Diary of a Financier

Top Newsstuffs (May 27-June 2)

In Bookshelf on Sun 2 Jun 2013 at 04:19

T-shirt weather this weekend…

Interview: Billy Joel | New York Times (NYT)
On aging rock stars, the revitalization of his music & an early, solemn retirement.

Emerging Market foreign exchange gets ugly, very ugly | MoneyBeat (WSJ)
When the Fed mentioned “tapering” its QE POMOs, a flood of $USD buying/EM currency selling cascaded through stop losses.

Junk bond issuance surges in 2013, correction looms | Seeking Alpha
High yield new issuance up to $254B globally ytd (+53% y/y); $130.6B in US (+24% y/y). Since the 5% yield barrier was broken & the mention of a Fed “taper,” cracks have started to show, with a combined $660mm in outflows from $HYG & $JNK this week.

Stocks diverge from everything else, ready to catch-down | Zero Hedge
Overlay shows the gaping divergence between rallying $SPX & plummeting other indicators, including $LB_F, $DBC, $HYG, 5y inflation breakevens, ttm EPS, FY13 EPS consensus & US Macro Index.
[Permabear Tyler Durden exercises his selection bias & chart scale magic, but the decoupling of equities in May is undeniable. I can, however, rationalize every example by attributing to rising real rates.]
#Bearish #Perception vs Reality

Rail traffic weekly: Weak week weakens slown trend | Association of American Railroads (AAR)
Weekly traffic -1.1% (vs. this week last year); total ytd volume +0.8% y/y.
5 of 10 carload groups posted gains: Petroleum products +28.7%; grains -21.8; metallic ores -10.5.
[Surprisingly negative week breaks seasonality-bucking uptrend & weakens already slow ytd growth; petroleum growth continues deceleration.]
#Bearish #Law of large numbers

Evaluating the statistical significance of valuation metrics for equity market forecasts | GestaltU
Linear regression analysis suggests that traditional fundamental ratios (PE, PB, PS, PCF, LTDER, CR, etc) have no predictive power, but the following are compelling measures that explain long term (optimized at 15-years) inflation-adjusted stock returns:
1. Shiller Cyclically Adjusted PE (CAPE)- earnings
2. Q-ratio- balance sheet
3. Market Cap/GNP- corporate share of the economy
4. Price residuals (deviation from trend)- technicals

White paper: Monetary Realism- Understanding the Modern Monetary System | Cullen Roche (Pragmatic Capitalism)

White paper: The lingering effects of economic shocks on public & private savings | Aizenman & Noy (Vox)
Data reveals that countries more prone to per capita income catastrophes historically have both higher household & lower government savings rates:
“Dramatic shocks have a long-lasting effect on saving behaviour. Past crises tend to increase savings among households, but they also lead to decreased public sector saving. However, the evidence suggests that this decrease in public saving is about 1/3rd of the magnitude than the corresponding increase in household saving.”

Lumber prices collapse, diverge from Homebuilders’ rally | Zero Hedge
$LB_F has absolutely collapsed -32% since March high; supply squeeze from idled sawmills & pine beetles has obviously been allayed.
[I don’t think this is as much a bearish leading indicator for housing as it reflects a return to supply/demand equilibrium balance. Previously]

SPX earnings forensic: Share buybacks largely responsible EPS growth & are masking credit conditions | JP Morgan (JPM)
Since 2011q3, 60% of SPX’s EPS growth is attributable to equity share buybacks ($2.20 ttm vs $1.50 organic growth).
Also, since most companies borrow to finance repurchases, “share buybacks mask weak credit growth in the economy,” and a chart of total credit creation (household + corporate) ex buybacks shows almost zero annual change in US & G4.

NYSE margin debt & balances (April 2013) | Doug Short (dshort.com)
Gross nominal margin debt has reached an alltime high ($384B v $381B record in 7/2007), and real debt has surged even closer to 2007’s record.
Net margin balances have far exceeded 2007/11 pre-correction lows and is now nearing the Tech Bubble’s record (-$105B vs -$130B in 2000).

Chart analogue: Silver vs SPX | Market Anthropology
Tight-fitting overlay compares 2011 $SLV (QE2) to 2013 $SPX (QE3/4).
[Consistent with my 2007 SPX analogue, this 2011 SLV analogue says a correction is days away.]

How & why QE isn’t inflationary: The broken transmission mechanism & unintended consequences | Coppola Comment
QEs have historically been deflationary (per CPIs in Japan, US & UK), which counterintuitive outcome is attributable to “unwanted redistributive effects [in that] QE benefits the asset-rich at the expense of the income-dependent.”
For example:
1. Banks won’t lend to small businesses due to risk & regulation, yet large companies have used the cheaper cost of capital for buybacks of their own shares (debt for equity repurchases) instead of investing in capital or people. That myopic focus on accounting profits over real growth has led to a loop of underemployment, falling productivity & weak real incomes.
2. The hope was that QE would offset US & UK fiscal tightening, which disproportionately afflicts those who live on (middle/low) earned income, but QE principally supports asset prices: “[ZIRP] is supposed to encourage people to spend instead of save. But when people are saving for their old age [demographics], and they see their savings whittled away in the form of below-inflation returns, they are likely to save more, not less.”
[Couldn’t have said it better myself.]

Contraction in government spending is finally about to reverse | Business Insider
After public sector employment dropped (starting 2010) and state & local government spending dragged on GDP (starting 2009q4), public entities like the state of California have repaired their balance sheets and are now trying to put their budget surplus cash to work–an unexpected boon for GDP growth.
$MUB #Bullish #Municipal


  1. […] have already been surpassed. More alarmingly, net margin credit balances (deficits) have far exceeded 2007/11 pre-correction level and are now nearing the Tech Bubble’s alltime low (-$105B vs -$130B […]

  2. […] bubbles- SPX has started catching down to other risk assets after stubbornly diverging throughout May; Oil price technicals are signaling a turn higher, but other commodities are still […]

  3. […] April. Detroit says it has ~2 months to avert the biggest muni default in US history. [Previously: Balance sheets & budgets repaired, US munis prepare to spend and Motor City revived as Detroit withers to Motown shadow] $MUB […]

  4. […] all day long, but you can never model human behavioral psychology. As aforementioned, QE ended up raising asset values, but not consumption/incomes, and therefore not growth. Finally, the conclusion must […]

  5. […] also propel us beyond? I’m certain Mr. Bernanke is looking at two primary catalysts. First, the health of state and local governments’ balance sheets. In aggregate, municipalities’ budgets have […]

  6. […] NYSE margin debt & balances (May 2013) | Doug Short (dshort.com) Gross nominal margin debt receded from April’s alltime high (down from $384B tp $377B), as did real debt (still shy of 2007′s record). Net margin balances still far exceeded 2007/11 pre-correction lows but have started normalizing, having missed the Tech Bubble’s record low deficit. [Previously] […]

  7. […] was wondering if some of QE/ZIRP’s unintended consequences will lead to longer term, structural issues, so I decided to dive into some research on the […]

  8. […] says the Fed can't untaper because QE essentially financed the budget deficit, which is waning, but QE doesn't finance the budget; Congress establishes the budget ahead of time, the Treasury auctions bonds to finance […]

  9. […] all day long, but you can never model human behavioral psychology. As aforementioned, QE ended up raising asset values, but not consumption/incomes, and therefore growth’s staying power was […]


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