WELCOME ABOARD

Retail investors, according to one source we've seen, now own around 37% of the corporate bond market.

What do we know about retail investors in general? They are usually late to the party and even later to leave. Since central banks around the globe have implemented thier ZIRP magic, yield-starved investors have flocked into bond funds especially one of Wall Street's latest love affairs, ETFs.

Concerns about ETFs continue most of which are directed at the retail market and hold the promise of instant access to one's funds. Many of these charge low fees, another attraction to bring in the retailers. Such has not escaped the view of regulators as just last month Fed Chair Janet Yellen brooked the idea of slapping exit fees on such funds to prevent a panic run.

One has to admit Yelllen's point is interesting given that she and her minions at the Fed have contributed mightily to the yield-hungry mania. But we'll leave that for another time.

Though yield-starved includes more that just the retail crowd, it's the retailers most likely to get crunched when crunch time arrives. And it will. Liquidity is and has been the fear as this yield-chasing climate continues to build this year. Some strategists say when it dries up as interest rates jog back to more normal levels a serious logjam is possible.

According  to the Financial Times, since 2008 there's been a 70% decline in measures used to quantify liquidity such as spreads between bid and ask and "the amount of debt on the balance sheets of dealer-banks."

There's still another side to this coin since most of  the junk bonds are of the corporate pedigree. Here's a quote from Jaime Dimon, chief executive of JPMorgan Chase, at a recent conference.

"We've lost tremendous sums of money on FHA...the real question is should we be in the FHA business at all."

Dimon is talking about home loans brokered through the Federal Housing Administration, an area where the bank had to cough up $600 million in fines to the government for faulty loans associated with the last real estate bubble.

The home mortgage business has slowed considerably, not the least of reasons is more, harsher government regulations like Dodd-Frank. Dimon is saying something quite simple about markets in general that some never get. Like a water filled balloon, if you push on it in one place it will just expand somewhere else.

That somewhere else for banks of late is the corporate bond market. According to the Financial Times, the "amount of corporate bonds outstanding has reached $9.9tn, easily surpassing $8.1tn of residential mortgage-backed securities, including those guaranteed by the US government's housing financiers."

Whereas Wall Street once turned out huge amounts of CMOs, collateral mortgage obligations, all bundled together, leveraged and sold, it's now cranking out CLOs, collateralized loan obligations. Investors see the higher yields on these instruments, their lower default rate compared to CMOs and for many it's a no-brainer.

Regulations are just like any other water filled balloon. Regulators push and the balloon bulges somewhere else. As one banker put it:  "You can't lend and make a basis point or two and have to pay 40bps in legal costs. Those are the the current economics of the business."

Summarizing the present hot corporate bond market another banking official noted: "This can go on for quite some time, but we'll eventually reach a point where it goes too far out of whack to the basic fundamentals in a similar way to the housing market before 2008."

Look no further than the options market for signs of similar concern. Here's a quote from MoneyWatch from yesterday's Wall Street Journal.

The options market is flashing concern about high-yield bond exchange-traded funds.

Demand for protective “put” options in the market’s largest high-yield bond ETF versus bullish options this month crept up to its highest level since May 2013’s  “taper tantrum,” when hints from the Federal Reserve on changes to its bond-buying program sent high-yield bonds, and other rate-sensitive assets, reeling.

Dimon's point leads to another one fundamental to all markets. Like any good prostitute, when conditions change you move to where the money is. If you have any doubts, check out the fracking oil boom up in North Dakota.



   

FECKLESS BUREAUCRATS

Sanctions by any other name.

When are are so-called sanctions toothless? Try this: We're going freeze your assets but you got a week to move them before we do.

Now we know there are some dumb folks and a hoard of non-believer roaming about. But usually billionaires aren't among them, especially Russian ones who had to corrupt so many to collect so much from corruption.

Russian oligarchs who are close to Vladimir Putin have a week to get their cash out of Britain before sanctions are imposed, it has emerged.

European Union officials started on Tuesday to prepare the list of businessmen and Moscow officials who will be targeted by the sanctions.

Philip Hammond, the Foreign Secretary, has made clear the Britain’s desperation to take action at those close to Mr Putin’s regime, saying "the cronies of Mr Putin and his clique in the Kremlin are the people who have to bear the pressure".

However, British sources disclosed that it will not be until the end of the month that all EU countries will have prepared their lists of individuals to be hit with the sanctions.

The length of time before any action against these so-called Putin cronies will fuel concerns that they can withdraw their money before sanctions are imposed.

http://www.telegraph.co.uk/news/politics/10986950/Putin-cronies-get-a-week-to-pull-their-cash-out-of-Britain-as-EU-drags-its-feet.html 

AROUND THE WEB

 
Yield-starved?
Yields on Ukrainian government bonds due 2023 rose to 8.38 percent as of 6:54 p.m. in Kiev from 8.27 percent yesterday, data compiled by Bloomberg show. Ukraine’s hryvnia weakened to 11.73 per dollar, compared with 11.68 yesterday.

Let's run up the prices some more here, according to CNN
Chinese buyers are now the biggest international players in the U.S. housing market and some states are seeing billions of dollars in real estate deals as a result.

More than half of the $22 billion Chinese buyers spent on U.S. homes during the 12 months ended in March was spent in California, Washington and New York, according to the National Association of Realtors.

Apparently no pig like a U.S. pig.
Pig farmers in the United States have continued to feed a controversial drug to their livestock, choosing production needs over human and animal health concerns, according to critics. The drug is ractopamine, which is given to 60% to 80% of all domestic pigs and cattle to make them grow leaner before slaughter. The Food and Drug Administration first approved it 15 years ago, claiming the drug was safe to use.
 http://www.blacklistednews.com/U.S._Pork_Producers_Keep_Using_Drug_Banned_or_Restricted_in_160_Countries

WORLD'S BEST INVESTMENT
 "Somebody asked the other day what the world's best investment opportunity is, and when I told him he was visibly disappointed," said Rich Bernstein of Bernstein Advisors.
Bernstein was talking about high-yield municipal bonds.
Investors in the bond market currently prefer investing in Iraq than U.S. municipalities.
As of July 23, Republic of Iraq bonds due in January 2028 were yielding 7.08%; high-yield municipal bonds in the U.S. were yielding 9%, or 1.9% more than Iraqi bonds.

http://www.businessinsider.com/high-yield-muni-bonds-versus-iraq-2014

 

Dangerous thinking that clearly omits two word-for now. Shades of different this time.

There is a message in that, and an interesting one.

The markets are no longer interested in what happens in the rest of the world. The days when geopolitics could impact the prices of stocks, bonds, commodities or currencies in any significant way have been consigned to the past.

http://www.marketwatch.com/story/why-the-markets-dont-care-what-happens-in-the-world-2014-07-23?

OUR VIEW

One appellate court in Washington says no. Another appellate court the same day in Virginia says yes.

That's not confusion. That's the big  F word. No, we don't use profanity any more than we have to here. That's fractured as in broken, separated, non-union, difference of more than just an opinion.

The left has been pushing people in one direction for years. And the right is no better. Yet there's a whole cadre of people in the middle not because they are middle-of-the-roaders, but because they don't want to be pushed by anyone.

And that's the one thing this or any other government knows best--pushing. Putin pushes in the Ukraine and the U.S. pushes around the world.

Any and all talk about bipartisanship is pure BS and has been and there's no need to pretend otherwise any longer.  America is a fractured nation, becoming more fractured daily. And it's healthy; it's healthy to get it out there. Let people say what's on the minds without fear of retribution or PC quarantining.

PC is BS without the tissue paper. Many are sick of the faux, overplayed, dramatic sensitivity that only trial lawyers and phony liberals love. It's right up there with the sickening religiosity of the right. In many ways there's not a dollar's worth of difference. We'd say dime but owing to inflation our Fed folks continue to lie to us about hardly anybody uses them any more.

For those of you who weren't conscious yet to catch the media's knee jerk reaction to the now deceased, discredited former Maryland Governor Sipro Agnew when he called MSM a bunch of nattering, nabobs, you don't understand how threatened these members of the phony Fourth Estate are.

Looney Hollywood Clooney recently went off on the tabloids, but someone should tell poor George not all of them are in the UK. More than a few masquerade here as the Washington Post, the New York Times and the Huff and Puff Post.

These are people who are not powerful; they're running scared. Their moat is being challenged by the Internet. The only people who need MSM today is MSM.

People are no longer fearful. They don't need interpretive reporting or back grounding the news, two archaic concepts left over from the days of  the three dominant networks. Journalistic elitists take note: It's over. Be careful what you wish for because it might just be spelled Internet.

What's going on in China is proof positive. The government there can hardly control the masses. Forget jobs. Their biggest nightmare is the Internet. Look it up in Webster's under freedom.

And let's not forget our illustrious Congress. In the greatest age of electronic technology the planet has ever seen, why do these freeloaders need two homes to spend so much time in Washington, so all the greedy lobbyists can conveniently locate them in one place?

Taxpayers should demand they only meet for one week twice a year and the rest of the time they ought to work from their home state homes the way half the damn nation does. The taxpayers will pick up their hotel bills for the two weeks annually. Talk about cutting the budget deficit and saving taxpayers money.

If nothing else it might put a crimp on how many dudes and duchesses want to join that exclusive millionaire-makers club.  

And what about these folks' bloated staffs?  History suggests most kings didn't have 35 employees on the payroll. Nearly all the televised speeches these poseurs make are to an empty chamber where they can stand behind a podium in their designer jeans, suit coat, white shirt and tie before rushing off to watch the kids play soccer before dinner.

There's an old joke, clearly not PC today, where one guy says to his buddy after some discussion: "If you had a brain you'd be dangerous." Today that describes America's foreign policy. Brainless and dangerous. Standing empty handed and tip-toed on the bottom just to try to touch the top.

But there is more than enough blame to go around, the masses and their incessant need for their load of nepenthe from sports, TMZ and social media to all those as yet undiscovered plagiarists who stroll the halls of Capitol Hill.

Skip plaques dedicated to notable athletes. They mostly do their deeds in public. Somewhere there should be one, an honor roll of plagiarists, with names like Biden, Kearns Goodwin, Walsh and Kennedy.  Yes, that Kennedy, so-called author of best selling Profiles in Courage.

See Ted Sorensen 2008, two years before Kennedy's speech writer and close confidant died, he publicly admitted writing much of the Pulitzer prize winning book for which Kennedy took full credit and later paid him a handsome chunk of change for his efforts.

This is a nation fractured at its core and all the king's horses and all the king's men, editorial writers included, can no longer BS their way around it.

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

GORED OXEN

Yesterday we mentioned in our Random Musing article the negative impact Dodd-Frank legislation was having on the economy.

Today the Financial Times, Dodd-Frank rules blamed for curbing growth, sheds more light on something many of us knew from the beginning. This is bad legislation loaded with, as usually, consequences not contemplated.

Once again these geniuses punish the many to try to apprehend the few.

"Low-income consumers and medium to small businesses that do not have alternatives to bank loans have been particularly hurt," the Times reports.

Quoting a study by Goldman Sachs Global Markets, a public policy institute, the Times notes the bill was an attempt to make banks safer after the 2008 financial meltdown. The new rules have imposed greater costs on banks. Those costs are apparently being passed on to guess who.

Proponents of the bill claim all the rules have yet to be implemented and to fairly evaluate its effects we need to wait until all the rules are in place. Now we don't know about you but that sounds vaguely familiar to what the anti-climate change folks are saying. So is there a double standard at work here?

Some including Fed chair Janet Yellen think higher costs are justified to have a safer system. But again it comes down to whose ox gets gored  

According to the study, "An employee who earns close to minimum wage now has additionasl interest expenses on his or her debt that is worth about one week's pay compared with the pre-2008 period."

And yesterday's WSJ carried an article about banks looking to grow above $50 billion asset level facing huge new regulations owing to Dodd-Frank.  Some apparently are deciding that he growth isn't worth it. Moreover, the cost for Fannie Mae and Freddie Mac on conforming home loans to meet new standard have gone up 14 basis points.

The costs to finance small and medium-sized businesses jumped  "175 basis points more than large companies that can tap public markets, compared with pre-crisis periods."




               
n

PROSECUTE

We don't know if former New York Mayor Michael Bloomberg broke any laws by defying the FAA's ban on flights to Israel.

But if it turns out he did, in the name of king-sized sugary drink lovers everywhere, we want to be among the first to push for regulators and law enforcement officials to prosecute him.

If the law of this land supposedly applies to all equally, we want him prosecuted. Show the people whether that's the truth or just something officials in high places simply mouth to quell the rabble.

MAKING SENSE

If you don't stay with your winners, you are not going to be able to pay for the losers.”

The above quote could easily apply to today's market as it continues to defy what many call "all reason." But the stock market, comprised as it is of millions of individuals, has little in our view to do with reason.

From the book, Market Wizards, the above reminder, like most things, is probably a double edged blade. And it will remain that way until it no longer does.

Too many today are looking for black swans. To be sure, they're out there lurking somewhere just below the surface. But this market, as the above quote implies, is not done sucking more innocents into the game. Nearly everyone talks about markets being perverse creatures, often making fools of the greatest number, but when the market gets as perverse as it's been so far in 2014, the grumbling starts.

Those who planned to short bonds, buy growth and ride the macro tide to huge prosperity this year so far remain frustrated and foiled. Things haven't gone as they were suppose to, not what they seem. To quote Gilbert and Sullivan, it's so far been a year of "skim milk masquerading as whip cream."  

With volatility 25% below its historical average, complacency still reigns. Like the alluring Sirens of mythology wooing unwary sailors to their doom, complacency can prove quite disturbing to those minds use to functioning within the limits of logic and rationality.

To quote Carl Jung "A symbol always stands for something more than its obvious and immediate meaning." 

Until future books about the history of the stock market get written, only then will we fully learn complacency's true place in market annals and what role, if any, the inhabitants of the Eccles Building at 20th Street and Constitution Avenue played.
t. man hatter

BITCOIN LICENSE

If you haven't heard of a bit license yet, stay tuned because you will.

It's about the new virtual currency, bitcoins. New York, it seems, has become the first state to propose the new fee. That's the kind term for new tax once it becomes law and most likely will follow in other states and jurisdictions all the way to the county and city levels. Federal, state, county and city, remember, each has its on taxing octopus.

The justifications for invoking the new rules never vary--to protect the public and prevent crime. Those two have replaced motherhood, apple pie and what use to be semi-revered God, the church and the American flag.

The proposed new rules applied only so far to those involved in trading and storing virtual currencies. Despite what naysayers will say, bitcoin is growing in acceptance as Michael Dell of Dell computer just announced they will accept the virtual currency. And there are many others like Dish Network, the cable provider. Around the globe there are now nearly 65,000 firms that accept the coin.

What remains to be solved, as some are already pointing out, is whether, contrary to what  the New York State Department of Financial Services is proposing, separate regulations are warranted. Some feel the new currency should just be folded into the already existing financial system.

Oscar Wilde noted that a cynic is a person who know the price of everything and the value of nothing. Well, we don't know what the price of any licensing fee will be--bureaucrats seldom miss a juicy new taxing opportunity--but our gut feeling is whatever it is will supersede the value those subject to paying will receive.
--
t. man hatter

RADOM MARKET MUSINGS

 

Once upon a time there was a popular song with the line: "I wouldn't last a day without you." That was a story about a love affair the singer didn't want to end.

Well, that line could be turned around a bit given the market's recent reaction to the terrible tragedy in the Ukraine and all the bloodshed in Gaza.

Investors seemed to be bothered by horrible news about one day. And that for all intents and purposes appears to be the meme of this market so far this year. "We hear and feel ya, but our focus is just somewhere else for now."

And many, many people obviously don't want this market love affair to end either. So what's going to finally change investor focus? At the moment nothing. As we said in our post Taos Jones Averages, it is what it is until one day it isn't.
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Here are two charts from a recent report by 90-year-old Richard Russell, the father of market newsletters. Russell says gold can go to $10,000. But whatever it does, he ain't selling. And on any price weakness below $1,200 he might even be a buyer.










Gold miners versus gold bullion. We've discussed the gold mining stocks before. Look at the charts and draw your own conclusions. Our point here is more to inform than to recommend. It's like the difference in the English language many fail to distinguish between the terms imply and infer. We imply, you infer.

In more pragmatic terms, you're on your own. So get use to it.
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A South African gold mining firm signs deal with gas company to bring cheap energy for their mines.

Gold miner AngloGold Ashanti (NYSE:AU) has signed a $140 million agreement with natural gas infrastructure business APA Group (ASX:APA) for a natural gas pipeline to supply the remote Tropicana and Sunrise Dam gold mines in Western Australia.

The 292 kilometer Eastern Goldfields Pipeline will connect AngloGold's mines to APA’s existing pipelines and is seen saving the South African miner millions of dollars in energy costs.

“Gas power generation is expected to reduce cash operating costs at both sites by between A$25-$30 an ounce,” said Michael Erickson, AngloGold Ashanti’s senior vice president in Australia.

The companies said engineering, design and procurement work has begun, with construction expected to start in February 2015. Gas transportation services are due to commence in January 2016.
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Investors can often accurtely anticipate an event. What they can't often accurately anticipate, it seems, is the consequences of that event. 

At the beginning of the year many macro investors anticipated higher interest rates and falling bond prices owing to the massive ballooning of money sloshing around the world as central banks continued to print the stuff.

Moreover, the Fed contributed to this outlook with its announcements about future monetary policy, the start of its tapering program and its constant reassurances there would be enough time for everyone to get to the life boats if they were needed.

As has been noted, the Federal Reserve's balance sheet exploded from $950 billion in 2008 to its current $4.3 trillion, a number that  for most is totally incomprehensible. 

Take the case of big U.S. banks. One of the stories in the news today is how tighter lending standards, much of it most likely owing to the cumbersome effects of Dodd-Frank, have apparently helped these giants clean up their loan losses, seemingly a good thing.

Tighter lending standards may lead to, as one analyst put it, claiming "In the worst of times the best loans are made," better quality loans, but they also lead to less expansion or economic growth, supposedly what the Fed's easing has been all about.

Investors cite numerous reasons for the economy's slow recovery, a recovery most agree that has been below historical norms. Some of that may stem from the recession itself which was deeper than historical norms.  

But that's not the complete answer. Despite what its proponents might say, the heavy-handed Dodd-Frank Act has played a bigger than accepted role.  

You can't have it both ways, at least not for long. And that's exactly what the Fed has done.