By
The
Inflation Trader
:
I suppose it is more interesting to have a whole plateful of
interesting news and data to look at than to be fixated on one
thing (say, Europe), but it does make it much harder to figure out
what things the markets will take seriously. Note that this is
distinct from the things that the markets
should
take seriously.
For example, Initial Claims launched higher Thursday, to 388k,
the highest level since June. This was clearly a correction from
the incredible drop last week, which was the result of an error. In
the mountain-to-molehill continuum, this definitely falls on the
"molehill side," as did the drop last week, but S&P rose 8
points on the release last week (which was obviously flawed) and
dropped a mere 2.5 Thursday on the reversal.
Maybe that should tell us something about sentiment, but as
investors we really ought to be ignoring both of them and focusing
on the fact that the true run rate of Claims seems to be pretty
stable at around 365k-375k, and hasn't improved measurably since
January. To be sure, that doesn't mean it isn't
about
to improve. In 2011, Claims were basically stable around 420k until
October, and then improved into the end of the year to about the
current level (see Chart, source Bloomberg).
(click to enlarge)
We also shouldn't worry too much about Vikram Pandit, the ousted
CEO of Citigroup (
C
). It makes good voyeuristic television to wonder about why Mr.
Pandit was dismissed and to go back and forth about his reputation,
but it doesn't mean anything for most of us. It probably doesn't
even mean very much for Citi. The 1980s-90s global giant überbank
model is dying, as I first predicted back in 2008 it would.
It's a very simple analysis: lower turnover, smaller margins,
and less leverage means lower return on equity. It does so by
definition, since these are the three components of the DuPont
model. And, since at least 2008, the trends were really obvious:
regulators are demanding less leverage, and have decimated
off-balance-sheet leverage so that the effect is larger than it
seems; turnover was almost surely going to ebb because banks were
weaker and customers more cautious; and margins were going to be
depressed by the evisceration of truly structured business and
movements of most products to exchanges.
To be fair, we didn't know Dodd-Frank was going to enshrine
these trends in legislation, but it was obvious where they had to
go. So big banks will rally, big banks will sell off, but the
fundamental pressures on the business means that banks will need to
shrink and specialize to survive. So Mr. Pandit? He could no more
have saved Citi in its current form than he could have turned back
the tides, and neither will the next CEO.
The formal establishment of the ESM, with a tiny sliver
(~$32bln) of leverage-able capital, could potentially mean more,
but only if it's used intelligently. On past history, that seems
unlikely, but in any event until it isused it doesn't mean
anything. I guess it means more than the two items above.
What about the rotten mid-day earnings from Google (
GOOG
) (horrendous) and Microsoft (
MSFT
) after the bell (awful)? Now, when the analysts tell us not to
worry because something isn't very meaningful,
that's
when I start wondering about how important it is. I should say I
couldn't care less about either of these companies. I still can't
figure out how Google makes $36.5 billion (in 2011) from search.
Who actually clicks on those ads? I once used a Google placement to
try and sell my book. I generated millions of impressions, a couple
hundred clicks, and sold one book. The campaign cost me $200. It
was mainly an education expense because I was curious how it
worked. It doesn't.
Oh, I'm sure you can sell some product through cute banner ads,
but it's only attractive if it's dirt cheap. And if it's dirt
cheap, how do you sell $36.5bln of it? Even more, how do you keep
growing that chunk, when it is getting harder and harder to keep
attention on any given website or search engine? As I said, I don't
understand Google's business and I don't much care about the
results. I understand Microsoft's business a bit better, since it's
essentially a slow-growing industrial concern now that churns out a
set of products (buggy software) that dominate their niches. But it
still doesn't matter to me, because I don't own MSFT (or GOOG or C,
for that matter), and likely never will.
But does it matter to the market? It's only Microsoft and
Google, right? Sure, and it was only Stonewall Jackson who got
killed at the Battle of Chancellorsville. It matters when the
generals fall, especially late in the year. I'm not saying it means
that stocks are going straight down, but it is not a good thing,
and it may matter.
The 30y TIPS auction Thursday doesn't matter to most observers,
but it matters to me. The auction was good, better than was widely
feared. After all, the last few TIPS auctions have looked very
weak, and this was $7bln of a 30-year accreting issue. It's a lot
of duration (roughly the equivalent of $19bln 10-year TIPS), but
the market needs duration in inflation-linked product. Last year,
the Fed took out of the TIPS market as much as the Treasury was
increasing issuance in that sector, which is one of the reasons
that TIPS yields are as low as they are.
There is a shortage of inflation-linked paper (and a great
opportunity to issue, incidentally, although corporate issuers in
the U.S. are always remarkably reticent to issue real bonds for
some reason), and especially at the long end of the curve where
inflation matters more than at the 5-year point. Not every TIPS
bond auction has gone well, or will go well, but it doesn't
surprise me much when they do.
See also
Hurricane Sandy's Impact On Airline Profits:
Overblown
on seekingalpha.com