NEW$ & VIEW$ (18 MARCH 2013)

Cyprus. Spring peak? Earnings watch. U.S., EMU inflation. Strong U.S. IP. China housing strong, posing risk. Canada housing weak, posing risk. Currency wars. Japanese stocks valuation. Sentiment watch. Italian clowns. Financial clowns.

CYPRUS!!  Whatever It Takes?

Cyprus concerns spook markets
Plan to tax bank deposits to fund bailout fuels risk aversion

Europe botches another rescue

Just as the eurozone had begun to set the right course in its struggle with an ever-mutating debt crisis, it relapsed into its old vice. Faced with a drowning member state, instead of throwing Cyprus a lifebuoy, leaders put a millstone around its neck.

Appearances notwithstanding, the Cyprus deal does not “bail-in” creditors in an orderly resolution of bankrupt banks. Instead it imposes a tax on all depositors down to the smallest ones. (…)

Pointing up The biggest risk is political. The prescription of universal austerity combined with kid-gloves treatment of big investors in banks is increasingly toxic to European voters. Leaders have just added fuel to the fire.

Europe is risking a bank run

(…) With the agreement on a depositor haircut for Cyprus – in all but name – the eurozone has effectively defaulted on a deposit insurance guarantee for bank deposits. That guarantee was given in 2008 after the collapse of Lehman Brothers. It consisted of a series of nationally co-ordinated guarantees. They wanted to make the political point that all savings are safe.

I am using the expressions “in all but name” and “effectively” because legally, Cyprus is not defaulting or imposing losses on depositors. The country is levying a tax of 6.75 per cent on deposits of up to €100,000, and a tax of 9.9 per cent above that threshold. Legally, this is a wealth tax. Economically, it is a haircut. (…)

So they opted for a wealth tax with hardly any progression. There is not even an exemption for people with only very small savings.

If one wanted to feed the political mood of insurrection in southern Europe, this was the way to do it. The long-term political damage of this agreement is going to be huge. In the short term, the danger consists of a generalised bank run, not just in Cyprus. (…)

FT Alphaville has a good piece on this wealth tax (The stupid idea, and the system) in which he quotes Barclay’s:

Recent events have highlighted the increasing willingness of governments and regulators to impose losses on bondholders and depositors. (…)

In addition to highlighting the risk of eroding protection for European bank bondholders, we believe the action taken in Cyprus will reignite concerns about the stability of deposits in weaker banking systems, especially considering that deposit insurance is still provided locally. This flaw is to be addressed as part of the banking union but progress has been minimal.

Understand that Cyprus is (was) considered a tax heaven by Russians “nouveaux riches” who deposited enormous amounts into Cyprus tiny banks. They are learning that there is no free lunch, but small savers should not be impacted by this.


Equity markets hit a speed bump in the spring of each of the last 3 years. Not only were valuations getting pretty close to fair value on the Rule of 20 scale (19.2 in 04’10, 18.7 in 04’11 and 17.3 in 03’12, the latter admittedly more reasonable), but economic momentum stalled, leading to a soft patch and rising investor concerns, aggravated by political chaos in Europe and the U.S.

Concerns on the U.S. economy, the only “steady” engine at this time, center on consumers facing a significant fiscal drag and on the impact of the sequester. Looking for signs of weakening momentum, ISI weekly Company Surveys provided good early warnings in each of the last 3 years. So far, so good: the surveys diffusion index rose to a nine month high last week as retailers, auto dealers, truckers and credit card companies all had solid moves higher. The fact that the consumer side of the surveys has strengthened in the last 2 weeks is both surprising and reassuring.

Equity valuation worsened a little last week as U.S. inflation rose from 1.6% in January to 2.0% in February, a level that looks like a strong anchor for inflation (see below). As a result, the Rule of 20 reading is now 18.1 (16.1 trailing P/E + 2.) inflation), 10.4% below fair value while downside to the rising 200-day moving average (1415) is 9.2%. Hmmm…


So, the upside = technical downside. The economic momentum is positive (see below) but inflation ticked up a little. March CPI could benefit if gasoline prices decline some more. Earnings season resumes in 3 weeks but Fedex results and conf. call on Wednesday will be scrutinized for signs of impending weakness…or continued strength. American politics are nowhere near stable but having survived the fiscal drag and the sequester, so far at least, investors have become less apprehensive of the games played in DC. Same in Europe…


Overall, 83 companies have issued negative EPS guidance for Q1 2013, while 25 companies have issued positive EPS guidance. Thus, 77% of the companies in the index that have issued EPS guidance have issued negative guidance. This percentage is well above the 5-year average of 61%. (Factset)


The most recent S&P data (March 14) shows Q1’13 estimates at $25.53, down 2.5% from Dec. 31, 2012 but essentially unchanged since mid-February ($25.57). Earnings would rise +5.3% Y/Y and reverse 2 quarters of Y/Y declines. Fingers crossed


Higher energy prices pushed the U.S. CPI up 0.7% in February, +2.0% Y/Y. All other ways used by the Cleveland Fed to monitor inflationary pressures rose 0.2% in February, very much in line with the trends of the last six months. Inflation seems stuck at the 2.0% level, although the Fed, perhaps seeking to cap expectations, still projects inflation to stay between 1.3% and 2.0% in 2013. The fact remains that monthly core CPI has gained 0.5% in the last two months, a 3.0% annualized rate.


Gasoline prices surged 9.1% M/M in February, accounting for nearly three-fourths of the gain. Overall energy prices climbed 5.4% after declining the previous three months.

The national average retail price of regular gas hit a four-month high of $3.78 a gallon toward the end of February, according to Energy Information Administration data, up almost 15% from the start of the year. Prices have since eased a little and were at $3.71 in the week ended Monday, the EIA said.




Crude-oil futures fell sharply in London trade Monday as the euro-zone bailout for Cyprus’ embattled financial sector sent shivers through the market and pushed the dollar higher.

At 1000 GMT, the front-month May Brent contract on London’s ICE futures exchange was down $1.23 at $108.58 a barrel.

The front-month April light, sweet crude contract on the New York Mercantile Exchange was trading 77 cents lower at $92.68 a barrel.

Pointing up  I sense that the time to begin to worry about inflation is about now. John Mauldin posted a piece from Dylan Grice explaining how central bankers’ printing presses eventually cause inflation.

Bernanke has monetized about a half of the federally guaranteed debt issued since 2009. The incoming Bank of England governor thinks the UK’s problem hasn’t been too much monetary experimentation but too little, and likes the idea of actively targeting nominal GDP. The PM in Tokyo thinks his country’s every ill is a lack of inflation, and his new guy at the Bank of Japan is revving up its printing presses to buy government bonds, corporate bonds and ETFs. China’s shadow banking credit bubble meanwhile continues to inflate…

U.S. PPI Led Higher By Energy Prices; Elsewhere Inflation is Moderate

The producer price index for finished goods gained 0.2% last month (1.8% y/y), the same as during January. The latest rise matched expectations.

Also, as expected, there was a 0.2% gain (1.7% y/y) in prices excluding food & energy during February. A 3.0% advance (1.1% y/y) in energy prices led the increase in wholesale prices last month. That rise was led by an 11.6% spurt (1.1% y/y) in home heating oil costs. Gasoline prices followed with a 9.3% increase (1.2% y/y). Offsetting these gains was a 0.5% drop (+2.6% y/y) in food prices. Fresh fruit prices were 3.0% lower (+4.1% y/y) while dairy prices fell 1.3% (+3.6% y/y). 

EMU Inflation Steadies

The accompanying chart shows the incredible impact of the ongoing austerity programs in Europe. In high-inflation Italy the inflation rate has plunged. In low-inflation Germany inflation rate has continued to work lower. The current EMU rate of inflation is below 2%, the long-run policy objective of the European central bank.

If we look at the statistical standard deviation of inflation among the first 12 members of the community, we find that we are back-tracking to the kind of intra-community inflation differences that were present in the early goings of the Monetary Union. In the early days of the Union the standard deviation of inflation across these members of the community started about 0.9% occasionally flaring up to 1.2 1.3% with an average of about 1.1%.

Currently the deviations are back up to about 1% and the trend is rising. (…) Some huge divergences have reemerged within the Community despite the fact that the chart above seems to show that, at least for those countries, inflation rates are moving in tandem.

Open-mouthed smile  U.S. Industrial Production Recovers With Across-the-Board Gains

Industrial production jumped 0.7% (2.5% y/y) during February following a 0.1% January uptick, earlier reported as a 0.1% dip. Firmer factory sector production led the increase with a 0.8% rebound (2.0% y/y) after a 0.4% January drop.

The increase in factory sector output was led by a 3.6% rise (9.3% y/y) in motor vehicle production. In the consumer products area, furniture & related product production surged another 1.7% (0.3% y/y) while apparel output rose 0.2% (-2.1% y/y). For business equipment, machinery output posted a strong 1.7% gain (1.7% y/y) while electrical equipment production improved by 1.2% (2.9% y/y).

Pointing up  The capacity utilization rate recovered to 79.6% in February. In the factory sector, the rate increased to 78.3%, its highest level since December 2007.



Markit looks at the rolling three month data:

The February upturn takes industrial production 1.5% higher in the three months to February compared with the prior three months, while manufacturing output is up some 2.3% in the same period – the strongest rate of expansion since March of last year.

These data therefore point to a strengthening rate of growth of the industrial sector in the first quarter compared to the end of last year. Industrial production rose just 0.7% in the fourth quarter, while
manufacturing output was up 0.8%.

Sun  And, considering the consumer sector, rightly concludes that

The upturn in manufacturing so far this year has coincided with better-than-expected non-farm payroll and retail sales data, suggesting that the US economy is faring well in the face of weak global economic growth, an increase in payroll tax and uncertainty caused by looming fiscal headwinds.

China Housing Prices Rise

Average new home prices in China rose sharply in February from a month earlier, a development that could give Beijing added reason to clamp down on the fast-heating property market.

(…) Prices of newly built homes in 66 of 70 large and medium-size cities rose in February from January, data released Monday by the National Bureau of Statistics showed. In January, prices rose in 53 cities.

Based on The Wall Street Journal’s calculations, prices in the surveyed cities rose 1.01% on average in February from January, compared with a 0.54% increase in January. (…)

Data provided show housing prices in the surveyed cities rose 1.75% on average in February from a year earlier, accelerating from the 0.63% increase in January from a year earlier, the first increase of its kind since February last year. In terms of floor space, housing sales jumped 55.2% in the January-February period from a year earlier.

Chinese Stocks Enter Correction as JPMorgan Cuts to Underweight  China’s stocks fell, dragging the Hang Seng China Enterprises Index down 12 percent from this year’s high, as slowing growth and faster inflation spurred JPMorgan Chase & Co. to downgrade the nation’s shares.


Slip in Home Sales Clouds Canada Forecast

(…) Now, Canada’s economic outlook is cloudier. Gross domestic product grew a paltry, annualized 0.6% in the fourth quarter, following a 0.7% gain in the prior three months. That was the weakest set of consecutive quarters since the recession. The economy grew just 1.8% last year, and many expect the government to soon trim its forecast of 2% growth for 2013.

Those numbers aren’t likely to get a lift this time around from the housing market. Existing home sales across Canada fell 2.1% in February from January—and dropped a sharp 15.8% from a year ago. Real-estate activity slowed in most major cities, and prices fell by the widest margin since July, the country’s real-estate trade group said Friday.

Nearly 80% of local markets across Canada posted year-to-year sales declines, the Canada Real Estate Association said. The average, non seasonally adjusted home price in Canada fell 1% year-to-year, CREA said, to 368,895 Canadian dollars ($361,697). (…)

Meanwhile, Canadian household debt reached another record high in the fourth quarter of 2012, according to the country’s statistics agency, although the pace of growth slowed sharply. (…)  The ratio of household debt to personal disposable income edged up to 164.97%, up slightly from 164.7% in the third quarter, Statistics Canada said Friday. That is the highest reading since the agency began compiling the data in 1990. (…)

Ghost  RBC Capital Markets summarizes Canada’s housing market:

Valuation metrics such as the price-to- rent and price-to-household income ratio suggest that homes are more than 60% overvalued nation-wide. And, despite historically low interest rates, affordability measures such as the RBC Housing Affordability Index, which measures home ownership costs as a percentage of household income, remain stubbornly high. In markets such as Vancouver and Toronto, ownership costs as a percentage of income are running at close to 90% and 60%, respectively, which seems unsustainable.


Flaherty to cut spending in response to weak growth forecast

Meanwhile, in the U.S.:

2013 Economic Report of the President (456 pages)


Currency Intervention Has Big Trade Impact  Is the world facing currency worries or an all-out war?

(…) But a new paper by former senior U.S. Federal Reserve economist Joseph Gagnon says currency intervention — when a government forcibly lowers the value of their exchange rate — has an impact on other economies several times larger than originally thought. The findings back arguments by some economists and lawmakers that not enough is being done to stop currency manipulation.

Mr. Gagnon says that the $1 trillion a year spent on currency intervention by countries such as China, Switzerland and South Korea will continue to fuel trade tensions without stronger action. (…)

Mr. Gagnon’s paper argues that for every dollar a country spends to lower the value of a its currency, it boosts the trade balance by between 60 cents to a dollar. For a country such as China, that impact is three to five times bigger than the IMF calculated in its last exchange rate assessment released last year.

(…) Mr. Gagnon says the study has the potential to put pressure on the IMF and the Group of 20 largest economies to act more urgently to stop exchange rate interventions.(…)

Clock  EUROPE: Shortermism Is Back

Monti’s analysis guides EU debate  Economic reform taking too long to work, says prime minister

(…) the summit’s communiqué seemed to hint at a change in thinking. The conclusions, backed by all 27 leaders including Ms Merkel, endorsed “short-term targeted measures to boost growth and support job creation” and the need to “balance productive public investment needs with fiscal discipline”. Just kidding

At a post-summit press conference, José Manuel Barroso, the European Commission president who has long been one of the most ardent advocates of fiscal consolidation, appeared almost Keynesian.

“We should have short-term measures addressing some of the most pressing social needs and indeed addressing some of possibilities to have, let’s call them, ‘quick wins’ in terms of growth,” Mr Barroso said. (…)

Mr Monti might have succeeded in shifting leaders’ thinking of what was happening politically and economically in the eurozone. But the divisions over how to respond appear little changed from the day he took office a year and a half ago.

S&P warns of socially explosive situation in euro zone

Standard and Poor’s sees a high risk that Spain, Italy, Portugal and France will not be able to carry through necessary reforms as the unemployed become less willing to put up with austerity, S&P’s Germany head Torsten Hinrichs told a newspaper.


Abenomics has become a buzzword and Japanese stocks have done well lately. This chart from CLSA (thanks Gary) puts Japanese equity valuation in perspective.



Note: you may also want to read Grant Williams’ pretty negative analysis on Japan (‘It’s Just Bluefish’) before you commit all your savings.

The election of Shinzo Abe in December of 2012 has brought Kyle’s premise closer to realization but still hasn’t been enough to scare people out of the water, as they willfully ignore the mathematical implications of a PM promising to generate 2% inflation in a country that has the largest debt relative to GDP anywhere on earth but can, for now at least, borrow money at levels that will most definitely NOT be available to them should they succeed in their aims.



  • Snap! There Goes Dow’s Streak 

    The Dow industrials’ winning streak ended at 10 sessions, its best run since 1996, after a disappointing reading on consumer confidence sent stocks lower.

Stocks declined just as another major benchmark, the Standard & Poor’s 500-stock index, was about to join the Dow in record territory. (…)

“The market is taking a breather,” said Patrick Kaser, a portfolio manager with Brandywine Global Investment Management, which oversees $42 billion. “This is pretty minor, to be down less than half a percent. I think it’s encouraging.” (…)

Pointing up  Although the day’s move was modest, investor interest was high. Total trading was the year’s highest, with overall volume of New York Stock Exchange stocks exceeding 4.9 billion shares. Nasdaq trading also was the highest of 2013. (…)

As they question whether indexes have more gains in them, investors will be influenced by the fact that stocks have defied skeptics since before the election last year. Repeatedly, experts warned they had come too far, too fast, and repeatedly stocks broke higher.

Other signs of frothy sentiment also have been bubbling up, notably a jump in bullishness among investment advisory services polled by Investors Intelligence. Bulls increased sharply to 50.0% last week from 44.2%, while outright bears fell to 18.8% from 21.1%, their largest weekly drop in 10 months. Advisors looking for a correction also dwindled to 31.2% from 34.7%. Moreover, the spread between bulls and bears surged to 31.2% from 23.1% in just a week and put it in “the dangerous territory around 30%,” Investors Intelligence commented. A wide spread a year ago preceded a market retreat, the service noted. (…)

And for Dow Theorists, Kass pointed to the advance in the Dow Transportation Average, which is looking rather extended. The transports were 19% above their 200-day moving average Thursday, implying that the average was well ahead of itself, which has tended to portend a pullback to its trend. The last time this happened was in early May 2010, after which the market fell 18% over the next two months. In January 2010, the transports jumped 19% above their moving average; this was followed by a 12% dip over the next month. And in May 2006, they got 21% above their moving average, after which came an 11% dip over the next two months.

(…) As a matter of fact, the fever of despair is slowly dissipating. Editorials are more positive and blogs are less preoccupied. Media is realizing that dynamism abounds, that many firms are doing well and that life is not centered around politicians. Insightful investors are seeing the difference and, in turn, the stock market is quietly booming.

Italy Did Not Just Send in The Clowns Why The Political Stalemate Is a Warning to Democracies Everywhere

(…) One reading of this extraordinary outcome is that it was a protest against the painful spending cuts, tax increases, and economic reforms that Monti’s government implemented as a precondition (albeit an unstated one) for European Central Bank support. The fact that, together, Grillo, who promised a referendum on the euro, and Berlusconi, who took a euroskeptic stance throughout 2012, won more than half of the votes was described by the economist Joseph Stiglitz as “a clear message to Europe’s leaders: the austerity policies that they have pursued are being rejected by voters.”

But the Italian election is telling us much more than that. In fact, Grillo’s party, founded only in 2009, focused less on euroskepticism than on a blanket rejection of the established Italian political elite and its way of doing politics. Rejecting traditional campaign techniques in favor of social media, the party pushed its agenda of, first, ending the generous state subsidies and salaries paid to Italy’s political parties and elected politicians and, second, replacing them with a vaguely conceived Internet-based representation system. The Grillo phenomenon is a challenge not only to austerity politics, but to the traditional party system itself. The economic crisis gave Grillo a favorable wind, but his offensive against Italy’s corrupt and self-serving politicians was brewing even before the downturn began.

It would be unwise to dismiss the election results as yet another Italian anomaly. All across Europe, membership of political parties is at its lowest level since the World War II. Voters are also less loyal than ever to traditional parties — they are more likely to switch votes to a rival party or an entirely new one. Only days after Grillo’s triumph, the UK Independence Party, which campaigns for British withdrawal from the EU, came to within 2,000 votes of winning a by-election held to replace a disgraced Liberal Democrat MP, pushing the ruling Conservatives into third place. And the success of the Pirate Party in Sweden, the anti-Islam party led by Geert Wilders in the Netherlands, and more established populist parties such as the French Front National, confirm that Italy is far from being an outlier.

The economic crisis in Europe is threatening the very survival of the mainstream political parties. European citizens have been showing signs of frustration and dissatisfaction with their elected politicians for years. Even before the crisis, voters had tired of choosing between broadly similar political parties whose policy options are constrained by European laws or the pressures of globalization. Faced with the worst economic crisis since the Great Depression, this frustration is boiling over into resentment and rejection. And the imposition of draconian measures by supranational institutions only makes things worse.

All that has created a crisis of legitimacy for Europe’s ailing political parties. If the established political class can be blown out of the water in Italy, politicians Europe-wide must be wondering how safe they are from a similar fate. Political parties not only need to address the economic crisis, they also need to reconnect with voters and revitalize their central role in democratic politics. If they do not, what happened in Italy may soon repeat.

Angry smile  SAC in record $614m insider settlements
Agreements over trading in Wyeth, Elan and Dell shares

(…) A person close to SAC said the fund had chosen settlement over two to three years of civil litigation that would follow the trial of Mr Martoma, threatening prolonged uncertainty for investors and staff of the hedge fund. (…)

Ed Butowsky, of Chapwood Investments, said he retained full confidence in SAC and Mr Cohen to manage money for him and his clients following the settlement: “Its like saying you would drop Michael Jordan from your team because of a technical foul”.

A technical foul!!!!!!!

SAC said in a statement: “We are happy to put the Elan and Dell matters with the SEC behind us. This settlement is a substantial step toward resolving all outstanding regulatory matters and allows the firm to move forward with confidence. We are committed to continuing to maintain a first-rate compliance effort woven into the fabric of the firm.”

Yeah, sure!

Remember Martha?

According to U.S. Securities and Exchange Commission (SEC), Stewart avoided a loss of $45,673 by selling all 3,928 shares of her ImClone Systems stock on December 27, 2001, after receiving material, nonpublic information from Peter Bacanovic, who was Stewart’s broker at Merrill Lynch. The day following her sale, the stock value fell 16%.

In the months that followed, Stewart drew heavy media scrutiny, including a Newsweek cover headlined “Martha’s Mess”.

After a highly publicized five-week jury trial that was the most closely watched of a wave of corporate fraud trials, Stewart was found guilty in March 2004 of conspiracy, obstruction of an agency proceeding, and making false statements to federal investigators, and was sentenced in July 2004 to serve a five-month term in a federal correctional facility and a two-year period of supervised release (to include five months of electronic monitoring).

Bacanovic and Waksal were also convicted of federal charges and sentenced to prison terms. Stewart also paid a fine of $30,000.

In August 2006, the SEC announced that it had agreed to settle the related civil case against Stewart. Under the settlement, Stewart agreed to disgorge $58,062 (including interest from the losses she avoided), as well as a civil penalty of three times the loss avoided, or $137,019. She also agreed to a five-year ban from serving as a director, CEO, CFO, or any other officer role responsible for preparing, auditing, or disclosing financial results of any public company.


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