MORNING BID – Pitfalls and switchbacks

Mar 31, 2014 13:36 UTC

This week profiles as one that contains a bunch of potential minefields that could challenge the market’s prevailing view on what’s to happen with major market-moving events.

The ECB meeting is one of the more obvious ones, what with investors expecting for some time that the euro would push higher and higher on the expectation of an improved outlook in the economic situation there.

That changed somewhat abruptly last week when Bundesbank President Jens Weidmann came out with some rather dovish comments that threw people for a loop. This looks like there could be some kind of situation where people are positioned against a rebound in the euro, only to be disappointed by the lack of action from the ECB should it go down that way.

The same can be said when it comes to events like Friday’s jobs report. The market still has to try to suss out the likely reaction to this and weekly positioning figures that show the market’s short position in five-year Treasury notes getting bigger than a week ago, as for other parts of the yield curve. A modest long position in two-year futures turned into a short position last week; long positions in the 30-year contract were trimmed, and investors extended short positions in the five- and 10-year area as well.

That seems to set up nicely for a jobs-report-weather-payback kind of deal this Friday, but it’s entirely possible that this won’t happen, and we’ll have another weak result on the jobs front. The latter would certainly reverse a lot of these bets and make for some volatile action as investors try to figure out what’s going on.

Either way, Jason Goepfert of Sundial Research points out that the positioning in the five-year hasn’t been this short since 2005, and even then, that short position was eventually overrun by unexpected consequences that resulted in a multi-month rally – so let’s be extra careful out there.

Ukraine’s situation remains fraught with concerns about Russian designs on part of the Ukrainian mainland following the annexation of Crimea.
And herein we have a third possibility of surprise, where tensions worsen, the price of oil spikes, and the European economy, much more dependent on Russian engineering than the US or the Far East, feels the pain, again, hitting the euro.

And then there’s China. The Financial Times reported bad loans written off by China’s biggest five banks increased by 127 percent in 2013. This is an ugly situation that will stoke concerns about a potential debt crisis, one made worse by the strange nature of many Chinese loans, whereupon deals made to borrow in dollars were backed by copper – which has been sinking as investors sell the metal for collateral.

MORNING BID – But I never could find…(sha na na na, sha na na na na)

Feb 7, 2014 14:05 UTC

An odd jobs report sets the tone for what’s likely to be another choppy day in the markets – stock futures plunged, briefly, after the Labor Department said nonfarm payrolls grew by just 113,000, but the household survey saw a drop (again) in the unemployment rate to 6.6 percent on a big gain in jobs in that survey. An odd decline of 29,000 in government payrolls offset the overall about-at-trend-but-let’s-not-kid-ourselves-about-this-being-awesome 140,000 or so gains in the private jobs market, so there’s a little bit to like, some to shake one’s head at, and still more to wonder about how many people didn’t get to work because their feet froze to the ground when they tried to get into their cars.

(More seriously on that point – the establishment survey doesn’t get some kind of massive job loss just because of a storm on a particular day of surveying, so it’s not as if a snowstorm destroys job growth, so let’s not overstate the weather issue here. It’s a factor, but don’t look for a revision to +300,000 or something.)

The activity in equity futures, however, seems to point to where we’ve been all along: jobs growth, factory activity and overall economic figures are just enough to put a brake on getting any kind of incipient rally and keeping the buyers less motivated right now, though the shallow correction we’ve seen so far appears to have hit a stopping point for the time being. Futures bottomed out around 1758 on the S&P E-Minis, a few points below the level the market had been sitting at before the downdraft that took futures to about 1730 for a few days. Stocks recovered from that level and now appear content to hang out around 1760 or so or even a bit higher, while the bond market is doing something similar – a quick post-jobs rally that took yields down to about 2.64 percent on the 10-year before the buyers eased off the throttle, lifting yields again to around 2.67 to 2.70 percent. Absent more emerging markets turmoil – and this appears to have been somewhat stemmed in the last few days, though maybe that’s just because we haven’t had bad news from China in the last day or two – these levels might end up prevailing for some time.

The jobs number of course raises the usual back-and-forth about whether the Fed might decide to accelerate or decelerate its schedule for winding down stimulus, but with the Federal Reserve – and especially with a new chair coming in – predictability when it comes to this policy is probably the preferred course of action. There’s enough weather-related shenanigans and uncertainty about global growth offsetting the relatively solid economic figures for the Fed to not want to jolt markets, and the Fedsters have been talking pretty tough on this one, essentially making it clear that this wind-down will become the equivalent of stock buyback programs: They continue, no matter what, unless something drastic happens to alter that expectation.

While we’re on the subject of buybacks, Apple is upping the ante on its own share repurchase schedule, succumbing to some of the pressure from the likes of Carl Icahn and others who have demanded the company boost shareholder returns in the absence of real spending plans. And of course, Apple has a ton of cash on hand, and they’re generating enormous profits even if they’re not the growth engine they had been in the past. It’s a bit early to say that the company should be lumped in with the likes of Exxon or IBM – gigantic businesses mostly notable now for moving money around, using up their free cash flow (and then some, thanks to low borrowing costs) for buying back their own shares.

Some analysts, notably Tobias Levkovich of Citigroup, have done studies that show that serial repurchasers – those who are steadily reducing their outstanding share count (share shrinkers, to come uncomfortably close to a Costanza-ism here) – have been better performers in the stock market over the last decade, with a total return of about 550 percent coming into the year compared with the S&P, which is up about 200 percent since the beginning of 2003. From a shareholder perspective, that works as long as these companies are so entrenched that their products deliver big sales at steady margins; once they fall behind, though, look out.

Growing pains

Nov 11, 2013 22:45 UTC

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At the IMF’s research conference last week, three Fed economists examined America’s economic wounds. A paper, by Dave Reifschneider, William Wascher, and David Wilcox, studied whether the economy has been permanently damaged by the effects of the financial crisis. Economists call it “hysteresis”, a concept coined in 1986 by Larry Summers and Oliver Blanchard, in a seminal work on the European labor market.

The Fed authors find that America’s potential GDP is about “7 percent below the trajectory it appeared to be on prior to 2007”. Before the crisis, America’s economy had the potential to grow at about 2.6% per year, the authors find; since the crisis, America’s potential growth rate has been just 1.3%. You can blame this decrease in productive capacity, the authors write, on things like lower productivity and persistently high unemployment.

Paul Krugman’s term for this is “The Mutilated Economy”: “The long-term unemployed eventually come to be seen as unemployable; business investment lags thanks to weak sales; new businesses don’t get started; and existing businesses skimp on research and development”. Worse, he writes, this is self-inflicted harm: the US simply hasn’t done enough to help the economy since the crisis.

Gavyn Davies argues that this paper takes the Fed into some new territory, and has three takeaways for investors. First, the Fed has moved on from debating the rough date of when it’ll start tapering; second, based on his reading of a paper by the Fed’s William English, he says the central bank may keep rates lower for a longer period of time; and third, he argues that the Fed has shifted the way it thinks about supply and demand during recoveries.

The worrying over America’s output gap — or the difference between the economy’s potential GDP, as measured by the CBO, and its actual GDP — isnt new. Last year, Grep Ip was reluctantly optimistic that the US hadn’t lost its growth potential. But Felix argued that lower growth rates may be here to stay, as America weans itself off “the artificial stimulant of ever-accelerating credit.”

Last year Greg Ip also looked at previous jobless recoveries (1991 and 2001) and found that the economy eventually recovered its growth potential. John Cassidy warns against drawing overly broad conclusions from the new Fed paper: “ Is it realistic to suggest that the economy’s capacity to expand has halved in five years? Population growth hasn’t ceased. Americans aren’t any less hardworking than they were five years ago, and their skills haven’t declined precipitously.” -Ryan McCarthy

On to today’s links:

Long Reads
The food stamp diet: America’s hungriest region is also its most overweight – Eli Saslow
Assets of the Ayatollah: Inside the Iranian spiritual leader’s massive financial empire – Reuters

Charts
Americans’ shrinking credit card debt – Matt Phillips

Felix
The CMS wars: On the companies that will dominate the future of digital publishing – Felix

New Normal
Wall Street is slowly beginning to worry about income inequality – WSJ

Right On
What it will take to fix climate change for good – Quartz

Possibly Not-So-Useless Data
What can statistics tell us about causality? – Andrew Gelman

Quotable
“Cars aren’t people. Babies aren’t luxury consumer goods. That’s just how it is.” – Matt Yglesias

Energy
“It would be quite a paradox if green regulation ended up being a bigger threat to Tesla than its safety record” – Matt Klein

Alpha
A really nice overview of the companies trying to mine raw Twitter data for a market edge – Will Alden
Worried about market manipulation, big banks may block traders from chat rooms – WSJ
Some chilling signs of a market top – Josh Brown

Must Read
“In these secular, jobless, globalised times when ever more of us live alone, we are no longer very sure who we are.” – Simon Kuper

Study Says
Gentrification helps credit scores – Cleveland Fed

The Fed
The Fed’s role in the recent big IPO pops – Macro Man

Follow Counterparties on Twitter. And, of course, there are many more links at Counterparties.

from Ben Walsh:

First quarter growth goes from lackluster to dismal

Ben Walsh
Jun 26, 2013 16:57 UTC

The newest estimate by the Bureau of Labor Statistics says the US economy grew at an annual rate of 1.8% in the first quarter. Previously, growth was earlier reported to be 2.4%.

There were two main drivers to the downward revision: growth in consumer spending, which fell to 2.6% from 3.4%, and business investment, which fell to 0.4% from 2.2%.

There’s a chance that slower than estimated consumer spending in the first three months of 2013 may have improved in the second quarter (consumer confidence just reached its highest level in five years). Still, the 0.6 percentage point drop in first quarter growth is bad news for the US economy, where, as Sober Look put it, “the consensus seems to be that the US consumer will come to the rescue once again”.

Sober Look points the Econoday chart below and notes that consumer sentiment shot up in May. Today’s revision in consumer spending indicates that sales might not be following sentiment:

Compared to the discrepancy between downward consumer spending revisions and rising current consumer confidence, the 1.8 point drop in the business spending number is more in line with more recent corporate data points. The mood among business managers isn’t as dour as today’s numbers, but it’s much more restrained than consumers’ current optimism. Earlier this month, a survey by the Business Roundtable showed that CEOs expected an essentially unchanged rate of 2.2% economic growth in the second quarter. The report was summarized with this cautionary statement: “Overall, CEOs see the US economy still on a slow road to recovery”.

Today’s revised GDP estimate seems to justify that view. Somewhat perversely, markets are up slightly. Bad news for the economy is good news for some on Wall Street: it means the Fed is presumably less likely to slow its monetary stimulus. As Agnes Crane wrote last month, this seems to be a key feature of the central bank’s quantitative easing: while it’s good for financial markets, it’s having little effect on the economy.

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