PRO CHOICE NOT WELCOME HERE

Trade tariffs take many forms.

One again free enterprise takes a kick in the groin from the so-called well meaning as Michigan joins four other states banning direct sales of the growing-in-popularity electric car Tesla.

Republican Governor Rick Snyder, bogged down in a tight re-election raced, signed "legislation banning Tesla Motors Inc. (NASDAQ: TSLA) from selling directly to Michigan consumers. As interpreted by Tesla, the legislation even prohibits the company from opening a gallery where it can show off the car and talk to customers about it in person."

Joining New Jersey, Texas, Maryland and Arizona, Michigan's action was expected.

Auto dealers in the five states succeeded in persuading legislators that the property and sales taxes the dealers pay combined with the number of workers they employ are far more important than letting customers chose to buy what they want. 

The new law requires all new vehicles sold in Michigan to be sold by a network of franchised dealers.

So much for free consumer choice and meritocracy. Though not mentioned by name in the new law, Tesla is the only electric car maker banned. The bipartisan vote tells you want we've been saying for a long time, there is no such thing as a pro-business political party in America, just two pro-my interests versus yours and our choices are always better for you than yours.

And we all know who's going to win that one as long as we continue to accept it.

BEWARE OF BUREAUCRATS BEARING GIFTS

If the term covered is new to you, it shouldn't be.

In the option game one can sell covered calls or buy puts and they in general meet the definition of covered as in less than totally exposed.

Much of the criticism of the ECB President Mario Draghi and the European Central Bank is it hasn't done enough of "whatever it takes." 

But the bank's new program is now underway. As the Financial Times states today:

News of the European Central Bank has begun its programme of buying covered bonds from banks in Spain, France and Germany will only whet the market's appetite for full-blown quantitative easing.

Covered bonds--considered palatable assets because they give the buyer dual recourse, to both underlying collateral and the issuing bank--are part of Mario Draghi's recipe for lowering banks' borrowing costs, boosting their lending and strengthening the ECB's own balance sheet.

Now lets jump on the Good Ship The Other Hand for a quick voyage across the Atlantic.

The Federal Reserve is not a true government entity and neither are Fannie Mae and Freddie Mac. And that gets us to the other hand.

Freddie and Fannie apparently under the guidance of Federal Housing Authority chief Mel Watt is pushing banks, according to the Wall Street Journal, "to repurchase loans that don't meet their (bank) standards."

If you smell a paradox here, try not to hold your nose in public. Once burned and forever-threatened-with fines, big banks like JP Morgan and Bank of America "have faced tens of billions of dollars of such repurchase demands. They have paid tens of billions more to settle litigation over sales of faulty assets."

So like any twice stung, MSM-vilified investor, banks took steps to protect themselves. To avoid such costs in the future, banks have put in place lending standards that intentionally overshoot the Fannie and Freddie requirements. The result of these so-called credit overlays is that it is harder for borrowers to get mortgages than regulators would like, the Journal notes.

At the same time officials at the Federal Reserve warned banks, as this headline again from the Journal, notes: "Fed Tells Banks to Shape Up or Break Up."  

Federal Reserve officials sent a warning shot across Wall Street on Monday telling bank executives they must do more to curb excessive risk-taking and improve employee behavior at their firms or face  stiff repercussions, including being broken into small pieces.

So lets see if we can get this straight. We have one central bank, the ECB, buying debt to stimulate their economy, but the bonds are hardly the most risky kind lounging around on bank balance sheets, the kind that slow down lending and consume capital. 

And here in America we have more of these ubiquitous bureaucrats telling bankers to clean up your act on the one hand but you need to relax your lending standards and, just trust us on the other, we "will provide details on what faults can trigger a repurchase even after a loan has entered a so-called safe-harbor after three years." 

You got to love the arrogance of these guys and gals. One can only wonder, recalling Dante's Inferno, if there's a special place in hell for these folks.
t. man hatter










 

OUR VIEW

 

In Monday's Wall Street Journal, Simon Nixon in his Europe File, "When a Crisis Looks Chronic, The Political Risks Multiply," raises the real question about what's going on there, one we've been writing since the crisis began.

It's a simple question, as simple as one that gets asked nearly every morning at breakfast: "How do you want your eggs, scrambled or over easy?"

Forgetting for the moment about the debate whether what's needed is more monetary stimulus or more financial discipline couched in the term austerity, here's what Nixon writes:

At the heart of this divide lies the central conundrum of the euro crisis: whether it survives on German or Italian terms. Is the euro to be a strong currency sustained by fiscal discipline, competitive economies and national responsibility? Or a weak currency forced to rely on deficit-spending, devaluation, inflation and ultimately the mutualization of debts to extricate itself from a crisis?

There in a paragraph is the heart of the matter, a question that can be asked in numerous ways. Do you want more of what you've got and had with the Italian-French connection to laxity, debt and devaluation or something new and better and more stable that takes time, discipline and competitiveness?

This clash is polarizing around two major issues: whether to effectively junk the eurozone’s fiscal pact in the face of France and Italy’s refusal to obey the rules; and whether the ECB should buy sovereign bonds despite German opposition.

Put crudely, German euro-skepticism is being fueled by fears that Germany is being asked to shoulder the ever-rising debts of countries that refuse to reform broken economic models based on cronyism and the protection of vested interests. At the same time, French and Italian euro-skepticism is being fanned by fears that German-inspired policies threaten to crush their economies and way of life without regard for national sovereignty.

Nixon concluded with:
 Prolonged stagnation risks widening this rift to the point where the market may question whether the eurozone’s survival is possible on either German or Italian terms. That’s when the euro crisis will truly be back.

Those who keep calling for monetary stimulus, though they will deny it, care very little about the strength and sovereignty of the euro for now as long they can quickly wash over the badly needed structural reforms and make the sun, however temporarily, shine again. 

The European version of socialism is no longer badly bent. It's broken. And this is a contagion, if these folks get their way, that will be far more difficult to contain than any Ebola virus. 

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

MARGIN DEBT INDICATOR

  
      Chart shows margin debt for S&P 500 to August 2014.

  
The last time the S & P 500 dropped 10 percent of more was 2001. Rising right along with this huge equity bull-run these years has been margin debt, another term for leverage.

Leverage works both ways. It can make one lots of money and, if not well-managed, can likewise lose one chunks of money. According to data from the New York Stock Exchange as noted in the Financial Times, margin debt "peaked in February at $466 billion and stood at $463 billion in August."

So there's still a lot of it around. What's the significance? Well, investors love upside volatility when they're heavily margined, but downside volatility is a horse of another breed. The peak in margin debt in 2007 before the fat lady cleared her pipes was $382 billion. In early 2009 it cratered at $173 billion, per the Times.

Moreover, the  Fed's ZIRP magic encouraged the use of margin owing to the lower carrying costs.When the Fed finally end QE, informally known as the punch bowl, investors will get, if they have not already, a sense of what it feels like to fly without a safety net.

During the Greenspan-run Fed, from1987 to 2000, Sir Alan exercised what became known as the Greenspan Put. When things got dicey he increased liquidity by lowering the Fed Funds rate, creating a negative real yield and thus encouraging risk taking to revive stock prices.

For some time now many market observers have viewed QE in a similar light. Buying on margin as noted can help boost returns. But huge downside volatility as happened last week squeezes margins and triggers broker margin calls forcing investors to sell, creating in the process more downside volatility.

Free lunches are only free until they aren't free anymore. And what a lot of investors don't apparently see is the Fed's huge QE program was a free lunch for many unless one was living on a fixed income.

 t. man hatter

TWO-WAY AFFAIR

 
 The effects of fear are a two-way affair.

For a good example take a look at the recent changes in high-yield junk bonds and Treasury securities.

Fear is pushing the prices of one down and the prices of the other up. Just the reverse is true on the yields of both. Yields for junk bonds are rising and for Treasuries declining. Much of this reaction, though they and their supporters are apt to deny it, can be placed at the entrance of the Eccles Building in Washington.

Forget for a second the concerns about slowing global growth. When you flood the market with bunches of free money you raise the specter of possible inflation whether you want to admit it or otherwise.

Easy money usually translates into to a weaker currency or decreased purchasing power, a form of inflation whether those officials want to admit it or not. Zero interest rates make folks chase riskier, higher yielding investments. Now you have a brief picture of what more QEing does.

 Since July when Fed Chair Janet Yellen mentioned her concern about valuations in some assets, one of which was high yield, high yield bonds have been under pressure pushing down performance and helping further push up Treasuries.

Lots of money recently flowed out of junk bond funds as yields went up and total returns declined. Some bond fund managers are now suggesting there's money to be made in the high-yield bond market.

Early last week the Wall Street Journal noted: 

High-yield bonds tracked by the bank yielded 6.61% on Tuesday, closing in on June 2013’s high of 6.95% during the so-called “taper tantrum” when investors rushed out of risky debt.

Energy and mining junk bonds were especially hard hit, as investors fled to the safety of government bonds and pulled the yield on the 10-year U.S. Treasury bond at one point below 1.9%, to its lowest level since May 2013. Still, many large high-yield investors saw the dip as little more than a buying opportunity.

Patrick Maldari, senior fixed-income investment specialist at Aberdeen Asset Management, which oversees about $550 billion of assets, said the firm was busily reducing cash it had piled up on the sidelines by adding to its junk-bond portfolios.

“We’re putting money to work,” he said. “We think the trajectory for credit is still pretty good.”

Like we said: Fear and its effects are a two-way affair.

OVERNIGHT

The U.S. dollar rallied overnight in Asian trading and coupled with the Japanese Nikki surging 3.5% could push U.S. stocks higher later today.

TOKYO (Reuters) - The dollar gained on Monday after upbeat data restored some calm to the financial markets, prompting equities to rally back from deep losses and triggering a rise in Treasury yields.

The greenback got a further lift against the yen after reports that Japan's $1.2 trillion Government Pension Investment Fund (GPIF) could boost foreign asset holdings, seen spurring demand for foreign currencies.

The dollar was up 0.4 percent at 107.345 yen, pulling further away from a five-week low of 105.195 hit the previous week.

The U.S. currency hit a six-year high at the start of this month, poking above 110 yen - a level at which nearly half of Japanese firms think the government should start defending it, according to a Reuters poll."The dollar could extend its gains to the mid-107 yen level if equity market sentiment in Asia and Europe improve," said Masafumi Yamamoto, a market strategist for Praevidentia Strategy in Tokyo. "The GPIF news is also rare as it touches on figures related to foreign asset allocations and could be leading to further selling of the yen."

On Friday, data showed U.S. consumer sentiment come in stronger than expected, restoring some faith in the U.S. economy and calming nerves after a week that saw Wall Street buffeted and Treasury yields fall sharply on global growth concerns.

Taking tips from Friday's rebound on Wall Street, Tokyo's Nikkei, which hit a five-month trough on 
Friday, surged 3.5 percent.

In focus was whether the equity markets can retain their semblance of calm in the face of coming data.

"There are not a lot of immediate factors today for currencies, which will continue to watch changes in risk sentiment while awaiting data starting tomorrow such as those from China," said Shinichiro Kadota, chief Japan FX strategist at Barclays Bank in Tokyo

Indicators including September industrial output, retail sales and third quarter GDP will be released in China on Tuesday.

Other data this week that could have a bearing on global risk sentiment includes U.S. inflation on Wednesday and euro zone and German PMI indexes on Thursday.

The two-year U.S. Treasury yield, often correlated to the dollar's performance, had risen to 0.378 percent from a 17-month trough of 0.244 percent reached last week.

The euro was steady at $1.2764 after pulling away from a three-week peak of $1.2887 scaled last week.

The dollar index, which measures the greenback against a basket of six major currencies, rose 0.1 percent to 85.209 after dropping to a three-week trough of 84.472.

Commodity currencies, sensitive to perceived shifts in global demand, also fared better as pessimism over the economy was tempered and risk sentiment declined.

Meanwhile, in Europe equities are expected to rise today, Reuters reports.

PARIS, Oct 20 - European stocks were set to rise on Monday, adding to the previous session's sharp rebound after robust U.S. macro data helped soothe worries over the pace of global growth. Financial spreadbetters expected Britain's FTSE 100 to open 26 to 27 points higher, or up 0.4 percent, Germany's DAX to open 34 to 35 points higher, or up 0.4 percent, and France's CAC 40 to open flat to up by 1 point, or 0.02 percent higher. On Friday, the Thomson Reuters/University of Michigan index of U.S. consumer sentiment was surprisingly strong, rising to its highest level in more than seven years....

READY TO RUN AT SHORT NOTICE

 
 When risky stuff hits trouble, all other asset classes get involved

Before the crash, the average time taken for full liquidation of corporate bond portfolios by mutual funds and ETFs was around five days. It is now nearer five weeks.

Why is that? Largely because regulators have made it tough for banks to run trading desks, by making it expensive to hold risky assets such as corporate debt on their balance sheets. And as trading has dried up, so has liquidity.

The above quotes are from Tony Jackson's  "The Long View" in the Financial Times, are about behavior as much as about market data. Push the threshold high enough and smart people will alter their behavior.

That the banks are not dumb enough or they are prohibited from owning these risky asset without the possibility of reward shouldn't surprise. So what if it's true they got caught holding them in the previous market crash and had to sell off better assets owing to dried up liquidity, that's what you have now, dried up liquidity.

Jackson goes on. The name for this is contamination. When the risky stuff hits trouble, all other assets get involved, and everyone takes a hit.

Once again the simple truth here is about behavior. When the paddy wagon comes they take the good girls along with the bad ones downtown. The other inviolable truth is every action has within it a counter reaction, another thing regulators and bureaucrat never to seem to comprehend.

Jackson correctly notes: And the truth is investment professionals know all this. Like farmers on the slopes of Vesuvius, they are ready to run at short notice.

COLLUSION BY ANY OTHER NAME

 Who says there's no such thing as collusion?

The weekend edition of the Financial Times carried this sub headline: "Hints that US and UK monetary policy tightening could be delayed help temper turbulent week."

After what turned out to be a more turbulent week with volatility once again grabbing the cynosure than many expected, some monetary officials suddenly stepped out of the shadows to issue what many believe, we among them, were coordinated soothing statements to calm investor nerves.

The ferocity of market moves appears to have alarmed policy makers, with Andy Haldane, the Bank of England's chief economist, saying yesterday (Friday) that he favored delayed interest rate rises. He said evidence of a weaker global economy, lower inflation pressures and low wage growth had forced him to reassess the UK economic outlook.

Haldane's comments, as pointed out by the Times, followed those of St. Louis Federal Reserve Bank Chief James Bullard from a day earlier when Bullard suggested that the Fed should continue with its asset purchases instead of ending them.

Collusion by any other name is still collusion. And as one money manager put these central banker commentaries, given their timing, "....smell of a coordinated attack to help boost declining sentiment," something central bankers everywhere can ill afford.

Losing investor confidence, especially in view of an upcoming  election, would spell further disaster for the Fed's friends in Washington and on Wall Street. 

"Markets need to check into the Betty Ford Center and go into rehab, to wean themselves off this addiction to central bank support. If that means more volatility and lower prices in some assets, so be it," he said.

And there my thirsty friends you have the crux of the matter.  Central bankers and regulators are control freaks with a severe permanent case of OCD.  And that's the big problem with these screw-ups.

People with OCD generally recognize their obsessions and compulsions as irrational and may become further distressed by this realization.

That would be fine if it applied to bureaucrats, central bankers and regulators. Unfortunately it doesn't.

The more this hand-wringing goes on, the more one should be thinking behind the curve.
t. man hatter

UPCOMING WEEK

Jim Dandy didn't ride to the rescue last week but it appears for now that earnings apparently did. And you can look for more this week as Apple, Boeing, Coke, Microsoft and others report. Here at home September CPI Wednesday follows China's GDP report on Tuesday.

Monday, October 20

US Economics (Time Zone: EST)
 
No major economic reports
11:00 Fed to purchase $1b-$1.25b notes in 5 to 6-year range
11:30 Treasury to sell $24b 3-month bills and $30b 6-month bills
 
Global Economics (Time Zone: GMT)

06:00 EUR German PPI
 
Earnings
 
Before:
Halliburton (HAL)
Valeant Pharma (VRX)
Hasbro (HAS)
 
After:
Texas Instruments (TXN)
Chipotle Mexican Grill (CMG)
IBM (IBM)
Apple (AAPL)
Rent-A-Center (RCII)

Tuesday, October 21

US Economics (Time Zone: EST)
 
10:00 Existing Home Sales (Sep) - expected 5.10M, prior 5.05M
11:00 Fed to purchase $1.4b-$1.7b notes in 7 to 10-year range
11:30 Treasury to sell 4-week bills

Global Economics (Time Zone: GMT)

02:00 CNY Retail Sales, Industrial Production, Fixed Investment
02:00 CNY GDP (3Q)
04:30 JPY All Industry Activity Index
06:00 CHF Trade Balance
08:30 GBP Public Budget

Earnings

Before:
Coca-Cola (KO)
Harley-Davidson (HOG)
Kimberly-Clark (KMB)
McDonald's (MCD)
United Tech (UTX)
Lockheed Martin (LMT)
Regions Financial (RF)
Verizon (VZ)
Reynolds American (RAI)
 
After:
Six Flags Entertainment
Cree (CREE)
Yahoo! (YHOO)
E-Trade Financial (ETFC)
Broadcom (BRCM)
VMWare (VMW)
Discover Financial (DFC)
Intuitive Surgical (ISRG)

Wednesday, October 22

US Economics (Time Zone: EST)

07:00 MBA Mortgage Apps
08:30 Consumer Price Index YoY (Sep) - expected 1.6%, prior 1.7%
08:30 CPI Ex Food & Energy YoY - exp 1.8%, prior 1.7%

Global Economics (Time Zone: GMT)
 
JPY Trade Balance
00:30 AUD CPI (3Q)
08:30 GBP Bank of England Minutes
14:00 CAD Bank of Canada Rate Decision
21:45 NZD CPI

Earnings

Before:
Abbott Labs (ABT)
Boeing (BA)
Dow Chemical (DOW)
General Dynamics (GD)
Northrop Grumman (NOC)
Stanley Black & Decker (SWK)
Biogen (BIIB)
US Bancorp (USB)
Owens Corning (OC)
Angie's List (ANGI)
Xerox (XRX)
Ingersoll-Rand (IR)
Norfolk Southern (NSU)
EMC (EMC)
 
After:
Citrix (CTXS)
AT&T (T)
Tractor Supply (TSCO)
Skechers (SKX)
SLM (SLM)
Yelp (YELP)
 
Fortinet (FTNT)
Lumber Liquidator (LL)

Thursday, October 23

US Economics (Time Zone: EST)

08:30 Initial Jobless Claims, expected 294k, prior 287k
08:30 Continuing Claims - exp 2440K, prior 2429k
08:30 Chicago Fed National Activity Index (Sep) - prior -0.21
09:00 FHFA Home Price Index MoM (Aug) - exp 0.3%, prior 0.1%
09:45 Markit US Manufacturing PMI (Oct prelim) - exp 57.0, prior 57.5
10:00 Leading Index (Sep) - exp 0.7%, prior 0.2%
11:00 Kansas City Fed - exp 6, prior 6
11:00 Fed to purchase $1.35b-$1.65b notes in 6 to 7-year range
1:00 Treasury selling $7b 30-year TIPS (reopening)
 
Global Economics (Time Zone: GMT)

AUD RBA's Stevens speaks in Sydney
Japan Investors Purchases of Foreign Stocks/Bonds
01:35 JPY Manufacturing PMI (Oct prelim)
01:45 CNY HSBC Manufacturing PMI (Oct prelim)
07:30 EUR German Manufacturing & Services PMI (Oct prelim)
08:00 EUR Eurozone Manufacturing & Services PMI (Oct prelim)
08:30 GBP Retail Sales
14:00 EUR Eurozone Consumer Confidence (Oct advance)

Earnings

Before:
Eli Lilly (LLY)
Union Pacific (UNP)
T Rowe Price (TROW)
Lorillard (LO)
KKR & Co (KKR)
Janus Capital (JNS)
Dr Pepper Snapple (DPS)
Caterpillar (CAT)
UnderArmour (UA)
 
After:
Freescale Semi (FSL)
Altera (ALTR)
Microsoft (MSFT)
Deckers Outdoor (DECK)
Amazon.com (AMZN)
Juniper Networks (JNPR)
Riverbed (RVBD)
Pandora (P)
 
3M (MMM)
Occidental Petroleum (OXY)
Comcast (CMCSA)

Friday, October 24

US Economics (Time Zone: EST)

10:00 New Home Sales (Sep) - expected 470K, prior 504K

Global Economics (Time Zone: GMT)

NZD Trade Balance
01:30 CNY China Property Prices
02:00 CNY Leading Index
06:00 EUR German GfK Consumer Confidence
08:30 GBP 3Q GDP (advance)

Earnings

Cabot Oil & Gas (COG)
Colgate-Palmolive (CL)
Procter & Gamble (PG)
Moody's (MCO)
Ford (F)
UPS (UPS)
Bristol-Myers (BMY)
State Street (STT)

Twitter: @MichaelSedacca

POSSIBLE DEAL REACHED

It looks as if Russia and the Ukraine has reach a tentative deal to supply much of Europe with gas this winter, Reuters is reporting.

Just what impact that will have on local economies remains to be seen. But this is a case of one side wants the fuel and the other side wants to be paid.

Russia's Vladimir Putin told reporters that a deal ensuring gas supplies "at least for the winter" had been reached after a final one-on-one meeting with Ukraine's Petro Poroshenko, which followed talks attended by European leaders.

"We agreed on all the parameters of this deal," Putin said, but he urged European countries to help Ukraine meet a debt for gas, which he said stood at $4.5 billion.
The agreement followed a hectic series of meetings on the margins of a summit between Asian and European leaders in Milan at which Europeans showed no signs of agreeing to lift sanctions against Moscow imposed over the Ukraine crisis. 

The news of a  possible deal comes on top of Moodys, the bond rating agency, cutting Russia's credit rating to the second lowest investment grade, acording to Bloomberg.

Citing sluggish growth prospects, Moody's downgraded the rating one level form Baa2 to Basa1 nd did not change its negative outlook for Russia's future. Last April Standard & :Poor downgraded the debt to BBB-, a notch below Moody's.

The ruble has lost 13 percent against the dollar in the past three months, more than any other currencies tracked by Bloomberg, extending its drop this year to 19 percent. Foreign reserves have declined 11 percent this year to a four-year low of $452 billion as the central bank acted to shore up the ruble, Bloomberg also noted, while declining energy prices have been putting more pressure on Russia.

 Here's chart from Business Insiders on the countries most effected by falling energy prices.
http://www.businessinsider.com/these-6-countries-will-be-screwed-if-oil-prices-keep-falling-2014-10?