Much of the upward revisions came from trade sector. Exports added 0.3 ppt more while imports added another 0.2 ppt. This suggests that global economy was more resilient than thought. Another 0.2 ppt up revision came from non-residential structure. Not a surprise again, given that real estate has gotten a boost from the Fed's accommodative policy.
What contributed less to Q4 GDP were Equipment & Software Investment (0.1 ppt), State & Local Government (0.1 ppt) and Inventory (0.3 ppt). Inventory subtracted 1.6 ppt from GDP vs 1.3 ppt in the prior reading. It appears that inventory stuffing at JCP and KSS, which reported yesterday were exceptions rather than a rule.
Subtraction to GDP from inventory is a very bullish sign. Inventory cycle could easily add 1 ppt to GDP in a future quarter.
Obama, Congress Must Reach Deal On Budget By March 1, And Then April 1, And Then April 20, And Then April 28, And Then May 1 And Then Twice A Week For Next Four Years
The Onion, 27-Feb-13
With the dramatic, across-the-board sequestration scheduled to occur this week, the nation’s leading economists have warned that President Obama and Congress must come to a compromise on the budget by Mar. 1, and then again by Apr. 1, and then Apr. 20, Apr. 28, and—after Congress is once again unable to come to a comprehensive agreement to fully stabilize the economy—May 1, along with agreements twice a week, every week, for the next four years.
Experts say that without reaching a deal this Friday, the automatic $85 billion reduction in government spending will immediately slow the U.S. economy and impact thousands of middle-class citizens. Officials said the same exact thing will happen next month, the month after that, and the month after that if Obama and Congress fail to meet deadlines created by the preceding, incomplete deals.
“If the president and Congress are unable to reach a grand bargain by Mar. 1, what they will likely do is reach a set of 100 or so smaller bargains, all with their own deadlines, and all of which could potentially plunge the U.S. economy into a recession,” said Princeton economics professor Marshall Kahn. “So, the Mar. 1 deadline is absolutely crucial. Just like the one next month will be. And the 12 deadlines in May. And the bi-daily deadlines that will kick in during the summer.” <Click Here for More>
Yesterday, I was right and wrong on my call on natural gas price, which I made just the day before. I said the price is trending higher, and it did. Then later price fell. Natural gas had a massive move yesterday. It was up 3% by noon and by the end of the day was down almost a percent, a massive reversal Looking at the UNG (natural gas ETF) trade, someone put big trades around 2:00pm that caused price to crater. There is no news on natural gas around that time. One plausible reason could be the expiration of natural gas future contracts but that event was the day before (Feb 26). If you don't know whom to blame, blame the weather. That's exactly what the WJS did (Natural Gas Prices Reverse Gains As Forecasts Turn Warmer). But weather did not turn warmer. According to more credible source, AccuWeather, they put out a story yesterday morning that said the opposite (Winter to Continue: March to Yield Snowstorms).
If you had tried to put on a seasonal trade on natural gas at the beginning of this winter, you'd have lost a bucket of dough. Natural gas price slumped this winter owing to demand-supply imbalance.
This demand-supply imbalance resulted in bloated inventories. Natural gas in the underground storage during this winter was at the high end of 5-year average. This situation is about to change. We could see a late winter cold snap in early March, which could pull the temperature in the eastern seaboard to below average, and increase demand for natural gas, the source of home heating for more than 50 percent of US households.
From a technical standpoint, the UNG (natural gas ETF) chart looks interesting. It has decisively broken above the "winter" downtrend and is comfortably resting above both (1) 50-day moving average and (2) 50% Fibonacci retracement level. The weekly EIA inventory data this Thursday will be pivotal. If natural gas price holds up after the release of the data, we might be seeing a short-term upswing in UNG price. I'm betting on that outcome. I'd say it's time to go long UNG.
Crunch Time: Fiscal Crises and the Role of Monetary
By David Greenlaw, James D. Hamilton, Peter Hooper, Frederic S. Mishkin
February 22, 2013
ABSTRACT
Countries with high debt loads are vulnerable to an adverse feedback loop in which doubts by lenders lead to higher sovereign interest rates which in turn make the debt problems more severe. We analyze the recent experience of advanced economies using both econometric methods and case studies and conclude that countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of these tipping-point dynamics. Such feedback is left out of current long-term U.S. budget projections and could make it much more difficult for the U.S. to maintain a sustainable budget course. A potential fiscal crunch also puts fundamental limits on what monetary policy is able to achieve. In simulations of the Federal Reserve’s balance sheet, we find that under our baseline assumptions, in 2017-18 the Fed will be running sizable income losses on its portfolio net of operating and other expenses and therefore for a time will be unable to make remittances to the U.S. Treasury. Under alternative scenarios that allow for an emergence of fiscal concerns, the Fed’s net losses would be more substantial.
Italians are going to vote this weekend to elect a new government. Polls close on Monday at 3:00pm local time or 9:00am EST. Exit polls start coming out soon after that. Final results are made available probably late Monday or early Tuesday. For the market, the best outcome is a clear win by center-left coalition led by Bersani. But given a late surge by populist Grillo, the outcome is anything but certain. Investors do not seem worried. The yield on 10-year Italian government bond has hardly budged in the past week (see the Chart). For political buffs, the key to the Italian PM chair is the Senate seats, and the key regions to watch are Lombardy, Campania, Sicily and Venetto. Italian Election 2013 The February 24-25 election is for 630-seat Chamber of Deputies and 315-seat Senate. To form a government, a party or a coalition must have a majority in both chambers, also called perfect bicameralism. In Italy, voters do not vote for a candidate but for a party. A citizen must be at least 18 years old to be allowed to vote for the Chamber of Deputies and at least 25 years old to be allowed to vote for the Senate. For a party to secure a seat in the parliament, it must cross a threshold (table).
Seat Assignment in the Chamber of Deputies Getting a majority in the 630-seat Chamber of Deputies is easy. The pre-election coalition that wins the largest share of national vote will automatically get 340 seats (54%). Within a coalition, seats are allocated to parties in proportion to their vote shares after they meet the threshold. The losing coalition/party is assigned the remaining seats on proportional basis after they meet the threshold
Seat Assignment in the Senate
Getting a majority in the Senate is more difficult and where all the complication of electoral politics come into play. Italy is divided into 20 regions, each with different number of senate seats based on size and population. In 17 of 20 regions, the pre-election coalition that wins the majority of votes in the region automatically get 55% of seats assigned to that region. So Senate election is the key to forming an Italian government. The key provinces to watch out for are, Lombardy, Campania, Sicily and Venetto.
The False Promise of Free Capital Flows
By Jonathan Schlefer, 19-Feb-2013
The economic orthodoxy that swept the world in the 1990s and 2000s attests to the terrifying power of ideas. Economists built "general equilibrium" models that, underneath all the fancy math, just assumed markets are stable and optimal. The models concluded — in a sort of "divine coincidence," as the MIT economist Olivier Blanchard and a colleague quipped — that if central banks merely maintained steady, low inflation, they would achieve economic stability and the best growth possible. Washington and London espoused this orthodoxy. The Treaty on European Union practically inscribed it in law.
In the Wake of the Crisis: Leading Economists Reassess Economic Policy collects essays by economists who are, indeed, leading — and are reassessing that orthodoxy. Never quite a true believer in it, Blanchard, now chief economist of the International Monetary Fund (IMF), acknowledges the terrible damage it caused. The macroeconomist David Romer concedes that the performance of pre-crisis state-of-the art models — some of which he developed — was "dismal." The editors frankly admit they have no clear idea how to replace them.
However, major Asian and Latin American nations offer pragmatic financial and economic guidance. Policymakers there deferred to orthodoxy in their words but not in their deeds — and avoided crisis. None of those nations' principal banks got in trouble, and growth there suffered far less than in the advanced nations. In fact, it wasn't a global financial crisis; it was a North Atlantic financial crisis. <Click Here for More>
The S&P500's unimpeded march towards all time high (1,576.09) came to a sudden halt today. Or did it? That's the question.
The technical set-up does not look good but it all depends on how the S&P500 performs for the next 10 days. There is potential for a Bearish Engulfing Pattern forming on a weekly basis (the key level is 1,513.61 close on Friday) or a Gravestone Doji forming on a monthly basis (the key level is 1,495.02 close next Thursday). We'll see.
The reason for the optimism was the confidence amongst investors that the Fed was still in play. They believes that the Fed will continue to pump $85 billion a month of fiat money into the economy no matter what. With today's FOMC Minutes, that belief has been questioned. Basically the Fed said, the $85 billion purchase of securities a month for the rest of the year is not a done deal.
This could be the start of something new, something like Draghi's comments on July 26, that started the bull market in the euro and the European markets, or Bernanke's speech at the Jackson Hole that first gave a hint of QE, and that started an 8 month long rally in the S&P500.
Of course, there are market gurus like Jim Cramer, who think this sell-off is an excellent buying opportunity.
Traders Are Watching to See If the Consumer Stumbles
CNBC
By: Patti Domm
Stocks could stay in low gear in the week ahead, as traders look for clarity on the Federal Reserve's policy, the housing recovery and especially — the consumer.
Merger activity could also be a factor as reports of talks between two retailers carry last week's merger boomlet into this week. The Wall Street Journal reports that Office Depot and Office Maxare in discussions to merge.
Homebuilder sentiment Tuesday, housing starts Wednesday and existing-home sales Thursday could provide a good look at how the housing market is faring. The Fed also releases minutes of its last meeting Wednesday, and there is much interest in what officials will say about their extraordinary easing policies.
At the December meeting, several Fed members said they wanted to stop quantitative easing by the end of this year but the Fed is still expected to continue the program into next year. The Fed is currently buying $85 billion in Treasurys and mortgage-backed securities monthly, under the program. But since the December meeting minutes were released in January, Treasury rates have risen and the 10-year note yield has moved to a higher range around 2 percent.
"I can't imagine that conversation got any less pertinent since December, given the fact we avoided the 'fiscal cliff' and the economic numbers got better," said Deutsche Bank chief U.S. economist Joseph LaVorgna. The makeup of the Fed changed in January, with new voting members, but it is still not expected to take on a more hawkish tone. <Click Here for More>
While a 55-foot meteorite with a power of 30 Hiroshima A-bomb shook Russian Siberia on Friday morning, it did not shake the resilience of the US market. The S&P500 kept marching higher on early Friday morning trade on its way to achieving a 7th consecutive weekly gain. The nonchalant reaction of US markets to a far off event was not surprising. It has been ignoring even bad economic news, whether it was a weak US industrial production (Friday) or terribly European GDP (Thursday). Even CSCO's rather tepid guidance on Wednesday, usually a market moving event, turned out to be a non-event.
Then at 2:00pm Friday, an internal Wal-Mart e-mail leaked. Jerry Murray, Wal-Mart’s vice president of finance and
logistics, said in a February 12 e-mail to other executive, “In case you haven’t seen a sales report these days, February MTD sales are a
total disaster. The worst start to a month I have seen in my ~7 years with
the company.” Boom, Wal-Mart stock started to slide immediately and it took the whole market with it. Again, the market showed its unbelievable resilience as it steadily pared losses into the close. The S&P500 was down on the day but was up for the week, the 7th consecutive weekly gain, the first since 21-January-11.
Wal-Mart reports earnings pre-market on Thursday February 21. It will be interesting to hear what they have to say in the conference call especially about their sales trend. The dollar stores (DG, DLTR, FDO) have been hit hard since late last year on worries about the impact on their low-end customers from the rise in the payroll tax starting January 1. Wal-Mart e-mail seems to suggest that the tax "hike" is having an impact. An additional factor that might be impacting low-middle income consumers is the delay in tax refunds from the IRS. As of February 3rd, only $4 billion refund had been mailed, down from $27 billion mailed at this point last year - that's down a whopping $23 billion.
The much talked about sequestration is upon us. It is going to go into effect on March 1 unless the President and Congress agree to an alternative plan. The market is betting that they will “kick the can” down the road again, and such, are ignoring the political rhetoric that is slowing building up in Washington DC.
On April 4, 2011, the Treasury Secretary wrote a letter to Congress saying that $14.294 trillion debt limit had been reached. On May 16, 2011, the Treasury suspended debt issuance and took extraordinary measures to meet government obligations. The Treasury notified Congress that such measures could only last until August 2, 2011, at which time the US will run out of money to pay its bills. After much wrangling, Congress and the President agreed to a plan, which was incorporated in the Budget Control Act (BCA) of 2011. The President signed BCA on August 2, 2011. BCA raised debt ceiling by $900 billion. Another $1.2 trillion could be raised but that required equal amount of spending cuts. It created a super-committee to help decide the $1.2 trillion of cuts. If the super-committee failed, automatic cut or sequestration will kick in on January 2, 2013. The super-committee failed. Just before the sequestration was supposed to kick in, Congress and the President agreed to another deal (American Taxpayer Relief Act of 2012), which delayed the implementation by 3 more months. That’s how we got here.
The sequester will cut $1.2 trillion over 10 years, or ~120 billion a year – around half comes from defense and the other half from non-defense including Medicare. According to the Bipartisan Policy Center, the impact of the cut to 2013 GDP is ~0.5% and around 1 million jobs during 2013-14.
My own feeling is that if the sequester were to hit fully, the impact will be significantly larger because of secondary/tertiary impact as well as the impact on consumer/business sentiment.Always remember that the Fed Chairman Bernanke said the impact of sub-prime mortgage is only ~100 billion in July 2007; the real impact was more like ~15x that.
GLD, the gold ETF has decisively moved to the downside today. Since the 2008 financial crisis, GLD has held the 100-week moving average. Even during the "dark days" of Jun-Aug 2012, it did not break that line. Today it gapped down below that line, an ominous sign. I have not read any specific news or reason for today's move. It could just be that bulls have finally given up and bears are in control.
Note that Credit Suisse came out with a bearish call on the gold market last week (click here for story) (click here for video). They argue that the reasons for buying gold vis-a-vis (a) protection against "tail risk" and (b) inflation hedge are no longer valid because (1) central bank actions have removed risk of (a), and (2) TIPs do not suggest (b) happening anytime soon. Also gold in $2007 is at the highest level since 1841 (yes, 1841).
The commodity guru Dennis Gartman agrees with Credit Suisse although Jim Rogers takes the opposite side of the trade.
The S&P500 rose 8.4 points on Friday and closed the week up 0.3%. More importantly, it was the 6th consecutive weekly gain for the index. Note, the index has not registered a weekly loss in 2013. The question in everyone's mind is whether this winning streak is going to continue or come to an abrupt end. Despite my earlier prediction that the S&P500 is set-up for a correction, I am betting my money that the S&P500 will close lower this coming Friday. Two reasons (1) lack of news and (2) statistics.
The economic calendar in the US is pretty light. The most watched data will likely be Retail Sales (Jan) on Wednesday, weekly Jobless Claims on Thursday and Michigan Sentiment (Feb) on Friday. Retail sales should not surprise anyone given that January comps from retailers last Thursday already surprised to the upside. Weekly claims do not move a needle unless it moves by a lot, which is not likely. Michigan sentiment, if anything, should surprise to the downside (remember the gas price). The corporate news is also light. There are bunch of earnings but they are not likely to impact the market. Also most of Asia is closed for the Chinese New Year. Given a dearth of news, or more specifically positive news, market will likely focus on negative news (sequestration, high oil/gasoline price, currency war, tired bull market, insider sell-off, noise from the Fed, European headlines including election in Italy and political turmoil in Spain) because investors are looking for an excuse to sell.
Regarding the statistics, since 1974, there have been only 10 instances when the S&P500 has registered 7 or more weeks of gains (7 weeks: 25-Aug-78, 18-May-07, 14-Jan-11; 8 weeks: 30-Jan-76, 10-Sep-93, 20-Jun-97, 20-Mar-98; 9 weeks: 1-Sep-89, 23-Jan-04; 12 weeks: 20-Dec-85). That's just 0.49% of the total. The last time, the 7th consecutive weekly gain happened was the week ending January 14 2011. That occurred on the backdrop of QE2, which was a huge surprise to the market.
The insurer has done a good job of rehabilitating itself. Can it stand on its own feet?
AMERICANS are often asked by politicians if they are better off now than they were four years ago. Anyone involved with American International Group (AIG), an insurance company felled by the financial crisis, can safely answer “yes” to that question. In just four years it has freed itself from a $182 billion bail-out; gone from being publicly owned back to the private sector (the Treasury sold the last of its stake in December); and turned itself into a leaner, simpler business. Now that it has successfully shaken off government ownership, AIG’s next task is to prove its worth as a stand-alone, listed company.
That AIG is around at all is remarkable. By piling into what would emerge as the most rotten part of the financial system (insuring investors against losses on securities linked to American subprime mortgages) during the credit bubble, it ended up owing billions of dollars to those holding the other side of its bets. Ben Bernanke, the Federal Reserve’s chairman, famously derided AIG as a hedge-fund attached to a large and stable insurance company. <Click Here For More>
With US companies struggling to create shareholder value in the "old fashioned way" i.e. through steady growth in revenue and income, they are resorting to financial engineering/machination. It is the world where 2+2>4.
No, I am not talking about LBO (leveraged buyout) or MBO (Management buyout). That's so 80s. I am talking about REIT, Real Estate Investment Trust.
Companies left and right are trying to turn themselves into a REIT.
Just this week, the solar industry got a big boost (FSLR is up 11% in 5 days) from a report that said one of them is trying to get permission from the IRS to set itself up as a REIT. As Bloomberg reported, A San Francisco startup may win approval as soon as this month to become the first firm allowed to raise money for solar-power projects as a REIT, the financing vehicle used in $640 billion of U.S. property ventures. (Full Story).
Last week, it was waste management companies that caught the fancy of REIT-crowd. Again, as Bloomberg reported, Waste Management Inc. (WM) rose the most in 17 months after analysts at Credit Suisse Group AG said investors would benefit if the biggest U.S. trash hauler was converted into a real estate investment trust. (Full Story).
Some non-traditional companies have already turned themselves into REITs such as timber companies, a casino company (PENN), and a retail company (DDS). I am sure there will be more in the next 12 months.
Investors can benefit, sometime mightily, if they can identify a company that could turn into a REIT before the Wall Street crowd do. PENN jumped over 30 percent on November 16, 2012 after it announced plans to split into a REIT. Good luck!
Now the Russian government has asked the same Goldman to soar up its reputation amongst investment community. Is this ironic or what? Goldman, the image makeover guru!!
Goldman Sachs Group has been hired by the Russian government to burnish the nation’s image overseas and attract more institutional investors.
The bank has signed a three-year agreement with the Economy Ministry and the Russian Direct Investment Fund to advise on issues such as communicating government decisions and setting up meetings with investors, according to Sergei Arsenyev, Goldman Sachs’s managing director of investment banking in Moscow. >>>
You can't complain about the performance of the market during January. The S&P500 was up 5% during the month. If one were to extrapolate that growth rate for the rest of the year, the market will be up a whopping 71%. That is clearly very unreasonable.
The market is taking a much overdue breather today. Whether today's move is a just a pause before another leg of the rally or a beginning of a sustained downturn is anyone's guess. If you believe in trend-investing, you're in the former camp. If you believe in mean-reversal, then you're in the latter camp.
The technical pattern in today's move suggests that the market may be heading towards a short/medium-term consolidation. The technical pattern we are referring to is called "island reversal". Whether this thesis is correct or not, time will tell.
The market will not sell-off on its own. It needs a reason, whether valid or not. The reason for today's sell-off was a huge jump (+22bp) in Spanish government bond yield given increased political uncertainty there. There are plenty of others in hibernation, they just need to pop their head - sequestration, oil heading $100, Middle East tension, currency war, disappointing economic data etc.
If the market is looking for excuse to sell, the high fliers of January might be most vulnerable i.e. transportation, energy and retailing. Watch out!!!
The mighty AAPL had seen better days. Since the intra-day high of $705 reached on September 21, 2012, the stock has fallen a whopping 36%. Just this year, the stock is down 14.7% while the S&P500 is up 5.0% and the S&P500 technology sector is up 1.3%. The question is whether it is the right time to buy the stock. The answer is "qualified yes".
From the fundamental prospective, it trades at 8.9x 2014 earnings ($51). Sure 2014 estimates have come down from $64 last July but so has the price. Actually, the price has fallen more. At the peak, AAPL traded at 11.0x 2014 EPS. If you take into account the amount of cash AAPL has on its balance sheet, the valuation looks even more compelling. It has $137 billion cash or $146 per share. Ex-cash, AAPL is trading at 6.0x 2014 earnings. Bottom-line, true, the latest earnings and guidance were not impressive, but lot of things have to go wrong for valuation to get extended.
From the technical standpoint, the stock is at a critical juncture from 3 prospectives (1) it is at the long-term trend-line that it established since 2003, (2) it is at the 38.2% retracement from all time high and (3) it is at the level where it "gapped up" above the trading range in January 2012, and started to make a parabolic up-move. It is very critical that APPL holds the $430 level.
AAPL will not just bounce off from current level because there are traders who are betting on it to get even lower, say $380 level. Those bearish traders have to be washed-out before it heads upwards. The only way those guys are going to give-up is for the stock to hold-up against the downward pressures. A catalyst would help. There are several potential ones (1) new product launch, (2) share buyback, (3) dividend increase or (4) stock split (remember CRM last week). Product launch is probably difficult since Tim Cook is no Steve Jobs. But unlike Jobs, Cook takes conventional corporate actions (remember the dividend payment) so #2, #3 and #4 are more likely. Stay tuned.
