Jun 132017
 
 June 13, 2017  Posted by at 9:55 am Finance Tagged with: , , , , , , , , ,  1 Response »
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Pablo Picasso Les femmes d’Alger Version 0 1955

 

The Average Stock Is Enormously, Tremendously Overvalued (Katsenelson)
72% Of US Businesses Are Not Profitable (Simon Black)
UBS Has Some Very Bad News For The Global Economy (ZH)
Fed To Raise Interest Rates, Give More Detail On Balance Sheet Winddown (R.)
EU Plans to Force Relocation of Euro Clearing After Brexit (BBG)
Norway Central Bank Explains How Money Is Created (Norges Bank)
Qatar Spends $8 Million To Airlift 4,000 Cows (BBG)
Things To Come (Jim Kunstler)
Multi-Million Dollar Upgrade Planned To ‘Failsafe’ Arctic Seed Vault (G.)
EU To Open Case Against Poland, Hungary, Czech Republic Over Refugees (R.)
ECB Unlikely to Include Greece in QE in Coming Months (BBG)
Greek Debt Deal ‘Not Far’ Says New French Finance Minister (AFP)
One Dead As 6.3-Magnitude Earthquake Rocks Greek Islands Lesbos, Chios (AFP)

 

 

No markets, no discovery, just smoke.

The Average Stock Is Enormously, Tremendously Overvalued (Katsenelson)

We are constantly looking for new stocks by running stock screens, endlessly reading (blogs, research, magazines, newspapers), looking at holdings of investors we respect, talking to our large network of professional investors, attending conferences, scouring through ideas published on value investor networks, and finally, looking with frustration at our large (and growing) watch list of companies we’d like to buy at a significant margin of safety. The median stock on our watch list has to decline by about 35–40% to be an attractive buy. But maybe we’re too subjective. Instead of just asking you to take our word for it, in this letter, we’ll show you a few charts that not only demonstrate our point, but also show the magnitude of the stock market’s overvaluation and, more importantly, put it into historical context.

Each chart examines stock market valuation from a slightly differently perspective, but each arrives at the same conclusion: the average stock is overvalued somewhere between tremendously and enormously. If you don’t know whether “enormously” is greater than “tremendously” or vice versa, don’t worry, we don’t know either. But this is our point exactly: When an asset class is significantly overvalued and continues to get overvalued, quantifying its overvaluation brings little value. Let’s demonstrate this point by looking at a few charts. The first chart shows price-to-earnings of the S&P 500 in relation to its historical average. The average stock today is trading at 73% above its historical average valuation. There are only two other times in history that stocks were more expensive than they are today: just before the Great Depression hit and in the 1999 run-up to the dot-com bubble burst.

We know how the history played in both cases—consequently stocks declined, a lot. Based on over a century of history, we are fairly sure that, this time too, stock valuations will at some point mean revert and stock markets will decline. After all, price-to-earnings behaves like a pendulum that swings around the mean, and today that pendulum has swung far above the mean. What we don’t know is how this journey will look in the interim. Before the inevitable decline, will price-to-earnings revisit the pre-Great Depression level of 95% above average, or will it maybe say hello to the pre-dot-com crash level of 164% above average? Or will another injection of QE steroids send stocks valuations to new, never-before-seen highs? Nobody knows. One chart is not enough. Let’s take a look at another one called the Buffett Indicator. Think of this chart as a price-to-sales ratio for the whole economy, that is, the market value of all equities divided by GDP. The higher the price-to-sales ratio, the more expensive stocks are.

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What does this say about where the S&P is?

72% Of US Businesses Are Not Profitable (Simon Black)

Total Household Wealth is exactly what it sounds like– the total net worth of every person in the United States, from Bill Gates down to the youngest newborn baby. So when you add up all the 330+ million folks in the Land of the Free and tally up their combined net worth, the total is $94 trillion. The thing is that the VAST majority of that wealth, especially the incredible growth over the last 8 years, has been from increases in just two asset classes: real estate and the stock market. In fact, stocks and real estate alone account for roughly 2/3 of the wealth increase since 2009. I’ll come back to that in a moment. Now, simultaneously, we see plenty of other interesting data, also published by the Federal Reserve and US federal government. Both the Fed and Census Bureau, for example, tell us that over 80% of businesses in the US are “nonemployer” companies, i.e. businesses which only employ one person (the owner), and often provide his/her primary source of income.

Yet according to the Federal Reserve, only 35% of these small businesses are profitable. Most are operating at a loss. In other words, only 35% of the companies which make up 80% of American businesses are profitable. You’re probably already doing the arithmetic– this means that a whopping 72% of all US businesses are NOT profitable. That hardly sounds like record wealth to me. Shifting gears, there’s the little factoid that an astounding 40% of young Americans are living with their parents– the highest%age in the last 75 years. And who can blame them considering student debt in the Land of the Free also hit a record $1.4 trillion three months ago, more than double the amount since the Great Recession. Speaking of record debt, US credit card debt passed a record $1 trillion, and total US consumer credit hit a record $3.8 trillion last month. Again, all of this hardly seems like ‘wealth’ to me.

Then there’s the issue of wages, which have remained essentially flat since the 2009 Great Recession if you adjust for inflation. According to the US Department of Labor, inflation-adjusted wages, aka “real hourly compensation” in the US fell an annualized 0.9% last quarter, and fell a dismal 5.6% in the previous quarter. Adjusted for inflation, the average American isn’t making any more money. Once again, this is a pitiful excuse for ‘wealth.’ American businesses aren’t more productive either. The same Labor Department report shows that productivity in the Land of the Free was flat in the first quarter of this year. And productivity actually declined in 2016– something that hasn’t happened in at least the last 50 years. Not to mention total economic growth in the Land of the Free has been pretty pitiful, logging a pathetic 1.6% last year. And GDP growth in the first quarter of 2017 was just 1.2% on an annualized basis. The US economy has exceed hasn’t surpassed 3% growth in more than 10-years.

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Oversaturated with debt.

UBS Has Some Very Bad News For The Global Economy (ZH)

[..] fast forwarding just over three months later, where are we now? To answer that question, overnight UBS released its much anticipated update on the current state of the global credit impulse, and it’s nothing short of a disaster. As Kapteyn writes in what may have been the most eagerly awaited report in recent UBS history, “we have been inundated with questions about the chart below, first published in March. Yes, the global credit impulse is still falling. And yes, it matters because the correlation of this global credit impulse with global domestic demand is 0.61.” But it’s what follows next that should send shivers down the spine of anyone still clutching to the failed “recovery” narrative:

From peak to trough the deceleration in global credit growth is now approaching that during the global financial crisis (-6% of global GDP), even if the dispersion of the decline is much narrower. Currently 55% of the countries in our sample have experienced a -0.3 standard deviation deterioration in their credit impulse (median over 12 months) compared to 77% of countries in Dec ’09 when the median decline was -1.4 stdev.” Here is what the stunning collapse in the credit impulse looks like as of today:

While we urge all readers to get in touch with their friendly UBS sales coverage for the full report, here is a quick primer from UBS on what the current data is telling us, not so much about China where the credit impulse slowdown was discussed previously, but about the world’s biggest economy. From UBS: The credit impulse in the US has also turned down, seemingly on the back of a sharp drop in demand for C&I loans. The slowdown is more visible in the bank loan data than the Flow of Funds data we are using to calculate the credit impulse (the FoF is 3x as broad and includes non-bank credit as well). But the slowdown is nonetheless at odds with confidence being expressed about investment and future borrowing plans.

The US credit impulse was running at 0.7% GDP back in September 2016 and by March had fallen to -0.53% GDP (recovering somewhat in April based on bank loan data). Why does this matter? Because as UBS shows in the chart below, in the US the correlation between activity and the impulse is very strong, and the lack of credit growth could constrain an acceleration in GDP from weak Q1 levels (the credit impulse suggests domestic demand growth should be close to 1% rather than the 2+% which consensus is currently tracking).

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Yawn.

Fed To Raise Interest Rates, Give More Detail On Balance Sheet Winddown (R.)

The U.S. Federal Reserve is widely expected to raise its benchmark interest rate this week due to a tightening labor market and may also provide more detail on its plans to shrink the mammoth bond portfolio it amassed to nurse the economic recovery. The central bank is scheduled to release its decision at 2 p.m EDT on Wednesday at the conclusion of its two-day policy meeting. Fed Chair Janet Yellen is due to hold a press conference at 2:30 pm EDT. “The expectation of a rate hike…is widely held, and has been reinforced by the most recent round of Fed communications,” said Michael Feroli, an economist with J.P. Morgan. Economists polled by Reuters overwhelmingly see the Fed raising its benchmark rate to a target range of 1.00 to 1.25% this week.

The Fed embarked on its first tightening cycle in more than a decade in December 2015. A quarter%age point interest rate rise on Wednesday would be the second nudge upwards this year following a similar move in March. Since then, the unemployment rate has fallen to a 16-year low of 4.3% and economic growth appears to have reaccelerated following a lackluster first quarter. However, other indicators of the economy’s health have been more mixed. The Fed’s preferred measure of underlying inflation has retreated to 1.5% from 1.8% earlier in 2017 and investors are growing increasingly doubtful policymakers will be able to stick to their anticipated pace of tightening of three interest rate rises this year and next.

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There’s money in derivatives yet.

EU Plans to Force Relocation of Euro Clearing After Brexit (BBG)

Firms that clear euro-denominated derivatives may be forced to relocate to the European Union from London after Brexit under EU proposals to be rolled out on Tuesday, according to a person with knowledge of the matter. Under the European Commission’s plans for overhauling supervision of clearinghouses that are based outside the bloc, firms deemed systemically important to the EU financial system could be required to accept direct oversight by the bloc’s authorities, the person said, asking not to be named because the proposals aren’t yet public. Firms could also be forced to move their euro clearing operations to a location inside the EU, the person said.

This so-called location requirement has spurred warnings from the industry of skyrocketing costs, and has helped to turn clearing into a political football as the EU and U.K. prepare for divorce negotiations. In a June 8 letter to Valdis Dombrovskis, the EU’s financial-services policy chief, the International Swaps and Derivatives Association said a survey of data from 11 banks showed that requiring euro-denominated interest-rate derivatives to be cleared by an EU-based clearinghouse would boost initial margin by as much as 20%. The proposals to be published on Tuesday are largely in line with initial plans floated last month by the commission, the EU’s executive arm.

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Central banks and shunned economists seem to be the only ones who understand this.

Norway Central Bank Explains How Money Is Created (Norges Bank)

Today, there are two forms of central bank money. One of the forms is common knowledge – banknotes and coins. The other, bank reserves at Norges Bank, is less well known. The sum total of banknotes and coins and bank reserves at Norges Bank is about NOK 85 billion.[5] But the total money supply is much larger than this. Customer deposits in banks are also money. These deposits, referred to as deposit money, total more than NOK 2 trillion in Norway. This money is created by banks, not by Norges Bank. Chart 1 shows the money supply and the supply of banknotes and coins in Norway since 1960. In Norway, the money supply mainly comprises deposit money in banks.[6] In the early 1960s, banknotes and coins accounted for a fifth of the money supply. Current accounts and cheques were already becoming commonplace.

Since then, banks’ deposit money has increased dramatically, and today, banknotes and coins make up less than 2.5% of the money supply. In other words, virtually all the money we use has been created by banks. So how do banks create money? The answer to that question comes as quite a surprise to most people. When you borrow from a bank, the bank credits your bank account. The deposit – the money – is created by the bank the moment it issues the loan. The bank does not transfer the money from someone else’s bank account or from a vault full of money. The money lent to you by the bank has been created by the bank itself – out of nothing: fiat – let it become. The money created by the bank does not disappear when it leaves your account. If you use it to make a payment, it is just transferred to the recipient’s account.

The money is only removed from circulation when someone uses their deposits to repay a bank, as when we make a loan repayment.[7] The money supply is therefore only reduced when banks’ claims on the rest of the economy decrease. Banks also fund lending by raising loans themselves instead of creating money in the form of deposits. In order to reduce risk, banks also use other forms of investment in addition to lending.[8] Nevertheless, the money supply is growing at almost at the same pace as total bank credit. To sum up: banks create money out of nothing and withdraw it when loans are repaid. Growth in total bank credit is normally matched by growth in the money supply.[9] This does not sound encouraging. Is money an illusion? Why is today’s privately issued deposit money often perceived to be as safe as money issued by the central bank?

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Flying pigs would have been even nicer.

Qatar Spends $8 Million To Airlift 4,000 Cows (BBG)

Call it the biggest bovine airlift in history. The showdown between Qatar and its neighbors has disrupted trade, split families and threatened to alter long-standing geopolitical alliances. It’s also prompted one Qatari businessman to fly 4,000 cows to the Gulf desert in an act of resistance and opportunity to fill the void left by a collapse in the supply of fresh milk. It will take as many as 60 flights for Qatar Airways to deliver the 590-kilogram beasts that Moutaz Al Khayyat, chairman of Power International Holding, bought in Australia and the U.S. “This is the time to work for Qatar,” he said. Led by Saudi Arabia, Qatar stands accused of supporting Islamic militants, charges the sheikhdom has repeatedly denied.

The isolation that started on June 5 has forced the world’s richest country by capita to open new trade routes to import food, building materials and equipment for its natural gas industry. The central bank said domestic and international transactions were running normally. Turkish dairy goods have been flown in, and Iranian fruit and vegetables are on the way. There’s also a campaign to buy home-grown produce. Signs with colors of the Qatari flag have been placed next to dairy products in stores. One sign dangling from the ceiling said: “Together for the support of local products.” “It’s a message of defiance, that we don’t need others,” said Umm Issa, 40, a government employee perusing the shelves of a supermarket before taking a carton of Turkish milk to try. “Our government has made sure we have no shortages and we are grateful for that. We have no fear. No one will die of hunger.”

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“..they had no idea what to do about it, except maybe try to escape the moment-by-moment pain of their ruined lives with powerful drugs. And then, a champion presented himself..”

Things To Come (Jim Kunstler)

As our politicos creep deeper into a legalistic wilderness hunting for phantoms of Russian collusion, nobody pays attention to the most dangerous force in American life: the unraveling financialization of the economy. Financialization is what happens when the people-in-charge “create” colossal sums of “money” out of nothing — by issuing loans, a.k.a. debt — and then cream off stupendous profits from the asset bubbles, interest rate arbitrages, and other opportunities for swindling that the artificial wealth presents. It was a kind of magic trick that produced monuments of concentrated personal wealth for a few and left the rest of the population drowning in obligations from a stolen future. The future is now upon us. Financialization expressed itself in other interesting ways, for instance the amazing renovation of New York City (Brooklyn especially).

It didn’t happen just because Generation X was repulsed by the boring suburbs it grew up in and longed for a life of artisanal cocktails. It happened because financialization concentrated immense wealth geographically in the very few places where its activities took place — not just New York but San Francisco, Washington, and Boston — and could support luxuries like craft food and brews. Quite a bit of that wealth was extracted from asset-stripping the rest of America where financialization was absent, kind of a national distress sale of the fly-over places and the people in them. That dynamic, of course, produced the phenomenon of President Donald Trump, the distilled essence of all the economic distress “out there” and the rage it entailed.

The people of Ohio, Indiana, and Wisconsin were left holding a big bag of nothing and they certainly noticed what had been done to them, though they had no idea what to do about it, except maybe try to escape the moment-by-moment pain of their ruined lives with powerful drugs. And then, a champion presented himself, and promised to bring back the dimly remembered wonder years of post-war well-being — even though the world had changed utterly — and the poor suckers fell for it. Not to mention the fact that his opponent — the avaricious Hillary, with her hundreds of millions in ill-gotten wealth — was a very avatar of the financialization that had turned their lives to shit. And then the woman called them “a basket of deplorables” for noticing what had happened to them.

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The permafrost is not all that perma.

Multi-Million Dollar Upgrade Planned To ‘Failsafe’ Arctic Seed Vault (G.)

The Global Seed Vault, built in the Arctic as an impregnable deep freeze for the world’s most precious food seeds, is to undergo a multi-million dollar upgrade after water from melting permafrost flooded its access tunnel. No seeds were damaged but the incident undermined the original belief that the vault would be a “failsafe” facility, securing the world’s food supply forever. Now the Norwegian government, which owns the vault, has committed $4.4m (NOK37m) to improvements. The vault is buried 130m inside a mountain in the Svalbard archipelago and contains almost a million packets of seeds, each a variety of an important food crop. The vault was opened in 2008, sunk deep into the permafrost, and was expected to provide protection against “the challenge of natural or man-made disasters” and “to stand the test of time”.

But the vault’s planners had not anticipated the extreme warm weather seen recently at the end of the world’s hottest ever recorded year. “The background to the technical improvements is that the permafrost has not established itself as planned,” said a government statement. “A group will investigate potential solutions to counter the increased water volumes resulting from a wetter and warmer climate on Svalbard.” One option could be to replace the access tunnel, which slopes down towards the vault’s main door, carrying water towards the seeds. A new upward sloping tunnel would take water away from the vault.

A former Svalbard coal miner, Arne Kristoffersen, told the Guardian most coal mines on the islands had upward sloping entrance tunnels: “For me it is obvious to build an entrance tunnel upwards, so the water can run out. I am really surprised they made such a stupid construction.” Hege Njaa Aschim, the Norwegian government’s spokeswoman for the vault, said: “The construction was planned like that because it was practical as a way to go inside and it should not be a problem because of the permafrost keeping it safe. But we see now, when the permafrost is not established, maybe we should do something else with the tunnel, so that is why we have this project now.”

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Hollow threats.

EU To Open Case Against Poland, Hungary, Czech Republic Over Refugees (R.)

The European Union’s executive will decide on Tuesday to open legal cases against three eastern members for failing to take in asylum-seekers to relieve states on the front lines of the bloc’s migration crisis, sources said. The European Commission would agree at a regular meeting to send so-called letters of formal notice to Poland and Hungary, three diplomats and EU officials told Reuters. Two others said the Czech Republic was also on the list. This would mark a sharp escalation of the internal EU disputes over migration. Such letters are the first step in the so-called infringement procedures the Commission can open against EU states for failing to meet their legal obligations. The eastern allies Poland and Hungary have vowed not to budge. Their staunch opposition to accepting asylum-seekers, and criticism of Brussels for trying to enforce the scheme, are popular among their nationalist-minded, eurosceptic voters.

Speaking in Hungary’s parliament earlier on Monday, Prime Minister Viktor Orban said: “We will not give in to blackmail from Brussels and we reject the mandatory relocation quota.” A spokeswoman in Brussels did not confirm or deny the executive would go ahead with the legal cases, but referred to an interview that Commission head Jean-Claude Juncker gave to the German weekly Der Spiegel last week. “Those that do not take part have to assume that they will be faced with infringement procedures,” he was quoted as saying. Poland and Hungary have refused to take in a single person under a plan agreed in 2015 to relocate 160,000 asylum-seekers from Italy and Greece, which had been overwhelmed by mass influx of people from the Middle East and Africa. Poland’s Interior Minister Mariusz Blaszczak was quoted as saying on Monday by the state news agency PAP: “We believe that the relocation methods attract more waves of immigration to Europe, they are ineffective.”

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Not going to happen, it would solve many of Greece’s problems, and Germany is not done with it yet.

ECB Unlikely to Include Greece in QE in Coming Months (BBG)

The ECB is unlikely to include Greek bonds in its asset-purchase program for the foreseeable future, a person familiar with the matter said, as European creditors aren’t prepared to offer substantially easier repayment terms on bailout loans to improve the nation’s debt outlook. Euro-area finance ministers will meet in Luxembourg on June 15 to discuss debt-relief measures that the ECB has said are needed before it will consider purchasing Greek bonds. The so-called Eurogroup is expected to complete a review of Athens’s rescue program that would allow for the disbursement of at least €7.4 billion in aid needed for a similar amount of bond repayments in July. An agreement among the ministers will likely allow the IMF – whose participation in the rescue program is a requirement for many nations – to commit in principle to a conditional loan, said the person.

But the extent and wording of debt-relief commitments probably won’t convince the Governing Council of the ECB to buy Greek bonds. And while the government of Prime Minister Alexis Tsipras is relying on quantitative easing to aid Greece’s return to the public debt market, the ECB won’t factor fiscal consequences into its policy-making decisions and excessive emphasis on QE inclusion would be misguided, according to the person. [..] The ECB’s quantitative easing is scheduled to continue until December 2017, with economists saying purchases will be gradually tapered throughout 2018. This would leave little time for purchases of Greek bonds before the program’s end.

Meanwhile, France, which is trying to bridge differences on the debt issue, has proposed automatically reducing loan repayments when Greece misses growth targets, according to two people with knowledge of the talks. European officials see the proposal as a step in the right direction but doubt it will be enough to convince the ECB to include Greece in its bond purchase program if the IMF maintains its position that the country’s debt is unsustainable. Other euro-area member states so far have opposed France’s proposal, the people said.

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Is Macron going to stand up to Merkel and Schäuble? I’m not convinced.

Greek Debt Deal ‘Not Far’ Says New French Finance Minister (AFP)

A deal on debt relief for Greece is “not far,” France’s new finance minister Bruno Le Maire said Monday ahead of crunch eurozone talks on the issue on Thursday. “I am optimistic that we will have a good solution. We are not far from agreement,” Le Maire said ahead of a meeting with Greek PM Alexis Tsipras. “We are really doing our best to find an agreement,” he had said earlier after seeing his Greek counterpart Euclid Tsakalotos. “It’s difficult. It’s complicated,” he said. At the June 15 meeting, Le Maire said he planned to propose a “mechanism” of “flexibility” to lessen Greek debt repayment based on its economic growth. “It’s a mechanism which should allow us to revise certain (debt) parameters based on Greek growth,” he told reporters.

The issue of debt relief for Greece has sharply divided its international creditors, the EU and the IMF, for months in the latest round of talks. The impasse has held up a tranche of bailout cash which Greece needs to repay loans in July, and Athens says its fragile recovery has also been impaired. Tsipras has said he will ask EU leaders to resolve the issue at the end of June if no solution is forthcoming on Thursday. “Piling drama on the problem helps no one,” he said on Monday. The Europeans expect Greece’s economy to grow strongly and its government to bring in large surpluses in revenue in the coming years, allowing it to pay down its debts. But the IMF is less optimistic, arguing there must be further relief for Athens before it can label its debt sustainable and justify loaning Greece any more cash.

New French President Emmanuel Macron last month called Tsipras after his election, saying he was in favour of “finding a deal soon to alleviate the weight of Greece’s debt over time.” Macron’s position puts him at odds with Germany where Greek debt relief – following three different bailouts with public money for the country since 2010 – is seen as a vote loser ahead of general elections in September. Macron explained his thinking about Greece in an interview to the Mediapart website two days before his election. “I am in principle in favour of a concerted restructuring of Greek debt and in keeping Greece in the eurozone. Why? Because the current system is unsustainable,” he said.

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Wonder what the older, religious people on Lesbos must be thinking by now. It once was a quiet place.

One Dead As 6.3-Magnitude Earthquake Rocks Greek Islands Lesbos, Chios (AFP)

A woman died and 10 people were hurt on Monday when a 6.3-magnitude earthquake struck the Greek islands of Lesbos and Chios and the Aegean coast of western Turkey, officials said. The middle-aged victim had been trapped for around seven hours in the ruins of her home in the Lesbos village of Vrisa, the area that bore the brunt of the strong quake and where several homes collapsed. “Our fellow citizen who was trapped in the house that collapsed in Vrisa was pulled out dead,” Lesbos mayor Spyros Galinos said in a tweet. The earthquake also struck the Aegean coast of western Turkey after 1200 GMT.

Video footage shot by a Vrisa resident on a cellphone showed masonry from several single and two-level homes clogging the streets. “It’s a difficult situation, we are facing a disaster,” Christiana Kalogirou, governor of the north Aegean region, told Greek state TV station ERT, adding: “Some 10 people are injured.” “The army is bringing in tents so people can spend the night,” she said, adding that the south of Lesbos had taken the brunt of the quake. The tremor, felt as far as Athens and Izmir in Turkey, damaged at least three churches and shops in south Lesbos, local owners said, while rock slides blocked some roads.

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May 162016
 
 May 16, 2016  Posted by at 9:28 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle May 16 2016
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Harris&Ewing Ford Motor Co. New medical center parking garage, Washington, DC 1938

Goldman: The Median Stock Has NEVER Been More Overvalued (ZH)
The Business Of Corporate America Is No Longer Business – It Is Finance (FT)
Stockman: Trump Will Scare The Hell Out Of The Markets, But That’s OK (CNBC)
Trump’s ‘Print the Money’ Proposal Echoes Franklin and Lincoln (E. Brown)
India’s Central Bank Governor Warns On Stimulus Overuse (FT)
Average Asking Price For UK First-Time Buyer Home Jumps 6.2% In A Month (G.)
CERN Discovers New Particle Called The FERIR (Steve Keen)
Isn’t it Time to Stop Calling it “The National Debt”? (Steve Roth)
Forget the Saudis, Nigeria’s the Big Oil Worry (BBG)
China Housing Revival Props Up Economy (WSJ)
China’s Record $26 Billion Buyout Deals at Risk of Unraveling (BBG)
China Private Sector Investment Is Declining (R.)
China’s Record Daily Steel Output Bodes Ill for Global Industry (BBG)
How Investors Are Duped Each Earnings Season (MW)
Battle Brews in Spain, Portugal Over Negative Mortgage Rates (WSJ)
Refugee Numbers Returned To Turkey Fall Short Of EU ‘Expectations’ (FT)

In some places, this would be called a bubble.

Goldman: The Median Stock Has NEVER Been More Overvalued (ZH)

When Goldman warned on Friday that a “big drop” in the market is possible before the S&P hits the firm’s year end price target of 2,100, one of the bearish reasons brought up by the firm’s chief strategist David Kostin is that stocks are now massively overvalued. In fact, according to Goldman , while the aggregate market is more overvalued than 86% of all recorded instances, the median stocks has never been more overvalued, i.e., is in the 100% valuation percentile, according to some key metrics such as Price-to-Earnings growth and EV/sales.

This is what Goldman said: “Valuation is a necessary starting point of any drawdown risk analysis. At 16.7x the forward P/E multiple of the S&P 500 index ranks in the 86th percentile relative to the last 40 years. Most other metrics paint a similar picture of extended valuation. The median stock in the index trades at the 99th percentile of historical valuation on most metrics (see Exhibit 3).” Goldman’s conclusion: “The most likely future path of US equities involves a lower valuation.”

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America no longer makes much of anything anymore.

The Business Of Corporate America Is No Longer Business – It Is Finance (FT)

One of the great ironies of business today is that the richest and most powerful companies in the world are more involved than ever before in the capital markets at a time when they do not actually need any capital. Take Apple, which has around $200bn sitting in the bank, yet has borrowed billions of dollars in recent years to buy back shares in order to bolster its stock price, which has lagged recently. Why borrow? Because it is cheaper than repatriating cash and paying US taxes, of course. The financial engineering helped boost the California company’s share price for a while. But it did not stop activist investor Carl Icahn — who had manically advocated borrowing and buybacks — from dumping the stock the minute revenue growth took a turn for the worse in late April. Apple is not alone in eschewing real engineering for the financial kind.

Top-tier US businesses have never enjoyed greater financial resources. They have $2tn in cash on their balance sheets – enough money combined to make them the tenth largest economy in the world. Yet they are also taking on record amounts of debt to buy back their own stock, creating a corporate debt bubble that has already begun to burst (witness Exxon’s recent downgrade). The buyback bubble is only one part of a larger trend, which is that the business of corporate America is no longer business – it is finance. American firms today make more money than ever before by simply moving money around, getting about five times the revenue from purely financial activities, such as trading, hedging, tax optimisation and selling financial services, than they did in the immediate postwar period. No wonder share buybacks and corporate investment into research and development have moved inversely in recent years.

It is easier for chief executives with a shelf life of three years to try to please investors by jacking up short-term share prices than to invest in things that will grow a company over the long haul. It is telling that private firms invest twice as much in things like new technology, worker training, factory upgrades and R&D as public firms of similar size — they simply do not have to deal with market pressure not to. Indeed, the financialisation of business has grown in tandem with the rise of the capital markets and the financial industry itself, which has roughly doubled in size as a percentage of gross domestic product over the past 40 years (even the financial crisis did not keep finance down; the industry itself shrank only marginally and the largest institutions that remained became even bigger). As finance grew, so did its profits — the industry creates only 4% of US jobs yet takes around 25% of the corporate profit share.

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“..Why would you hang in a boiling pot where the upside is 2% and the downside is 40?”

Stockman: Trump Will Scare The Hell Out Of The Markets, But That’s OK (CNBC)

Former Reagan administration aide David Stockman has a message for the next president: The markets are going down for the count and you can’t do anything about it! President Ronald Reagan’s director of the Office of Management and Budget said in a recent CNBC interview it doesn’t matter if Hillary Clinton or Donald Trump gets elected in November — neither will be able to stop the economic meltdown that’s looming. Wall Street seems to have its mind made up about which candidate it prefers. More than 70% of respondents to a recent Citigroup poll of institutional clients said the former secretary of state, first lady and New York senator would likely become the U.S.’s 45th president. Just over 10% gave Trump the nod, and small business owners appear to be divided between the GOP and Democratic standard bearers.

Stockman, however, doesn’t believe either one can prevent what may be on the horizon. “There’s no way the next president can stop a recession that’s already baked into the cake,” Stockman said Thursday in the “Futures Now” interview. Stockman has been calling for a major market downturn and global recession for some time, but he is more certain than ever that it could happen during this political cycle. He pointed to depleting earnings, peaked auto sales, inventory ratios and issues in the freight and rail space as some key indicators that the U.S. economy is more unstable than people would like to believe. “The idea that this economy is somehow going to get stronger in the second half, or that the next president can stall a recession I think is wrong,” he said.

According to Stockman, there is “plenty of evidence” that the U.S. will slip into a recession by year-end or shortly after. And as he sees it, that could send the S&P 500 spiraling to levels not seen since 2012. “The market can easily drop to 1,300,” Stockman warned. That represents a nearly 40% fall from where the large-cap S&P 500 Index is currently trading. “We have been trading in a range for the last 600 days plus or minus days 2,060 on the S&P 500. … Why would you hang in a boiling pot where the upside is 2% and the downside is 40?” Stockman noted that if given a choice between Trump and Clinton, he certainly would not want another Clinton in the White House. Instead, he said America needs a disruptor like Trump to “break the chains of the status quo” and manage the country in a different way than what has been done in the last decade.

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It’s time this becomes a serious discussion.

Trump’s ‘Print the Money’ Proposal Echoes Franklin and Lincoln (E. Brown)

“Print the money” has been called crazy talk, but it may be the only sane solution to a $19 trillion federal debt that has doubled in the last 10 years. The solution of Abraham Lincoln and the American colonists can still work today.
“Reckless,” “alarming,” “disastrous,” “swashbuckling,” “playing with fire,” “crazy talk,” “lost in a forest of nonsense”: these are a few of the labels applied by media commentators to Donald Trump’s latest proposal for dealing with the federal debt. On Monday, May 9th, the presumptive Republican presidential candidate said on CNN, “You print the money.”

The remark was in response to a firestorm created the previous week, when Trump was asked if the US should pay its debt in full or possibly negotiate partial repayment. He replied, “I would borrow, knowing that if the economy crashed, you could make a deal.” Commentators took this to mean a default. On May 9, Trump countered that he was misquoted:

People said I want to go and buy debt and default on debt – these people are crazy. This is the United States government. First of all, you never have to default because you print the money, I hate to tell you, okay? So there’s never a default.

That remark wasn’t exactly crazy. It echoed one by former Federal Reserve Chairman Alan Greenspan, who said in 2011:

The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.

Paying the government’s debts by just issuing the money is as American as apple pie – if you go back far enough. Benjamin Franklin attributed the remarkable growth of the American colonies to this innovative funding solution. Abraham Lincoln revived the colonial system of government-issued money when he endorsed the printing of $450 million in US Notes or “greenbacks” during the Civil War. The greenbacks not only helped the Union win the war but triggered a period of robust national growth and saved the taxpayers about $14 billion in interest payments. But back to Trump. He went on to explain:

I said if we can buy back government debt at a discount – in other words, if interest rates go up and we can buy bonds back at a discount – if we are liquid enough as a country we should do that.

Apparently he was referring to the fact that when interest rates go up, long-term bonds at the lower rate become available on the secondary market at a discount. Anyone who holds the bonds to maturity still gets full value, but many investors want to cash out early and are willing to take less. As explained on MorningStar.com:

If a bond with a 5% coupon and a ten-year maturity is sold on the secondary market today while newly issued ten-year bonds have a 6% coupon, then the 5% bond will sell for $92.56 (par value $100).

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“..central banks “cannot claim to be out of ammunition because immediately that would create the wrong kind of expectations..”

India’s Central Bank Governor Warns On Stimulus Overuse (FT)

Central banks and governments of rich countries are running out of ammunition for stimulating their economies, says Raghuram Rajan, the head of the Indian central bank — but they can never admit as much. Speaking to the Financial Times at the University of Chicago Booth School of Business in London, Mr Rajan criticised efforts to use fiscal and monetary policy and infrastructure programmes to boost growth rates in advanced economies. Long a critic of low interest rates in rich countries that can drive hot-money flows to poorer parts of the world, the governor of the Reserve Bank of India suggested that loose policies were also weakening the underlying performance of advanced economies.

Although Mr Rajan said there were limits on stimulus, he said central banks “cannot claim to be out of ammunition because immediately that would create the wrong kind of expectations, so there’s always something up their sleeves”. Mr Rajan said he was a supporter of stimulus policies to “balance things out” over short periods when households or companies were proving excessively cautious with their spending. But eight years after the financial crisis, we “have to ask ourselves is that the real problem?”. “I have this image of stimulus as a bridge,” he said. “As the economy goes down, there is an expectation it will come up. Stimulus is a bridge which smoothes over the growth rate of the economy and prevents damaging expectations from building up.”

If stimulus went on for a long time, if it did not work, he said, the adjustment would be sharp, indicating there was little room for further stimulus. Mr Rajan warned governments not to rely too much on fiscal stimulus through cutting taxes or increasing public spending. “If your debt to GDP is over 100%, [and you] do more fiscal stimulus, you’d better have a pretty high rate of return in mind, otherwise your younger and middle-aged generations are thinking ‘This thing is not going to return enough, but I’m going to have to pay for it’.”

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Want to know how to bankrupt a society?

Average Asking Price For UK First-Time Buyer Home Jumps 6.2% In A Month (G.)

The average asking price of a typical first-time buyer home leapt by 6.2% in a month after buy-to-let investors rushed to buy properties before last month’s stamp duty increase, according to figures on Monday. The average for properties coming on to the market in England and Wales with two bedrooms or fewer was £11,298 higher in May than in April, at £194,224, according to data from the property website Rightmove. The figures, based on properties listed during the month, showed that across the UK the average price of a first-time buyer property had risen by 11.4% since May 2015. In hotspots such as Croydon, Dartford and Luton – all towns within easy commuting distance of central London – asking prices were up by more than 18% over the year.

The figures do not include inner-London homes. The website said strong demand from investors keen to buy before the introduction of the surcharge on second homes had caused a “property drought” at the lower end of the market, putting upwards pressure on prices for those homes that were being made available. However, Rightmove’s director, Miles Shipside, said: “It remains to be seen if these prices can be achieved and there may be some over pricing in the market. It is also a reflection of better quality property coming to market in this sector which is now targeting owner-occupiers rather than landlords.”

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Brilliantly hilarious must read.

CERN Discovers New Particle Called The FERIR (Steve Keen)

CERN has just announced the discovery of a new particle, called the “FERIR”. This is not a fundamental particle of matter like the Higgs Boson, but an invention of economists. CERN in this instance stands not for the famous particle accelerator straddling the French and Swiss borders, but for an economic research lab at MIT—whose initials are coincidentally the same as those of its far more famous cousin. Despite its relative anonymity, MIT’s CERN is far more important than its physical namesake. The latter merely informs us about the fundamental nature of the universe. MIT’s CERN, on the other hand, shapes our lives today, because the discoveries it makes dramatically affect economic policy.

CERN, which in this case stands for “Crazy Economic Rationalizations for aNomalies”, has discovered many important sub-economic particles in the past, with its most famous discovery to date being the NAIRU, or “Non-Accelerating Inflation Rate of Unemployment”. Today’s newly discovered particle, the FERIR, or “Full Employment Real Interest Rate”, is the anti-particle of the NAIRU. Its existence was first mooted some 30 months ago by Professor Larry Summers at the 2013 IMF Research Conference. The existence of the FERIR was confirmed just this week by CERN’s particle equilibrator, the DSGEin. Asked why the discovery had occurred now, Professor Krugman explained that ever since the GFC (“Global Financial Crisis”), economists had been attempting to understand not only how the GFC happened, but also why its aftermath has been what Professor Summers characterized as “Secular Stagnation”.

Their attempts to understand the GFC continued to fail, until Professor Summers suggested that perhaps the GFC had destroyed the NAIRU, leaving the ZLB (“Zero Lower Bound”) in its place. This could have happened only if there was a mysterious second particle, which was generated when a NAIRU equilibrated with a GFC. Rather than remaining in equilibrium, as sub-economic particles do in DSGEin, NAIRU apparently vanished instantly when the GFC appeared. Something else must have taken its place. DSGEin was unable to help here, since it rapidly returned to equilibrium—while the real world that it was supposed to simulate clearly had not. CERN’s attempts to model this phenomenon in DSGEin were frustrated by the fact that a GFC does not exist inside a DSGEin—in fact, the construction of the DSGEin was predicated on the non-existence of GFCs.

The ever-practical Professor Krugman recently suggested a way to overcome this problem. Why not turn to the real world, where GFCs exist in abundance, and feed one of those into the DSGEin? Unfortunately, the experiment destroyed the DSGEin, since the very existence of a GFC within it put it through an existential crisis. However, before it broke down (while mysteriously singing the first verse of “Daisy, Daisy, give me your answer do”), the value for the NAIRU in DSGEin suddenly turned negative. This led Professor Summers to the conjecture that perhaps there was a negative anti-particle to the NAIRU, which he dubbed the FERIR.

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It’s all in the eye of the beholder.

Isn’t it Time to Stop Calling it “The National Debt”? (Steve Roth)

Fourteen. Trillion. Dollars. That’s how much the U.S. government “owes.” You hear that massive number all the time, right? And people are forever telling you that you and your family are on the hook to pay off that scary huge number. There are 125 million U.S. households. You do the arithmetic. The horror. What those scare-mongers don’t tell you, and generally don’t even understand: it actually makes almost no sense to call that figure “the national debt.” And no, you’re not on the hook to pay it back. Imagine this: you’re the queen or king of a sovereign country. You decide to mint and issue a bunch of tin coins that your people will find useful. You use those coins to buy stuff from people in the private sector, and pay them to do work. Voilà, the people have money.

Is your government now in “debt” as a result of that “deficit spending”? Does it have to “pay” something to somebody at some point in the future? Do you have to redeem those coins for wheat or pigs or anything else? Obviously not. There’s just a bunch of money out there that people can use. You’ve made no promise that your treasury will ever redeem those coins for anything. They just circulate. Those government-issued assets, held by the private sector, are only “liabilities” to the government in the most pettifogging accounting sense. If you “owed” some money that you would never, ever have to pay, would you put that on your balance sheet as a liability? Would it be anything beyond a pro forma entry designed to satisfy some obsessive impulse for accounting closure? A debt that will never be paid off is a very questionable “liability.”

That’s essentially the situation with the U.S. national “debt.” The U.S. issues money by deficit spending. It puts more money into private accounts than it takes out via taxes. The private sector has more balance-sheet assets (but no more liabilities, so it has more “net worth,” the balancing item on the righthand side of its balance sheet). The treasury has made no promises to redeem that new money for…anything (except maybe…different government-issued assets). It’s just out there. Now it’s true that the U.S. et al operate under an arguably archaic and purely self-imposed rule: their treasuries are required to issue bonds equal to that deficit spending. This is a straightforward asset swap: the private sector gives checking-account deposits (back) to the government, and the government gives bonds in return.

Private sector assets and net worth are unaffected by that accounting swap; it just changes the private-sector portfolio mix — more bonds, less “cash.” (Treasury “forces” the private sector to make that collective portfolio-adjusting swap through the simple expedient of selling bonds at an attractive price — a point or two below similar deals in the private sector.) The same kind of asset swap happens when the Fed “prints money” for quantitative easing. The private sector gives bonds (back) to the government, and the Fed gives “reserves” in return — deposits in banks’ Fed accounts. Sure, the Fed creates those reserves ab nihilo, but they’re not a money injection into the private sector, like deficit spending. They’re just swapped for bonds. That accounting event doesn’t increase private-sector assets or net worth. It just changes the private-sector portfolio mix (more reserves, less bonds).

In any case, the private sector is holding government-issued assets. Whether they consist of bonds, “cash,” or reserves, is it realistic to call that money originally spent into private accounts a “debt” for the government? Is it in any real sense a government “liability” if it will never be redeemed for anything?

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Big Oil’s decades of criminal activity come home to roost.

Forget the Saudis, Nigeria’s the Big Oil Worry (BBG)

Drag your attention away from the Middle East for a moment. While policymakers have been focused on Saudi Arabia’s oil market machinations, what really matters right now is happening 3,000 miles away in the Niger River delta. The country that was, until recently, Africa’s biggest crude producer is slipping back into chaos. A wave of attacks and accidents have hit infrastructure, taking Nigeria’s output down to 20-year lows. Oil prices are responding, rising to their highest in more than six months. Part of this is explained by the IEA lifting demand estimates this week. But taking both things together, it’s easy to doubt whether current oil surpluses are sustainable. With no solution in sight to the problems that beset the delta’s creeks and mangrove swamps, production from onshore and shallow-water oil fields looks vulnerable.

If the latest group of freedom fighters seeks to outdo its predecessors, then deepwater facilities may be at risk too.The Niger Delta Avengers have certainly been busy, forcing Shell’s Forcados terminal to shut in about 250,000 barrels of daily exports; and breaching an offshore Chevron facility in the 160,000 barrels per day Escravos system. In April, ENI had to declare force majeure – letting it stop shipments without breaching contracts – on exports of its Brass River grade after a pipeline fire. It’s hard to see any long-term let-up given Nigeria’s record on fixing this problem. The previous wave of discontent, which hit a peak in 2009, only came to an end when President Yar’Adua offered amnesty, training programs and monthly cash payments to nearly 30,000 militants, at a yearly cost of about $500 million.

Some leaders of the Movement for the Emancipation of the Niger Delta (MEND), the militant group, got lucrative security contracts. But the failure to properly address local grievances means it was only a matter of time before another wave of angry young men took up the fight for a better deal for southern Nigeria. The crisis has been hastened by new president Muhammadu Buhari’s termination of the ex-militants’ security contracts and his seeking the arrest of former MEND leaders. The Avengers now say they want independence for the Niger River delta. And it’s not as if Nigeria’s oil woes are limited to the militants. Exxon had to declare force majeure on Qua Iboe exports after a drilling platform ran aground and ruptured a pipeline, while Shell did similar with Bonny Light exports after a leak from a pipeline feeding the terminal.

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Beijing will flood in enough money to ‘reach its targets’ while talking about clamping down.

China Housing Revival Props Up Economy (WSJ)

China’s housing market is showing nascent signs of recovery after a two-year downturn, helping to counter a slowdown in the broader economy but prompting fresh warnings about a buildup of debt. Property prices and sales have risen in recent months, driven by looser lending policies, accompanied by a sustained advance in new construction. That occurred even though China is weighed down by unsold homes with enough square footage to fill seven Manhattan islands. “Property developers’ appetite has returned,” said Xia Qiang, a senior partner at Yi He Capital, which provides loans to property firms. “Just two weeks ago four developers from Fujian and Zhejiang asked if there were any projects they could invest in in Shanghai.”

From January to April, housing sales rose 61.4% to 2.41 trillion yuan ($369 billion) from a year ago, the National Bureau of Statistics said on Saturday. Property investment in the first four months of this year rose 7.2% to 2.54 trillion yuan. Construction starts gained 21.4% to 434.3 million square meters. But the rosy statistics present a quandary for Chinese officials. After engineering a credit-fueled property upturn, Beijing has started tapping the brakes amid concern that it has overshot, economists say. Among the fixes Beijing has imposed are a decrease in bank lending and more purchase restrictions on some of the hottest property markets, including Shanghai and Shenzhen. A column in the official People’s Daily recently criticized debt-fueled growth policies, warning that China faces a “property bubble.”

The zigzag policy reflects China’s tough balancing act in a nation where empty apartment towers ring many smaller cities. It wants to boost the property sector enough to hit its 6.5%-plus growth target for 2016 without making its overcapacity and debt problems too much worse, economists said. “New loans are pouring into the real-estate sector,” said Alicia Garcia-Herrero, economist with investment bank Natixis, part of France’s Groupe BPCE. “But the elephant in the room is credit risk.”

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This is about money that doesn’t at all want to move back home, no matter how lucrative that may seem.

China’s Record $26 Billion Buyout Deals at Risk of Unraveling (BBG)

The great retreat of Chinese companies from the U.S. stock market is hitting a snag. Concern last week that Chinese regulators may restrict overseas-traded companies from returning home helped erase more than $5 billion in the market value of firms seeking to do so. Shares of companies from Momo to 21Vianet have plunged at least 20% since May 6 amid speculation that the management-led investor groups may back away from the buyout deals or lower their purchase prices. The selloff marks another twist in the saga of U.S.-listed Chinese companies seeking to go private, lured by the prospect of relisting at higher valuations in Shanghai or Shenzhen. More than 40 have received buyout offers worth at least $35 billion since the beginning of 2015.

About three quarters of the deals are still pending, including Qihoo 360, whose $9.3 billion offer is the largest. The unraveling started on May 6 when the China Securities Regulatory Commission said that it’s studying the impact of companies seeking to relist domestically after withdrawing from overseas. The regulators are concerned the valuations estimated for some domestic backdoor listings are too high and could affect the stability of the stock market, according to the people familiar with matter. Policy makers also want to avoid encouraging more buyouts that could prompt capital outflows, the people said.

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The one sector Beijing cannot control is the biggest there is. “Pushing on a string” comes to mind. “Interest rates are low, but investment is declining, which shows that the overall market – domestic and overseas market – is not good,” he said.”

China Private Sector Investment Is Declining (R.)

Xia Xiaokang and Bruno Chen, who both run private-sector companies, are the sort of businessmen that Chinese leaders are increasingly concerned about as economic growth slows. Beijing is counting on the private sector to invest more in the economy and take up the slack as the government tries to engineer a shift away from largely state-run heavy industry to more entrepreneurial and services-led growth. Unfortunately, just when China needs the private sector to step up, they look to be stepping back. “We plan to downsize our business rather than expand,” said Chen, who runs Ningbo Tengsheng Garments Co in the coastal export hub of Zhejiang province in eastern China. “We cannot feel any improvement in the economy,” he said.

Xia, general manager of Wenzhou Kingsdom Sanitary Ware, some 400 km from Shanghai, similarly lacks confidence in the economy. “We have hardly made any fixed-asset investment since last year and we now plan to rent out part of our factory building because it’s too big,” he said. After March data suggested that economic activity was finally picking up after a long slowdown, April figures released at the weekend suggested otherwise. Overall investment, factory output and retail sales all grew more slowly than expected. Private-sector investment for January to April grew just 5.2%, its weakest pace since the National Bureau of Statistics (NBS) started recording the data in 2012. More worrying, private-sector investment is decelerating sharply from rates near 25% in 2013, to just 10% last year and now just over 5%.

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Damn the torpedoes!

China’s Record Daily Steel Output Bodes Ill for Global Industry (BBG)

China’s record daily steel output in April bodes ill for an embattled global steel industry already reeling from a deluge of exports from the world’s top producer. Crude steel output over the month rose 0.5% to 69.42 million metric tons from a year earlier, the National Bureau of Statistics said on Saturday. The gains came after mills ramped up production to take advantage of a spurt higher in prices that has given them the best profits this decade. While below March’s record monthly figure of 70.65 million tons, the daily rate of 2.314 million tons was higher due to fewer producing days and surpassed the previous best set in June 2014. “Given how high margins went, we’ve been expecting to see a supply response like this,” Ian Roper at Macquarie said in a WeChat message. “Chinese mills will likely look back to the export market as domestic oversupply reappears.”

China’s overseas sales in the first four months were already running 7.6% higher than a year earlier, piling on the pressure after the nation shipped a record 112 million tons in 2015. Output remaining at such elevated levels “definitely adds to oversupply risks and exports may continue to rise,” said Helen Lau, Hong Kong-based analyst at Argonaut Securities. In a sign that China is recommitting to the reform of its bloated state sector, its top producer, Hebei Iron & Steel, said Friday it’ll cut 5.02 million tons of capacity. That still leaves a way to go. Japan’s biggest mill, Nippon Steel & Sumitomo Metal, also said Friday that it would take control of a smaller domestic steelmaker in a bid to weather a “rapid deterioration of the business environment” caused in part by overcapacity in China of some 400 million tons.

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It’s all so sad it’s funny.

How Investors Are Duped Each Earnings Season (MW)

A year ago, we explained the many ways companies make reading their quarterly earnings reports a miserable task. We weren’t just whining. We wanted to remind companies that our readers regularly tell us they struggle to understand earnings announcements, and our job is to decode them for investors. Making that difficult isn’t helping anyone. We noted that some of their tactics – inventing or manipulating numbers, using meaningless jargon, distributing lame executive quotes, and more — can be outright damaging, eroding investor trust and creating skepticism. We hoped they’d change their ways. We’re sorry to say that today, as another earnings season draws to a close, things are even worse.

“Companies are definitely less transparent than they used to be,” said Leigh Drogen, founder and chief executive of Estimize, which crowdsources earnings estimates. They are “using accounting schemes that are more specific to … how they want investors to perceive their results.” Earnings are a crucial quarterly update for investors, as they provide the “best unbiased” view of what’s going on with companies, sectors and the economy, said Karyn Cavanaugh, senior market strategist at Voya Investment Management. “Earnings discount all the noise,” she said. But today, according to FactSet, more than 90% of S&P 500 companies use their own metrics in an attempt to make their numbers look better. Some conceal revenue and other key numbers in hard-to-access tables.

And a recent NYSE rule change has led some companies to report very early in the morning and pushed others to join the posse reporting after the closing bell, creating bottlenecks. While all this has meant more stress for reporters and analysts, it’s also made things harder for everyday investors trying to do due diligence on the companies they own. Experts say more companies seem to be breaking the most fundamental pact they have with their co-owners: to keep them informed of the true state of their business. “It’s a holographic presentation bubble distorting underlying operational reality,” said analyst Nicholas Heymann at William Blair. “Companies are working all the angles.”

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What you get when decision makers don’t understand their fields.

Battle Brews in Spain, Portugal Over Negative Mortgage Rates (WSJ)

As interest rates in Europe fall near or below zero, lawmakers and consumer advocates in Spain and Portugal are attacking an ancient tenet of finance by insisting that lenders can owe money to borrowers. Banks in the two countries, struggling to recover from recessions that shook their financial systems, are fighting back, with billions of dollars in mortgage interest payments potentially at stake. Portugal’s central-bank governor, in a reversal, has rushed to defend the banks against a proposed law that would require them to pay borrowers when interest rates turn negative. Banks in both countries are rewriting new mortgage contracts to warn homeowners that they could never profit from subzero rates.

In Spain and Portugal, banks typically tie interest rates on mortgages to the euro interbank offered rate, or Euribor, a fluctuating rate banks pay to borrow from each other. In addition, interest rates in both countries include a fixed percentage of the loan, called the spread. In much of Europe, by contrast, fixed mortgage rates are common. Euribor began turning negative last year after the ECB cut interest rates below zero—charging lenders to hold deposits—to stimulate the Continent’s economies. That has pulled mortgage rates into negative territory in a few isolated cases in Portugal.

The vast majority of Spanish and Portuguese mortgage holders still pay interest, because Euribor hasn’t dropped enough to wipe out the spreads. But while lenders consider further steep drops unlikely, they are taking steps to protect themselves just in case. Europe already has a precedent: Banks in Denmark are paying thousands of borrowers interest on their home loans, nearly four years after the central bank introduced negative interest rates. Danish banks have increased some fees to compensate but never mounted serious legal objections. In Spain and Portugal, bank executives said they would pay borrowers when pigs fly.

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Europeans have established the ultimate NIMBY.

Another EU plan that goes predictably off track. “Brussels wants to see group returns but Greece is looking at applications for asylum on a case-by-case basis.”

Refugee Numbers Returned To Turkey Fall Short Of EU Expectations (FT)

The number of migrants being sent back to Turkey from Greece has fallen well short of EU expectations, prompting fears that a fresh wave of arrivals could overwhelm the Aegean Islands during this summer. Fewer than 400 of the 8,500 people who have arrived on the Greek islands since the March 20 EU deal with Ankara — aimed at reducing migrant flows — have been returned to Turkey, according to figures from the Greek government’s migration co-ordination unit. Instead, Athens has approved more than 30% of the 600 asylum applications from Syrians that have been assessed since March 20, a significantly higher percentage than anticipated, according to European officials and aid workers. While the slow pace of returns will irk many in Brussels, Greek officials say it reflects their own policy on asylum requests.

They dismiss fears that the deal between the EU and Turkey could collapse if the trend continues – leading to a fresh influx – and stress that Greece’s migration laws do not recognise Turkey as a safe third country for refugees. Maria Stavropoulou, a former UN official who heads the Greek asylum service, said: “We fully understand the [EU] concerns but if you look at it from the perspective of the rule of law, it is going exactly as it should. “We have many vulnerable people on the islands … a lot of very sick people. By law they are exempt from the return process.” Epaminondas Farmakis of Solidarity Now, a refugee charity funded by the billionaire investor George Soros, said: “Brussels wants to see group returns but Greece is looking at applications for asylum on a case-by-case basis.”

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Dec 012014
 
 December 1, 2014  Posted by at 11:10 pm Finance Tagged with: , , , , , , ,  14 Responses »
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DPC Government Street, Mobile, Alabama 1906

Is the Plunge Protection Team really buying oil now? That would be so funny. Out of the blue, up almost 5%? Or was it the Chinese doing some heavy lifting stockpiling for their fading industrial base? Let’s get to business.

First, in the next episode of Kids Say The Darndest Things – oh wait, that was Cosby .. -, we have New York Fed head (rhymes with methhead) Bill Dudley. Dudley’s overall message is that the US economy is doing great, but it’s not actually doing great, and therefore a rate hike would be too early. Or something. Bloomberg has the prepared text of a speech he held today, and it’s hilarious. Look:

Fed’s Dudley Says Oil Price Decline Will Strengthen US Recovery

The sharp drop in oil prices will help boost consumer spending and underpin an economy that still requires patience before interest rates are increased, Federal Reserve Bank of New York President William C. Dudley said. “It is still premature to begin to raise interest rates,” Dudley said in the prepared text of a speech today at Bernard M. Baruch College in New York. “When interest rates are at the zero lower bound, the risks of tightening a bit too early are likely to be considerably greater than the risks of tightening a bit too late.” Dudley expressed confidence that, although the U.S. economic recovery has shown signs in recent years of accelerating, only to slow again, “the likelihood of another disappointment has lessened.”

How is this possible? ‘The sharp drop in oil prices will help boost consumer spending’? I don’t understand that: Dudley is talking about money that would otherwise also have been spent, only on gas. There is no additional money, so where’s the boost?

Investors’ expectations for a Fed rate increase in mid-2015 are reasonable, he said, and the pace at which the central bank tightens will depend partly on financial-market conditions and the economy’s performance. Crude oil suffered its biggest drop in three years after OPEC signaled last week it will not reduce production. Lower energy costs “will lead to a significant rise in real income growth for households and should be a strong spur to consumer spending,” Dudley said.

The drop will especially help lower-income households, who are more likely to spend and not save the extra real income, he said.

Extra income? Real extra income, as opposed to unreal? How silly are we planning to make it, sir? Never mind, the fun thing is that Dudley defeats his own point. By saying that lower-income households are more likely to spend and not save the ‘extra real income’, he also says that others won’t spend it, and that of course means that the net effect on consumer spending will be down, not up. He had another zinger, that the whole finance blogosphere will have a good laugh at:

[..] He also tried to disabuse investors of the notion that the Fed would, in times of sharp equity declines, ease monetary conditions, an idea known as the “Fed put.” “The expectation of such a put is dangerous because if investors believe it exists they will view the equity market as less risky,” Dudley said. That could cause investors to push equity markets higher, contributing to a bubble, he said. “Let me be clear, there is no Fed equity market put,” he said.

That’s in the category: ‘Read my lips’, ‘Mission Accomplished’ and ‘I did not have sex with that woman.’ I remain convinced that they’ll move rates up, and patsies like Dudley are being sent out to sow the seeds of confusion. Apart from that, this is just complete and bizarre nonsense. And that comes from someone with a very high post in the American financial world. At least a bit scary.

Another great one came also from Bloomberg today, when it reported that US holiday sales had missed by no less than 11%. Maybe Dudley should have put that in his speech?! This one turns the entire world upside down:

US Consumers Reduce Spending By 11% Over Thanksgiving Weekend

Even after doling out discounts on electronics and clothes, retailers struggled to entice shoppers to Black Friday sales events, putting pressure on the industry as it heads into the final weeks of the holiday season. Spending tumbled an estimated 11% over the weekend, the Washington-based National Retail Federation said yesterday. And more than 6 million shoppers who had been expected to hit stores never showed up. Consumers were unmoved by retailers’ aggressive discounts and longer Thanksgiving hours, raising concern that signs of recovery in recent months won’t endure.

The NRF had predicted a 4.1% sales gain for November and December – the best performance since 2011. Still, the trade group cast the latest numbers in a positive light, saying it showed shoppers were confident enough to skip the initial rush for discounts. “The holiday season and the weekend are a marathon, not a sprint,” NRF Chief Executive Officer Matthew Shay said on a conference call. “This is going to continue to be a very competitive season.” Consumer spending fell to $50.9 billion over the past four days, down from $57.4 billion in 2013, according to the NRF. It was the second year in a row that sales declined during the post-Thanksgiving Black Friday weekend, which had long been famous for long lines and frenzied crowds.

Shoppers are confident enough to not shop. And why do they not shop? Because the economy’s so strong. Or something. They were so confident that 6 million of them just stayed home. While those that did go out had the confidence to spend, I think, 6.4% less per capita. Maybe that confidence has something to do with at least having some dough left in our pocket.

On the – even – more serious side, two different reports on how much stocks in the US are overvalued. First John Hussman talking about his investment models, an where he did get it right:

Hard-Won Lessons and the Bird in the Hand

[..] the S&P 500 is more than double its historical valuation norms on reliable measures (with about 90% correlation with actual subsequent 10-year market returns), sentiment is lopsided, and we observe dispersion across market internals, along with widening credit spreads. These and similar considerations present a coherent pattern that has been informative in market cycles across a century of history – including the period since 2009. None of those considerations inform us that the U.S. stock market currently presents a desirable opportunity to accept risk.

I know exactly the conditions under which our approach has repeatedly been accurate in cycles across a century of history, and in three decades of real-time work in finance: I know what led me to encourage a leveraged-long position in the early 1990’s, and why were right about the 2000-2002 collapse, and why we were right to become constructive in 2003, and why we were right about yield-seeking behavior causing a housing bubble, and why we were right about the 2007-2009 collapse. And we know that the valuation methods that scream that the S&P 500 is priced at more than double reliable norms, and that warn of zero or negative S&P 500 total returns for the next 8-9 years, are the same valuation methods that indicated stocks as undervalued in 2008-2009.

As an important side note, the financial crisis was not resolved by quantitative easing or monetary heroics. Rather, the crisis ended – and in hindsight, ended precisely – on March 16, 2009, when the Financial Accounting Standards Board abandoned mark-to-market rules, in response to Congressional pressure by the House Committee on Financial Services on March 12, 2009. The decision by the FASB gave banks “significant judgment” in the values that they assigned to assets, which had the immediate effect of making banks solvent on paper despite being insolvent in fact.

Rather than requiring the restructuring of bad debt, policy makers decided to hide it behind an accounting veil, and to gradually make the banks whole by lowering their costs and punishing ordinary savers with zero interest rates, creating yet another massive speculative yield-seeking bubble in risky assets at the same time. [..]

This is 5.5 years ago. Do we still think about this enough? Do we still realize what the inevitable outcome will be? Hussman suggests the moment is near.

The equity market is now more overvalued than at any point in history outside of the 2000 peak, and on the measures that we find best correlated with actual subsequent total returns, is 115% above reliable historical norms and only 15% below the 2000 extreme. Based on valuation metrics that are about 90% correlated with actual subsequent returns across history, we estimate that the S&P 500 is likely to experience zero or negative total returns for the next 8-9 years. At this point, the suppressed Treasury bill yields engineered by the Federal Reserve are likely to outperform stocks over that horizon, with no downside risk.

As was true at the 2000 and 2007 extremes, Wall Street is quite measurably out of its mind. There’s clear evidence that valuations have little short-term impact provided that risk-aversion is in retreat (which can be read out of market internals and credit spreads, which are now going the wrong way). There’s no evidence, however, that the historical relationship between valuations and longer-term returns has weakened at all. Yet somehow the awful completion of this cycle will be just as surprising as it was the last two times around – not to mention every other time in history that reliable valuation measures were similarly extreme. Honestly, you’ve all gone mad.

115% above reliable historical norms. That’s what the equity put that doesn’t exist, plus the Plunge Protection Team, have achieved. None of that stuff is worth anything near what you pay for it. But people do it anyway, and think very highly of themselves for doing it. Because it makes them money. And anything that makes you money makes you smart.

Then, the crew at Phoenix Capital, courtesy of Tyler Durden:

Stocks Have Been More Overvalued Only ONCE in the Last 100 Years (Phoenix)

Stocks today are overvalued by any reasonable valuation metric. If you look at the CAPE (cyclical adjusted price to earnings) the market is registers a reading of 27 (anything over 15 is overvalued). We’re now as overvalued as we were in 2007. The only times in history that the market has been more overvalued was during the 1929 bubble and the Tech bubble. Please note that both occasions were “bubbles” that were followed by massive collapses in stock prices.


Source: http://www.multpl.com/shiller-pe/

Then there is total stock market cap to GDP, a metric that Warren Buffett’s calls tge “single best measure” of stock market value. Today this metric stands at roughly 130%. It’s the highest reading since the DOTCOM bubble (which was 153%). Put another way, stocks are even more overvalued than they were in 2007 and have only been more overvalued during the Tech Bubble: the single biggest stock market bubble in 100 years.


Source: Advisorperspectives.com


1) Investor sentiment is back to super bullish autumn 2007 levels.
2) Insider selling to buying ratios are back to autumn 2007 levels (insiders are selling the farm).
3) Money market fund assets are at 2007 levels (indicating that investors have gone “all in” with stocks).
4) Mutual fund cash levels are at a historic low (again investors are “all in” with stocks).
5) Margin debt (money borrowed to buy stocks) is near record highs.

In plain terms, the market is overvalued, overbought, overextended, and over leveraged. This is a recipe for a correction if not a collapse.

If we combine Hussman and Phoenix, we see an enormous amount of people playing with fire. And their lives. And that of their families. All as ‘confident’ as those American shoppers are (were?) supposed to be. At least a whole bunch of those were smart enough not to show up. How smart will the investment world be? Their senses have been dulled by 6 years of low interest rates, handouts and other manipulations. They’re half asleep by now.

Nobody knows what anything is worth anymore, investors probably least of all. After all, their sentiment is back to ‘super bullish autumn 2007’ levels. And they listen to guys like Dudley, who don’t have their interests at heart. Everybody thinks they’ll outsmart the others, and the falling knife too. Me, I’m wondering how much y’all lost on oil stocks and bonds recently. And how much more you’re prepared to lose.