Gold falls, leveraged funds get margin calls and triggers Apple sell off?

Spurious correlation? or something else, imagine telling someone, "Hey I have a great idea, let's short Gold and Apple, the world is in a deep recession, those securities are the worst."

 



 All kidding aside, I am wondering if some large players are getting creamed on lower gold prices and are selling Apple stock to meet margin calls. The definition of forced selling and maybe what you could call panic selling. If the price of a metal gets high enough it is just as easily in a bubble as housing was (or Tulips). Strange world.

For example:

Appaloosa Management LP, the hedge-fund manager run by billionaire David Tepper, cut its stake in Apple Inc. by 41% last quarter as the computer maker slumped while stock markets rallied.

Appaloosa held 540,000 shares of the Cupertino, California- based technology company at the end of March, valued at US$239-million, down from 912,661 shares at the end of last year, according to a regulatory filing today. Apple extended losses after the filing, declining the most in three weeks.
Tepper, who had been investing in the stock since the end of 2010, pared his stake as Apple declined 17% in the first three months of the year, even as U.S. stocks added 10%. Tepper said in an interview with CNBC yesterday that he sold Apple shares because the maker of the iPhone and iPad devices hasn’t been “evolutionary” or “revolutionary” recently."

Of course Tepper is telling everyone the truth about why they sold Apple (sarcasm). If they'd lost money on a bad bet on Gold you think he'd go on CNBC and say, "Hey we got into some deep #$@! We're levered up the arse and had some margin calls and well we had to sell the the largest and most liquid asset we had to raise cash and not move the market."

Wage Inflation in the US?

I've thought about the same topic David writes about below. Good to see I'm not absolutely mad and that this may actually happen.

David Rosenberg: A Bond Bull Turns Bearish

How do we get to full employment and improved national education from the launching point of David Rosenberg's very recent call (at the conference and elsewhere) that we will soon see inflation and the onset of a bond bear market? I must say that he surprised a few of us with his conversion from bond bull to bond bear. But the reason why he converted surprised us even more. I am not going to be able to do justice to his impeccably reasoned, highly detailed presentation in this short space, but let me hit some highlights.
Specifically, Rosie thinks that the Fed is going to be surprised by wage-push inflation. How could we see inflation in wages in such a soft labor market? That was the first question in my mind, and the following charts give me some reasons for my question.
The present unemployment rate is still higher than at any time in the last 60 years, except after recessions. The Great Recession ended four years ago, and unemployment is still stubbornly high. Indeed, this is the slowest "jobs recovery" we have ever experienced. The current level of unemployment has never been seen four years after the end of a recession.

And those who lose their jobs are staying unemployed longer. The fact is that the mean duration of unemployment is still almost double what it has ever been. Average length of unemployment is 37 weeks. When the recession ended, it stood at 23 weeks. This is structural, not frictional, unemployment. Ninety million American adults now subsist outside the official labor force –It could be there's an underground economy that we need to capture. The pool of available labor for the business sector is shrinking 2% per year.

Worse yet, the unemployment rate is still stubbornly high in spite of an unprecedented rise in the number of people who are no longer counted as being in the labor force. These are people who are no longer looking for jobs.We are back to workforce participation levels not seen since the 1970s. A good 5% of US citizens who are able to work are no longer are looking for work. Part of this trend is due to alternatives to employment becoming easier to pursue. Millions have been added to the disability rolls – some 4 million since the beginning of this century and almost 2 million since the beginning of the Great Recession (and still rising at an alarming rate!). Others have gone back to school, borrowing money in the form of student loans, which have topped over $1 trillion and are the only form of consumer credit that has been on the increase.
As a quick aside, we are also seeing skyrocketing rates of late payments as student loans overwhelm the ability of borrowers to pay. This is a true crisis brewing, as student loans are the only type of debt that cannot be discharged in bankruptcy. Student loans can make you an indentured servant for a very long time.
Some would-be workers find that in some states they can collect more on government assistance than they can earn by working lower-wage jobs, and thus they have no economic incentive to look for jobs that would actually lower their income. As I wrote in a recent letter, this is why we are seeing a large rise in non-reported incomes and jobs. And finally, there are those who are just discouraged. Jobs seemingly do not exist for their skill sets and in places where they can access them.
With so many people not participating in the labor market, isn't it reasonable to assume that if jobs again ever become available, these people will rejoin the official workforce? And wouldn't that create a shadow supply of workers that would keep wages suppressed for a long time?

Wage Inflation?
Maybe yes and maybe no. Rosie makes the case that there are numerous jobs available and that the numbers are rising, and there is data that supports his argument. I will reproduce here a few of his charts (out of the 59 he showed!). Job openings are on the rise and are back to levels last seen in the middle of the previous decade.
And what about all the businesses that have jobs on offer but can't find people to fill them? The following chart is from Rosie's and my mutual friend William Dunkelberg, chief economist for the National Federation of Independent Businesses. While job openings are not at all-time highs, the trend is encouraging.


The next chart shows the ratio of job openings to new hires. It is at a six-year high. As Rosie stated (inexact quotes, from my notes):

Looking for labor? Labor demand is not weak – JOLTS survey shows job openings up 10%, employers can't find qualified applicants. Firings plunge, layoffs 10% lower than in 2007. Number of job quitters rises – people leaving jobs to go to new ones, the 'take this job and shove it index.' 7.5% unemployment is actually the new 4.4%.

What are companies doing? More overtime, longer work week. Combination of rising wages, productivity growth heading lower. We've taken a lot of inventory out of the labor market. Keep your eye on unit labor costs. Correlation with inflation – unit labor costs are on the rise.

Employees are increasingly willing to leave a job and go to another one, yet productivity has recently begun to fall.
Yet young people are having increasing difficulty landing jobs. People aged 20-24 are still unemployed at levels not seen unless a recession is involved (see chart below). And research keeps coming in that more than 50% of college graduates are stuck in jobs for which a degree is not needed.

Even though the headline unemployment rate is falling, a large part of that drop is due to the precipitous plunge in the participation rate, as well as a rise in low-paying jobs. Curiously, it now seems a disproportionately high level of temporary jobs is no longer a precursor to economic recovery but is a new structural fixture.
Part of the responsibility for that increase in temporary employment can readily be laid at the feet of the Affordable Healthcare Act (Obamacare). Employers do not have to pay health insurance for temporary employees; that burden falls on the employee.
Healthcare for lower-wage employees can be a huge percentage of overall labor costs. While you may argue that employers should cover workers at all levels, the data coming in says that is not happening – thus the rise in temporary workers. Even an established employer like UPS is hiring new temporary employees in low-skill jobs at low wages without health insurance for their first year and cutting back on employees with major seniority (who cost more than double what new employees do), not giving them enough hours to survive and forcing them into the temporary market to meet their basic living needs.
We see evidence of this happening system-wide in the data showing lower hourly wages and a reduced number of hours in the work week. And those trends seem to be stabilizing. We are seeing the creation of a two-tier market, an upper tier for those with skills in demand and a lower one for those whose skills just do not command a premium in today's marketplace.
Rosie makes the argument that there is a shortage of skilled labor and that the price for those workers is going to rise, surprising the Federal Reserve, which still looks at historical data from a world that no longer exists. And he says this segment of the labor market is going to be large enough to create wage-push inflation.
It is an interesting argument, and contradicting David Rosenberg is generally not a good idea, although he did not convince Lacy Hunt or Gary Shilling, at least not at the conference. But at any turn there is always someone who has to lead the way. His arguments are something we must pay attention to.
In the panel discussion later in the day, I agreed that there are two labor markets, but the divide is between workers with skills that are in demand and workers whose jobs require no special experience or education.

the warning signs of an asset bubble - bonds, stocks & the search for yield redux

May 16, 2013 - Investors are searching for yield and returns, this happened in 2007 and we've all been warned about inflation but what happened in 2007 was that a bubble formed in housing and if you remember, inflation was stable as far as the government measures it through CPI core and CPI including food & energy. When housing was in a bubble, people denied, it failed to deflate, it seemed like the party would never end. Today, in the absence of demand and revenue generating enterprises and cheap money it makes sense to lever up and invest in the largest most liquid markets on earth treasuries, bonds, then high yield bonds, then finally dividend yielding stocks.

The financial markets in the US are an asset bubble in 2013. Real GDP for the US and Europe are forecast to remain low and downright negative respectively in 2013 and possibly 2014. While China struggles to rebalance in a lower demand world towards a consumer led economy or at least more consumer based. The rise in asset prices do not reflect current fundamentals or even 1 or 2 years out. Commodity prices have declined in pace with slower global demand, a downright recession. On top of this there was probably a bit of oversupply and now it is a lot of oversupply, thus commodity prices are forecast to continue to remain flat, despite all the money printing.


Valuation: Impossible to Properly MeasureWhile market sentiment and valuation are separate constructs, they are both affected by the Fed's monetary policy. Continuing to use traditional Wall Street axioms on valuation without considering the current environment is inane. It is impossible to see clearly by looking at theS&P(INDEXSP:.INX) through the lens of Price to Earnings without factoring in the Fed buying of $85 billiona month in debt. We are not saying that stocks are expensive or cheap. Rather, we are saying that traditional valuation analysis has been rendered impossible by the Fed.

Furthermore, we believe the ferocious buying back of shares by companies from issuing cheap debt is thetruelow valuation story. However, it is a story that is anchored on a historically unprecedented and unsustainable catalyst of Fed bond market manipulation.

These are negative short term fundamentals on a global and macro scale. This is an asset bubble built to combat deflation. This was Bernanke's specialty and PHD thesis. If the asset bubble pops the underlying deflationary current will join the bursting current from the deflating asset bubble.  This asset bubble is in financial assets as opposed to the last bubble that was in housing. Asset inflation encourages those with stocks/bonds/ financial interests to spend more as their apparent wealth increases. It's the same story as the credit crisis except instead of housing, financial assets are at the center of this story this time around. In 2007 subprime borrowers took equity out of homes and spent. As long as house prices rose this party went on.As fund managers run out of BONDs to invest in at reasonable prices they're rushing into high yielding dividend stocks at low trailing P/FCF and imo (were) good value stocks = MSFT LXK AAPL.

Debt: Connection with Equity Markets and Divergence from IssuanceIt is also important to look at the market structure issues within the debt markets. Corporate issuance had its busiest January ever with $412.3 billion vs. the all-time high January issuance of $407.2 billion in January of 2009. The obvious difference is the massive narrowing of spreads from historically wide levels in 2009 to all-time lows today. We believe the Fed's QE programs have turned equity markets into expressions of "bond yield complacency" and therefore the two markets are inextricably linked. This link manifests itself in the capital market phenomenon of Profit and Loss (PnL). For any market participant, whether institutional like a pension or hedge fund, or an individual, it's the loss of principal that causes aggressive net selling.

The real risk here is the global margin call that can occur from simply too much long leverage chasing artificially low yields. The bloat in the system on the long side in bonds is now associated with long bloat on the equity side. Margin calls and selling in junk bonds and down bond funds will bleed over into equity funds and vice versa. The Fed would have zero control over a global PnL margin call on bond principal scenario.

Read more: http://www.nasdaq.com/article/us-stocks-overleveraged-markets-at-risk-of-global-margin-call-cm238313#ixzz2SXP7un6C

http://etfdailynews.com/2013/04/17/the-great-duration-rotation-continues-but-for-how-long/


UPDATE - 5/29/13 approximately 13 days later:

This chart



now looks more like:

and the culprit?

The Chart below is concerning because it looks as if hedge funds also joined the fun in 2013 and have been trying to play catch-up with the S&P 500, couple this with record high profit margins, high valuations, and a flood of money into dividend yield stocks, you have a crowded trade. Who else is coming?

Reviewing my thoughts on August 8 th 2011

wild monday.

1) the s&p downgrade affected fixed income instruments across the US except for the very thing that was downgraded.

2) floating rate bonds are down 7%, yielding nearly 7%

3) High yield bonds are down 3 to 4%, yielding 7%+

4) municipal bonds are down 5%, probably yielding nearly 9% on a tax equiv basis

5) equities are down 3.4% and down 15% in a month

6) many stocks, e.g. Siemens, Dow chemical are now yielding nearly 4%.

If you consider the # of unemployed + # of discouraged workers and assuming their contribution to GDP was maybe half the average GDP per capita for the USA, this means that US GDP should be lower by  $1.2 to $2 trillion dollars so not $14.12 but maybe 12.1 to $12.9 trillion in GDP. (This is all assuming a natural unemployment rate of 5% or so).

The last time the US was at those GDP levels was 2004 to 2005 when the S&P 500 ranged from 1,000 to 1,150, pretty close to where it is today.

GDP contracted from 14.37 to 14.12 over the 2008 2009 period.

Now if GDP contracted another 8 to 13%, this should result in a stock market valuation of 1000 to 1150 but you can bet we'd first see a market crash unlike anything we've ever seen in history. Government deficit spending has made up this 1 to 2 trillion dollar gap over the last few years (Unemployment benefits, medicare, social security, military spending etc...) but it seems congress, S&P, etc are more willing to stop this spending, which can only mean a contraction in GDP is imminent assuming inflation rates around 2%.

Another route is a coordinated (or not) devaluation of the dollar to monetize the debt, which will oddly result in chaos in Brazil, SE asia, China, etc.. where rampant inflation or currency appreciation will result in companies shifting production to other countries. Quite baffling how US efforts to create inflation shows up in emerging markets but this is the result of neo-mercantilist policies in these countries. Neo mercantilism doesn't work if there are multiple nations attempting to weaken their currencies.

Bank of New York Mellon's fee on cash balances over $50 million is a taste of what's to come. In a sense this fee is equivalent to some measures Brazil has taken to limit inflows that are forcing Brazil Reais appreciation--a  tax on inflows. This is a currency war between the neo-mercantlists and free trade countries.

In this nightmare scenario, the US should charge a fee to secure investments in treasuries, given the revolts and instability likely to ensue in neo-mercantilist and 3rd world countries, the relative safety of treasuries, whose 'collateral'  or 'assets' is/are ensured by our military.

Anyway, I hope we don't go down that route, neither does any other nation, there has to be a global accord here soon to coordinate a 'rebalancing'.

u6 vs u3 vs u6 - u3 vs s&p 500 etc

Strategic default

Home prices have to go down, banks need to reduce prices they ask for foreclosures until market accepts the new level, only then will people be willing to risk both their capital, future income, and be willing to subject themselves to the rigorous underwriting process.

This is a deflationary trend. These are underutilized assets. Bank assets, fnma, freddie mac, and any mortgage assets held by gov't overvalued. Bofa's zombie bank creation should reflect this deflationary trend through write-offs going forward.

Gov't is trying to inflate away debt problems and show a USD based profit on the mortgage assets (or break-even) all the while the dollar is losing it's value, and inflation is rearing it's ugly head elsewhere. The Bernank sees inflation is already out of control but is too scared to raise interest rates too quickly. Sadly this divergence between home prices declining and food/fuel costs increasing will net a weird CPI that will vary based on two conflicting trends.

Optimistically at some point economies recover from defaults (which is what printing money amounts to) jobs return at a lower salary base but at least people are employed. Banks must write-off losses and reduce home prices. Local governments have to figure out where else to obtain tax revenue other than property taxes.

“At this point new homes are likely to continue to lose to existing homes because distressed properties pose a better bargain for buyers,” said Millan Mulraine, senior U.S. strategist at TD Securities in New York. “We’re not seeing a strong rebound in the horizon because permit approval is just marginally above starts.”

“Many potential home buyers are finding mortgages difficult to obtain and are also worried about additional declines in house prices,” Bernanke told lawmakers March 2.

For housing, employment “is the most important part today or biggest impediment,” said Larry T. Nicholson, chief executive officer of Ryland Group Inc. (RYL), a Calabasas, California-based homebuilder catering to first-time buyers.

Whether potential buyers “have a job and they’re going to keep their job or whether their hopes of employment are out there is still the biggest challenge for us today,” Nicholson said at an investor conference March 8 in Orlando, Florida.

BP needs to be able to borrow...very bad until they can easily

There are already signs that trading partners are becoming wary of BP’s financial outlook; one market participant, Bank of America Merrill Lynch, is halting long-term contracts with BP. The company’s deteriorating credit rating — on June 15, it was downgraded byFitch to one notch above junk bonds — makes it harder for traders to cheaply deploy vast amounts of cash. And with its stock down by more than half since the blowout in the gulf, BP can only watch as rival firms try to poach its best traders.

“A lot of the swagger comes from the amount of money they have to trade with,” said Craig Pirrong, a director at the University of Houston’s Global Energy Management Institute. “And traders realize they don’t have the capital they had just a couple of weeks ago.”

It is a humbling moment for a secretive unit that earns the company $2 billion to $3 billion annually and has long inspired fear and envy among rival traders.

BP declined to comment for this article.