Saturday, June 29, 2013

Today's links

1---Bernanke Admits QE Raises Stock Prices, Force Investors Into stocks, CNBC (video)

2---How could markets possibly have misunderstood? , Economist

New York Fed president Bill Dudley pushed back hard as well, saying among other things:
Some commentators have interpreted the recent shift in the market-implied path of short-term interest rates as indicating that market participants now expect the first increases in the federal funds rate target to come much earlier than previously thought. Setting aside whether this is the correct interpretation of recent price moves, let me emphasize that such an expectation would be quite out of sync with both FOMC statements and the expectations of most FOMC participants

As it happens, markets have in fact leveled out. The rate on the 10-year Treasury soared to 2.6%, but has since fallen back to around 2.5%. The S&P 500 has rebounded almost 3% since Monday. But in my Monday post I also wrote:
[I]t's frustrating that the message reversal, when it comes, will probably reflect thinking within the Fed that, "markets misinterpreted what we were saying, and so we had to set them straight". That's not what will have happened. Whether the Fed gets it or not, it set a tighter monetary policy last week. And if a new policy message calms markets it will be because the Fed is effectively setting a more accommodative policy than it did on the 19th.
The comments above illustrate the point perfectly. "Policy hasn't changed!" they all insist; "Markets just misunderstood us!" But that's wrong. The market reaction is the policy. When bond and equity prices fall, inflation expectations, drop, and the dollar jumps in response to your statement, policy got tighter, whatever the intention was. Furthermore, the market reaction strikes me as a totally reasonable response to the Fed's statement. The Fed clarified its definition of "substantial improvement" in a meaningful and disappointing way: to mean virtually no improvement relative to the labour-market trend that has persisted since 2011. And it suggested that current trends were likely to justify a complete end to QE3 despite the fact that unemployment is well above the natural rate and inflation is well below the Fed's target and falling.

And the Fed, by saying that the market overreacted, is saying that it goofed when it tightened policy last week. Again, I am happy that the Fed is saying, albeit unwittingly, that it goofed and that the policy stance is easing. But the conclusion to my Monday post still stands:
The past few days have made it overwhelmingly clear that the Fed is steering this recovery. That should be comforting; all it has to do is steer things in a more expansionary direction! But it isn't, because the Fed keeps looking around and wondering, who's got the wheel?

3---The Big Picture
Wall St boom, Main St bust
Source: FT Alphaville

3---US backed al Qaida "behead" victims, RT video

A video purportedly showing an extrajudicial public beheading of two Bashar Assad loyalists has been uploaded onto the internet. Its authenticity has been verified by pro and anti-Assad sources, though it remains unclear who is behind the execution.

4---The political crisis in Australia, wsws

Gillard began the shift to austerity, entrenching a long term budget schedule of deep spending cuts, targeting single parents, the unemployed and other welfare recipients. But the ruling elite is demanding nothing less than a European-style social counter-revolution, with permanent, sweeping spending cuts to public education, healthcare, welfare, other basic services and social infrastructure.

The world economic crisis has likewise accelerated, and is now finding far more direct expression in Australia. The China-driven mining export boom, which provided a certain buffer for Australian capitalism in the immediate aftermath of the global financial crash, is now over.

A Bloomberg article, published yesterday, compared the Australian economy to a collateralised debt obligation (CDO), one of the “toxic assets” that triggered the financial crash in 2008. “Australia is a leveraged time bomb waiting to blow,” Albert Edwards, Société Générale SA’s London-based global strategist, declared. “It is not just a CDO, but a CDO squared. All we have in Australia is, at its simplest, a credit bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China.”
Already several Australian states are in official recession

5---NYSE Margin Debt Posts First Monthly Decline in a Year, pragmatic capitalism

NYSE margin debt declined to $377MM in May from April’s record reading of $384MM.   This was the first decline on a monthly basis since last June.

Historically, margin debt has a strong correlation with the S&P 500 as investors tend to lever up as the market advances and the mood shifts from risk off to risk on.  I often refer to this as evidence of a disaggregation of credit or the way credit is often employed in our economy for productive and unproductive uses.

6---Corporate creditworthiness in the U.S. is deteriorating at the fastest pace since 2009 with earnings growth slowing as yields rise from record lows. , Bloomberg
(Bank loans to issue dividends?? falling profits! and --rather than pay down debt--corps are buying their own stock)

The Federal Reserve has pumped more than $2.5 trillion into the financial system since markets froze in 2008, helping companies improve profitability by lowering their borrowing costs. Policy makers are considering curtailing $85 billion in monthly bond buying intended to prop up the economy as analysts surveyed by Bloomberg forecast earnings growth of 2.5 percent in the current quarter, the least in a year.
“The trend of improving credit quality has slowed as profits are slowing,” Ben Garber, an economist at Moody’s Analytics in New York, said in a telephone interview. “As the recovery matures, companies are liable to get more aggressive in taking on share buybacks and dividends.”

Buybacks, Dividends

Rather than using cash to pay down debt, companies in the S&P 500 Index are attempting to boost their share prices by buying back almost $700 billion of stock this year, approaching the 2007 record of $731 billion, said Rob Leiphart, an analyst at equity researcher Birinyi Associates in Westport, Connecticut.
Borrowers controlled by buyout firms are on pace to raise more than $72.7 billion this year through dividends financed by bank loans, surpassing last year’s record of $48.8 billion, according to S&P Capital IQ Leveraged Commentary & Data.
After cutting expenses as much as they could to improve profitability, companies “will need to see further revenue growth to boost earnings from here,” Anthony Valeri, a market strategist in San Diego with LPL Financial Corp., which oversees $350 billion, said in a telephone interview.

Investors are pulling back from auto debt, the largest part of the asset-backed market, threatening to constrain financing to borrowers with blemished credit histories. Subprime vehicle debt accounted for 13.2 percent of asset-backed issuance this year compared with 10.5 percent in 2012, Wells Fargo & Co. analysts led by John McElravey said in a June 7 report. ...

Sales Slow

S&P, the world’s largest credit rater, has cut 138 U.S. companies this year through June 17 and upgraded 114 companies.
Credit markets have been roiled since Fed Chairman Ben S. Bernanke told Congress on May 22 that the central bank’s policy-setting board could start scaling back purchases of $40 billion in mortgage bonds and $45 billion in Treasuries in its “next few meetings” if the U.S. employment outlook shows sustained improvement. After the Fed’s meeting on June 19, Bernanke said the policy could end entirely by mid-2014.
With yields on 10-year Treasuries at the most in almost two years, corporate borrowing costs have reached 4.28 percent, the highest level since June 2012, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Index.
Issuance has slowed, following the busiest May on record, as company yields have soared from a record low 3.35 percent on May 2. Bond sales last week of $16.5 billion fell below the 2013 average for the fourth straight period, according to data compiled by Bloomberg.

‘Apprehensive’ Raters

Earnings growth at S&P 500 companies is poised to slow from 2.7 percent in the first quarter and 8 percent in the final three months of last year, Bloomberg data show.
The ratio of cash to total assets for S&P 500 companies stands at about 10.3 percent, close to a record high 10.4 percent reached June 19, Bloomberg data show. The ratio was as low as 5.6 percent in March 2007.
“Companies have done a great job cleaning up their balance sheets but now the focus has moved on to dividends and share buybacks,” Rajeev Sharma, who manages $1.5 billion of fixed-income assets in New York at First Investors Management Co., said in a telephone interview. “That’s what makes the ratings agencies get apprehensive.

7---Fed QE Exit Impact: Lower EPS, Fewer Dividends Seen, IBD

Investors could see corporations return less capital and report weaker profits as the era of cheap debt appears to be winding down.
Corporate bond issuance has collapsed to the lowest level since late 2011 amid fears the Federal Reserve will soon taper the pace of monetary stimulus, sending debt yields of all kinds sharply higher.

June bond sales in the U.S. totaled $43.9 billion through Thursday night, down from $127.5 billion in May, according to Dealogic. The number of issuers tumbled to 72 from 188.
A similar trend can be seen in corporate debt globally, and municipalities have withdrawn planned bond sales as their borrowing costs soar. Sovereign bond yields have spiked as well, especially in emerging markets.

Funds holding debt of all kinds have sold off sharply. Investors pulled $61.7 billion from U.S.-listed bond mutual funds and exchange-traded funds in the month to June 24, TrimTabs Investment Research said, easily topping the previous record outflow of $41.8 billion set during the financial crash in October 2008.
It marks a sharp reversal from just a few months ago. In April, for example, Apple (AAPL) set a corporate-bond record by selling $17 billion of debt amid demand that topped $50 billion....

Bottom-Line Boost
Companies had rushed to load up on cheap cash, despite the economy offering scant encouragement to invest and expand.
So they instead used the easy money to refinance and cut debt-servicing costs, providing a boost to the bottom line as tepid growth held back the top line.
"It definitely helped on the earnings side," said Andy Richman, managing director of fixed income at SunTrust's (STI) investment advisory.
Q1 revenue from S&P 500 companies was flat vs. a year earlier, according to Thomson Reuters, which sees Q2 growth at 1.8%.
Companies also showered shareholders with dividends and stock repurchases. The start of the year saw a record number of dividend hikes, following a flood of payouts at the end of 2012 ahead of tax hikes.
The money was used for mergers and acquisitions too, and 2013 began with a flurry of megadeals, like $28 billion for Heinz and $24 billion for Virgin Media, though the pace has slowed.
Roll Over
But any companies that need to roll over maturing debt with new borrowing will see higher rates now. And firms that didn't use the debt to invest in their operations when borrowing costs were low may suffer as the economy picks up again, said Minyi Chen, operating chief for TrimTabs Investment Research.


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