on the 10-year treasury note falling to 1%.

Another massive mistake was to overlook the strident warning from Evergreen’s favorite valuation metric, the price-to-sales (P/S) ratio. By the summer of 2014, the median stock in the S&P 500 was trading at its highest P/S ratio on record. Sadly, this attracted little attention. (See Figure 7.)

But perhaps the most egregious oversight of all was to forget the theorem from the late, great economist Hyman Minsky who long ago warned that stability breeds instability. As was the case from 2002 through 2007, the exceptionally low volatility of the years leading up to the latest crisis numbed market participants to the steadily rising risks. Even professional investors convinced themselves they could get out in time once conditions became unstable, an arrogance that has been severely punished, as well it should. Alas, we’ve had to learn Dr. Minsky’s lesson the hard way, once again.

But let’s close this EVA by focusing on the stunning opportunity for investors created by the Fed’s latest misadventure…

Investors, start your engines! It is certainly understandable that US investors are thoroughly disenchanted with the stock market. The fact that the powers-that-be, or at least used-to-be, allowed securities trading to become so heavily dominated by computers was, like the tolerance of the Fed’s asset inflation, inexcusable. The influence of computerized, black box trading was unquestionably a huge factor in the speed-of-light-in-a-vacuum drop in stock prices. Also as feared, many ETFs poured kerosene on the fire as investors became terrified by the nearly overnight erosion in these prices, causing them to sell en masse. The plethora of ETFs holding illiquid underlying securities were particularly crushed, with many simply halting trading for long stretches. Now, instead of rapturous paeans about the wonders of ETF liquidity and low costs, the financial press is full of horror stories about their fundamental flaws (fortunately, higher quality and more liquid ETFs, performed as expected during the worst of the panic).

Further, based on the failure of the Fed’s desperate maneuver to stabilize stocks after their first big break, by launching another $1 trillion QE, this time directly buying US shares, investors have rationally lost faith in the Fed’s ability to make stocks dance to its tune. While QE 4 did cause a sharp counter-trend rally after it was initially launched, the supportive effects soon waned, as we all are now painfully aware. The resumption of the bear market after the Fed’s frantic triage effort was reminiscent of Dorothy, the Tinman, the Lion, and Toto discovering that behind the green curtain was a scared old man instead of The Wizard of Oz.

The extreme negativity by investors toward the stock market today is reflected in the high level of outflows being seen from equity mutual funds, including ETFs. Cash levels are high everywhere as institutional and retail investors, as well as corporations, have become excessively risk averse. This provides the rocket fuel for the next bull market which might just be much closer than almost everyone believes.

Rampant investor pessimism is also being manifested in the drop in the Shiller P/E to the mid-teens from 26 at the peak of the last bull romp.  As a direct result, future returns on stocks are now projected by the aforementioned Jeremy Grantham and John Hussman to be in the low double digits over the next seven to ten years.  Yet, no one seems interested. Even Warren Buffett’s ragingly bullish comments, which were considerably premature, are being attributed to the ramblings of a soon-to-be nonagenarian.

Naturally, I have considerable empathy for Mr. Buffett because, as usual, Evergreen was early to shift into bullish mode. We waited much longer than most people and actually did a fairly commendable job of cutting back into the Fed’s QE4 driven rally, after raising our equity exposure during the initial steep sell-off. But once stocks fell hard after that sugar-high wore off, we were guilty of our typical “premature accumulation syndrome.”

However, we did the same thing way back in October of 2008 when we published our client newsletter, “A Bull is Born” (and wrote a series of “buy the panic” EVAs), only to watch the market slide another 30%.  Yet, buying when almost the entire world was in liquidation mode, much of it forced, in the fall of 2008 proved to be extremely lucrative over the next two years. We are convinced the same will be true following this latest episode of market mayhem. 

From a longer-term standpoint, a perspective most investors seem unwilling to take given their still-fresh pain and suffering, conditions look highly encouraging. In addition to the previously described remedies our policy makers are belatedly adopting, many of the key positive trends the bulls used to justify over-the-top valuations for stocks back in 2014 are still in place. Admittedly, the enthusiasm got ahead of reality but the energy renaissance continues apace in the US, despite the well-publicized fracking problems. Re-shoring of manufacturing, which has been slower than the uber-optimists forecast, appears to be now accelerating. Relatedly, robotic adoption is rapidly spreading through the US industrial base, supporting Evergreen’s belief that re-shoring is a reality, not a fantasy. Yet, there’s even more to like.

Nanotechnology and solar power innovators continue to provide breathtaking breakthroughs. Today, nanotech is becoming as ubiquitous as the microprocessor was a decade ago. Meanwhile, solar power, thanks to miniaturization advances similar to Moore’s Law, has achieved “grid parity,” or even lower, in over a dozen US states. Power is becoming increasingly cheap and abundant and that’s terrific news for humanity.

Finally, and perhaps most significantly, we are far closer to achieving that wondrous, if slightly scary, state known as “singularity.” As most us now know, this means that humans are becoming one with computers. The proliferation of wearables has essentially elevated the intelligence of anyone who can afford to spend $150 for an iWatch or Google Glass, to the level of a supercomputer. We now take for granted being able to whisper a few instructions into our watches, like Dick Tracy, and have all the information of the Cloud at our disposal. (It may soon be feasible to actually have a computer implanted into our brains, possibly even curing Alzheimer’s.) Clearly, the implications for productivity are nearly limitless. Already, we are beginning to see this in the data and we believe we are in the very early innings of a true revolution – with no apologies to gloomsters like Northwestern University’s Robert Gordon who believed, and still do, that the era of radical innovation ended long ago.

One of the biggest challenges a professional investor faces is the tyranny of current prices. When they are relentlessly rising, as they were back in 2013 and 2014, clients extrapolate those indefinitely, and, for a long time, they are right to do so. The same thing happens on the downside in periods such as we are in right now.  But rising markets always turn down and falling ones always turn up. Those are unquestionable facts. We are getting closer to the point where this bear goes back into its cave for a nice long nap while a powerful young bull is ready to bust out of the pen it’s been cooped up in for what seems like an eternity. Get out your checkbook – it’s time to bet on the bull!

Back to the here and now. A wise man once said that if you are going to predict that something will happen, don’t be so foolish as to say when it will happen. You may have noticed, I’ve followed that advice, perhaps to an irritating degree, mainly because I truly have no clue when our current bull market, already so long in the horns, will succumb.

It also goes without saying, but I will anyway, that the sequence and details of future financial events are almost certain to be dramatically different than what I’ve suggested in this EVA edition. However, I believe the broad outline is likely to be roughly along these lines, including my exceedingly optimistic long-term outlook for America.

It dawned on me as I wrote the section about tax, tort, healthcare, and regulatory reforms that many readers were probably thinking: “Not in my lifetime – and I’m only 50!” First, of all, let me say that I’m jealous you’re just 50. Second, it is highly unlikely stocks will remain in a long-term bull market, or even continue to hover at such generous valuations, unless our country makes some truly dramatic changes. It can’t remain business as usual, persistently avoiding essential reforms, relying almost totally on the Fed.

Believe me, I will be a bull again, and likely a very lonely one at that. But it’s going to take a combination of lower valuations and a serious makeover of how this country operates. We can do it and I’m convinced we will do it. Hopefully, I’ll be able to convince some of you the next time fear is on the rampage.

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Legal Basis for War in Syria? Amazing Three-Point Logic!

Courtesy of Mish.

The hypocrisy of the US is on full display. We have imposed preposterous sanctions on Russia following its takeover of Crimea.

Given that Crimea actually had a vote, and the vote was overwhelming, one can legitimately argue the Crimea takeover was democracy in action. Rigged or not, it’s 100% certain the vote would have gone in favor of Russia.

Votes? Constitutions? Who Gives a Damn?

Who gives a damn about votes?

Some claim the vote was illegal by Ukraine’s constitution. But what good are constitutions anyway?

The US doesn’t give a damn about the US constitution let alone the constitution of any other nations (unless of course it serves our purpose).

Legal Basis for Troops in Iraq?

On September 5th, the Guardian commented on the legality of US troops in Iraq: Legal basis for Iraq troop deployment called into question as days wear on.

The legal basis for the recent introduction of more than 1,000 US ground troops in Iraq was called into question on Friday, after the White House confirmed that it does not consider itself bound by time limits that usually constrain such deployments.

Under the terms of the 1973 War Powers Resolution, troop deployments into war zones may not last longer than 60 days, unless Congress explicitly authorises military force.

As no congressional authorisation yet exists – Congress returns from its August recess next week – lawyers have wondered about the solidity of the legal grounding for the latest US war in Iraq.

Obama’s ISIS Plan Legal?

On September 12, Salon asked: Is Obama’s ISIS plan legal?….

Continue Here

Stocks Take Off Their Beer Goggles

Stocks Take Off Their Beer Goggles

Courtesy of 

My friend Peter Boockvar is not a fan of unconventional policies at the Fed to boost the economy. He’s also been a critic of the way QE has artificially boosted the stock market. Here he looks at the recent weakness in the Russell 2000 that everyone’s so concerned about and ties it to the tapering off of the Fed’s bond-buying programs…

As all of us search for reasons why the S&P 500 is at a 3 month low, the Russell 2000 is at a 4 month low, the Mid cap 400 index at a one month low, and the high yield bond etf’s are back to the lows of the year, I’m going to be blunt with my belief. S**t happens when QE ends. Back in January, obviously way early as I always am, I said QE puts beer goggles on investors and makes everything look great and the end of it in 2014 would be trouble. Twice before when QE ended, the goggles cleared up. Let’s look at the evidence of the market and I’ll use the Russell 2000 to start. The Russell 2000 took off in March 2009 after QE1 was expanded (obviously marking the market bottom) and didn’t break its 200 day moving average until May 2010, about two months after QE1 ended. QE2 was then widely telegraphed in Jackson Hole in August ’10 and the Russell 2000 took off and didn’t see its 200 day moving average again until late July 2011, about two months after QE2 ended. Operation twist then followed but it certainly was not the same as QE and it wasn’t until late 2012 that the Russell 2000 took off again of course driven by QE3/4. It then was 6 months into the end of the QE program and the Russell 2000 broke its 200 day moving average.

He makes a similar case when looking at the behavior of both mid-caps and large-caps, but the Russell appears to have been the most sensitive to the beginnings and ends of these programs.

Of course, the other side of this debate is the fact there’s also been more than enough earnings growth during this experiment, even if it hasn’t necessarily manifested itself in a more robust GDP recovery.

Can stocks weather the end of QE4 next month so long as the Fed doesn’t jack its interest rates higher anytime soon?


Peter Boockvar
Managing Director, Chief Market Analyst
The Lindsey Group LLC

Initial Claims Celebrate a Year At Record Levels

Initial Claims Celebrate a Year At Record Levels

Courtesy of Lee Adler of the Wall Street Examiner

The headline, fictional, seasonally adjusted number for initial unemployment claims of 293,000 surprised Wall Street economists a bit this morning as their consensus guess had been 300,000.

The actual, not seasonally finagled numbers, which the Wall Street captured media ignores, shows claims at all time record levels, slightly below the levels reached at the top of the housing/credit bubble in 2006. This continues 12 months of near record readings or record readings. Since September 2013 when the number of claims first fell to a record low, the data has suggested that the central bank financial engineering/credit bubble has been at a dangerous juncture. But thanks to their slavish and idiotic focus on only the made up seasonally adjusted (SA) numbers, news media press release repeaters have given little indication that by historical standards the numbers have represented a danger sign. The media echo chamber continues to present record lows as positive, rather than the danger sign that it is.

Here are the actual unmanipulated numbers and the data showing why those numbers are so troubling.

According to the Department of Labor, “The advance number of actual initial claims under state programs, unadjusted, totaled 238,539 in the week ending September 20, a decrease of 3,533 (or -1.5 percent) from the previous week. The seasonal factors had expected a
decrease of 13,214 (or -5.5 percent) from the previous week. There were 255,087 initial claims in the comparable week in 2013.”

Actual initial unemployment claims were 6.5% lower than the same week a year ago. The normal range of the annual rate of change the past 3.5 years has mostly fluctuated between approximately -5% and -15%. The current number is on the weaker side of trend norms but there are no real signs of weakening yet.

The actual week to week change last week was unremarkable, at a decrease of 3,533. There’s no seasonal pattern in the third week of September. It’s a swing week in which claims sometimes increase and sometimes fall. The average of the prior 10 years for that week was an increase of 7,485.

New claims were 1,716 per million workers counted in August nonfarm payrolls. This compares with 1,780 per million in this week of 2007, which was when the housing bubble was starting to deflate, and 1,919 per million in the comparable week of 2006, around the top of the bubble. In the first week of September 2013, this figure set a record low. In each ensuing week over the past year the numbers remained at or near record levels. This week they did so again.

These numbers persisted at extreme levels at the tops of the last two bubbles for a year before the collapses got rolling. The foundations were already beginning to crumble by the time the first anniversary of record readings rolled around. Today’s situation is similar to those, but there are few signs yet in other indicators that the economy or the market are on the verge of similar collapses. On the other hand, the continuation of this trend will continue to encourage the Fed to continue to pull the punchbowl. It is that action that triggers the collapse of the house of cards built with Fed paper.

Get regular updates on the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE’s Professional Edition risk free for 30 days!

Copyright © 2014 The Wall Street Examiner. All Rights Reserved. 

Picture from Geralt at Pixabay.

Chart o’ the Day: S&P 500 on the 50-Day

Chart o’ the Day: S&P 500 on the 50-Day

Courtesy of 

The larger uptrend for the S&P 500, as defined by the popular 200-day moving average, remains intact. Shorter-term oriented players and strategies will be focused on the 50-day, however, which is in play this afternoon.

The S&P 500 has broken below the 50-day moving average on a few occasions this past year and it hasn’t mattered. In fact, each of these breaches turned out to have been a pivot point for a bounce to new record highs. Stephen Suttmeier, ace technician at Bank of America Merrill Lynch, illustrates this below.

The blue line represents the 50-day, red is 200, the black doted line is the key trendline going back to 2012’s liftoff moment.

Screen Shot 2014-09-25 at 2.16.09 PM


S&P 500 pressing key support
Bank of America Merrill Lynch – September 25th 2014

Get ready for rising interest rates – and stocks

Get ready for rising interest rates — and stocks


Going back to 1962, equities have been helped by Fed tightening

There is increasing evidence the Federal Reserve will tighten monetary policy in the next year, ending its bond-buying efforts and positioning itself to raise interest rates.

Quantitative easing is effectively over, with the stimulus program scheduled to end in October, and the “dot plot” of projections from Fed officials shows rates will likely get their first bump in 2015 with a projected fed funds rate of 3.75% by the end of 2017.

Say what you want about previous central-bank policies, but it’s indisputable that the massive stimulus efforts of the Federal Reserve were unheard of, and the winding down of its recession-era policies will be an equally unprecedented task.

As a result, many investors are worried about what the end of easy money policies will mean for the stock market. If history is any guide, however, rising rates should also mean rising stocks.

There are a boatload of caveats here. For starters, the early days of a rate hike often are characterized by weakness in the stock market…

Keep reading: Get ready for rising interest rates — and stocks – MarketWatch.


Here's the "dot plot" from the Federal Reserve:

According to Rex Nutting at Market Watch, the recent dot plot released by the Fed indicates that it is likely to raise interest rates at nearly every Federal Market Committee meeting for two years: 

The federal funds rate is now between 0% and 0.25% and is likely to remain there for a “considerable time,” the Fed said Wednesday. But by the end of 2017, the majority of the committee expects the fed funds rate to rise to around 3.75%.

The Fed usually raises rates in quarter-point moves. That means the end game of 3.75% is 13 rate hikes away… (Dot plot shows Fed will be quick about raising rates, once it starts)

Blue Ribbon for Sanction Craziness: Italy Seizes Hotel of Putin Ally; Russia Threatens Law Allowing Seizure of Foreign Assets

Courtesy of Mish.

What’s Russia to do? Stand back and let the US and Europe escalate sanction after sanction, or respond in kind?

Either way, Russia loses. I believe Europe has the worst of it, but both suffer.

Hope for Sanity Appears to Be Lost Cause

By responding in kind, Russia hopes to put some sanity in the heads of US and EU officials. But with brains as dense as Obama, McCain, and various EU officials, hope for sanity appears to be a lost cause.

Sanction Madness Escalates: Italy Seizes Hotel of Putin Ally

Two days ago sanction madness hit a new extreme: Italy seizes Putin ally Arkady Rotenberg’s property assets.

The Italian tax police have seized €30m in assets, including a luxury hotel in Rome and two villas in Sardinia, controlled by Arkady Rotenberg, a longtime ally of Russian president Vladimir Putin targeted by US and EU sanctions. 

The move comes amid continued tensions between Russia and the EU over Ukraine, and ahead of a possible visit by Mr Putin to Milan next month for a summit with European and Asian leaders that could offer a chance to rebuild some bridges.

Speaking to Russian newswire Interfax, Mr Rotenberg said: “I have been subject to sanctions for several months. Nothing surprises me anymore. But what puzzles me is that the current situation involves real estate to which the sanctions do not apply. Sanctions only apply to accounts and assets which I do not have in Italy.”

Russia Threatens Law Allowing Seizure of Foreign Assets

Response from Russia was swift. Moscow Times reports Draft Law Allows Russia to Seize Foreign Assets in Response to Sanctions.

Russian courts could get the green light to seize foreign assets on Russian territory under a draft law intended as a response to Western sanctions over the Ukraine crisis.

The draft, which was submitted to parliament on Wednesday by a pro-Kremlin deputy, would also allow state compensation for an individual whose property is seized in foreign jurisdictions.

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Debt Rattle Sep 25 2014: It’s The Dollar, Stupid!

Courtesy of The Automatic Earth.

Wyland Stanley Studebaker motor car in repair shop, San Francisco 1919

There are substantial and profound changes developing in the global economy, and in my view we should all pay attention, because everyone will be greatly affected. Some more than others, but still.

‘Metal markets’, be they gold, silver, copper or iron, exhibit distress and uncertainty, prices are falling, or at least seem to be. Partly, that is because of the apparently still ongoing investigation in the Chinese port of Qingdao, through which a $10 billion ‘currency fraud’ is reported today, ostensibly related to the double/triple borrowing that has been exposed, in which the same iron ore and copper shipments were used as collateral multiple times.

This could soon bring such shipments to the market and add to the oversupply already in place. Combined with ever more evidence of a slowdown in Chinese growth numbers, this doesn’t look good for iron, copper, aluminum.

But the Slow Boat To – or from – China is by no means the only reason metal prices are dropping. The main one is, plain and simple, the US dollar. Gold, for instance, hasn’t changed much at all when compared to a year ago, against the euro. Whereas it’s lost 8-9% against the dollar over the last 2-3 months, about the same percentage as that same euro. The movement is not – so much – in gold, it’s in the dollar.

To claim that this is the market at work makes no sense anymore. Today central banks, for all intents and purposes, are the market. As Tyler Durden makes clear once again for those who still hadn’t clued in:

Bank Of Japan Buys A Record Amount Of Equities In August

Having totally killed the Japanese government bond market, Shinzo Abe has – unlike the much less transparent Federal Reserve, who allegedly use their proxy Citadel – gone full tilt into buying Japanese stocks (via ETFs). In May, we noted the BoJ’s aggressive buying as the Nikkei dropped, and in June we pointed out the BoJ’s plan to buy Nikkei-400 ETFs and so, as Nikkei news reports, it is hardly surprising that the Bank of Japan bought a record JPY 123.6 billion worth of ETFs in August.

The market ‘knows’ that the BoJ tends to buy JPY 10-20 billion ETFs when stock prices fall in the morning. The BoJ now holds 1.5% of the entire Japanese equity market cap (or roughly JPY 480 trillion worth) and is set to surpass Nippon Life as the largest individual holder of Japanese stocks. And, since even record BoJ buying was not enough to do the job, Abe has now placed GPIF reform (i.e. legislating that Japan’s pension fund buys stocks in much greater size) as a primary goal for his administration. The farce is almost complete as the Japanese ponzi teeters on the brink.

Shinzo Abe wants the yen to fall, and he gets his (death)wish, because the Japanese economy and the financial situation of its government are in such bad shape, there’s nowhere else to go for the yen. That doesn’t spell nice things for the Japanese people, who will see prices for imported items (energy!) rise, but for all we know Abe sees that as a way to push up inflation. That’s not going to work, what we will push up instead is hardship. And that plan to force pension funds into stocks is just plain insane, an idea he got from US pension funds which are 50% in stocks – which is just as crazy.

Draghi talks down the euro, says a headline today, but I don’t see it; I wonder why that would be supposed to work now, and not in the preceding years, when it was just as obvious how poorly Europe was doing. Sure, there’s a new ‘threat’ in the AfD (Alternative for Germany), a right wing anti-euro party, but that’s not – for now – enough to cause the euro slide we’re seeing. The movement is not – so much – in the euro, it’s in the dollar.

Why the Fed moves the way it does, the moment it does, in its three pronged combo of fully tapering QE, hiking rates (or at least threatening to) and pushing up the greenback, is not immediately clear, but a few suggestions come to mind, some of which I mentioned earlier this month in The Fed Has A Big Surprise Waiting For You and in What Game Is Being Played With the US Dollar?.

My overall impression is that the Fed has given up on the US economy, in the sense that it realizes – and mind you, this may go back quite a while – that without constant and ongoing life-support, the economy is down for the count. And eternal life-support is not an option, even Keynesian economists understand that. Add to this that the -real – economy was never a Fed priority in the first place, but a side-issue, and it becomes easier to understand why Yellen et al choose to do what they do, and when.

When the full taper is finalized next month, and without rate rises and a higher dollar, the real US economy would start shining through, and what’s more important – for the Fed, Washington and Wall Street -, the big banks would start ‘suffering’ again. Just about all bets are on the same side of the trade today, and that’s bad news for Wall Street banks’ profits.

The higher dollar will bring some temporary relief for Americans, in lower prices at the pump, and for imported products in stores, for example. Higher rates, however, will put a ton and a half of pressure bearing down on everyone who’s in debt, and that’s most Americans. The idea is probably that by the time this becomes obvious and gets noticed, we’re far enough down the line that there’s no going back. Besides, we could be in full-scale war by then. One or two IS attacks in the west would do.

The higher dollar – certainly in combination with higher rates – will also mean a very precarious situation for the US government, which will have to pay a lot more in borrowing costs, but our leadership seems to think that at least in the short term, they can keep that under control. And then after that, the flood. Maybe the US can start borrowing in yuan, like the UK wants to do?

To reiterate: there is no accident or coincidence here, and neither is it the market reacting to anything. That’s not an option in this multiple choice, since there is no market left. It’s all central banks all the way (like the universe made up of turtles). It’s faith hope and charity, and the greatest of these is the Federal Reserve. Is they didn’t want a higher dollar, there would not be one. Ergo: they’re pushing it higher.

The Bank of England will follow in goose lockstep, while the ECB and Bank of Japan can’t. That’s earthquake and tsunami material. The biggest richest guys and galls will do fine wherever they live. The rest, not so much. Wherever they live . At the Automatic Earth, we’ve been telling you to get out of debt for years, and we reiterate that call today with more urgency. Other than that, it’s wait and see how many export-oriented US jobs will be lost to the surging buckaroo. And how a choice few nations in the northern hemisphere will make through the cold days of winter.

Whatever you do, don’t take this lightly. A major move is afoot.

Is Apple Watch a Needle Mover?

Is Apple Watch a Needle Mover?

By Adam J. Crawford

The investment community has been up in arms over a lack of innovation from Apple. After all, the company hasn’t launched a new product line in quite some time… that is, until now. Meet the company’s brand-new smart device: Apple Watch. Investors hope the product will send Apple’s stock to new heights. Is that wishful thinking?

Apple brings its new product into a hotly contested space, with the likes of Sony, Nike, and Samsung all offering a competing smartwatch. But there’s a common theme with reviews for these gadgets: not enough features, not enough style. Apple aims to fill this void… and will charge a premium for doing so, of course.

Apple Watch will retail for $349, notably higher than most competing watches. Since Apple is notorious for putting the squeeze on retail margins (it reportedly allows retail as little as 3% on tablets), retailers would likely make 10% on the Apple Watch, placing Apple’s revenue per watch at around $315.

In 2013, Apple sold 150 million iPhones. It would be an extremely tall order to sell that many watches, especially at $350 a pop. So for a base-case scenario, let’s say that 30% of iPhone buyers will purchase an Apple Watch. For a bullish scenario, 50%. And for a bearish scenario, 10%. Using these adoption rates yields the following annual unit sales.

  Bear Base Bull
Percent of iPhone Sales 10% 30% 50%
Apple Watch Annual
Units Opportunity (Millions)
15 45 75


At a projected price of $315, we get the following projected revenues.


  Bear Base Bull
Apple Watch Sales
as a percent of iPhone Sales
10% 20% 50%
Annual Units
Opportunity (Millions)
15 45 75
Price per Watch $315 $315 $315
Revenue (Billions) $4.7 $14.1 $23.6


Over the past four years, Apple’s profit margin has ranged from 19.2% to 26.7%. Let’s assume a 23% profit margin on the Apple Watch. With shares outstanding of 6 billion and at Apple’s current multiple of 15, here’s our calculation of the impact on share price for each volume scenario.


  Bear Base Bull
Revenue(Billions) $4.7 $14.1 $23.6
Profit Margin 23% 23% 23%
Profit (Billions) $1.1 $3.2 $5.4
Shares Outstanding
6 6 6
EPS $0.18 $0.53 $0.90
Multiple 15 15 15
Apple Watch
Share Price
$2.70 $7.95 $13.50


Smartwatches will be a nice addition to Apple’s product line in that they will further institutionalize an already iconic brand. However, in looking at just the annual hardware sales, our projections suggest anywhere from a 3% to a 13% impact on share price.

At the low end of the projections, the impact is anemic. At the high end, the impact is significant, but hardly seismic. There may be a host of reasons to buy Apple stock, but the Apple Watch by itself isn’t one of them.

The better investment option is to look at companies that supply Apple; this is one of the things we track at BIG TECH. One Apple chip supplier, Avago Technologies, yielded our subscribers over 100% return in just over 12 months, piggybacking on the rise of the iPhone.

For access to our unparalleled investment advice, simply sign up for a 90-day risk-free trial of BIG TECH. If you decide to keep your subscription, it will only cost $99 a year. If for any reason you’re unsatisfied, simply cancel for a full refund. No questions asked.

The article Is Apple Watch a Needle Mover? was originally published at

Housing Early Warning Stress Indicator On Rise

Courtesy of Mish.

A chart in the latest Black Knight Mortgage Monitor Release caught my eye.

For five months, the number of properties and the percentage of properties 30-days delinquent has been on the rise (arrows added).

click on chart for sharper image

Key Indicators

  • The mortgage delinquency rate jumped nearly 5% in August, reaching its highest point since February.
  • The year-over-year change in 30-day delinquencies is a negative 4.8%. Another month like August would nearly reverse the year-over-year downtrend in delinquencies.
  • The inventory of  30-day delinquent homes rose by 146,000. Another month like August would reverse the year-over-year change.
  • 90-day delinquencies do not show the same ominous trend as 3-day delinquencies, but 90-day delinquencies first require 30-day delinquency then 60-day delinquency.

So far, the 90-day stats have not rolled over, but with the 30-day uptrend this long, it likely will.

Mike “Mish” Shedlock

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Surfers Beat Billionaire in Landmark California Beach Case

The controversy between oceanfront property owners and the public rages on in CA.

In this case, Vinod Khosla (co-founder of Sun Microsystems) took a stand against the Surfrider Foundation over access to the beach across his private property. Khosla does not have a home or plan to build one on the property–so privacy is not his chief issue–but he wants a resolution. He had been spending money on insurance and upkeep of the passageway. 

Khosla lost this round of the battle. The latest ruling by a San Mateo Superior Court requires Khosla to seek a permit from the California Coastal Commission before closing the gate to the beach. He will also be requited to "consult with the community to determine changes to the property and public access to the beach." (Silicon Valley billionaire Vinod Khosla forced to allow access to the beach he had blocked?)

Khosla may appeal. His side:

"[Khosla] said that he tried to meet with the Commission several times, and that it was unreasonable to expect him to pay exorbitant fees to keep the beach open to the public. He claims to have paid between $500,000 and $600,000 a year in costs for maintenance, liability insurance, and infrastructure, among other expenses." (Silicon Valley billionaire Vinod Khosla forced to allow access to the beach he had blocked?)

How do you think conflict between property owners' rights and beach goers' rights should be resolved in this case? In general? 

Surfers Beat Billionaire in Landmark California Beach Case

By  at TIME

The latest ruling in the ongoing battle over a northern California surf spot is a blow to venture capitalist Vinod Khosla

A California court issued a milestone ruling Sept. 24 that may restore public access to a beach that requires traveling across privately owned land, the latest turn in a multi-year legal frenzy that has pitted the surfers who cross the property against the billionaire who owns it.

At the center of the controversy is a low-slung metal gate that sits at the top of Martins Beach Road, an offshoot of the Pacific Coast Highway that is the only way to access Martins Beach from dry land. The road snakes across 53 acres that Khosla bought for $32.5 million in 2008. For two years, his property manager allowed the public to occasionally visit a stretch of sand where locals have gone smelt-fishing and surfing and picnicking for decades. But Khosla allowed the gate to be closed permanently in 2010 after his property manager received a letter from the county demanding that it stay open every day.

The conflict comes at a time when an influx of tech wealth has sharpened class tension in northern California. “[Kholsa] believes that he can find a way to use his wealth and power to strong-arm the situation,” says Chad Nelsen, environmental director of the Surfrider Foundation.

Khosla doesn’t own a home on the land and says he has no plans to build one. The decision to shut off access to the road was a way to take a stand about what he felt were his basic rights. “This is a case about private property,” Khosla told TIME in an email. “We need to assert our rights and get the courts to clarify them.”

Khosla’s lawyers say they are considering appealing the verdict. “We will continue to seek protection of the constitutional rights of private property owners that are guaranteed by the U.S. and California Constitutions and that have long been upheld by the United States and California Supreme Courts,” his attorneys said in a statement.

Surfrider’s argument rested on a seemingly bureaucratic detail. The organization claimed that under the 1976 Coastal Act, which gave a statewide Coastal Commission jurisdiction over beachfront land, Khosla needed to apply for a development permit in order to close the gate. The commission will often only grant development permits, typically to build a home or another structure, if the public gets an established right of way in return.

“Because they’re in charge of beach development, they’re allowed to do this quid pro quo,” says Arthur McEvoy, a professor at Southwestern Law School in Los Angeles. “They can ask you in trade to dedicate a little easement, if the development threatens to impede public access.”

The tricky matter is that while beaches are widely considered public, people don’t necessarily have a right to cross private property to get there. Cases such as this one set precedents that resonate up and down California’s 840 miles of coastline.


“Our culture abhors private beaches, and generally speaking our law abhors private beaches as well,” McEvoy said. “And any landowner is going to want to keep people away from their beach.”

[emphasis mine]

Continue reading: Surfers Beat Billionaire in Landmark California Beach Case | TIME.


“Mission Relaunched”: The Economist Goes There

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Nobel Peace Prize-winner Barack Obama became president on a platform of pacifism, and withdrawal from America's numerous conflicts. 6 years later, he is where Dubya was a decade ago, only on the other side, according to the latest Economist cover (and story).

And Reuters with a good summary in "Islamic State drags Obama back into Mideast quagmire"

Goldilocks Economy? What Are They Smoking at the Wall Street Journal?

Courtesy of Pam Martens.

Homeless Child PhotoImagine historians 25 years from now looking back on one of the worst economic periods since the Great Depression and finding that the Wall Street Journal was calling this a “Goldilocks Economy” – “not too hot, not too cold.” (They can’t actually bring themselves to say “just right” to stay on script with the fairy tale.)

On September 7, 2014 the Wall Street Journal went with this headline: “The Upside of August’s Jobs Report: A Goldilocks Economy.” The next day, in a blog post, this appeared: “Stocks rallied Friday following the disappointing jobs report as those hoping for a Goldilocks economy (not too hot, not too cold) cheered.”

During the Great Depression, headline writers were admonished not to use the phrase “Great Depression” but to go with the more benign “hard times.” The theory behind the use of the phrase “Goldilocks Economy” at the Wall Street Journal seems to be: move along, nothing more to see here in the way of a depressed economy so just forget about extending unemployment benefits or increasing the minimum wage or helping homeless families. That’s so not cool in the age of casino capitalism where the winner takes all – by hook or by crook.

On Monday, the U.S. Education Department released statistics showing that 1.3 million homeless children were enrolled in school in the 2012-2013 school year – an increase of 8 percent from the 2011-2012 period. And the numbers likely undercount the severity of the problem as the study notes that it does not include homeless infants, toddlers or children too young to attend school.

Last week, the U.S. Census Bureau reported the following on the number of individuals still living in poverty in our country: “In 2013, there were 45.3 million people in poverty. For the third consecutive year, the number of people in poverty at the national level was not statistically different from the previous year’s estimate.”

The same week the new poverty numbers for the U.S. came out, the latest data on newly minted billionaires was released by Wealth-X and the UBS Billionaire Census 2014. Naturally, the U.S., global haven of casino capitalism, boasted the most newly minted billionaires, adding 57 to bring its total to 571 billionaires out of a global total of 2,325.

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A Look Inside The Secret Deal With Saudi Arabia That Unleashed The Syrian Bombing

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

For those to whom the recent US campaign against Syria seems a deja vu of last summer's "near-war" attempt to ouster its president Bashar al-Assad (which was stopped in the last minute due to some very forceful Russian intervention and the near breakout of war in the Mediterranean between US and Russian navies), it is because it is.

And as a reminder, just like last year, the biggest wildcard in this, and that, direct intervention into sovereign Syrian territory, or as some would call it invasion or even war, was not the US but Saudi Arabia . Recall from August of 2013: "Meet Saudi Arabia's Bandar bin Sultan: The Puppetmaster Behind The Syrian War." Bin Sultan was officially let go shortly after the 2013 campaign to replace Syria's leadership with a more "amenable" regime failed. But Saudi ambitions over Syria remained.

That much is revealed by the WSJ today in a piece exposing the backdoor dealings that the US conducted with Saudi Arabia to get the "green light" to launch its airstrikes against ISIS, or rather, parts of Iraq and Syria. Not surprising, it is once again Assad whose fate was the bargaining chip to get the Saudis on the US's side, because to launch the incursion into Syrian sovereign territory "took months of behind-the-scenes work by the U.S. and Arab leaders, who agreed on the need to cooperate against Islamic State, but not how or when. The process gave the Saudis leverage to extract a fresh US commitment to beef up training for rebels fighting Mr. Assad, whose demise the Saudis still see as a top priority."

In other words, John Kerry came, saw and promised everything he could, up to and including the missing piece of the puzzle – Syria itself on a silver platter – in order to prevent another diplomatic humiliation.

When Mr. Kerry touched down in Jeddah to meet with King Abdullah on Sept. 11, he didn't know for sure what else the Saudis were prepared to do. The Saudis had informed their American counterparts before the visit that they would be ready to commit air power—but only if they were convinced the Americans were serious about a sustained effort in Syria. The Saudis, for their part, weren't sure how far Mr. Obama would be willing to go, according to diplomats.

Said otherwise, the pound of flesh demanded by [Saudis] to "bless" US airstrikes and make them appear as an act of some coalition, is the removal of the Assad regime. Why? So that, as we also explained last year, the holdings of the great Qatar natural gas fields can finally make their way onward to Europe, which incidentally is also America's desire – what better way to punish Putin for his recent actions than by crushing the main leverage the Kremlin has over Europe?

But back to the Saudis and how the deal to bomb Syria was cobbled together:

The Americans knew a lot was riding on a Sept. 11 meeting with the king of Saudi Arabia at his summer palace on the Red Sea.

A year earlier, King Abdullah had fumed when President Barack Obama called off strikes against the regime of Syria's Bashar al-Assad. This time, the U.S. needed the king's commitment to support a different Syrian mission—against the extremist group Islamic State—knowing there was little hope of assembling an Arab front without it.

At the palace, Secretary of State John Kerry requested assistance up to and including air strikes, according to U.S. and Gulf officials. "We will provide any support you need," the king said.

But only after the Saudis got the abovementioned assurances that Assad will fall. And to do that they would have to strongarm Obama:

Wary of a repeat of Mr. Obama's earlier reversal, the Saudis and United Arab Emirates decided on a strategy aimed at making it harder for Mr. Obama to change course. "Whatever they ask for, you say 'yes,'" an adviser to the Gulf bloc said of its strategy. "The goal was not to give them any reason to slow down or back out."

Arab participation in the strikes is of more symbolic than military value. The Americans have taken the lead and have dropped far more bombs than their Arab counterparts. But the show of support from a major Sunni state for a campaign against a Sunni militant group, U.S. officials said, made Mr. Obama comfortable with authorizing a campaign he had previously resisted.

To be sure, so far Obama has refrained from directly bombing Assad, it is only a matter of time: "How the alliance fares will depend on how the two sides reconcile their fundamental differences over Syria and other issues. Saudi leaders and members of the moderate Syrian opposition are betting the U.S. could eventually be pulled in the direction of strikes supporting moderate rebel fighters against Mr. Assad in addition to Islamic State. U.S. officials say the administration has no intention of bombing Mr. Assad's forces"… for now.

But why is Saudi Arabia so adamant to remove Assad? Here is the WSJ's take:

For the Saudis, Syria had become a critical frontline in the battle for regional influence with Iran, an Assad ally. As Mr. Assad stepped up his domestic crackdown, the king decided to do whatever was needed to bring the Syrian leader down, Arab diplomats say.

In the last week of August, a U.S. military and State Department delegation flew to Riyadh to lay the ground for a military program to train the moderate Syrian opposition to fight both the Assad regime and Islamic State—something the Saudis have long requested. The U.S. team wanted permission to use Saudi facilities for the training. Top Saudi ministers, after consulting overnight with the king, agreed and offered to foot much of the bill. Mr. Jubeir went to Capitol Hill to pressed key lawmakers to approve legislation authorizing the training.

And the US once again folded to Saudi demands to attack another sovereign, it was merely a matter of planning:

Hours before the military campaign was set to begin, U.S. officials held a conference call to discuss final preparations. On the call, military officers raised last-minute questions about whether Qatar would take part and whether the countries would make their actions public.

Mr. Kerry was staying in a suite on the 34th floor of New York's Waldorf Astoria hotel, where he was meeting leaders attending United Nations gatherings. He called his Gulf counterparts to make sure they were still onboard. They were.

The UAE, which some defense officials refer to as "Little Sparta" because of its outsized military strength, had the most robust role. One of the UAE's pilots was a woman. Two of the F-15 pilots were members of the Saudi royal family, including Prince Khaled bin Salman, son of the crown prince. In the third wave of the initial attack, half of the attack airplanes in the sky were from Arab countries.

The best news for Obama: it is now just a matter of time to recreate the same false flag that the Saudi-US alliance pushed so hard on the world in the summer of 2013 to justify the first attempt to remove Assad, and once again get the "sympathy" public cote behind him, naturally with the support of the US media.

But how does one know it is once again nothing but a stage? The following blurb should explain everything:

Saudi players in attendance for the Sept. 11 meeting included Prince Bandar bin Sultan, who as the king's spymaster last year ran afoul of Mr. Kerry over Syria and Iraq policy. U.S. officials interpreted his presence as a sign the king wanted to make sure the court was united, U.S. officials said.

Actually, his presence is a sign that the same puppetmaster who pulled the strings, and failed, in 2013 to remove Assad, and as noted above was at least officially removed from the stage subsequently, is once again the person in charge of the Syrian campaign, only this time unofficially, and this time has Obama entirely wrapped around his finger.

Fear image by William Banzai7

Nomi Prins: Why Is the US So Interested In the Ukraine and Syria


[Image source]

Nomi Prins: Why Is the US So Interested In the Ukraine and Syria

Courtesy of Jesse's Cafe Americain

"Why do we care about the Ukraine? We care about Ukraine because it’s a gateway to oil. It’s a gateway to Eastern Europe. It’s a gateway to control a situation politically, but also for our banking system to get involved from a financial perspective…

Nobody really wants to have a third world war. That’s expensive and deadly, but this fighting over financial and political gain is really continuing to crescendo. It is crescendoing because there is so much money on the table and because the economies involved, ours, China’s, Russia’s, are really all weaker than any government wants to admit on the surface.”

Nomi Prins, Iraq, Syria and Ukraine-Financial Gateways

"War is madness. Even today, after the second failure of another world war, perhaps one can speak of a third war, one fought piecemeal, with crimes, massacres, destruction. In today's world, behind the scenes, there are interests, geopolitical strategies, lust for money and power, and there is the manufacture and sale of arms.  And these have engraved on their hearts, 'what does it matter to me?'.”

Francis I, Memorial of the Hundred Thousand at Redipuglia, 13 September 2014

What does it matter to me? Am I my brother's keeper? This is the mark of Cain.

In this interview below Nomi Prins is suggesting that under the guise of humanitarianism and freedom, the Anglo-Americans are pursuing an age old colonialism with a modern financial twist.  And that pursuit is manifesting in 'gateways' or friction points where its expansion meets some countervailing force.

The notion of taking and controlling 'gateways' is interesting.  These could be seen as the current areas of action in the ongoing currency wars, which are merely exercises in financial power.  The geographic importance of the gateways reminds one of strategic points of control based on topography and supply lines in the last century.  

Now we have the flow of money and debt to consider as well as the ability to set prices and value.

If a fiat currency becomes like a Ponzi scheme, without growth underpinned by organic economic activity, it must continually expand or endure the risk of collapse.  The ability to enforce a valuation becomes paramount. 

The reason that the US dollar has become a Ponzi scheme is because of the utterly artificial and unsustainable recovery that has been created.  Inequality of opportunity, wealth and justice is the hallmark of aristocracy, oligarchy, and all the empires of the past in which a narrow group of people skew the economic performance of the economy for their own benefit.

The choice has apparently been made to engage the world in financialisation, which has had its way with many of the developing countries, and is now confronting opposition from competing forces in more distant lands where it seeks to expand.

You can see the write up and view the original source of this Nomi Prins interview at USAWatchdog here.


Watch US inflation expectations

Watch US inflation expectations

Courtesy of

China's "no stimulus" pledge and falling commodity prices are sending US inflation expectations to multi-year lows. Below is the 5-year inflation expectation indicator (breakeven) implied by inflation-linked treasuries (TIPS).

The 5-year real rates in the US have recently turned positive, which some would suggest represents tighter monetary conditions. With real rates on the rise, the Fed will have a great deal of room to "slowroll" the rate hikes. If inflation expectations fall further, we may see a more dovish stance from the FOMC. 

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Housing Prices, “Real” Interest Rates, and the “Real” CPI

Courtesy of Mish.

With housing prices still rising, albeit more slowly, inquiring minds might be wondering about “Real” interest rates and the “Real” CPI?

CPI Distortions

I believe the CPI is hugely distorted, but not for the same reasons as everyone else. Home prices used to be in the CPI but the BLS now uses OER (Owners’ Equivalent Rent). OER is a measure of actual rental prices as well as fiction.

The BLS determines OER from a measure of rental prices and also by asking the question “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?

If you find that preposterous, You are not the only one. Regardless, rental prices are simply not a valid measure of home prices.

OER Weighting in CPI

OER has the single largest weight of any component in the CPI, at 23.957%.

Let’s play “What If?” Specifically, “What if the BLS used actual home prices instead of OER in calculating the CPI?”


Periodically, Black Knight Financial Services provides the actual data behind their HPI (Home Price Index), a measure of actual prices.

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Euro Area PMI Data Weak, Stocks Decline Sharply

Euro Area PMI Data Weak, Stocks Decline Sharply

Courtesy of 

Flash PMI Disappointment

Markit released its euro area composite Flash PMI and the Flash PMIs for the “core” countries Germany and France on Tuesday. The data once again showed that economic growth in Europe is not much to write home about. Germany’s data look superficially good, but there is a widening gulf between manufacturing and service sector data, with the former weakening markedly.

The euro area composite output index fell to a 9 month low, the manufacturing PMI to a 14 month low – at 50.5 it remains barely in positive territory. Note in this context that in spite of the popular myth that manufacturing is only an insignificant part of the economy, it is actually its largest and most important part. In GDP accounting, almost the entire production structure is ignored (only investment in fixed capital assets is considered). And yet, if one looks at industry gross output tables, it becomes clear that this ignored portion of the economy actually represents the bulk of economic activity. Properly considered, consumer spending amounts only to about 35%-40% of economic activity, not 70% as is generally assumed. In short, manufacturing PMI data are actually a rather important gauge of an economy’s health.

France’s PMIs remain in contraction, even if it is mild at this point. However, it is not surprising that French unemployment remains near multi-year highs and that the government consistently fails to meet its budget deficit targets.

1-EZ-PMI and growth

Euro area, Markit composite PMI and GDP growth – click to enlarge.

A few salient quotes from Markit’s Flash PMI reports (the detailed reports can be viewed, resp. downloaded here):

Euro area overall:

“Euro area business activity grew in September at the lowest rate seen so far this year, according to the preliminary ‘flash’ PMI survey data.

At 52.3, down from 52.5 in August, the Markit Eurozone PMI™ Composite Output Index fell for a second month running, dropping to its lowest since December of last year. At 52.9, the average quarterly reading for the three months to September was also the lowest so far this year.


By sector, growth of services activity slowed to a three-month low, while new business growth was the weakest since March. Employment in services barely rose as a result and prices charged fell slightly on average. Future expectations also nudged lower to the least optimistic since July of last year.

Manufacturing fared worse than the service sector with the headline PMI falling to 50.5, its lowest since July of last year and edging closer to the 50.0 mark that signals stagnation. Although factory output grew slightly, new orders fell for the first time since June of last year.”


“September data signaled a continuation of the ongoing expansion in German private sector output, as highlighted by the seasonally adjusted Markit Flash Germany Composite Output Index rising slightly from 53.7 in August to 54.0. The current period of growth now stretches to 17 months and surveyed companies generally linked this to increased order intakes.

However, the gap between manufacturing and services widened further in September. Production growth in the goods-producing sector slowed to a 15-month low, while service sector output rose at a slightly faster pace compared to August.

As has been the case since July 2013, the volume of incoming new business placed with German private sector companies rose during September, but the rate of increase eased for the fourth month running and was the weakest in one year. Slower growth was largely attributed to the manufacturing sector, where new orders contracted for the first time since June last year amid reports of a weakening economic environment.”


The latest flash PMI data indicated a fifth consecutive monthly decline in French private sector output during September. At 49.1, down from 49.5 in August, the seasonally adjusted Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, was at its lowest level in three months, albeit signaling a marginal rate of contraction.

Service sector activity fell for the first time in three months during September, offsetting a slower decline in manufacturing output.

Underlying reduced activity was a drop in the level of new business received by French private sector firms during the latest survey period. Although slight, the reduction in new orders reversed a rise in August. Whereas manufacturers signaled a solid decline in new work, service providers registered a fractional fall.”

2-Core-periphery output

French, German and rest of euro area PMI output indexes – click to enlarge.

Although no-one should have been surprised by this, surprise was allegedly registered by market participants.

Stock Markets Plummet

The action in major European stock markets looks more and more like a beginning decline after a failed rally that “back-kissed” a previously broken major trend line. The probability that this interpretation is correct is enhanced by the fact that the European indexes have diverged from the S&P 500 twice in a row recently (i.e., two new highs in the SPX were not confirmed by the European indexes. Note that these indexes have fared far worse in dollar than in euro terms to boot).

Below is an updated version our previously posted comparison chart with adapted annotations. The chart shows the “core country indexes” DAX and CAC-40 compared to the SPX. Admittedly, the most recent decline is still young, but this is definitely technically suspicious action and therefore deserves to be highlighted.



The action in European stocks suggests that the recent rally has cemented the previously registered divergence with the SPX and represents a rebound that may have failed right at the trend line that has provided support during the preceding uptrend – click to enlarge.


An additional remark to this: China’s manufacturing PMI data came in slightly “better than expected” on Tuesday morning, even if they were not particularly strong either. Many had feared the data would indicate contraction, but a small expansionary reading was in fact eked out – which was enough to give the Shanghai stock market a small boost.

In light of this it is actually noteworthy that European markets reacted so negatively to the so-so European Flash PMI data. After all, there is still an expansion underway Europe-wide, even if its pace is clearly weakening. Since this was probably no secret even before the data release, we conclude that market participants were simply looking for an excuse to sell.


After several years of heavy bombardment with ultra-easy monetary policies, only the US has so far managed to exhibit a consistent improvement in economic data. However, US data are just as suspect, on the grounds that they reflect the effects of a huge expansion in the US money supply (exceeding the money supply growth achieved by the ECB, let alone the BoJ, by far). Thus the greater growth rate in aggregate US economic activity contains an unmeasurable, but likely quite large, malinvestment component. When considering European data one must keep in mind that credit expansion has gone into reverse in several peripheral countries and a lot of malinvested capital has been liquidated. Alas and alack, the ECB appears intent on reigniting boom conditions, even though it has so far not succeeded.

As regards stock markets: while US stocks have done significantly better than European ones lately, even the major US indexes are hovering just above trend line support after just two days of selling (as a result of the wedge-shaped advance of recent months, the support trend line has crept very close to current prices). Meanwhile, US small cap stocks are very weak, and so are market internals. Thus the strong showing in cap-weighted indexes has masked a lot of weakness spreading under the surface. Caveat emptor – risk remains very high.

Charts by: Markit, StockCharts

Bank Of Japan Buys A Record Amount Of Equities In August

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Having totally killed the Japanese government bond market, Shinzo Abe has – unlike the less transparent Federal Reserve, which allegedly use their proxy Citadel – gone full tilt into buying Japanese stocks (via ETFs). In May, we noted the BoJ's aggressive buying as the Nikkei dropped, and in June we pointed out the BoJ's plan tobuy Nikkei-400 ETFs and so, as Nikkei news reports, it is hardly surprising that the Bank of Japan bought a record JPY 123.6 billion worth of ETFs in August.

The market 'knows' that the BoJ tends to buy JPY10-20 billion ETFs when stock prices fall in the morning. The BoJ now holds 1.5% of the entire Japanese equity market cap (or roughly JPY 480 trillion worth) and is set to surpass Nippon Life as the largest individual holder of Japanese stocks. And, since even record BoJ buying was not enough to do the job, Abe has now placed GPIF reform (i.e. legislating that Japan's pension fund buys stocks in much greater size) as a primary goal for his administration. The farce is almost complete as the Japanese ponzi teeters on the brink.

Via Nikkei Asia,

The Bank of Japan is growing into its role as a key source of support for the country's stock market, as it has stepped up purchases of exchange-traded funds to bring its equities portfolio to an estimated 7 trillion yen ($63.6 billion) or so.

The central bank bought 123.6 billion yen worth of ETFs in August, the largest monthly tally so far this year. At one point, it snapped up ETFs in six straight sessions amid weak stock prices.

The BOJ tends to make 10 billion yen to 20 billion yen worth of purchases when stock prices fall in the morning. The bank has not made any purchases so far in September because the market has been rallying.

According to BOJ data, the market value of individual stocks and ETFs that it held as of March 31 came to 6.15 trillion yen. Given its purchases since then and the market rally, the value is estimated to have increased to a whopping 7 trillion yen or so by now.

That figure accounts for 1.5% of the entire market value of all Japanese shares, or roughly 480 trillion yen. It also means the BOJ may surpass Nippon Life Insurance, the largest private-sector stock holder with some 7 trillion yen in holdings, as early as this year and emerge as the second-biggest shareholder behind the Government Pension Investment Fund — the national pension fund with 21 trillion yen.

The BOJ started outright purchases of shareholdings from banks back in 2002 with the aim of stabilizing the country's financial system. To prevent stocks from tumbling steeply, it also began buying ETFs in 2010. The bank does not buy individual shares now, but it doubled its annual ETF purchases to 1 trillion yen when it introduced unprecedented levels of monetary easing in April 2013.

It is unusual for a central bank to buy stocks and ETFs, given that their sharp price swings pose the risk of undermining the health of the bank's assets. High levels of purchases by the BOJ affect stock prices and may hurt asset allocation and development of the financial markets.

The timing and technique of selling the BOJ's shareholdings are also a tricky question. A freeze has been put on sales of individual shares until March 2016, and there is no selling schedule for ETFs. But given that the bank's holdings are equal to roughly half the 15 trillion yen in net buying by foreigners last year, large-scale selling would be certain to shake the market.

*  *  *

We hope, by now, it is clear what a fraud the entire system has become. Simply put, the BoJ has the firepower (unlimited printing) but not the liquidity (the markets are just not deep enough as was clear in the JGB complex) to keep the dream alive if (and when) investors lose faith in Abenomics. Clearly that's why Abe needs to get the GPIF on the case…