Friday, June 29, 2012

For the 38th time Europe is Saved!!!

Well, after the buzz of the EuroCup semifinals wore off, the major players decided to go all in on their proposed bailout of one another.  The details are sparse but all the markets needed to hear was "we'll be buying everything you are selling" which is exactly what the market has grown to demand.  Complete government support of the markets at all times or else the banks threaten to crash the markets.

The timing of this is very convenient because it is causing a 1.5-3% jump in stock prices right at the end of the quarter.  If the market would have ended flat today it would have been unchanged for the year 6/30/11 to 6/30/12.  That would have meant meaningful underperformance by many large pension funds that price their assets on 6/30.  Today's "insta-rally in a can" will ensure at least a positive return for the year and lessen the blow for these funds.

This also begs the question: who knew what and when about this deal?  The US markets soared about 100 pts in the blink of an eye yesterday on no news.  Well, we now know what the news was but it wasn't public at the time of the rally so someone had insights that the rest of us only wish we had (hint, hint for the SEC - it was probably the same person that bought 50,000 E-mini S&P 500 futures).

To quote my favorite t-shirt - Stand back: I'm going to try Science!

The US Army has developed a laser that can be used to direct lightning bolts at a target.  So now miltants won't have to just worry about insect sized drones but attacks from killer lightning bolts as well. 
Who sits around in a room saying "You know what we need?  A way to control lightning so we could point it a target."?  I think I need that job.
Finally, a little Friday fun - cracking an egg under 60 feet of water, just because we can. 


Monday, June 25, 2012

This will be big news by tomorrow...

This will likely seem like old news by the time you get to read the story on my blog but the story that has come out tonight on the Wall Street Journal's website regarding Apple users and Orbitz is going to be a big story.

"Orbitz executives confirmed that the company is experimenting with showing different hotel offers to Mac and PC visitors, but said the company isn't showing the same room to different users at different prices. They also pointed out that users can opt to rank results by price.

Orbitz found Mac users on average spend $20 to $30 more a night on hotels than their PC counterparts, a significant margin given the site's average nightly hotel booking is around $100, chief scientist Wai Gen Yee said. Mac users are 40% more likely to book a four- or five-star hotel than PC users, Mr. Yee said, and when Mac and PC users book the same hotel, Mac users tend to stay in more expensive rooms.

"We had the intuition, and we were able to confirm it based on the data," Orbitz Chief Technology Officer Roger Liew said."

So, to translate if you surf to Orbitz from an Apple product, Orbitz believes you are more brand conscious and less price sensitive so you should see a different set of rooms and some times a different price.  For a little offline perspective that's like checking a woman's purse before she pays and saying "Oh, I see you're carrying Chanel today.  That $89 chair is on sale today for you at just $119."

There will be two quick impacts: 1) Orbitz will have to abandon this plan in my opinion and 2) Apple is going to have to do some fast damage control to convince their legions of followers that they are not going to get overcharged at Amazon or any other etailer.

Companies are just beginning to grasp the power of the data you are sharing with them.  This is the future of commerce with individualized pricing.  Yikes.

Well, the market has shown signs of life at times in the past week or so, but every step forward is met with multiple steps backward.  Europe remains a trouble spot (Moody's downgrade of Spanish banks certainly won't help matters) but the focus on a slowdown in North America has become a hot button issue as well. 

There are a couple of catalysts in the near-term that could help the markets:

1) The Facebook quiet period is about the end which means lots of banks that sold stock to the public at $38 are going to have to formulate an opinion with the stock trading at $32.  Hmmm, if they thought you should buy the IPO at $38 what do you think they'll say with the stock at $32?  If you guessed "buy, buy, buy....." you'd be in the right ballpark (again, that's not my opinion, but that will likely be the banker's opinion).

2) The quarter end is upon us.  Last year as people realigned their portfolios at the end of June stocks surged nearly 5% on little news in 3-4 days.  There are many major pension funds that are sitting on flat 2011-2012 performance right now.  A little 5% run would soften the blow of those "dear pension plan participant" letters.


Monday, June 11, 2012

Well, what now?

So Spain got their bailout and as I hinted in the morning, the markets were concerned about the validity of the bailout.  Well, those concerns seemed to build throughout the day and when the Apple developer conference turned out to be a yawner (although $999 Macbook Air's are going to FLY off the shelves) the markets sold off hard.

So once again, the rumor of a bailout proves to be more advantageous than the actual bailout.  Well, that model should bode well for the markets (tongue in cheek commentary here) because Italy should be back in the news in short order.  There are also rumblings of trouble in France again.  If Spain was the "The Big ONE", France would be the L'enorme un, but I'm getting ahead of myself.

Other news of note:

* India warned that they could be the first of the BRIC countries to lose their investment grade status. 

* Further evidence of a Chinese hard landing.

* Spain's private sector is still struggling despite today's news and without private sector reform.

Despite all of this gloom in the world there are many reasons to expect things to perk up for the rest of the month.

I'll try to touch on a few items in coming weeks.

Sunday, June 10, 2012

And you get a bailout, and you get a bailout....

Some times the markets are a little slow on the uptake.  If you remember WAY back on June 1st when the weak jobs number hit the tape I said "I wouldn't be surprised to hear the "QE3 is coming, QE3 is coming" chant by the end of the day."

Well, it didn't quite happen on that Friday but by midweek the talk of easing was on everyone's lips.  More liquidity from Central Banks (namely the Fed and China) lit a fire under the markets and resulted in the best week for the markets this year.

By Friday, it was becoming clear that there may not be a great deal of appetite in the US for further easing but never fear, in the Friday Rumor Round-up we heard that Spain might be in line for a handou... ooops, I mean bailou.... ooops, I mean "credit line".

Remember for the past two months Spain has been pounding the table "WE ARE NOT GREECE", but the Spanish bonds were telling a different story and it was clear that smart money was betting that Spain was in fact, a really big version of Greece.  Over the weekend we've received confirmation that Spain has gone hat in hand to the EU in search of 100 billion Euro bailout fund.

The immediate market reaction has been a huge relief rally around the globe (roughly 1% for the US futures right now) but there are many variables that need to be ironed out.

* What happens to existing Spanish bonds?
* Will the German Parliament be on board with this plan (I think there is 30% chance that they push back).
* Well, who's next?  Italy?

It should be an interesting week.

Just when you think NYS has the market cornered on crazy sales tax rules consider the variables hidden inside Maine's snack tax rules...

"Today, the purchase of five bakery doughnuts can be subject to sales tax; six are tax free. A small container of milk is tax free at the convenience store but taxed at a sandwich shop. Ham and cheese are tax free when bought at the deli counter, but a deli platter of ham and cheese at the same place is taxed."


Thursday, June 07, 2012

Overreaction of the Day

This story is priceless. 

"Police had responded Friday to a report of a young cougar in the yard near a wooded area. The animal moved on without threatening anyone.

A state wildlife biologist reviewed photos of the cat and determined Monday it was not a cougar. It's a domesticated cat."

Manic Markets

The day after the worst day for the markets of 2012, the markets staged their best day of the year on....

* news of further ECB easing?  No, while this was rumored it never came to pass.

* news of Eurobond issuance? Nope, again just a rumor. *** UPDATE: this morning Merkel of Germany said that Germany could support Euro-area instruments.  Wow.  I think she may want to check with the people of Germany but this is the sort of news the market wanted to hear.

* Rumor of a rumor that more free money will be available?  That sounds about right.

Last night after the markets closed in the US, a Federal Reserve Board member hinted at possible further actions by the Fed (which begs the question: who knew what she was going to say and when?).  This was the first public admission that I've seen that the banks are going to get their wish and the Fed is going to bend over backwards to save the stock market (again!). 

Today China joined the easing train, cutting their benchmark bank lending rate.  All of these stories have turned the tide in the markets from "Europe is falling apart" to (in my best Oprah voice) "and you get free money, and you get free money and you get free money!".

Business Insider pulled together a ton of charts today from various websites and most of them are old news but if you want to understand why the banks want this current model to continue consider the following:

When we bailed out the banks in 2008 it was with the understanding that without a bailout, the banks would stop lending and that would lead the economy to seize up.  Well, the inconvenient truth is that banks took the bailout and reduced lending anyways (some of the decline was due to lower loan demand).  So what did the banks do with the money?  Well, according to Chart 1 it appears that they bought about $700 billion worth of government debt. 

So take a moment to wrap your head around that circular logic - The government borrowed money from China, pensions, and US citizens to save the banks.  The banks then took that money and lent it back to the government by purchasing government debt.  I'll pause to allow your head to explode.

Also during the 2008 recession the Fed announced a plan to help the banks by paying them interest on "excess reserves".  Well, if you are a bank and you can borrow from the government for basically 0% and you can earn 3% from the government (see above) and 0.25% on excess reserves guess what happens... well, Chart 2 shows that pretty clearly.

As the stock market held its own earlier this year and the economy appeared to be picking up a little steam, the banks could see the writing on the wall.  Their free money gravy train was coming to an end.  If we've learned anything over the past 5 years it is that the banks will not be denied and thus, we had a May sell-off which has prompted a tremendous amount of chatter of FURTHER easing (read QE3, TWIST2 or whatever).  That is what has goosed the markets sharply in the past 24 hours.


Tuesday, June 05, 2012

The market really wants a rumor

Yesterday afternoon, the markets perked up meaningful as rumors began circulating that something was brewing.  Maybe a coordinated central bank statement or maybe something from G-7? Goldman said they think the Fed will begin another round of asset purchases financed through balance sheet expansion (this fits with my thinking, but the size and breadth of the purchases will be important). 

Late last night Spain - after months of saying "We're not Greece! We're not Greece!" - decided that might like a little of that bailout juice themselves.  Credit markets have been telling me for months that things are getting increasingly difficult for Spain, but there is a culture of "deny and pretend" that is pervasive in politics today so the Spanish government stuck their head in the sand and hoped things would improve.  There are likely to be plenty of "emergency" discussions regarding Spain (and probably Italy) in the coming weeks which will all provide fodder for the rumormongers.

That brings us to today's latest round of rumors which were centered on the G-7 meetings.  A coordinated message was expected to calm the global markets, but what we got was effectively an agreement to keep on watching things and no joint statement will be issued.

So, obviously the markets decided to ramp higher on this news (which should on the surface be bad for the markets) because a new rumor has emerged that while the G-7 said there would be no joint statement, the market still thinks one could be released.  This is sheer madness.

Finally, there will be three Fed governors speaking this afternoon so if this market wants to find a hint of further Fed easing it will have a chance during those speeches.


Sunday, June 03, 2012

Please make it stop

Nothing quite makes my head hurt like the Sunday morning talk show circuit.  Even the good reporters get lost talking about subjects like the economy, budgets and taxes.  The weak jobs report on Friday gave the media plenty to talk about this weekend but frankly most of it was recycled bullet points instead of reasonable analysis.

To review: the jobs number was weak and this is starting to feel like the same old story as 2011.  Strong winter data that fades as we enter the summer.  However, digging a little deeper we find that:

* Labor Force Participation Rate, which has been the focus of many people (including myself) in recent months, actually increased to 63.8% in May. This is encouraging and it is one of the strange issues with the employment data - as more people re-enter the workforce or start looking again it will actually cause the unemployment rate to increase.  Despite this increase the number of still way below the historical average.

* Also, it's worth noting that the employment/pop ratio increased to 58.6% in May.

* Government jobs continue to decline but there appears to be some moderation of the decline among state and local governments.  The one qualifier I'd add is that pension costs could crop up again in 2012-2013.  Governments received a small reprieve from the relentless increase in pension costs in 2011-12 because of the strong performance of the stock market from 6/2010-6/2011.  However, right now we're about a month away from having 1 year with no change in the markets.  If this is the case, governments will be forced to increase contributions to their pensions and this could impact employment in 2012-13. 

* Those looking for a positive spin on the employment data could point to the 420k+ increase in the household survey data.  However, this tends to be a very volatile data set and it is not a terribly great predictor of future job reports.

Other items to keep in mind from last week:

* Initial Jobless Claims jumped to 383k
* Pending Home Sales fell 5.5%
* Refinancings and purchase applications fell even with record low interest rates.
* European unemployment  was unchanged.
* India’s GDP grew at only 5.3% (however, I think in the US we'd be very happy 5.3%) and that was the slowest growth in a decade.
It should be another interesting week with lots of European news, questions as to whether the Fed start to hint at QE3 and potential unrest in the Middle East.


Friday, June 01, 2012

Jobs report + 69k

Well, it wasn't a complete disaster but this was a pretty big miss relative to a 150k estimate and my 120k guess.  The number for April was also revised downward substantially.   I'll go through the details but the birth death model which added 204k jobs to the BLS magic block box formula (we don't know how many "jobs" this adds, but it clearly didn't make the number smaller) will draw lots of attention.

However, the key may be this quote from an award winning economist 2 minutes after the release "Terrible numbers, increases the likelihood of QE3" and that will be all the markets hear. 

Right now, European markets are taking it on the chin (down 1.3-2.8%), but give the spinmasters some time and I wouldn't be surprised to hear the "QE3 is coming, QE3 is coming" chant by the end of the day.

Should be a wild day.

Jobs report - preview

We'll hear lots of interesting commentary around the May Jobs report that is due out in the next hour.  The consensus is for around +150k but there are lots of qualifiers.  The warmer winter may have pulled forward some jobs that are not going to show up now and there is a great deal of concern about the impact overseas uncertainty could have on the number.

My best guesstimate is that the number will be slightly below expectations (120k sounds about right) but there is an outside shot at a really poor number.  The markets are clamouring for more central bank intervention and a "slightly weaker" number will not be enough to get the central bankers moving.  If the May jobs number came in at +30k to +50k and the unemployment rate moved up we could see some serious chatter about more easing.

Stay tuned...