EXIT LGHTS LIGHTING UP?

Bill Gross, chief  investment officer of bond giant Pimco is a guy who of late  knows a thing or three about controversy, revealed in an interview Friday that whenever the Fed starts to crank interest rates back up, they need to be careful.

Gross offered June 2015 as the possible starting date and that the yield on the 10-year Treasury note should not go above the 2.5 to 3 percent range owing to still some structural problems in the economy such as "lower real growth" and job displacement he blamed on technology advances.

He noted too what's important is when, how rapidly and where the Fed stops is of concern to both equities and bonds. Based on a recent survey of analysts the starting date for the Fed has been moved from the third quarter of next year to the second.

Gross warned the rate on those 10-year Treasury notes should be kept in the 2.5-3 percent range for "now and the next few years depending on how long the Fed continued  accommodating the market. He also expressed that the Fed should hold the rates once they start back up at 2 percent until sometime in 2017.

Rates have been held near zero by the Fed since 2008.
--
Maybe junk bond investors are apparently starting to see the lights lighting up the exit signs.


Yield-starved investors might be taking their cue form the Fed's recent uncharacteristic comments about the asset class and its "very, very lofty" levels, according to some money managers. Recent figures show that mutual funds and ETFs that invest in the high-yield or junk bond market have witnessed resumptions that totaled around $2 billion in the most recent week that numbers were available.

The outflow, according to Lipper, was the largest since late summer 2013. In mid-June yields hovered near 4.8%, a record low. As of  mid-last week the were yielding 5.1%, still low by historical measures but perhaps a sign of things to come as investors begin heeding the Fed's words.  

In some quarters there are rumblings that corporate bonds might be next. Liquidity is always a concern in what many perceive as over-valued areas of the market.
t. man hatter

MARGINOT TOOL KIT

How does one explain U S. Treasury bonds in the face of Fed tapering still yielding around 2.5% and the looming risk of higher interest rates somewhere on the horizon?

One explanation might be simply this: Fear premiums have subjugated risk premiums. In plain English, the fear of missing out supersedes the fear of losing out. If bond yields, for example, drop from, say, 2.5% to 1.5% that's the fear of losing out and it is also a bet on more of the same, meaning the "new neutral" or possibly more deflation ahead that people like those at Pimco are selling.

The absence of risk premium is a clear statement of "We'll worry about that later, but for now..." In our recent post Fed Policy Danger we quoted noted investor Stanley Druckenmiller's comment about Fed policy being too focused on the now and too little concerned about its policy impact down the road.

Back in 1980-81 you could walk into any bank or savings and loan firm (if any were still around after the S & L industry tanked) and purchase a one-year CD yielding 14%. Thirty year Treasuries were yielding around 15% in those days. The long running bull market in stocks that's apparently still going didn't officially start until August 1982.

Now the pundits will cite, as they almost always do, their that-was-then-this-is now argument. So be it. But the truth is almost no one saw the big equity bull market coming. And most certainly not the Fed or the bureaucrats in Washington.

Much of the new neutral argument centers on a macro call. That can be a form of extrapolation of the weakest kind because it leaves little or no margin for surprises. Druckenmiller's comment, at least in our mind, is suggesting exactly what we're talking about.

Despite all the Fed's claims about its tool chest still being adequate one could suggest that after WWI hoards believed the 1930s constructed Maginot Line would be adequate.

The French established the fortification to provide time for their army to mobilize in the event of attack, allowing French forces to move into Belgium for a decisive confrontation with Germany. The success of static, defensive combat in World War I was a key influence on French thinking. Military experts extolled the Maginot Line as a work of genius, believing it would prevent any further invasions from the east.

While the fortification system did prevent a direct attack, it was strategically ineffective, as the Germans invaded through Belgium, outflanking the Maginot Line. The German army ran through the Ardennes forest and the Low Countries, completely sweeping by the line, defeating the French army and conquering France in about six weeks.^[1] 

As such, reference to the Maginot Line is used to recall a strategy or object that people hope will prove effective but instead fails miserably. It is also the best known symbol of the adage that "generals always fight the last war, especially if they have won it".^[2]

For the sake of history there was second line--Alpine Line--facing Italy. In our humble view, too few investors today are considering the possibility that for all its reassurances, Fed policies could turn out to be their Maginot Tool Kit.
 t. man hatter
 (2) Wikipedia

WEEK UPCOMING

It's another big earnings week coming up as firms from Apple to Caterpillar to Microsoft to Verizon announce earnings and the dove-hawk show continues with Yellen speaking again in Washington and Fisher in Los Angeles and Bullard, another hawk, in Kentucky.

On the economic front from consumer confidence ex food and energy (as if anyone really believes it) to US durable goods to German consumer confidence are on the docket.

Monday, July 21

US Economics (Time Zone: EST)

08:30 Chicago Fed National Activity Index - expected 0.18, prior 0.21
11:00 Fed to purchase $1b-$1.25b bonds in 22-30 year range
11:30 Treasury to sell $26b 3-month bills and $24b 6-month bills

Global Economics (Time Zone: GMT)

04:30 JPY All Industry Activity Index
06:00 CHF Trade Balance
08:30 GBP Public Trade Balance

Earnings

Before:
Halliburton (HAL)
BB&T (BBT)
Suntrust Banks (STI)
Six Flags Entertainment (SIX)

After:
Chipotle Mexican Grill (CMG)
Netflix (NFLX)
Texas Instruments (TXN)
Rent-A-Center (RCII)

Tuesday, July 22

US Economics (Time Zone: EST)

08;30 Consumer Price Index YoY (June) - expected 2.1%, prior 2.1%
08:30 CPI Ex Food & Energy YoY - exp 2.0%, prior 2.0%
09:00 FHFA Home Price Index MoM (May) - exp 0.2%, prior 0.0%
10:00 Richmond Fed - exp 5, prior 3
10:00 Existing Home Sales (June) - exp 4.99M, prior 4.98M
11:30 Treasury to sell $25b 52-week bills, 4-week bills

Global Economics (Time Zone: GMT)

01:30 AUD CPI
08:30 GBP Boe Minutes
12:30 CAD Retail Sales

Earnings

Before:
Coca-Cola (KO)
duPont (DD)
Harley-Davidson (HOG)
McDonald's (MCD)
Comcast (CMCSA)
State Street (STT)
Lockheed Martin (LMT)
Verizon (VZ)

After:
Apple (AAPL)
Microsoft (MSFT)
Electronic Arts (EA)
Broadcom (BRCM)
Juniper (JNPR)
VMWare (VMW)
Discover Financial Services (DFS)

Xilinx (XLNX)
TDAmeritrade (AMTD)
Regions Financial (RF)

Wednesday, July 23

US Economics (Time Zone: EST)

07:00 MBA Mortgage Apps
11:00 Fed purchasing $2.5b-$3.25b notes in 7 to 10-year range

Fedspeak:

10:00am Yellen (dove, chair) to give semi-annual testimony to House Committee
12:00pm Fisher (hawk, voter) speaks in Los Angeles

Global Economics (Time Zone: GMT)

NZD RBNZ Rate Decision
JPY Trade Balance
01:45 CNY HSBC Manufacturing PMI (July prelim)
08:00 EUR Eurozone Manufacturing & Services PMI
08:30 GBP Retail Sales

Earnings

Before:
Boeing (BA)
Dow Chemical (DOW)
Freeport-McMoran (FCX)
General Dynamics (GD)
Biogen (BIIB)
Delta Airlines (DAL)
Whirlpool (WHR)
Pepsi (PEP)
EMC Corp (EMC)
Norfolk Southern (NSC)

After:
Qualcomm (QCOM)
Citrix (CTXS)
Gilead Sciences (GILD)
F5 Networks (FFIV)
AT&T (T)
CA (CA)
Tractor Supply Co (TSCO)
Etrade Financial (ETFC)
Illumina (ILMN)
Sallie Mae (SLM)
Facebook (FB)
TripAdvisor (TRIP)

Thursday, July 24

US Economics (Time Zone: EST)

08:30 Initial Jobless Claims, June 28, exp. 309k, prior 302k
08:30 Continuing Claims - exp 2513K, prior 2507k
09:45 Markit US Manufacturing PMI (July prelim) - exp 57.5, prior 57.3
10;00 New Home Sales (June) - exp 480K, prior 504K
11:00 Kansas City Fed - exp 6, prior 6
11:00 Fed to purchase $2b-$2.5b notes in 5 to 6-year range
1:00 Treasury selling $15b 10-year TIPS

Fedspeak

1:35pm Bullard (hawk, nonvoter) speaks in Kentucky

Global Economics (Time Zone: GMT)

Japan Investors Purchases of Foreign Stocks/Bonds
JPY CPI
06:00 EUR German GfK Consumer Confidence
08:00 EUR German IFO Current Assessment, Expectations
08:30 GBP GDP (2Q advance)
14:15 BoJ's Kuroda to speak in Thailand

Earnings

Before:
Cabot Oil & Gas (COG)
Cliffs Natural Resources (CLF)
Starwood Hotels & Resorts (HOT)
Noble Energy (NBL)
Union Pacific (UNP)
DR Horton (DHI)
General Motors (GM)
Ford (F)
Southwest Airlines (LUV)
NASDAQ (NDAQ)
Raytheon (RTN)
UnderArmour (UA)
Caterpillar (CAT)

After:
Starbucks (SBUX)
Deckers (DECK)
Amazon.com (AMZN)
Riverbed (RVBD)
Netsuite (N)
Homeaway (AWAY)
Visa (V)
Pandora (P)
American Airlines (AAL)

Bristol-Myers (BMY)
3M (MMM)
Jetblue Airlines (JBLU)
Dunkin Brands (DNKN)
GrubHub (GRUB)
Celgene (CELG)

Friday, July 25

US Economics (Time Zone: EST)

08:30 Durable Goods Orders (June) - expected 0.5%, prior -1.0%
08:30 Durable Goods ex Transports - exp 0.5%, prior -0.1%
08:30 Cap Goods Shipments Nondef Ex Air - exp 1.5%, prior 0.4%
08:30 Cap Goods Orders Nondef Ex Air - exp 0.4%, prior 0.7%

Global Economics (Time Zone: GMT)

01:30 CNY June Property Prices
12:30 CAD CPI

Earnings

Moody's (MCO)
Xerox (XRX)

Twitter: @MichaelSedacca

Read more: http://www.minyanville.com/business-news/markets/articles/7/18/2014/id/55588#ixzz37webgeAJ

ROLLING BACK BANS

t.man hatter
In our recent post, Unintended Bureaucratic Consequences, we raised the question:What do you want, heat or pollution?

Heat is a synonym for energy. The roll back of an environmental law in Australia that many believed was hurting the economy and the mining industry there is, as we suggested, no small matter.

Mining can be a dirty business with the ever-present possibilities of big environmental damage if one is to believe the environmentalists. Going back to the Santa Barbara oil spill long before the Valdez or Gulf of Mexico incidents, we have all learned offshore oil drilling has its risks, as does we now know, onshore transportation of hydrocarbons.

Though it may be a small point, one has to ask how much does the EU's dependence of Russian gas since the Ukraine eruption first broke play into this: A little, a lot or not at all? Japan is a relatively small island but a big energy dependent nation. And there are others.

Now comes the following story about the Obama administration's rolling back similar bans of offshore drilling along the East Coast in an area from Delaware to Florida.

You can bet the environmental crowd ain't cheering right now. But this is not about our taking sides; it's about still another question. Is this the beginning of a trend that could impact not just the economy but one's investments?

http://hosted.ap.org/dynamic/stories/U/US_OFFSHORE_DRILLING_AIR_CANNONS?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2014-07-18-14-07-18

MARKET TAOISM

All of us, sooner or later, take a seat at the table of consequences.
                                                     Robert Louis Stevenson

Taoism is an ancient philosophy about living in harmony with the Tao or the way.

In brief, it's both source and force, the mysterious something driving everything that exists. Like the stock market, it's ineffable.

What's interesting about the market today is anytime anyone it seems starts questioning the validity of this bull market how quickly media mavens and other talking heads pounce on them with all four feet.

In many ways it's quite similar to the general mood of the country. Say you're for or against something, anything, and someone for damn well sure will take you to task. And more than likely sooner rather than later.

And in case you have yet to notice, the same holds true with research. Bulls and bears go back and forth spewing out their data almost as regularly as any big city rapid transit train.

In the nation's National Cesspool it's called gridlock. Don't laugh, but someone wrote a book about the stock market, a pretty decent one at that, titled The Tao Jones Averages. It's a book about left brain, right brain, total brain investing, assuming much of that is really around.

Stevenson's remark is probably more appropriate about today's long running bull market than many want to believe let alone accept. Few want to see a good party peter out. Now we don't know how long it will take this charade to play itself out, but it's a safer than an even bet the time remaining is much shorter than what we've enjoyed until now.

Sooner or later those consequences will hit not only the market but the Fed and the hoards of income-hungry, yield-starved. For now with the Dow up nearly 124 points at mid-day following yesterday's tragic Malaysian air carrier story, it appears as if, as one scribe today emotionally put it, "Its lost touch with reality."

In the short run, a good 9% to 12% correction would most likely keep this overgrown dandelion breathing a bit longer than otherwise. Like the people who play it, the market is many things. Irrespective of what anyone thinks, one day it will roll over like a scolded dog with all four paws in the air.

How long will that take to happen? Perhaps the best answer is a Taoist answer: "How ever long it takes"

And that has little if anything to do with reality.
t. man hatter

AROUND THE WEB

1. Frothy Homebuilders
http://247wallst.com/housing/2014/07/17/ubs-says-homebuilders-are-frothy-only-four-stocks-are-buys-now/

2. Third Plane Down In Week
http://www.latimes.com/world/europe/la-fg-ukraine-plane-crashes-20140717-story.html

3.Media Hype Continues
http://www.bloomberg.com/news/2014-07-17/latest-state-of-the-climate-yup-still-getting-hotter-.html

4. Time To Drain The Punch Bowl
http://money.cnn.com/2014/07/17/investing/federal-reserve-hawks-punchbowl/index.html?iid=HP_LN

5. What Happened?
http://www.minyanville.com/sectors/energy/articles/what-happened-energy-portfolio-energy-energy/7/17/14

6.  Calling It The Way It Is
http://www.cnbc.com/id/101845544

7. So Much For Foreign Policy Leadership
http://blogs.reuters.com/ian-bremmer/2014/07/17/world-cup-chants-reveal-true-state-of-u-s-german-relations/

8. The Feud Continues
http://blogs.marketwatch.com/thetell/2014/07/17/gundlach-fund-declared-unratable-by-morningstar-amid-prolonged-dispute/

GOVERNMENT BLACKMAIL?

For those of you who follow medical breakthroughs there's been some controversy of late about Gilead Sciences, the big biotech firm, that just came out with an apparent cure for Hepatitis C.

The controversy is not about whether the drug, Solvaldi, works or its possible untoward side effects, what's known in the industry as effective and efficacious. It's about something bigger, money. The treatment costs $84,000 for a full course of the remedy.

Now Oregon's got some funny ways to begin with. But we'll leave that for another time. Gilead is not alone in this area. It has competitors who will soon be bringing similar drugs to market. What remains in question is another key word related to the green stuff, price.Where on the scale will Gilead's competitors price their drug?

Oregon already gets a federally mandated discount or rebate from Gilead on Solvaldi of about 23%. Two of the drug companies competing for market share are Merck and AbbVie. AbbVie  has said it expects its drug to clear FDA approval around October this year.

AbbVie's CEO Richard Gonzalez has reportedly stated his firm "will compete with Gilead on the merits of its drug, and not on price."  Though it isn't clear yet who will meet the criteria for treatment, cost of the treatment is already on the front burner of discussion.

According to the Wall Street Journal, "The head of pharmaceutical drug purchasing for Oregon’s Medicaid program has a message to hepatitis C drug makers: Let’s make a deal." In trying to severely restrict the drug's use and hold costs down, Thomas Burns, pharmacy director for Oregon Health Authority, noted:
 
If the drugs work similarly, we can say to the companies, ‘Only one of you will get to do business with the state of Oregon. Which one of you wants to give the right price?’” Burns doesn't reveal just who gets to determine the "right price," but one can only guess it's not in the eyes of the drug companies if Burns has his way.

 The number of people in the U.S. with Hep C is estimated at around 4 million. Again according to the WSJ: 

Most states are required under federal law to reimburse all FDA-approved drugs, but Burns notes that Oregon operates under a federal waiver that allows it to exclude certain therapies from its coverage in exchange for providing health services to a wider population than mandated by law.
 
Oregon estimates that some 1,450 Oregon Medicaid beneficiaries would be candidates for Sovaldi under current state guidelines, which would cost the state about $160 million after including the price tag for other therapies that are currently combined with Sovaldi.

Burns apparently has decided to take a page from AIDs activists by trying to link the price of the drug to the pay and bonuses Gilead''s CEO, John Martin, received in 2013, emotionally staggering figures for many designed to pander to those who hate corporate America. Martin last year took in $15 million in salary and exercised stock options on the company worth an estimated $159 million dollars.

Burns didn't stop there. He threw in this kicker: “We fail to understand why they think the taxpayers of Oregon ought to finance their CEO’s salary.” This of course is bogus but emotionally effective rhetoric since Gilead sells more than one product and does so around the globe.

The lines keep getting clearer and clearer. It matters little whether it's fracking, global warming, health care, same-sex marriage, gridlock, taxes, spying, foreign policy or whatever. This is a divided society. And one that could get really ugly in a hurry.

There are many forms of blackmail. The current Justice Department's, some are saying, "greedy fines" against several financial firms is just one example.
c.c chance

UINTENDED BUREAUCRATIC CONSEQUENCES

 

Here's an interesting quote from down under.

 Australia's seismic carbon shift angers Greens
Australia has repealed pro-environment carbon laws that put a price on greenhouse gas emissions, the first time a developed nation has made such a U-turn. 

Given what we wrote in yesterday's piece, Not So Fast, Australia's movement might be the beginning of the camel's nose under the tent. Given that political pundits of all stripes, affiliations and favorite lobbying groups (I like mine better than yours.) have been caterwauling more recently about the absence of something that never existed except in the minds of idealists, bipartisanship, this could if it spreads get intriguing.

One might perhaps categorized it with a simple question next winter in the EU when the thermometer starts to dictate. Do you want heat or no pollution? And with the threat of more of what once was called global warming and soaring temperatures, though currently in the Midwest there are complaints about this summer so far being cooler than normal, do you want air conditioning or no pollution?

That most likely would be an interesting question this time of year for the inhabitants of Houston

Pundits rant on about countries going to war over oil and more recently water is the next suspected culprit. But the schism between believers and non-believers in the climate change world could get very big and very ugly very fast given the the necessary turn of circumstances. And no one offhand knows for sure what they might be.  

In Australia, the unintended consequences of bureaucratic meddling once again apparently reared it unwelcome head.

Prime Minister Tony Abbott, who made a pre-election "pledge in blood" to voters and business to prioritize growth above climate shift, delivered on his promise after independent senators with deciding votes in the upper house sided with his conservatives, following a power shift this month that ended years of domination by the pro-environment Greens party.

"Today the tax that you voted to get rid of is finally gone, a useless destructive tax which damaged jobs, which hurt families' cost of living and which didn't actually help the environment is finally gone," a jubilant Mr. Abbott told voters in a news conference after the Senate's decision.

t. man hatter 
 http://online.wsj.com/articles/australia-repeals-carbon-tax

LET IT BEGIN

 
 t. man hatter

 If you look up the word quixotic you'll see in its normal use it means impractical, idealistic usually intended when used by MSM as a pejorative--aka Don Quixote senselessly swinging away at windmills.

Breaking up the world's sixth largest economy, a dysfunctional, bureaucrat-laden, over-taxed gargantuan miasma, into six states is the most practical, non-idealistic merciful act of kindness and common decency any sentient human could propose.

If you click on this link you'll also see how MSM treats such proposals.

In the article the writer even mentions what nearly every Californian who isn't a union member or a crony of Governor Brown knows is one of the biggest boondoggles in the history the human race, the high speed train.

To paraphrase a famous statement made every four years at the start of the Olympics: Let the breakup begin.

That's our view. We hope you know yours.

http://blogs.marketwatch.com/themargin/2014/07/16/plan-to-cut-up-california-into-six-states-moves-toward-vote/

NOT SO FAST

As energy prices soften of late after running up for several weeks--though oil finished up Wednesday one day after Yellen's Humphrey-Hawkins appearance--there seems to be a general mood that any supply disruptions will occur from geopolitical turmoil.

A fairly reasonable assumption given all the recent global upheaval. Yesterday's Financial Times, for example, ran a huge, full page piece, The indispensable country, singing the praises of how the U.S. shale revolution headed off a possible oil crisis. And that's probably accurate. But that same indispensable country, not the usual suspect geopolitics, may prove to be the problem.

Shale has to be fracked. And like it or no, fracking, as it's known in the industry, is beginning to catch some, well, flak.  In this case, environmental flak.  In 2011 two towns in New York voted to amended  their zoning laws to ban fracking, claiming it "threatened the health, environment and character of communities."

So far around 180 towns in New York State have followed suit, adopting codes to control or stop fracking in their areas.  And this recent July 1, New York's highest court ruled that communities could use zoning laws to ban fracking.

Yes, given the U.S. mother load from hydraulic fracturing, there appears to be an abundance of U.S. oil and gas. But opposition--some even coming in research claiming that fracking can increase earthquakes-- is growing.

In boxing there's an old saying it's the one you don't see that does the damage. Among this sea of apparent abundance could be lurking in that supply chain something hardly anyone anticipated. For more, here's an excellent piece from oilprice.com.
t. man hatter

http://oilprice.com/Energy/Energy-General/As-Fracking-Expands-So-Does-Opposition-Even-In-Texas.html