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We talked last week how corporate earnings were not going to pull us out of the financial mess the globe has made for itself. It’s going to have to come from real spending in the form of capex which then provides more production (jobs) which then sustains consumption (spending). But, corporate earnings sure could throw a wrench into things. Two main things are afoot here. Back in September 2014, corporate Q1 2015 EPS was forecasted to be 10% year over year. That was quickly revised to a more modest 4%. We now stand at -2.8%. What gives? Two things: Crude Oil prices and an overly strong dollar. It’s no secret how Crude as had a less than net positive effect on the US economy. Lower capex in the US Shale sector and the accompanying job losses there are the two main things that come to mind. Next, the strong dollar’s effect. Let’s take a look at some text taken from a few companies’ latest earnings reports:

–Finally, we do see currency as a continued headwind. We factored into our guidance the headwind of approximately $0.15 to $0.20, which was roughly the same rate of devaluation we experienced in FY 2014.” –Monsanto (Jan. 7)

– “Before I share with you some of the highlights from the quarter, let me provide some background on the impact to our business from the volatile foreign exchange rates. Nearly every currency we do business in weakened against the U.S. dollar when compared against Q3 last year, last quarter or against guidance…These rate changes negatively impacted both the income statement, where we use an average rate for the quarter and the balance sheet, which is translated using spot rates at the end of the quarter. For instance, total revenue would have been $13 million higher using Q3 rates from last year, a $11 million higher using rates from last quarter, and $3 million higher using the rates given in September for guidance.” –Red Hat (Dec. 18)

– “Turning now to revenues, net revenues for the quarter were $7.9 billion, an increase of 7% in U.S. dollars and 10% in local currency, reflecting a negative 3% FX impact compared to the negative 2% impact provided in our business outlook last quarter.” –Accenture (Dec. 18)

– “Our Consumer Foods segment operating profit, adjusted for items impacting comparability, was $310 million or up about 7% from the year-ago period…Foreign exchange had a negative impact of $8 million on net sales and about $6 million on operating profit for this segment this fiscal quarter.” –ConAgra Foods (Dec. 18)

– “And as I mentioned, foreign exchange lowered reported sales by 2 percentage points.” –General Mills (Dec. 17)

– “The as reported numbers were heavily impacted by the strengthening of the U.S. dollar in comparison to other currencies. Total revenue saw a 4% currency headwind which would double what it was at the time of my guidance.” –Oracle (Dec. 17)

From FactSet:

“And with all variable costs already trimmed out of existence in the past 5 years, this can mean only one thing -millions more in layoffs, especially if the companies that comprise the above sample are also eager to maintain their record pace of corporate buybacks: something they would be unable to do with the residual cashflow that lower sales generate.”

I cannot wait to see how the BLS comes up with new and improved ways to seasonally adjust and revise the numbers as we go through the next few quarters!

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In last’s night email I asked the question, “I cannot wait to see how the BLS comes up with new and improved ways to seasonally adjust and revise the numbers as we go through the next few quarters!” I asked this almost sarcastically and I don’t know how this got by me, but look what I find today:

“Effective with the release of the January 2015 CPI on February 26, 2015, the Bureau of Labor Statistics will utilize a new estimation system for the Consumer Price Index. The new estimation system, the first major improvement to the existing system in over 25 years, is a redesigned, state-of-the-art system with improved flexibility and review capabilities. For more information on this new system, please see http://www.bls.gov/cpi/cpinewest.htm.”

Upon visiting the BLS site, they highlight three main changes.

“Imputation of sampled items unavailable for pricing. When a sampled consumer item is temporarily unavailable, its price change is imputed by the price change of other items within a geographic area. In the current estimation system, these missing prices are imputed by all the price changes within a CPI item stratum.

Imputation of off-cycle prices. Many CPI prices are collected on a bimonthly basis, but the CPI is calculated and published monthly. In the current estimation system, elementary indexes for items that are ‘off-cycle’ are imputed at no change to the current month, and combined with the monthly and ‘on-cycle’ elementary indexes to calculate the higher-level published indexes.

In the new estimation system, off-cycle indexes will no longer be used in the calculation of indexes. Instead, the prices themselves will be imputed, and thus more prices will be used directly in the calculation of the basic (item-area) indexes of the CPI.

Calculation of annual averages for bimonthly areas. Related to this change, the calculation of annual average indexes for areas published on a bimonthly basis will change. In both the current and new estimation systems, the calculation of annual averages is based on the average of 12 monthly indexes, including the six on-cycle published indexes, as well as an estimate of the off-cycle indexes.

In the current estimation system, an annual index for an area published on a bimonthly basis is based on its six published indexes, plus six geometrically interpolated off-cycle indexes.

In the new estimation system, BLS will calculate (instead of interpolate) the unpublished off-cycle indexes, and the calculated indexes for all 12 months will be used in the calculation of the annual averages for areas on a bimonthly publication schedule.”

The net impact of these changes on the All Items U.S. City Average level is expected to be minimal.”

Ok, great! My head is sufficiently spinning. My favorite part of the release is the last sentence. Essentially, they are saying “Trust us! This is not a big deal!” I have learned that when someone (especially a Government Agency) tells me there’s nothing to worry about, it’s time to start worrying. Revise away BLS!

Trade well and follow the trend, not the perma-bull OR perma-bear “experts.”

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A few days ago I wrote about how the big price drop in Crude Oil and the parallel shift down in gasoline prices was affecting consumer spending. Long story short is that since this savings comes in at about $7.50 each week, no real traction would ever be made. What are we going to do, buy an extra cup of coffee and a muffin once a week? Courtesy of the US Bureau of Economic Analysis (BEA) we got the first revision of consumer spending. We see that in Q4 2014 “Americans spent even more on healthcare, pushing the total up by $1 billion more, to a whopping $21.4 Bn, or 18% of all spending on goods and services.” When we are asked where the “de facto tax cut” that Americans got in the form of lower gas prices went and why Q4 retail sales were so dismal, let’s take a look at this chart:

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Now that the Greece crisis is solved (HA!), the world has turned their attention (and HFT black boxes) to the long awaited address of the Senate Banking Committee from the Fed Chairwoman, Janet Yellen. What will she say? Almost more importantly, what is the tone of her words? These statements and subsequent Q&A are so nuanced, it borders on insanity.

As related to policy:

*YELLEN: `PATIENT’ MEANS LIFTOFF UNLIKELY FOR COUPLE OF MEETINGS
*YELLEN: GUIDANCE CHANGE TO MEAN LIFTOFF POSSIBLE AT ANY MEETING
*YELLEN: FED WILL RAISE WHEN `REASONABLY CONFIDENT’ ON INFLATION
*YELLEN: FED WILL CHANGE FORWARD GUIDANCE BEFORE RAISING RATES
*YELLEN SAYS FED WILL REDUCE BALANCE SHEET GRADUALLY
*YELLEN: NEW GUIDANCE NOT NECESSARILY LIFTOFF IN COUPLE MEETINGS
*YELLEN: BALANCE SHEET REDUCTION MAINLY VIA HALTING REINVESTMENT

As related to the macros:

*YELLEN SAYS GDP STRONG ENOUGH TO GRADUALLY LOWER JOBLESS RATE
*YELLEN: LOWER OIL PRICES SIGNIFICANT NET PLUS FOR U.S. ECONOMY
*YELLEN SAYS FOREIGN DEVELOPMENTS COULD POSE RISKS TO U.S.
*YELLEN SAYS LOWER BOND YIELDS PARTLY REFLECT WEAKNESS OVERSEAS
*YELLEN SAYS CHINA COULD SLOW MORE AND EURO AREA FACES RISKS
*YELLEN SAYS RISKS FACING FOREIGN OUTLOOK NOT JUST ON DOWNSIDE
*YELLEN SAYS INFLATION TO FALL FURTHER IN NEAR TERM
*YELLEN SAYS IMPROVING JOBS AND FADING OIL IMPACT TO LIFT PRICES
Quincy Krosby, market strategist at Prudential Financial, said the market reaction to Yellen’s testimony indicates that it was perceived as dovish.

“The 10-year yields fell, the dollar gave up gains and stocks rose, even though those moves were not huge. At this points, just as the Fed is data-dependent, markets are data-dependent too. Investors will be watching every data point carefully,” Krosby said.

“Today’s Janet Yellen is the same Yellen who in 1994 warned Alan Greenspan to be careful about raising rates too soon and too fast. The Fed needs to see more evidence that the economy is truly on a viable trajectory before beginning to normalize interest rates. They would not want to be in a position where they would have to cut rates shortly after the first hike,” she said.”

Trade well and follow the trend, not the perma-bull OR perma-bear “experts.”

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We all have very busy lives. Between our family, friends and careers it’s hard to find enough hours in the day to get everything done. When the weekend rolls around, we finally allow ourselves some time to step back and relax. It’s easy to let the weekend get away from us. But come on Greece! You had one very easy homework assignment to get to us Monday morning. You said that you were going to submit to us the list of economic reform commitments that you were going to implement so we would float you the money you need to keep the lights on and the European Union firmly intact. We learn from marketwatch.com that (in increasingly Greek fashion) that:

Greek officials said late Monday that the list would be sent the following morning, past the original midnight deadline. Eurozone finance ministers are due to review the proposed reforms during a conference call Tuesday afternoon.

George Saravelos, strategist at Deutsche Bank notes:

The Greek government’s capacity to agree and deliver on the conditionality of the current program remains the key source of uncertainty under the current agreement. Most immediately, the government will have to navigate the fallout from today’s agreement, as well as the ‘reform list’ that will need to be submitted on Monday.

On a more forward-looking basis, it is likely that the government will have to agree to fresh revenue generating measures: even with a downward adjustment to this year’s fiscal targets, budget execution for this year is meaningfully off-track. The road ahead remains long, and it remains unclear how the current government can navigate between the commitments it has made to Europe with competing domestic political demands – both internally within the Syriza party as well as with the electorate.

If these guys can’t even send in the note that promises what they are going to do and when you are going to pay on time, how quickly do you think you will see the cash when the actual money comes due?

I believe it was Whimpy from the Popeye cartoon series who famously uttered the phrase: “I will gladly pay you Tuesday for a hamburger today!”

I am starting to think that Greece’s calendar doesn’t have a Tuesday on it.

***This morning, the plot thickens. From Zerohedge:

“Well, as it appears Greece did actually manage to sneak the revised list through in time just before midnight on Monday, yet another indication that someone was lying becase as the WSJ reported “Dijsselbloem said he received the list of reforms at 11:15 on Monday evening. That means Athens submitted the list in time, despite an announcement by the Greek government on Monday night that it wouldn’t send the measures until Tuesday morning. Greek Finance Minister Yanis Varoufakis also sent the list of reforms to the commission, the ECB and the IMF” aka the Troika.”

Now, who are we to believe?

Trade well and follow the trend, not the perma-bull OR perma-bear “experts.”

Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banking mafia.

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Now that Greece should be off of the front page of the financial news, the markets can get back to what they love deary: central bank liquidity. Since Greece didn’t throw a monkey wrench into the gears of the EU and with the ECB QE about to begin, the S&P500 made new all-time highs again Friday.

We have all heard a lot about central bank easing over the last several years; however, have you seen a list of them all? Or a chart perhaps? Below is a chart of exactly that from Morgan Stanle

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Of all of the central banks on the chart, 29 are in the expansionary mode.

Trade well and follow the trend, not the perma-bull OR perma-bear “experts.”

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Once upon a time long, long ago, in a mystical land of non-central bank planning, economic data used to matter. Much like today, economic reports were released nearly every day. The difference between then and now, however, is that in the mystical land of “semi-free markets” the data mattered. Today it is of no matter whatsoever. Now, all that counts is what size will the next global QE be.

Let’s take a look at this week’s data and search for a trend.

  • Monday – Markets were closed for President’s Day.
  • Tuesday – Empire State Mfg Index was worse than expected. Housing Market Index (HMI) was worse than expected. E-Commerce retail sales report was even worse than expected.
  • Wednesday – MBA Purchase Applications were expected to be bad, but it was actually even worse than that (-9.0% vs. -13.2%). PPI (inflation) data was worse than expected, from the Fed’s point of view. Industrial Production data was 50% worse than expected.
  • Thursday – Weekly Jobless Claims were better than expected. The Philly Fed Survey was worse than expected. Leading Economic Indicators (LEI) were worse than expected.
  • Friday – Will it really matter?

One wonders why Friday’s data will matter, or any economic reports for that matter, because the whole time that nearly every data point was worse than expected, the S&P500 rallied: New highs, new highs…bad data?…”meh” new highs.

Apparently the oil market was feeling left out. Oil traders tore a page out of the equity trader playbook when they got today’s DOE data: much higher (worse) supply…and it rallied like a scalded cat running up a tree.

Isn’t it awesome?

Trade well and follow the trend, not the perma-bull OR perma-bear “experts.”

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Seems like things are coming to a head today over in the Eurozone while the US markets idly watch. We see that Bloomberg notes:

UPDATE: *EU FINANCE MINISTERS’ TALKS WITH GREECE OVER FOR TODAY, GREECE SAYS WON’T TAKE ORDERS ON BAILOUT

EU President Jeroen Dijsselbloem had some words to say highlighted here:

*DIJSSELBLOEM SAYS MINISTERS WERE DISAPPOINTED BY WEEKEND TALKS

*DIJSSELBLOEM SAYS BEST WOULD BE EXTENSION FOR GREEK PROGRAM

*DIJSSELBLOEM SAYS EXTENSION WOULD ALLOW FLEXIBILITY FOR GREECE

*DIJSSELBLOEM SAYS EXTENSION WOULD INVOLVE COMMITMENTS

*DIJSSELBLOEM SAYS WOULD NEED AGREEMENT TO ROLL BACK MEASURES

*DIJSSELBLOEM SAYS WE STAND READY TO CONTINUE DISCUSSIONS

*DIJSSELBLOEM SAYS IT’S UP TO GREECE TO DECIDE ON EXTENSION

*DIJSSELBLOEM SAYS COULD BE EXTRA EUROGROUP ON FRIDAY

*DIJSSELBLOEM SAYS WE HAVE THIS WEEK, BUT THAT’S ABOUT IT

I think the “deadline” was just extended by 40% if my math is correct!

Clearly, the EU is worried. Why would they not? What does Greece have to lose? They seem to be bargaining from a point of weakness really well. They know that the EU cannot afford to provide a model for future governments to pull the same gambit or the EU faces the very real possibility that whatever is providing coherence in their economic “union” will have about a many teeth as a three-month old child.

But, this is just political banter right? I know the markets were for all intents and purposes closed over here in the US, but those that were forced to man the desk had some fun for sure:

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On the Brink?
Seems like things are coming to a head today over in the Eurozone while the US markets idly watch. We see that Bloomberg notes:

UPDATE: *EU FINANCE MINISTERS’ TALKS WITH GREECE OVER FOR TODAY, GREECE SAYS WON’T TAKE ORDERS ON BAILOUT

EU President Jeroen Dijsselbloem had some words to say highlighted here:

*DIJSSELBLOEM SAYS MINISTERS WERE DISAPPOINTED BY WEEKEND TALKS

*DIJSSELBLOEM SAYS BEST WOULD BE EXTENSION FOR GREEK PROGRAM

*DIJSSELBLOEM SAYS EXTENSION WOULD ALLOW FLEXIBILITY FOR GREECE

*DIJSSELBLOEM SAYS EXTENSION WOULD INVOLVE COMMITMENTS

*DIJSSELBLOEM SAYS WOULD NEED AGREEMENT TO ROLL BACK MEASURES

*DIJSSELBLOEM SAYS WE STAND READY TO CONTINUE DISCUSSIONS

*DIJSSELBLOEM SAYS IT’S UP TO GREECE TO DECIDE ON EXTENSION

*DIJSSELBLOEM SAYS COULD BE EXTRA EUROGROUP ON FRIDAY

*DIJSSELBLOEM SAYS WE HAVE THIS WEEK, BUT THAT’S ABOUT IT

I think the “deadline” was just extended by 40% if my math is correct!

Clearly, the EU is worried. Why would they not? What does Greece have to lose? They seem to be bargaining from a point of weakness really well. They know that the EU cannot afford to provide a model for future governments to pull the same gambit or the EU faces the very real possibility that whatever is providing coherence in their economic “union” will have about a many teeth as a three-month old child.

But, this is just political banter right? I know the markets were for all intents and purposes closed over here in the US, but those that were forced to man the desk had some fun for sure:

I won’t even bother to show you a Greek Bond chart!

At any rate, I think we have some fireworks to look forward to this week!

Trade well and follow the trend, not the perma-bull OR perma-bear “experts.”

Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banking mafia.

TradeWithLarry

The market was very quiet (read: dead) on Tuesday; or using Fed-speak, it was patient. Could it possibly get deader, or even more “patient?” Yes, Wednesday was ridiculously slow despite the release of the FOMC Minutes from its last meeting.

It were the minutes and headlines below that should have moved the market in the afternoon. It did not.

  • MANY FED OFFICIALS INCLINED TO STAY AT ZERO LONGER: MINUTES
  • MANY OFFICIALS FELT DROPPING `PATIENT’ MAY LEAD TO DATE FOCUS
  • MANY FED OFFICIALS SAW RISKS IF FOREIGN WEAKNESS WORSENED
  • FED OFFICIALS AGREED POLICY SHOULD STAY DATA DEPENDENT
  • FED SAYS CONTINUED TEPID WAGE GROWTH COULD RESTRAIN SPENDING
  • FED EXPECTED STRONGER DOLLAR TO BE PERSISTENT DRAG ON EXPORTS
  • A FEW FED OFFICIALS NOTED RISK DOLLAR COULD STRENGTHEN FURTHER
  • FED MINUTES NOTED RISKS FROM CHINA, MIDEAST, UKRAINE, GREECE
  • FED OFFICIALS SAW RISKS TO OUTLOOK NEARLY BALANCED AT JAN. FOMC
  • FED OFFICIALS SAW RISKS TO OUTLOOK NEARLY BALANCED AT JAN. FOMC

A couple of key paragraphs in the text were…

Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time.

…and…

There was wide agreement that it would be difficult to specify in advance an exhaustive list of economic indicators and the values that these indicators would need to take. Nonetheless, a number of participants suggested that they would need to see further improvement in labor market conditions and data pointing to continued growth in real activity at a pace sufficient to support additional labor market gains before beginning policy normalization.

In the first paragraph the Fed is saying that the risks in the system are making them keep rates low for even longer than expected. But this is odd for two reasons; the stock market sees NO risk whatsoever, and the president has assured us that “the shadow of crisis has passed.” So are the market and the president wrong? What gives?

In the second paragraph, the Fed is admitting that it has no idea what data it will need to move on rates. It will simply know it when the time is right.

Trade well and follow the trend, not the perma-bull OR perma-bear “experts.”

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As we get a brief respite from the “Grexit” banter for a couple of days while the Troika waits a few days to kick the can down the road, we can get back to looking at something far more important to those in the U.S., the “recovery” we are (not) experiencing. If you listen to television, things are looking up! The stock market continues to make new high after new high! How bad can it be if that’s true? Let’s be honest with ourselves. The U.S. economy, however it gets driven, needs production. In order to produce, individuals need jobs. Corporations will not lead the way out of this mess for any sustained period of time. So where are we on the individual front? Not good. Labor force participation for those aged 16-54 is the lowest it’s been since the ‘70s.:

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You can keep your “unemployment rate”, labor force participation is what is important (along with wages).

Retail sales are down. But I thought that the huge drop in the cost of gasoline was going to be a defacto tax cut? You could argue that. But, unlike your tax refund check that comes all at once, this “tax cut” comes in the form of drips. Lance Roberts of STA Wealth Management notes:

“While the typical consumer will save between $500 and $800 this year from lower gasoline prices, they do not receive a check up front. Instead, the savings accrue gradually as they fill up their tanks from week to week. On a weekly basis, the saving works out to between $10 and $15, which is meaningful for lower and middle-income households, but not enough to finance a spending spree, particularly right off the bat.”

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We have a lot of work left to do.  Stimulating the economy ten bucks at a time just is not going to cut it!

Trade Well and follow the trend, not the perma-bull or perma-bear “experts”.