January 16, 2017

Why The Stock Market Has Soared (And We'll All Soon Know What It's Like To Be A Madoff Client)



What is driving the US stock markets to such amazing gains?  While some corporations have seen increases in sales and most have innovated to reduce costs, lessen waste, and maximize efficiency, I'll focus on some of the other means that have driven profits higher helping to push US equities into record territory.

1- Declining % of profits going to Uncle Sam.

2- Minimal wage growth and holding the line on new hires.

3- Debt fueled stock buybacks and dividends at the expense of investment in mid and long term activities (R&D, cap-ex, exploration, etc.).
To represent the US market as broadly as possible, we'll use the Wilshire 5000 index, representing all 3600+ publicly traded US corporations (chart below vs. the 10yr Treasury rate).

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January 13, 2017

The Corporate Bond Market: Binge-Borrowing

Celery and raspberry? Marathon miles of Sudoku and crossword puzzles? Extra reps at the gym? Binge away.

Tis the season after the season, that other most wonderful time of the year when it’s a challenge to get a machine at the gym and resolutions are resolute, at least until February or a more intriguing deal comes along. What better way to make amends for that huge holiday hangover that crescendos with so many a New Year’s Eve bash?

Some of us chose to ring in 2017 in a substantially more subdued manner that nevertheless entailed binging of a decidedly different derivation. Enter Netflix. Yours truly must confess that closet claustrophobia was the culprit in keeping this one indoors coveting the control, confining the choices to richly royal romps. It all started innocently enough, with a recommendation to catch The Crown, which has just won a Golden Globe. The devolution that followed began in Italy, with Medici, stopped over in France, with Versailles, and round tripped back to England, with the epic saga that kicked off the modern day, small screen genre, The Tudors. At some point hallucinations began to give the impression that all the series’ stars had British accents. Wait, they actually did.

Thankfully, at some point, bowl games snapped the spell and reality rudely reared its redemptive head before anyone’s else’s head rolled (those royals were a bloodthirsty lot!). Sleep and sanity followed.

Sadly, the same cannot be said of borrowers of almost every stripe these days. For those tapping the fixed income markets, the borrowing binge fest is conspicuous in its constancy. Not only did global bond issuance top $6.6 trillion last year, a fresh record, sales are off to a galloping start thus far in January.

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January 12, 2017

Why Are Wal-Mart And Boeing Laying Off Workers If The U.S. Economy Is In Good Shape?

The stock market has been on quite a roll in recent weeks, but signs of trouble continue to plague the real economy.  Earlier this week, I talked about the “retail apocalypse” that is sweeping America.  Major retail chains such as Sears and Macy’s are closing stores and laying off workers, but I didn’t think that Wal-Mart would be feeling the pain as well.  Unfortunately, that is precisely what is happening.  USA Today is reporting that approximately 1,000 jobs will be cut at Wal-Mart’s corporate headquarters in Bentonville, Arkansas by the end of this month…

Walmart’s plan to lay off of hundreds of employees is the latest ripple in a wave of job cuts and store closures that are roiling the retail industry.

The world’s largest retailer is cutting roughly 1,000 jobs at its corporate headquarters in Bentonville, Ark., later this month, according to a person familiar with the matter who was not authorized to speak about it.

The company is saying that these cuts are necessary because Wal-Mart is always “looking for ways to operate more efficiently and effectively“.  But something doesn’t smell right here.  You don’t get rid of 1,000 employees at your corporate headquarters if everything is just fine.

I have driven past Wal-Mart’s headquarters in Bentonville a number of times, and it is in a beautiful part of the country.  Bentonville and the surrounding areas had been booming, but it looks like times may be changing.

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January 11, 2017

Fed Remits Only $92 Billion To Treasury In 2016, Lowest Since 2013

The world was reminded of the cozy relationship between The Fed and The Treasury again today as Janet sent Jack $92.0 billion of freshly ponzi'd net income for 2016 providing the federal government with an important source of funding. This, however, is down almost 6% from 2015 and despite a considerably larger balance sheet is the lowest remittance since 2013 due to doubling the handouts to the major banks to $12 billion last year.

As Reuters reports, part of the decline is due to a drop of about $2.6 billion in what the Fed earns on its holdings of U.S. Treasury bonds and mortgage-backed securities accumulated in fighting the 2007 to 2009 financial crisis.

But most of it is a result of the interest paid on excess reserves held by commercial banks at the 12 regional Federal Reserve institutions. Banks are required to hold some reserves, but are allowed to deposit more if they choose.

Between more cautious lending and weak economic growth, total reserves have been at historically high levels since the financial crisis -- roughly $2 trillion as of the end of the last year compared with a few billions of dollars in more typical times.

When the Fed increased its target interest rate in Dec. 2015 by a quarter of a percentage point, to a range of between 0.25 and 0.5, it increased the rate paid to banks as well - and pushed its overall reserve interest costs from $6.9 billion in 2015 to $12 billion last year

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January 10, 2017

Mysterious $5 Billion Biotech Firm Moderna Lays Out Drug Pipeline

Moderna Therapeutics, based in Cambridge, Mass., has raised $1.9 billion at a valuation approaching $5 billion–higher than most publicly traded biotechnology companies. But the company is so secretive that until now the company didn’t even disclose what most of the drugs and vaccines it is developing are meant to do.

Today, at the J.P. Morgan Healthcare Conference in San Francisco, Moderna is unveiling new details about its pipeline and strategy.

The company now has five vaccines in clinical trials. Two are for strains of influenza that could become pandemic, for which governments might want to stockpile vaccines. Another is for Zika virus, and a fourth, being developed with AstraZeneca, would treat heart attacks disease. The goal of a fifth, being developed with Merck, is not being revealed. Another vaccine, for Chikungunya virus, a mosquito-transmitted disease, is ready to start trials.

The flu vaccines are an interesting strategic gambit. Neither is likely to become a product, although governments may want to stockpile them, according to Stéphane Bancel, Moderna’s chief executive officer and a 10% stockholder in the company. But they provide an early chance to prove that Moderna’s basic technology works.

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January 9, 2017

It’s A Retail Apocalypse: Sears, Macy’s And The Limited Are All Closing Stores

It has only been two weeks since Christmas, and already we are witnessing a stunning bloodbath of store closings.  Macy’s shocked the retail industry by announcing that they will be closing about 100 stores.  The downward spiral of Sears hit another landmark when it was announced that another 150 Sears and Kmart stores would be shutting down.  And we have just learned that The Limited is immediately closing all stores nationwide.  If the U.S. economy is doing just fine, then why are we experiencing such a retail apocalypse?  All over America, vast shopping malls that were once buzzing with eager consumers now resemble mausoleums.  We have never seen anything quite like this in our entire history, and nobody is quite sure what is going to happen next.

Not too long ago I walked into a Macy’s, and it was eerily quiet.  I stumbled around the men’s department looking for something to buy, but I was deeply disappointed in what was being offered.  After some time had passed, an employee finally noticed me and came over to help, but they didn’t have anything that I was looking for.

And it is a sad thing, because over the past several years when I have gone into Macy’s looking to spend money, most of the time I have come out of there without spending a penny.  Macy’s has made some very bad decisions recently, and I am hoping that they can still turn things around.  But for the moment, they are closing stores and cutting jobs.  The following comes from the New York Times

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January 6, 2017

The Era Of Cheap Money Is Ending: "This Is The Calm Before The Storm"

We’re living in the calm before the storm.

That much everyone can sense.  The stock market highs and holiday spending spree will soon be over, the inauguration will presumably go as planned, but that’s when everything could start to go off course.

The only question is how the storm is going to stir into a frenzy – there will be a pretext of some kind. What seems certain is that it is past time to get ready for a difficult period. This could be the big, slow squeeze and the long winter.

The economy became immune to stimulus and quantitative easing; the market can only be propped up so long, and the realities of raised interest rates a matter of timing for the Fed to decide. Now, President-elect Trump provides the catalyst necessary for a dramatic rise and fall in the economy.

With the force of the economic avalanche that is poised to fall upon us all, the policies and actions of President Trump will do little to stem the tide of what is already coming; for better or worse, there is little that Trump himself can do even though it may fall squarely on his administration.

There are many putting out the talking points now; the warnings are reaching a crescendo.

Jay L. Zagorsky, Economist and Research Scientist at Ohio State University, is predicting a recession for 2017, in spite of glowing outlooks, that could dominate headlines:

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January 5, 2017

What Is This "Neutral" Interest Rate Touted By The Fed?

There’s a lot of talk these days about the so-called “neutral” (or “natural” or “terminal”) interest rate projections of the Federal Reserve. In fact, their projection of this number is a key argument in their ongoing decision to keep rates at historically very-low levels for what has been an extended period of time. (Specifically, Federal Reserve officials have argued that the neutral interest rate has sharply declined in recent years, meaning that apparently ultra-low interest rates do not really signify easy monetary policy.)

What is this neutral rate? The neutral rate, it is argued, is simply the federal funds rate at which the economy is in equilibrium or balance. If the federal funds rate were at this mysterious neutral rate level, monetary policy would be neither loose nor tight, and the economy neither too hot nor too cold, but rather just chugging along at its long-run optimal potential. The underlying theory is that loose monetary policy — where the Fed’s policy rate is set below the neutral rate — can temporarily stimulate the economy, but only by causing price inflation that exceeds the Fed’s desired target (which, by the way, eventually causes overheating and a crash). On the other hand, if the Fed is too tight and sets the policy rate above the neutral rate, then unemployment creeps higher than desired and price inflation comes in below target.

In short, the neutral interest rate is one where the central bank is not itself distorting the economy. Monetary policy would really be nonexistent, as the Fed would not be altering the interest rate resulting from a free market discovery process between borrowers and savers. (This of course raises the question, why do central planners need to fabricate something that would naturally exist in their absence?) This is near where Yellen actually thinks we are these days, hence she sees little urgency in raising rates and thus lessening what, on the face of it, looks like a very loose current monetary policy.

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January 4, 2017

Bitcoin: The Best Performing Currency For A Second Year In A Row

Bitcoin is no stranger to extreme fluctuations. As Visual Capitalist's Jeff Desjardins notes, for each of the last four years, the cryptocurrency has either been the best or the worst performing currency – with nothing to be found in between.

Luckily, for those that follow the digital currency closely, those fluctuations were mostly pointed in an upwards direction for 2016. The currency finished the year at $968.23, which is more than double its value from the beginning of the year.

Bitcoin is now the best performing currency for two years in a row (2015, 2016):

And in the opening days of 2017, the cryptocurrency has already gained a head start on other global currencies. It passed the vital $1,000 mark in the first days of New Year trading, and could be poised to three-peat for the title of best-performing currency of the year.

To do it again, bitcoin prices would likely need to rise at least 30% on the year, closing in on the $1,300 mark.

Will it be another extreme for 2017 – or will the bitcoin price finally settle for middle ground among other global currencies?

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January 3, 2017

Chinese Interbank Lending Freezes; Government Bond Trading Halted After Massive PBOC Liquidity Drain

Earlier today, we were surprised to note that having aggressively drained liquidity from the interbank funding market, on the first trading day of 2017, the PBOC not only fixed the Yuan well lower (sy 6.9498 vs 6.9370 on the last day of 2016, even if this was well stronger than the Offshore Yuan), but the People's Bank of China withdrew even more liquidity. It did that by injecting CNY20 billion via 7-day reverse repos and another CNY20 billion via 14-day reverse repos in its open-market operations Tuesday, according to traders, while continuing to skip 28-day reverse repos.

The move resulted in a net drain of CNY155 billion for the day, and followed a substantial drain of a net CNY245 billion last week - the first removal of liquidity in three weeks. We promptly followed up with a warning:

Just over an hour later, it appears our warning was warranted, because according to the latest daily fixing of the Treasury Market Association, as a result of the PBOC's massive liquidity drain which soaked up a nearly a third of a trillion Yuan in the past two weeks, the interbank market is freezing again as follows:

1-month yuan interbank rate in Hong Kong rises 1.16ppts to 13.01%,
3-month CNH Hibor +89bps to 10.02%;

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January 2, 2017

How Hedge Funds Closed Out 2016, And Why Hopes For A 2017 Rebound May Disappoint

2016 was a year most hedge funds would be happy to forget. And while the same goes for 2015, 2014, 2013, 2012, 2011, and 2010, in fact virtually every year since the financial crisis in which the vast majority of the two and twenty crowd have failed to generate alpha, in 2016 - a year many said would mark a renaissance for active managers - the "flash hedge fund return" according to a report by BofA's Paul Ciana from Friday was a paltry 3.34%, which as BofA conveniently calculated meant they "underperforming the S&P 500 index by 6.2%" at which point your average underperforming hedge fund manager complains that they shouldn't be benchmarked against the S&P, even as the redemption notices flood in and the AUM gets ever smaller.

Not everyone did poorly: credit related strategies lead HF performance, including Distressed Credit, Convertible Arbitrage and Event Driven strategies. On the other end, predictably, dedicated Short Bias was down 5.10%

In recent weeks there has been a fresh burst of hope that 2017 will be better for the HF community as a result of the recent collapse in cross-asset correlation; it is hoped that the resulting returns dispersion will make it easier for hedge funds to stand out in a world in which due to central bank intervention, correlations had been abnormally high following the financial crisis.

But is that an accurate description of events?  To a great extent, the answer is no.

While correlation between diversified HF performance and S&P 500 price return declined from the May 2016 high (Chart 1), the 1-year correlation (83.7%) was slightly above the 3-year correlation (83.0%) as of the end of November. Overall, correlation remained far higher than it has been historically. Which as BofA redundantly explains, means that "when S&P 500 declines, performance of HFs with higher positive correlation is expected to suffer."

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December 30, 2016

Dollar Flash Crashes On Last Trading Day Of 2016

It is oddly appropriate that in a year everyone finally admitted markets are manipulated by central banks and broken by HFT algos, that on the last trading day of 2016, the dollar flash crashed with for no reason whatsoever.

Shortly after 6:30pm Eastern, the dollar plunged by 150 pips against the Euro, once 1.05 stops were taken out, with algos sending the EURUSD as high as 1.07 in a matter of seconds...

.. while concurrently the Swiss Franc soared as much as 1.6% against the greenback, as the USDCHF tumbled from just over 1.025 to just above 1.0050 as the pair briefly flirted with parity.

What caused it? As there was no fundamental news, the answer is the same catalyst as the pound sterling flash crash: once EURUSD stops were taken out, algos all piled up on the same side of the trade and with virtually non existent market depth, it sent the world's most actively traded currency pair soaring. Indeed, as FX traders in Asia, cited by Bloomberg said, the EUR/USD jump was partly driven by a surge of algo-buy orders after pair rose above 1.0500 in early session.

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December 29, 2016

Contagion Concerns Slam Japanese Financials As Toshiba Crashes 50% In 3 Days

After two days of total carnage in Toshiba stocks, bonds, and credit risk, the bloodbath continues with the once-massive Japanese company is collapsing once again in early trading - now down 50% in 3 days. Following the semiconductor and nuclear business catastrophes, the company had nothing to add regarding today's crash but more worryingly the massive loss of market cap is spreading contagiously to Japanese financials with Sumi down 4%, and MUFG down almost 3%.

As we noted yesterday, Tsunukawa said that “I apologize to shareholders, business partners and all stakeholders for the trouble we have caused,” after Toshiba said cost overruns at U.S. nuclear reactors it is building were likely to force a write-down of as much as several billion dollars, clouding its turnaround plan after the 2015 accounting scandal. Specifically, the company said it may have to book several billion dollars in charges related to a U.S. nuclear power plant construction company acquisition, rekindling "concerns about its accounting acumen."

The problem is that the nuclear business, together with the semiconductors, has been positioned as one of key pillars underpinning Toshiba's growth which has been trying to shift away from its consumer electronics core. Alas, the latest gaffe now means that much of Toshiba's growth is gone, and the stock price reflect that overnight, when Toshiba's stock plunged by 20%, the most permitted, before it was halted for trading.

The derisking is weighing heavily on USDJPY..

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December 28, 2016

Global Stocks Rise, Dow Flirts With 20,000 As London Reopens; Oil In Longest Winning Streak In 7 Years

Global markets continued their levitation with the UK returning from vacation, pushing the MSCI Asia Pacific Index higher for the first time in seven days, while oil headed for the longest winning streak in almost seven years ahead of the promised OPEC production cut which is set to begin in just days. The USDJPY rose for a second day, pushing US equity futures higher and the DJIA is once again teasing with the 20,000 mark, although a race of sorts has emerged between the Dow and bitcoin, as to who can cross key psychological levels first: the Dow and 20,000 or Bitcoin and 1,000.

Despite the full reopening of global markets, trading remains thin across the globe during the last week of the year, with volume on the Topix about 45% below the 30-day average on Wednesday.  European equities fluctuated and Hong Kong stocks rose the most in a month after being closed Monday and Tuesday. More than twice as many shares on Japan’s Topix index rose than declined, even though the Nikkei225 ultimately closed fractionally lower at 19,402. Australian stocks rode a rise in commodities to gain 1 percent. Indonesian shares added 1.9 percent while Shanghai shed 0.3 percent.

Crude climbed for an eighth session before OPEC and other producing nations start reducing output. The yen fell the most among major currencies against the dollar.

"Until data starts to turn negative or the headlines suggest that (U.S. president-elect) Trump's stimulus programme could fall short of expectations, the dips in the dollar will be shallow with the currency aiming for new highs," wrote Kathy Lien, managing director of FX strategy for BK Asset Management. "But at the first sign of bad news there could be massive correction in what is quickly becoming a crowded long dollar trade," Lien added.

The dollar index was steady at 102.930, while the Bloomberg Dollar Spot Index was also little changed, trading near the highest level in more than a decade. The euro inched up 0.2 percent to $1.0474 and sterling dropped again, sliding to a 2 month low of 1.2224.

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December 27, 2016

As Mystery Of China's Multi-Billionaire Default Deepens, A New "Bond Scare" Emerges

Last week, in a largely "under the radar" event, one of China's wealthiest billionaires (if only on paper), Wu Ruilin, chairman of the Guangdong based telecom company Cosun Group, and whose personal fortune of 98.2 billion yuan ($14 billion) makes him wealthier than Baidu founder Robin Li who is ranked 8th on the Hurun Rich List 2016, shocked Chinese bond market watchers when he defaulted on a paltry 100 million yuan ($14 million) in bonds sold to retail investors through an Alibaba-backed online wealth management platform, citing "tight cash flow."
Needless to say, many were stunned that a billionaire for whom $14 million is pocket change, blamed "tight cash flow" for defaulting on mom and pop investors. In any case, as South China Morning Post reported, despite the founder's personal fortune, according to a notice put up by the Guangdong Equity Exchange on Tuesday, two subsidiaries of Cosun Group are each defaulting on seven batches of privately raised bonds they issued in 2014. According to the notice, “the issuer had sent over a notice on December 15, claiming not to be able to make the payments on the bonds on time, due to short-term capital crunch."
To be sure, yet another default in a Chinese landscape suddenly littered with bankrupting debt dominoes would have been the end of it, however this morning Reuters added to the mystery when it said that the fate of the defaulted $45 million Chinese corporate bond sold through an Alibaba-backed online wealth management platform was thrown into doubt on Monday, after a bank said letters of guarantee for the bonds were counterfeit.
Quoted by Reuters, China Guangfa Bank Co Ltd (CGB) said guarantee documents, official seals and personal seals presented by the insurer of the bonds "are all fake" and that it has reported the matter to the police.

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