Diary of a Financier

Top Newsstuffs (July 29-August 4)

In Bookshelf on Sun 4 Aug 2013 at 06:35

Floating away in Mass Bay…

The “Fed Model” is misleading | The Economist
Dispels myth of correlated Treasury yields & earnings yields, which only ever prevailed during Greenspan’s disinflationary Great Moderation (1985-99).
When interest rates drop, discounted cash flow (DCF) raises present values of assets & stock prices, but when $TNX falls due specifically to lower real growth expectations (not inflation), the $SPX E/P ratio should decouple & rise (not fall), because lower real GDP growth should mean lower profits.
[Exactly! SPX earnings yield decoupled from the 10y in 1999 due to lower growth expectations, which is why I choose to compare equity earnings yields to investment grade corporate bond rates (Baa).]
#Selection bias

America facing a grape shortage | Citibank
US developed a grape surplus by increasing vineyard capacity to meet growing wine demand in 1990s, but the oversupply led farmers to switch to other crops due to waning grape prices; after a particularly small harvest in 2011, there’s a deficit that requires a 2.5% increase in supply per annum.

Rail traffic weekly: Back on track after big week | Association of American Railroads (AAR)
Weekly traffic +2.5% y/y; ytd volume drops to +0.8% y/y.
6 of 10 carload groups posted gains: petroleum products +23.2%; grain -7.6.
[Monster recovery after last 2 weeks were looking bleak.]

Purchasing Managers Index (July 2013): EM/DM decoupling inverts more, global eeks out gains | Business Insider
Global PMI expands again (50.6 to 50.8) with a pan-European recovery & UK/US strength outrunning Australiasia’s deep contraction:
Japan’s expansion surprisingly slows (52.3 to 50.7).
China’s official PMI upticked (50.1 to 50.3), but the unofficial keeps sliding (48.2 to 47.7) in signs of deep contraction among small/mid-sized businesses.
The rest of Asia was ugly, like South Korea’s plummet (51.1 to 49.4).
Australia reversed back below 1H lows (49.6 to 42.0), its 25th consecutive month of contraction, although the government hopes May’s interest rate cut & weakening $AUD will help.
Eurozone comeback broke-through to expansion (48.8 to 50.3).
UK remains a leader (52.9 to 54.6).
US ISM beats big (50.9 to 55.4 v 52.0 exp), with employment finally reporting huge gains (48.7 to 54.4).
[Big global risk-on rally ensues.]

If “Europe is fine,” why is Deutsche Bank deleveraging at fastest pace since 2011 crisis? | ZeroHedge
$DB total gross derivative exposure is €55.6T notional vs 2.7T German GDP. Net market value (long less short) is €20.3B, but total market value has dropped €425B y/y (from €1.678T to 1.253T).
Total assets & deposits less loans have also plummetted, so why is DB deleveraging so quickly is Europe is healthy?
DB is also undercapitalized, with Europe’s lowest Core Tier 1 Capital ratio.
[This could be deposit flight back into EU periphery, reversing the flows from the Eurocrisis. Gross notionals do matter, because “net” exposures quickly catch-up to “gross” when counterparty defaults wipe out one leg of a hedged/offset position.]
#Counterparty risk

Bipartisan jobs proposal: A better bargain for the middle class (2013.07.29) | President Barack Obama (US White House)
“Pro-growth tax reform & jobs package” includes:
1. Simplify corporate tax code- eliminate loopholes; max 28% rate (25% for manufacturing); remove incentives for offshoring/outsourcing
2. Infrastructure investments- financed by “Rebuild America” public/private partnership
3. Education investment- “America Fast Forward” bonds to modernize schools; a “Community College to Career Fund” for more skilled workforce; retraining & recruiting for long term unemployed
4. Attract foreign investment- expand SelectUSA (2010 federal/state partnership) to woo international investment; emphasize US exports
5. Increased minimum wage- raise to inflation-adjusted level from Reagan Administration (1981)
6. Revive manufacturing communities- access to $6B credit over 3 years & “Investing in Manufacturing Communities Partnership” to attract investment
7. Clean energy investment- increase funding by 30% to $7.9B, with additional $2B over 10 years for research
8. Natural gas- exploit competitive advantage of cheap NG; FY13 budget includes $375M investment in clean fossil fuels + $40M for research + $25M for first NG combined cycle power plant (integrates carbon capture & storage)
[Could be this Administration’s defining legislation, overshadowing Obamacare; huge offset to QE tapering & waning defict spending from sequestration; the fiscal stimulus we’ve been begging for.]

Chartbook: Market technicals & sentiment (July 2013) | Fusion Analytics
Includes consumer sentiment & AAII investor surveys.

Video interview: Howard Marks (Oaktree Capital) takes the market’s temperature (July 2013) | Morningstar
“There are lots of risks out there today & everybody is pretty conscious of them,” which is why sentiment is moderate for stocks, supporting continued gains in the bull market.
Despite that, credit investors are too complacent, with the bond market now overheated; ZIRP/QE sent investors further out on the risk curve, “causing prices for [fixed income] assets to become quite elevated, perhaps in the absence of bullish attitudes [for equity].”
#Bullish #Risk-on #Cycle of Psychology #Bond bubble #Disinflation $AGG

US Treasury quarterly refunding statement (2013q3) | ZeroHedge
As a result of GSE ($FNM & $FRE) dividends, Treasury’s Q2 cash soared by $66B & TBAC now expects a 30% y/y decline in Q4 borrowing needs (from $1.134T in 2012 to $782B 2013E).
The decerease in T-bill/bond needs would increase the Fed’s share of the new issue market from 48% to 69%, likely prompting a QE taper from $85B/mo to $65B in September, as planned.
[N.B. Fed POMOs buy on the secondary market, not direct at auction.]

NYSE margin debt & balances (June 2013) | Doug Short (dshort.com)
Gross nominal margin debt receded again, now -2% below April’s alltime high (down from $384B to $376.6B), as did real debt, which peaked above 2000’s high but shy of 2007′s record.
Net margin balances (-$68B debit) still far exceeded 2007/11 pre-correction lows but have started normalizing, having missed the Tech Bubble’s record low.
[Again, low summer trading volume & lagging $SPY MFI since June’s bottom should enable continued upside. Previously]


  1. […] Howard Marks astutely points out that there’s lots of equity risk out there today, but everyone seems pretty conscious of it […]

  2. […] there’s always the potential for cancelled orders.  But, the pickup in railtraffic that has persisted since the last week of July shows some followthrough, telling me that renewed demand for capital […]

  3. […] My mind wants to refute this null hypothesis.  I can contrast that with a number of 1982 analogue sightings, which themselves suggest that we’re in the early stages of an unabated secular bull.  More importantly to me, SPY is closing this week near the low point of a -5% drawdown.  Risk markets are discounting the grey swans out there, including a strike on Syria, September tapering, and a debt ceiling debate.  I’m reminded of what Howard Marks (Oaktree Capital) recently declared: […]

  4. […] Howard Marks’ (Oaktree) comments from August still ring true: everyone’s still conscious of the equity risks out there, and […]

  5. […] QE will not continue forever (QEternity) [Where's/when's the call for fiscal stimulus!? Previously: The Fed Model is misleading] #Bullish #Euphoria #To the moon […]


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