The Banking and Strategy Initiative

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The mid-week Trend Update (US Economy and Markets) : European GDPs being a positive surprise on Low expectations

In 1935, Cret designed the Seal of the Board o...

In 1935, Cret designed the Seal of the Board of Governors of the Federal Reserve System. (Photo credit: Wikipedia)

Using a discussion of QE globally to raise the spectre of withdrawal

Let me lead with the worries of stripping of QE liquidity by Ben Bernanke fueled in Asia today by Minister Amari’s remarks in the Abenomics government. Amari did remark on Monday, rather precipitately that he thought the 102 levels quite enough for the Yen to last. Though his remarks were not welcomed and the then sudden rally of the Yen stopped midday after he was suitably disparaged by colleagues. However, BoJ commentary this week cheering on Abenomics was miconstrued with innocent remarks regarding the ultimate exit from QE simultaneously with the US and the central bank buying back 75% of its 30 year bond issue to comeback after Bernanke’s testimony was anyway put to a razor test to discover any hidden bombs leading a global unwinding in equities triggered across Asia and europe. The BoJ in the meantime did unleash critical liquidity immediately on Thursday to quell the noise as yields on the 10 year benchmark used to price retail mortgages climbed from 0.3% last month to 1.0% in morning trades. The global losses are in situ being repaired by a rally in the Dow that started about 90 minutes back. You can probably guess that Economics minister was again taken seriously today when he said he thought the Nikkei had risen too fast, the Nikkei closing down 7% before the rush of bond money restabilised expectations of continued government support

New home Sales in the meantime were all the bull they could muster at 454k and the morning shakedown test that had the Dow starting near the 15180 mark in the first few seconds of trading. However as Oil reaches its low of the day at $92 and seems to have a lot of downtrend in the price readings, China’s manufacturing PMI weakness and worries of an early QE exit are likely to fade before markets close for the week. Though the policy speak and actions (in case of BoJ) have effectively quelled it, there is still a risk to equities off any real recovery esp in the insipid retail sales and consumption data is instead pledged as a threat of a QE exit as in 2010. The commodities cycle’s continuing downward consolidation however makes a sustained recovery more likely and real earnings may beat backt he chances of price cross into an asset bubble except perhaps in a long term lock for euro zone bonds

J P Morgan acting on new gold lows

In a true mark of greatness, JP Morgan is picking up the other side of the gold trades as April and May saw a lot of investors offloading their Gold holdings including investor George Soros

Bernanke’s testimony to the Joint Economic Committee (Chair: Rep Brady, Vice Chair:Amy Klobuchar)

Bernanke’s testimony again though unequivocal had enough direct answers to the Joint Economic Committee’s questions on the ultimate exit from QE to scare global markets and/or confirm the opinion that QE could in fact even be increased till the cyclical unemployment gains of another 2% were achieved by the Fed. Bernanke promised that he would be just starting reducing purchases of Agency MBS the month good economic data was incoming and even suggested rather bluntly in various responses that he had already shown that there was actually no need to ever sell the Fed’s large holdings of Treasury Securities and Agency MBS particularly as they could expire at their own pace and thus reduce the Balance sheet of the Fed at an appropriate pace. Earlier Dudley had reiterated that it needed at least 3-4 months to plan any such unwinding of QE purchases of Agency MBS on Monday. On Tuesday, Bullard had also drowned the spectre of receding QE with the hope of increasing QE being a real option in the light of flailing Economic data. Meanwhile Jack Lew’s statement on the risks to the stability of the Fiscal plan in the oversight council seemed routine and should not raise any new concerns either with their being agreement that enough regulation had been committed on the Banking Industry to take care of the risks

Key concerns raised by Bernanke yesterday that affect the long term US recovery remain centered around issues of structural unemployment with 8 million part time workers also seeking full time employment and the 12 million unemployed including a large amount of those unemployed for more than 6 months who were not being welcomed back by employers. Bernanke also underlined that the interest paid to banks on reserves were required to make tools available for guidance of interest rates to the banking system. Again Bernanke also cited the forward guidance of low interest rates as a key policy feature/tool in light of continuing low interest rates.

Though Bernanke easily met expectations in responses to other members including Ms Sanchez, Toomey and Senator Lee, their comments impressed on the real state of the US economy. The trio added to the Fed’s plate , original economic platitudes critical to any discussion of future outlook showcasing the new highs in real estate prices in California and rents exceeding ownership costs, QE just bringing forward future economic activity than adding new legs ( Toomey) and Senator’s Lee’s insistence on how deleveraging was achieved in a QE liquidity led US recovery

However the improved affordability from the price crash of 2008 still has not removed questions of a sset bubble even at the new low prices which seem to be jumping in an investor led frenzy esp in the West. Existing Home Sales reported ajust a point lower at 4.97 million early in the afternoon

A promise of a better Corporate Q2 despite ‘bouncing’ credit

Ford came back on Monday with good news increasing production in the USA by 200,000 on top of its near capacity 2.8 million production in 2012 entirely in new shifts and reduced downtimes across plants in the midwest from down in Kansas to north in Detroit. Unbelievable but the stodgy yet gleaming F150(Silverado at GM/Chevrolet) is leading growth year/year with a 20% jump in the first four months. Overall Ford sales have jumped 13% till April 2013 with 18% jump in April data itself despite the plateaued consumer credit data

Toll Brothers repeated their results in February with New Home orders up 50% to 1753 and the 30% jump in sales in the quarter bringing value realised up by 57% on price increases of more than $26000 per home. Their outlook for 2013 is up 33% in no of units at 4400(seekingalpha (10Q extract)) near the top end in the tough premium markets, including Washington. The year/year gains in the industry remain around 30% and turnaround time from listing to sale is down from 62 to 46 days even as the proportion of first time buyers hits a three year low at less than a quarter of the buyers( Diana Olick) underlining fears raised the the JEC session yesterday

Meanwhile Target and Lowe led fears over retail coming up stumped this year with earnings falling short of expectations in the May reports itself. Target also reduced its 2013 EPS outlook on Wednesday (Reuters Insider/Bloomberg Tv) as it is about to miss comp sales peg in the coming months too

Saks for sale was more of a boost for the New York Post than for the landmark retailer as networks flagged the potential Goldman Sachs deal for the good times promised before the confusion from Bernanke’s testimony skidded markets and Amari reiterated that with stocks falling so much, Yen would raise an equivalent amount raising the irrational worries of investos the way a politician almost always can and does.

The Yuan’s strength, what mirage of hope is holding that up!!

China PMI flashes marks of a tough changeover for big brother but with growth at 7.7% in Q1, one has to agree there is nothing to stop this machine from toughening up the road for everyone else. Trade refuses to pick up as surpluses continue to dominate China’s monthly trade reports and statistics , however suspect do not seem to be behind the continued exports scores without industrial imports and thus a better economic outlook for Brazil and Aussie among others. While the Aussie has ‘recovered’ weaker 97 level below parity from 1.06 in April, the Yuan is on way to its promised 2-3% appreciation per year at 6.14 to the Dollar

Mitsubishi, now did that ever make cars?

Dan Loeb scores a soft big hug from Sony and the deal perks look increasingly low margin Asia business this week with Sony CEO mustering up the courage to openly acknowledge the plan to sell 20% of product heavy Sony before expecting a reprieve from customers(Reuters Insider) Sony ‘s plan. According to the WSJ, Sony already listed its Bank in 2007 and thus the idea of taking 20% of its entertainment business to IPO could not really be a foreign idea.

More event led transformation could lead deals to Asia heavies as Samsung leads the charts of outperformers alongside Honda and Toyoda and Canon, Mitsubishi and many others search for relevance. Mitsubishi motors in the meantime is reducing Capital to wipe out losses and resume dividends at the end of a 10 year long reorg. The Mitsubishi group is now better known in the US agan in the West for its biggest Japanese Bank – MUFJ that owns Morgan Stanley stock as well. Wild gyrations on the Nikkei were more than matched by Mitsubishi’s jump of 25% in the week folloed bya double digit fall to 162 Yen today

America’s future meanwhile loves new real estate investments with corporate cash even as Apple was pulled up for international tax adventures by the IRS. Lori Lerner in an aside ina business heavy week pleaded the fifth on charges leveled gainst her Cincinnati offices by the IRS and the DoJ. From ring shaped spaceships in California (Apple Campus 2) to 95 ft Spherical biosphere cacti in Seattle are signalling Tech tax tribulations a new cash option?( subscription required) lori lerner headed the office for deciding exempt status for voluntary organisations for the last three years Land buys and premier landscaping by Amazon and Apple are however not just requirements of Silicon Valley character or diversification investment but also a contribution to society considered palatable by big American institutional investors in a prelude to the frenzy seen led by ISS against JP Morgan to an equal distraction/nuisance value

Ratings agencies prove their quest for opacity missing the agency MBS market now ready to bite in 5..4..3..2..1?

At least a quarter of the current stock of MBS should be investment grade( subscription required) and that has turned off quite a few bankers as rating agencies follow up on the pre 2007 habit of indiscriminate AAA ticketing of tranches with an equally indiscriminate junk rating of perfectly fine MBS tranches to cover up for lost ground, not that us bankers and traders ever took them seriously to start now

UK survives Q1 growth scare to plunge headlong into Q2 gloom with retail sales negative on Monday..

European PMI reports closed May flash data at around a respectable 47, with France pulling up above 45 but remained in the contraction zone even as retail sales and employment data reported negative growth in UK on Monday but looked pretty scaled up on lower bases in Spain and Italy among others. April’s warning from Germany and weak retail data reported two weeks back set the stage for continuing successful French and italian central bank auctions as Germany enters election mode. The euro club reported double the monthly trade surplus at EUR 26 B in the Current Account yesterday and German Bund yields went up on cue to 1.4% in Wednesday’s 10 Y auction. Dutch data continues to lag the euro club most precipitously and the expected GDP data blues followed true to form with investors letting Spanish yields up to 3% in the corresponding Spanish Central Bank auction within hours of the bund auctions caught up in the day’s flurry of correction trades masking false japanese short exits and the said worries on QE withdrawal

However the Euro is likely to continue to trade up at least till the Sterling finds renewed support from improving data and then on to 1.35 levels and even 1.40 before 2013 is over

The Dollar ready for a slide soon after it is already at 84

Aussie and Canada seem to be the unfortunate ones caught int he global crisis of confidence as resource rich economies whose trade reductions have caused tremendous grief to consumers and the recent currency depreciation is a welcome respite. However with interest rates powering up in the global selldown of US and Japanese government issues should perk up other currencies sooner than later as the longevity of the QE infusion sinks in (pun not intended)

Sucker’s bets, Seeking alpha and the season of transcripts coming to an end

Detroit ready to report a Chapter IX event in 6 months (Reuters insider)

Whats driving dropping euro zone yields and how much is that appetite

Well, as Confucius said and Canton and Malabar/Malacca felt at various points in history, may you live in interesting times ( courtesy Bernstein’s tome on “The Splendid Exchange” and a offering by Prof Jeff Borland on “Generating the wealth of nations”

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