On Friday, we learned that China's official manufacturing PMI unexpectedly climbed to 50.8 in May. However, China's unofficial HSBC PMI fell to 49.6 from 50.4 a month ago.
PMI numbers from South Korea, Taiwan, and Vietnam all deteriorated, raising some skepticism about the official Chinese numbers.
Meanwhile every major region in Europe reported significant improvement.
PMI: At the beginning of each month, Markit, HSBC, RBC, JP Morgan, and several other major data gathering institutions publish the latest local readings of the manufacturing purchasing managers index (PMI) for countries around the world. PMI is one of the best leading indicators of the economy. Each reading is based on surveys of hundreds of companies. Read more about it at Markit. These are not the most closely followed data points. However, the power of the insights is unparalleled. Jim O'Neill, the former Goldman Sachs economist, believes the PMI numbers are among the most reliable economic indicators in the world. BlackRock's Russ Koesterich thinks it's one of the most underrated indicators.
Emerging market (EM) assets – currencies, debt, and stocks – all had a pretty terrible month in May. Poor performance in emerging markets was so pronounced during the month of May alone that several Wall Street shops are now out with big calls declaring the "end of the bull market."
However, despite the wave of negative sentiment that has hit emerging markets, macro hedge funds were in there buying up EM last month. "Based on our exposure analysis, Macros bought EM exposure to the highest since October 2011, while maintaining their net long positions in [Europe, Australasia, and the Far East]," writes BofA Merrill Lynch analyst Stephen Suttmeier in the investment bank's latest Hedge Fund Monitor report. It looks like either the macro funds are taking a bath on their increased exposure to EM, or they see the latest movements in the market as a good buying opportunity.
EARNINGS ESTIMATES - PE Expansion Hides Risk and is itself Unjustified
When stock prices rise faster than earnings, you are witnessing something called earnings multiple expansion. In other words, stocks are getting more expensive. Earnings multiples have expanded and contracted since the beginning of the stock market. Unfortunately, if you have been a stock market bear lately banking on falling earnings growth expectations, then your prediction has only been half right.
In a new report, FactSet's John Butters takes a brief look at evolving Q2 earnings expectations, which have only been coming down for months.
"The Q2 bottom-up EPS estimate (which is an aggregation of the estimates for all 500 companies in the index) has dropped 3.4% (to $26.52 from $27.45) since March 31," writes Butters.
This has occurred as stocks have only been going up. And according to Butters, this dynamic is not that unusual:
Is it unusual for the earnings estimate for the index to decline and the value of the index to increase during the first two months of a quarter?
In recent quarters, it has not been unusual for the value of the index to increase at the same time analysts are trimming earnings estimates for the same quarter. In fact, it has occurred in 9 of the past 20 quarters (including Q2 2013). During these nine quarters, the average decrease in the bottom-up EPS during the first two months of the quarters has been 4.7%, while the average increase in the value of the index during the first two months of the quarter has been 6.8%.
Some warn that this trend of stock prices rallying with no earnings growth is getting dangerous for investors. But for now, it'll continue to make the bears look like fools. Here's the chart from FactSet's John Butters:
BILDERBERG MEETING - The Upper Crust
Defintion of Upper Crust: "A bunch of crumbs held together with a little dough!"
The only thing more ominous for the world than a Hindenburg Omen sighting is a Bilderberg Group meeting. The concentration of politicians and business leaders has meant the organisation, founded at the Bilderberg Hotel near Arnhem in 1954, has faced accusations of secrecy. Meetings take place behind closed doors, with a ban on journalists. We suspect the agenda (how the US and Europe can promote growth, the way 'big data' is changing 'almost everything', the challenges facing the continent of Africa, and the threat of cyber warfare) has been somewhat re-arranged as market volatility picks up and the status quo begins to quake once again. The annual gathering of the royalty, statesmen, and business leaders, conspiratorially believed to run the world (snubbing their Illuminati peers and Freemason fellows), will take place this week at the Grove Hotel in London, England. The Telegraph provides the full list of attendees below - for those autogrpah seekers - including Britain's George Osborne, US' Henry Kissinger, Peter Sutherland (the chairman of Goldman Sachs), the Fed's Kevin Warsh, Jeff Bezos?, Peter Thiel, Italy's Mario Monti, and Spain's de Guindos.
Bilderberg delegates in full
Chairman: Henri de Castries, Chairman and CEO, AXA Group
Paul M. Achleitner, Chairman of the Supervisory Board, Deutsche Bank AG
Josef Ackermann, Chairman of the Board, Zurich Insurance Group Ltd
Marcus Agius, Former Chairman, Barclays plc
Helen Alexander, Chairman, UBM plc
Roger C. Altman, Executive Chairman, Evercore Partners
Matti Apunen, Director, Finnish Business and Policy Forum EVA
Susan Athey, Professor of Economics, Stanford Graduate School of Business
Asli Aydintasbas, Columnist, Milliyet Newspaper
Ali Babacan, Turkish Deputy Prime Minister for Economic and Financial Affairs
Ed Balls, Shadow Chancellor of the Exchequer
Francisco Pinto Balsemão, Chairman and CEO, IMPRESA
Nicolas Barré, Managing Editor, Les Echos
José Manuel Barroso, President, European Commission
Nicolas Baverez, Partner, Gibson, Dunn & Crutcher LLP
Olivier de Bavinchove, Commander, Eurocorps
John Bell, Regius Professor of Medicine, University of Oxford
Franco Bernabè, Chairman and CEO, Telecom Italia S.p.A.
Jeff Bezos, Founder and CEO, Amazon.com
Carl Bildt, Swedish Minister for Foreign Affairs
Anders Borg, Swedish Minister for Finance
Jean François van Boxmeer, CEO, Heineken
Svein Richard Brandtzæg, President and CEO, Norsk Hydro ASA
Oscar Bronner, Publisher, Der Standard Medienwelt
Peter Carrington, Former Honorary Chairman, Bilderberg Meetings
Juan Luis Cebrián, Executive Chairman, Grupo PRISA
Edmund Clark, President and CEO, TD Bank Group
Kenneth Clarke, Cabinet Minister
Bjarne Corydon, Danish Minister of Finance
Sherard Cowper-Coles, Business Development Director, International, BAE Systems plc
Enrico Cucchiani, CEO, Intesa Sanpaolo SpA
Etienne Davignon, Belgian Minister of State; Former Chairman, Bilderberg Meetings
Ian Davis, Senior Partner Emeritus, McKinsey & Company
Robbert H. Dijkgraaf, Director and Leon Levy Professor, Institute for Advanced Study
Haluk Dinçer, President, Retail and Insurance Group, Sabanci Holding A.S.
Robert Dudley, Group Chief Executive, BP plc
Nicholas N. Eberstadt, Henry Wendt Chair in Political Economy, American Enterprise Institute
Espen Barth Eide, Norwegian Minister of Foreign Affairs
Börje Ekholm, President and CEO, Investor AB
Thomas Enders, CEO, EADS
J. Michael Evans, Vice Chairman, Goldman Sachs & Co.
Both total new orders and new export orders decline
Output growth maintained, but at marginal rate
Purchasing activity falls for the first time in eight months
From HSBC's Hongbin Qu:
“The downward revision of the final HSBC China Manufacturing PMI suggests a marginal weakening of manufacturing activities towards the end of May, thanks to deteriorating domestic demand conditions. With persisting external headwinds, Beijing needs to boost domestic demand to avoid a further deceleration of manufacturing output growth and its negative impact on the labour market. The new leaders should strike a delicate balance between reform and growth.”
INTERVIEWER: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying ‘Oh, this is a bubble, and it’s going to burst, and this is going to be a real issue for the economy.’ Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?
BERNANKE: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.
House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.
Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear…At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.
...we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.
I expect there will be some failures [among smaller regional banks]… Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.
“In separate comments, Mr. Bernanke went further than he had in the past, suggesting that the Fed would remain aggressive and vigilant to prevent a repetition of a collapse like that of Bear Stearns, though he said he saw no such problems on the horizon.”
[Fannie Mae and Freddie Mac are] adequately capitalized. They are in no danger of failing… [However,] the weakness in market confidence is having real effects as their stock prices fall, and it’s difficult for them to raise capital.
I see the financial markets as already quite fragile. The credit markets aren’t working. Corporations aren’t able to finance themselves through commercial paper. Even if the situation stayed as it did today, that would be a significant drag on the economy.
BEGIINING TO GET IT!!
* * *
... And Now
EDITORS NOTE: The tone of the problems is now worse than above, more concern is being expressed, yet we are told everything is all right by those who didn't see the Financial Crisis coming (or would tell us then either)
"[M]y reading of the evidence is that we are seeing a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit....Even if we stipulate that low interest rates are part of the reason for, say, a worrisome boom in one segment of credit markets, they are unlikely to be the whole story....One of the most difficult jobs that central banks face is in dealing with episodes of credit market overheating that pose a potential threat to financial stability/"
"a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant, pointing to the elevated issuance of bonds by lower-credit-quality firms or of bonds with fewer restrictions on collateral and payment terms (socalled covenant-lite bonds). One participant cautioned that the emergence of financial imbalances could prove difficult for regulators to identify and address, and that it would be appropriate to adjust monetary policy to help guard against risks to financial stability."
There are potential risks associated with current policy. The Fed’s securities purchases have reduced mortgage yields and, to a lesser extent, Treasury yields. Current low bond yields are disruptive to management of fixed-income portfolios, retirement funds, consumer savings, and retirement planning. They may encourage unsophisticated investors to take on undue risk to achieve better returns. MBS purchases account for over 70% of gross issuance, causing price distortion and volatility in the MBS market. Fixed-income investors worry that attractive mortgage-backed securities are in very tight supply. Higher premium coupons carry too much exposure to prepayments, potentially led by new government support programs for housing. Many are concerned about the Fed’s significant presence in the market. They have underweighted MBS in favor of corporate, municipal, and emerging-market bonds. There is also concern about the possibility of a breakout of inflation, although current inflation risk is not considered unmanageable, and of an unsustainable bubble in equity and fixed-income markets given current prices.
Further, current policy has created systemic financial risks and potential structural problems for banks. Net interest margins are very compressed, making favorable earnings trends difficult and encouraging banks to take on more risk. The Fed’s aggressive purchases of 15-year and 30-year MBS have depressed yields for the “bread and butter” investment in most bank portfolios; banks seeking additional yield have had to turn to investment options with longer durations, lower liquidity, and/or higher credit risk. Finally, the regressive nature of the artificially compressed savings yields creates pent-up demand within bank deposit portfolios; these deposits may be at risk once yields begin to rise and competitive pressures increase.
Uncertainty exists about how markets will reestablish normal valuations when the Fed withdraws from the market. It will likely be difficult to unwind policy accommodation, and the end of monetary easing may be painful for consumers and businesses. Given the Fed’s balance sheet increase of approximately $2.5 trillion since 2008, the Fed may now be perceived as integral to the housing finance system.
Risk assets extended their rally as further monetary easing helped market participants tune out signs of a global growth slowdown. The spate of negative economic news between mid-March and mid-April did little to interrupt the rise of equity prices in advanced economies. The growth jitters left more of a dent on commodity prices while emerging market equities continued to underperform.
This new phase of monetary policy accommodation in the major currency areas spilled over to financial markets around the world. The prospect of low yields in core bond markets contributed to investors searching for yield in lower-rated European bonds and emerging market paper as well as in corporate debt. This drove spreads even lower while issuance in riskier credit market segments strengthened. Abundant liquidity and low volatility fostered an environment favouring risk-taking and carry trade activity.
... equity markets were quick to shrug off the uncertainty and extended their gains as investors expected poor fundamentals to be followed by further policy easing.
The S&P 500 posted several all-time highs in rapid succession, first on 11 April and again throughout May. Similarly, European bourses held up well in the face of negative economic news and political uncertainty.
Throughout this period, the Japanese equity market continued its relentless ascent, fuelled by the prospect of massive monetary stimulus. The rapid gains left equity valuations vulnerable to changes in market sentiment...
Larry Fink, May 2013 CNBC interview: "It just doesn't matter"
In a world in which glaringly misreporting factual news no longer generates much more than a shrug, the latest lie reported so often by the mainstream media and various 'expert' pundits it has almost become "the truth", is that that the key missing link to a global recovery - free cash flow, and its derivative, capital expenditures - are now once more rising. After all, corporations can not grow revenue (as confirmed by the most recent reported quarterly earnings) without investing in themselves, and they can't spend for maintenance or growth unless they generate Free Cash Flow: this is simple finance 101. So in order to put this pervasive lie to rest, we present the following chart showing free cash flow and Capex in the developed "G-4" region as a % of world GDP, which have now round-tripped back to 2010 levels, and ask a simple question: what growth?
THE pressure on tax-avoiders is mounting. In the latest episode Tim Cook, Apple’s boss, was called before a Senate subcommittee to explain why the tech giant had paid no tax on $74 billion of its profits over the past four years—though it has done nothing illegal. This comes at a time when America's corporate profits are at a record high, thanks to
the swift sacking of workers at the start of the recession,
lower interest expenses, and
the fact that cheap labour in emerging markets has eroded union power, allowing firms to move production offshore and defy demands for pay rises.
Meanwhile corporation tax, which makes up 10% of the taxman’s total haul (down from about a third in the 1950s) has plummeted. An increase in businesses structuring themselves as partnerships and "S" corporations, which subject profits to individual rather than corporate income tax, is in part to blame.
But tax havens are also culprits, as they lower their tax levels to lure in bigger firms.
GLOBAL FINANCIAL IMBALANCE
STANDARD OF LIVING
CORRUPTION & MALFEASANCE
NATURE OF WORK
CATALYSTS - FEAR & GREED
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Tipping Points Life Cycle - Explained Click on image to enlarge
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