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The Great Stock Buyback Craze Is Finally Ending

As we reported last night, whether as a result of Snowden revelations and NSA blowback by BRIC nations, or simply because the global economy is contracting far faster than rigged and manipulated markets worldwide will admit, IBM's Q1 revenues not only missed consensus earnings, but dropped to their lowest level since 2009. And yet, IBM stock is just shy off its all time highs and earnings per share have been flat if not rising during this period, leading even such acclaimed investors who never invest in tech companies as Warren Buffett to give IBM the seal of approval. How is that possible?

Simple: as we forecast first in 2012, all that investment grade companies like IBM have done in the New Normal in order to preserve the illusion of growth, is to use cash from operations, or incremental zero-cost leverage, to fund stock buybacks with the express goal of reducing the number of shares, and hence dilution, in the EPS calculation. In essence a balance sheet for income statement tradeoff. Earlier today, David Stockman touched just on this issue.

However, that "great stock buyback craze" as we call it, is finally coming to an end.


Before we explain, in order for readers to get a sense of the true perspective of how massive IBM's stock buybacks have been over the past two years, here is a chart showing the quarterly amount of net debt issued by Big Blue as well as the total notional in stock buybacks.



And yes, in the just completed quarter, IBM bought back a record $8+ billion of its own stock.

Before we proceed, for those wondering if IBM is allocating more cash to buybacks or capex, here is a quick and simple explanation.


As the chart above shows, since 2012, IBM has used roughly four times as much cash to spend on stock buybacks, as it has on capital expenditures. And not only IBM: this relationship is largely true of most investment grade companies. Incidentally, for anyone curious why there is no revenue growth, show them this chart. As long as corporate management teams seek to appease hedge fund raiders and activist shareholders who merely intend to use a company as a leveragable piggy bank vessel for a brief period of time, and buybacks explode at the expense of true investment in the future by way of capex, there simply can not be true organic growth. Period.

Now going back to the original topic, here is the first chart above presented in the form of a snapshot in time, showing that since the start of 2012 nearly identical amounts have been spent to fund stock buybacks as has been raised through net debt issuance: some whopping $34 billion of buybacks to be precise.



Summarizing the chart above: in the past 2+ years, virtually every dollar in debt IBM has issued has gone for shareholder friendly actions (this chart does not include some $8.8 billion in dividends over the same time period).

Which brings us to the topic at hand. While for a over a year, starting in 2012, IBM generated enough cash to where the incremental debt-funded buybacks did not result in a major change in the company's net leverage, starting about a year ago, organic cash flow declined so much that IBM had no choice but to see its net debt surge, and in fact since Q1 2012 has risen from $20 billion to nearly $35 billion, a 75% increase in just about two years!



But while net debt soaring is an unpleasant, if perfectly expected consequence of trying to mask income statement weakness with ever more debt, the piece de resistance is a chart showing IBM's Debt to Equity ratio. Because while a company can grow its debt indefinitely for a long time, unless it is also generating retained earnings, the party is ending. And as of this quarter, IBM's debt to equity ratio has risen to the highest on record, surpassing even the highs hit during the Lehman crisis!


One can be certain that the rating agencies are certainly taking a long hard look at this massive jump and are currently wonder if and to what degree they should cut IBM's credit rating.

Which, in turn, leaves Big Blue in a very unpleasant situation: should it continue buying back stock at record levels, all funded through new debt issuance, but at least preserving for one more quarter the illusion that EPS is stable and maybe even growing while revenues keep declining in the process risking the very basis of what allowed the company to kick the can for so long, its pristine credit rating, or should IBM finally throw in the towel, and instead preserve its balance sheet while allowing EPS to finally track revenue growth. Or lack thereof.

Considering that for IBM its balance sheet is far more precious than its income statement and what its stock does over the near-term (all the more so since unlike many other companies it is not being accosted by random pesky hedge fund activists) especially since its price per share is just shy of all time highs, we can only assume that IBM will promptly slow down if not end outright, its stock buyback gimmick routine. First IBM, and then every other investment grade company that like Big Blue has postponed the day of income statement reckoning by unleashing record amounts of debt on what was once upon a time a pristine balance sheet.

Which is naturally great news for those who are sick and tired of every form of manipulation and rigging big and small that has been plaguing the market ever since Bernanke made capital markets a policy vehicle for the Fed's central-planning mandate. Because once the buyback fraud is gone, and the crackdown on HFTs' market rigging and order frontrunning practices is complete, the only entity responsible for a criminally manipulated market will be none other than the Federal Reserve. Luckily, with Yellen in charge, it is only a matter of time before that final support of this epically-rigged travesty formerly known as the market, gives way and ushers in the grand reset so critical for restoring investor faith in what was once a real and fair marketplace.


VIX-slamming, USDJPY-ramping, BTFDe-escalating muppetry and we end the week near the highs with the S&P and Trannies comfortably green YTD (though notably underperforming gold still). Treasuries were sold hard today (7Y +10bps) as the D word was bandied about by the politicians (while in reality de-escalation was anything but what was happening), but the 5s30s still flattened modestly further. 10Y saw one of its worst days of the year and yields pressed up to their 200DMA. Gold and silver were flat to modestly lower as copper and oil limped higher. FX markets were relatively calm as the USD pushed higher on the week (+0.5%). Stocks closed weak into the close but after 3 days of ramp, it's hardly surprising.


It seems the President's less exuberant belief in the De-Escalation was not liked by the market...


Another day another ramp job but a weaker close...


But from the US Open today things are not quite as exuberant...


As we close this shortened week, YTD stocks remain laggards of bonds and gold...


Year to date, the S&P and Trannies are green but Nasdaq and Russell and Dow notably red still...


USDJPY led stocks...but stocks close ugly...


VIX was slammed...


Treasuries were monkey-hammered today...across the curve


As a flattening yield curve is now the excuse to BTFD...


and 10Y yields jammed higher to the 200DMA...


Credit does not seem as excited either about the "d" word...


In commodity land, safe haven PMs were sold and growthy excitment was bid...


Charts: Bloomberg

Bonus Chart: Weibo stick-saved or the entire Alibaba derivative trade is fucked...

More "De-escalation" - NATO Sends Five Warships To Baltic Sea

The latest development out of NATO, which was already largely expected, must be part of the just announced elaborate de-escalation scheme.  From VOA:

NATO members are sending navy ships to the Baltic Sea to increase the security of the alliance's eastern European allies in response to the Ukraine crisis.


NATO's Maritime Command said Thursday it is sending four minesweepers and a support vessel to the Baltic Sea. The ships are from Norway, the Netherlands, Belgium and Estonia.


The alliance said Thursday it does not intend to escalate the situation in Ukraine, but rather to "demonstrate solidarity" and ramp up NATO's readiness.


NATO has made clear it does not want to get involved militarily in Ukraine, which is not a NATO member.

Ah yes, because the Geneva "de-escalation" statement explicitly did not mention anything about a military build up when it is solely for "solidarity demonstration" purposes, and not for "intimidation or provocation." At least we now know what loopholey, umbrella phrase the next Russian escalation in east Ukraine will be held under: "demonstrating solidarity" with ethnic Russians in the region.

WTF Moment Of The Week: No One Bought Japanese Bonds For 36 Hours This Week

Submitted by John Rubino via Dollar Collapse blog,

Here’s something you don’t see very often: For a day and a half this week, the Japanese government’s benchmark 10-year bonds attracted not a single successful private sector bid. At today’s artificially-depressed yields, no one wants this paper — except of course the Bank of Japan, which is buying up the bonds with newly-created yen. As the Gulf Times noted:

Japan bond market liquidity dries up as BoJ holding crosses ¥200tn

The Bank of Japan’s massive purchases of government debt hit a milestone this week, sucking liquidity out of the market to such an extent that the benchmark 10-year bond went untraded for more than a day, the first time in 13 years.

Data from the BoJ late on Monday showed its holding of Japanese government bonds topped ¥200tn ($1.96tn), or about 20% of outstanding issuance – up by more than half from ¥125tn about a year ago.


The fall in market liquidity looks set to intensify as the BoJ has vowed to continue its aggressive buying for at least another year, with market players expecting it to expand its easing some time later this year.


“Everybody thinks the market is not going to move for the time being because of the purchase by our dear customer, the BoJ,” said a trader at a major Japanese brokerage.


The BoJ stepped up its bond buying last April when Haruhiko Kuroda became its governor, vowing to take radical easing steps to end deflation once and for all.

The increasing dominance of the BoJ in the market, however, resulted in shortage of tradable bonds in the market, reducing trading flows between market players.

Brokers are reluctant to go short, fearing that they cannot buy back when they want. On the other hand, few investors are willing to chase prices higher, when the 10-year bonds yield about 0.6%


The upshot was that the average daily trading band of 10-year JGB futures price so far this month is 0.15, compared to about 0.50 in the 10-year US Treasury notes futures.


The current 10-year cash bonds saw its first trade of the week yesterday afternoon, having gone untraded for more than a day and a half.


Trade volume in the benchmark cash bonds so far this month dropped to less than one trillion yen, down about 70% from the same period last year.


In a sign that the BoJ is also worried about falling bond market liquidity, the central bank tweaked its JGB repo programme on Monday, saying it will offer to sell JGBs twice a day, compared to once a day now.


Yet traders shrugged off the measure as a drop in the ocean. And with the BoJ seen mopping up another ¥60tn-¥70tn of JGBs from the market, few investors are ready to pick up a fight.


“Everybody is holding off buying now only because they want to buy at a higher yield. But in the end, the only strategy you can take under an environment like this is buy more given the shortage of what you can buy,” said Takeo Okuhara, fund manager at Daiwa SB Investments.


One reason many investors are cautious about buying despite tight market conditions is the trauma of sharp reversal in the market rally after the BoJ adopted the current policy last April.


The 10-year JGB yield hit a record low of 0.315% on the following day after the BoJ’s easing, only to jump back to 1% about a month later – a scenario market players think can be repeated, given the fall in liquidity.


“I know this could end badly. But if you are in this market, you will have no choice but to buy,” Daiwa SB’s Okuhara said.

What exactly does this mean? Well, it’s definitely weird. These are the most important fixed income instruments of the world’s third biggest economy, and the only entity willing to own them is the government that issues them. The rest of the world now refuses to lend money for ten years at 0.6% to a government whose debt is 200% of GDP and rising, which leaves Tokyo with only two choices: monetize virtually all its future borrowing or allow interest rates to rise and pay two or three times as much in interest going forward. The latter choice would hobble, if not cripple, an economy that can only function when borrowed money is nearly free.

Here’s a brief interview with prominent Japan bear Kyle Bass noting the country’s “terrible” bond predicament.

In a world of markets rather than manipulations, this kind of imbalance would be an automatic short candidate. Actually, this kind of imbalance would never occur because it would be arbitraged out of existence long before it reached such an extreme. But today, when governments brazenly set prices for just about everything, there’s no reason why the Bank of Japan can’t simply decree a rate of zero or -1% or whatever it wants. As the trader notes at the end of the above article, this can’t end well. But exactly how and when it ends is anybody’s guess.

So Much For The De-escalation? Kiev Says Military Operation In East Ukraine To Continue

Everyone knows that the half-life of these pointless diplomatic summits aimed at "de-escalating" geopolitical tensions is measured in days if not hours... But minutes? Moments ago from RT, and literally minutes after the final Geneva "agreement" was blasted, we get this: "Kiev says Military operation in Ukraine southeast to go on despite Geneva agreement." The agreement, which as a reminder, said "All sides must refrain from any violence, intimidation or  provocative actions." That's right: not just "pro-Russian separatist terrorists", but all sides.

From RT:

Despite calls for a peaceful dialogue in the document on Ukraine adopted in Geneva, the coup-imposed Ukrainian Foreign Minister said it will not affect the “anti-terrorist” operation in the East of the country and the troops will remain there.


Soon after the Geneva document, adopted at a four-side meeting between Ukraine, the US, the EU and Russia, was published, Ukraine’s acting Foreign Minister Andrey Deshchytsa said Kiev is not bound by its recommendations.


According to Deshchytsa cited by RIA Novosti, “the troops in the East of the country are carrying out a special operation and can remain where they are.”

So, everyone disarm as the same time... but the other side first.

So, It Seems Like That Andreesen Dude Might Actually Know What He's Talking About, But I'll Still Spill His Secrets

I got into a Twitter debate with Marc Andreesen of Netscape (the inventor of the commercial web browser) and Andreesen Horowitz (the VC fund that financed Facebook, Twitter, Skype & Zynga) fame.

He spit out what was mostly common sense, yet still flew in the face of what is taught in school, most text books and by most B school teachers. Here's how it went down, first ten tweets are from Marc, the rest are from me or my followers...

1/A few common fallacies about valuation of public and private technology companies:

— Marc Andreessen (@pmarca) April 17, 2014

2/First, ask any MBA how to value tech companies, she'll say "discounted cash flow, just like any other company":

— Marc Andreessen (@pmarca) April 17, 2014

3/Problem: For new & rapidly growing tech co's, up to 100% of value is in terminal value 10+ years out, so DCF framework collapses.

— Marc Andreessen (@pmarca) April 17, 2014

4/You can run as many DCF spreadsheets as you want and may get nothing that will help you make good tech investment decisions.

— Marc Andreessen (@pmarca) April 17, 2014

5/Related to fact that tech co's don't have stable products like soup or brick companies; future cash flows will come from future products.

— Marc Andreessen (@pmarca) April 17, 2014

6/Instead, smart tech investor thinks about: A future product roadmap/opp'y, B bottoms-up market size & growth, C talent and skill of team.

— Marc Andreessen (@pmarca) April 17, 2014

7/Essentially you are valuing things that have not yet happened, and the likelihood of the CEO and team being able to make them happen.

— Marc Andreessen (@pmarca) April 17, 2014

8/Finance people find this appalling, but investors who do this well can make a lot of money, but spreadsheet investing is often disastrous.

— Marc Andreessen (@pmarca) April 17, 2014

9/Doesn't mean cash flow doesn't matter, in fact opposite: this is the path to find tech companies that will generate tons of future cash.

— Marc Andreessen (@pmarca) April 17, 2014

10/Corollary: For tech companies, current cash flow is usually useless for forecasting future cash flow--lagging not leading indicator.

— Marc Andreessen (@pmarca) April 17, 2014

Here's where I chimed in and started spilling the VC secret sauce beans.

RT @pmarca: "common fallacies in valuation of private tech companies" media falsely assume preferred & common valuations are comparable. NOT

— ReggieMiddleton (@ReggieMiddleton) April 17, 2014

@pmarca on false assumptions re: tech co. Valuations, startup that got a $8m premoney prefd would have gotten $2m val if done in common

— ReggieMiddleton (@ReggieMiddleton) April 17, 2014

When entrepeneurs get all happy because they're recieving what thier VC said was an $8 million valuation for their Series A found, of which they're giving up 20% for $1.6M (gross expenses), they are naively comparing this to the dollars recieved in a common stock financing. This is fallacious. The control premiums, dividend claims and liquidation preferences often built into the preferred offerings really bring the economic valuation way down. If anyone doesn't believe me, ask their VC to take common founders stock instead of preferred on VC steroids at the quoted valuation. Get back to me with those answers, I'll sit here and wait. 

@pmarca re: bad ASSumptions in tech co. value, overpriced paper = poor proxy, even for debased fed reserve notes, ex #FB $19b buy WhatsApp

— ReggieMiddleton (@ReggieMiddleton) April 17, 2014

Selling overpriced, negative real rate, Fed pumped up paper certificates in liue of cold hard cash basically does the same "price inflation thing" in the public markets. Now I know Marc invested in Facebook and made a ton of money, but the valuation that FB went to market at was simply a joke, see my mucho analytical rants - To wit:

pre-IPO - Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!

at the IPO - The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1 as well as The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

and post-IPO - On Top Of The 2x-10x Return Had Off Of BoomBustBlog Facebook Research, Our Models Show How Much More Is Available... as well as...

Now, that I've established how overvalued FB was (and how much money Marc made for his LPs), take a look at how much money FB really pays for a company like Whatsapp when it says it pays $19B...

@pmarca re: bad tech co. Valuation notions, economically #FB probably paid less than $10b for WhatsApp users, paid ~nothing for tech & co.

— ReggieMiddleton (@ReggieMiddleton) April 17, 2014

I wrote on my blog...  The Man Who Correctly Anticipated Facebook's IPO Value Knows Why Whatsapp Was Purchased

RT @pmarca: "For new & rapidly growing tech co's, up to 100% of value is in terminal value 10+ years out, so DCF framework collapses." True

— ReggieMiddleton (@ReggieMiddleton) April 17, 2014

@pmarca a other big problem with DCF is its difficult to measure reinvestment vs actual expense early on & tends to mischaracterize both

— ReggieMiddleton (@ReggieMiddleton) April 17, 2014

So many people can't differentiate the difference between what amounts to a structural cost, or effectively a disguised fixed expense (like what is now much of Apple's marketing and sales expense) and true business investment and reinvestment (which is what you have seen in Google with YouTube, Android, Grand Central, Glass, Driverless cars, Fiber, balloons and drones). The academic use of DCF simply exacerbates this problem by compounding the smeared differences. 

@pmarca pay $19b in Federal Reserve Notes (USD) for my startup and I'll gladly walk you through it (devious chuckle in the background d) :-)

— ReggieMiddleton (@ReggieMiddleton) April 17, 2014

Self expanatory...

@pmarca I'm strong believer in spreadsheet investing, but you need reliable numbers input in models & those don't exist in tech startups

— ReggieMiddleton (@ReggieMiddleton) April 17, 2014

Garbage in, garbage out! No?

RT @pmarca: ”current cashflow based on past, not future prods & profit often breeds complacence, bureaucracy” See

— ReggieMiddleton (@ReggieMiddleton) April 17, 2014

To put it more verbosely - Most Accurate Apple Analysis Ever Pt 2, The Only Investor Accurately Calling To Short Apple Tells What's Next

@ReggieMiddleton: "Don't be surprised if shortly after April 15th #BTC prices start to level off or rise."" What's today's date & BTC price?

— ReggieMiddleton (@ReggieMiddleton) April 17, 2014

Self explanatory...

@lex_looper well said.
U should check @ReggieMiddleton 's thoughts on critial education,
that makes people more than just employees,on RT

— Canary ina Democracy (@highqoo) April 15, 2014

And this goes back to that MBA education thing. Here's some more on the topic... 

Reggie Middleton Illustrates Pitfalls of American Education Using His 5 yr Old Daughter

  • How To Profit From The Impending Bursting Of The ...‎

    Jan 7, 2013 - Many do not think of their education as an actual investment, but if you put .... Academia is primarily interested in the first, Reggie Middleton is ...
    You +1'd this

  • How To Profit From The Impending Bursting Of The ...‎

    Jan 3, 2013 - You would have had a superior education and only been in the hole for $16,000, as well as having $160,000 .... Latest from Reggie Middleton.
    You +1'd this

  • Calculate The Value & ROI Of Your College Education Now ...‎

    Feb 12, 2013 - This is the 4th installment in the educationbubble series. This piece gets down to the ... About Knowledge How: College and University Education Valuation Software ..... By Reggie Middleton; Again, The Sell Side Analysts .

  • Which all brings us back to 
  • 15/Which goes right back to the start: Who are the people, what are the products, and how big is the market. That's the formula.

    — Marc Andreessen (@pmarca) April 17, 2014

    This debate all stemmed from my due diligence in deciding whether to approach venture capital firms for my UltraCoin "smart contract" startup. Since I plan to disintermediate the banking system, wholesale, I thought I better get some additional capital lined up. 

    That is a story in and of itself. I went to the crowdsourcing and Bitcoin community, and they really weren't feeling me. I then turned to my natural constituency, clients from my blog and of course we found Nirvana. 

    The board and the team that I'm building is outrageous, and I'm quite tempted to spill the beans right here. Alas, it's not quite time yet. As Marc said, its about... Who are the people, what are the products, and how big is the market. Well here 'ya go. 

    The Financial Nostradamus, serial enterpeneurial investor who's called nearly every major boom and bust in finance and technology over the past 8 years.

    Contract and IP attorneys (all in one person) with over 15 years experience doing both!

    My team of financial analysts whom I've worked with for 7 years,

    The product - outrageous ZeroTrust, no counterparty risk, no credit risk, peer to peer financial asset trading with near real time settlement.

    A board of advisors containing some of the most successful people in politics, finance and technology!!!

    And how big is the market? Well...

    For those who feel they have financial or intellectual capital to contribute to the cause, I'm still looking... Click here to learn more.

    Krugman, Who Is Paid $25,000/Month To Study Inequality, Says "Nobody Wants Us To Become Cuba"

    When it comes to Krugman's views on any particular topic, he may be right and he may be wrong, but whatever his opinion he always has a much to say about it (even if the factual backing is of secondary importance or outright missing). Today, his chosen topic is inequality, and in an interview with Bloomberg's Tom Keene, shown and transcribed below, he certainly says much, encapsulated perhaps by the following gem:

    "There's zero evidence that the kind of extreme inequality that we have is good for economic growth. In fact, there's a lot of evidence that it is actually bad for economic growth. Nobody wants us to become Cuba. The question is, do we have to have levels of inequality that are getting close to being the highest levels ever anywhere. We're really starting to set new records here. Is that a good thing for anybody? If you look at our own history, it's not true. The fact of the matter is since inequality began soaring around 1980, the bottom half of America has been pretty much left behind. It has not been a rising tide that raised all boats."

    Ah yes, inequality, the same inequality that the Fed - Krugman's favorite monetary stimulus machine, after all it was none other than Krugman who suggested that in order to offset the bursting of the tech bubble the Fed should create the housing bubble - has been creating at an unprecedented pace since it launched QE. Just recall: "The "Massive Gift" That Keeps On Giving: How QE Boosted Inequality To Levels Surpassing The Great Depression."

    So while Krugman is right in lamenting the record surge in class divide between the 1% haves and the 99% have nots, you certainly won't find him touching with a ten foot pole the root cause of America's current surge in inequality.

    And, tangentially, another thing you won't find him touching, is yesterday's revelation by Gawker that the Nobel laureate is the proud recipient of $25,000 per month from CUNY to... study inequality.

    From Gawker:

    According to a formal offer letter obtained under New York’s Freedom of Information Law, CUNY intends to pay Krugman $225,000, or $25,000 per month (over two semesters), to “play a modest role in our public events” and “contribute to the build-up” of a new “inequality initiative.” It is not clear, and neither CUNY nor Krugman was able to explain, what “contribute to the build-up” entails.


    It’s certainly not teaching. “You will not be expected to teach or supervise students,” the letter informs Professor Krugman, who replies: “I admit that I had to read it several times to be clear ... it’s remarkably generous.” (After his first year, Krugman will be required to host a single seminar.)



    CUNY, which is publicly funded, pays adjunct professors approximately $3,000 per course. The annual salaries of tenured (but undistinguished) professors, meanwhile, top out at $116,364, according to the most recent salary schedule negotiated by the university system’s faculty union. And those professors are expected to teach and publish. Even David Petraeus, whom CUNY initially offered $150,000, conducted a weekly 3-hour seminar.


    Along with the offer letter, CUNY released dozens of emails between Krugman and university officials. “Perhaps I’m being premature or forward,” the Graduate Center’s President, Chase Robinson, tells Krugman in one of them, “but I wanted you to have no doubt that we can provide not just a platform for public interventions and a stimulating academic community­—especially, as you will know, because of our investments in the study of inequality—but also a relatively comfortable perch.”


    Which is undeniably true: $225,000 is more than quadruple New York City’s median household income.

    Surely, and in keeping with this very vocal beliefs, the good professor
    will promptly donate the $225,000 in annual income reserved to help the problem of inequality to a needy charty
    catering to the poor, at the first opportunity.

    Or not. After all, nobody wants us to become like Cuba, eh?

    The full Bloomberg interview below:

    And the transcript of the key highlights:

    Krugman on dangerous slack in Economy:

    "If people are unemployed for long enough, they may never get back into the workforce. If investment is depressed long enough, we never build the capacity. So if you think there is a lot of slack or even if you think that there might be a lot of slack in the US economy, then that should be a tremendous preoccupation. We've got to get rid of that. We need to get this economy back to something like full employment. It becomes the most urgent priority we have right now."

    Krugman on Japan vs. Europe:

    "I have to say, when the Europeans say we're not Japan, I agree. Japan was never in as dire straits as Europe is right now. They never had the mass unemployment. There was never a part of Japan that looked like Spain or Greece does in Europe right now. So their notion that they are somehow doing better than Japan, they are doing worse than Japan ever did."

    Krugman on current economic conditions:

    "We should be vastly impatient. This has gone on. If you had said in 2007, that more than 6 years after a recession begins, we would still be talking about an economy with high unemployment, sluggish job growth, there hasn't been a single month, that I can remember, where we've created as many jobs as we did during an average year during the Clinton administration. This is crazy. The idea that this should be regarded as an acceptable pace of progress is just really, really wrong."

    Krugman on inequality:

    "There's zero evidence that the kind of extreme inequality that we have is good for economic growth. In fact, there's a lot of evidence that it is actually bad for economic growth. Nobody wants us to become Cuba. The question is, do we have to have levels of inequality that are getting close to being the highest levels ever anywhere. We're really starting to set new records here. Is that a good thing for anybody? If you look at our own history, it's not true. The fact of the matter is since inequality began soaring around 1980, the bottom half of America has been pretty much left behind. It has not been a rising tide that raised all boats."

    Krugman on how income inequality gets solved:

    "American history is actually very encouraging because in America, we often had leadership, we had often people from the affluent classes themselves who said this is too much. If we could have modern politicians speaking as forthrightly about the danger of high concentration of wealth as Teddy Roosevelt did in 1910, we would be a long way towards having a good solution to this. I guess I believe that America has a tremendous redemptive capacity, an ability to take a look and say, in the end, what our ideals, what do we want society to look like, an ability to step back. We don't have to become this oligarchy that unfortunately we are drifting towards."

    Krugman on whether we are living in a gilded age:

    "It's more than that. We're at gilded age level of inequality and beyond. It's a belle epoque as Pikkety says. It's an era not just of great inequality but increasingly of inherited inequality and I think if people understand that they'll say nope, we don't want that to happen and we can do things that are not Draconian, that are not socialist in the American tradition to limit that rise in inequality."

    Krugman on Obamacare and Obama:

    "At this point, Obamacare looks like it is a success. It's not the program anyone would have designed from scratch but it is a huge improvement for American lives and just having that legacy plus the somewhat weaker but still important legacy of financial reform, Obama is one of our most consequential presidents. You have FDR, LBJ, Ronald Reagan and Barack Obama as presidents who left America quite a different place once they were done."

    Krugman on the basic problem with the US Economy:

    "The basic problem with the US economy is that there are not enough jobs. And then, given that, employers get to be picky. Who would they want to offer a job? Preferably somebody who already has one or who lost a job only recently so the long-term unemployed get ruled out."

    Krugman on whether he has seen long term unemployment like this ever in his career:

    "No, we know that there's been nothing like this since the 1930s. This is a completely new thing for almost everybody. People who remember this were children when they saw it…There are many things I'm angry about but that's certainly one of them. We have millions of people who have just been ruled out of the discussion but we can try to do things to make them more employable but we really just need more jobs. So that employers have an incentive to go out and look for qualified people even if they aren't people who already have jobs."

    Krugman on proper level of growth that we need to begin solving our labor challenges:

    "Well I'm of the belief that we have slack in the economy. Best guess, and we don't know this for sure but I think we still have 5 or 6% slack in the economy and we should be taking it up fast. We should be growing -- we are that deep in the whole that we should be growing several points above the long run growth rate. So we should be having 4 or 5% economic growth at this point. So when we look and we say oh great, we're doing 2.5%, that's just showing how far we've become accustomed to -- how used to really dismal economic conditions."

    Krugman on Government and Wall Street:

    "Government has shaped the form of markets all the time. There's no law of nature that says that people have to be free to build a new fiber optic cable that allows them to be 3 milliseconds ahead of the rest of the market. This is stuff that certainly could be regulated. There's actually two things. One is, the market being too perfect is actually undermining the work of discovering useful knowledge and the other is, you are spending a lot of your sources on stuff that is of zero social benefit."

    Krugman on whether there is a lack of confidence in our financial system because 'the smart guys have too much information':

    "I think there's not enough skepticism. Our financial sector has gotten way bigger and more concentrated. It has grown from 4% to 8% of GDP and it is not at all clear what society is gaining from that. I think if anything, the general public is too willing to take Wall Street at face value as actually performing a useful service."

    Full Geneva Statement On Ukraine "De-escalation"

    From the European Union:

    Geneva Statement on Ukraine


    Representatives of the European Union, the United States, Ukraine and the Russian Federation issued today the following statement:


    "The Geneva meeting on the situation in Ukraine agreed on initial concrete steps to de?escalate tensions and restore security for all citizens.


    All sides must refrain from any violence, intimidation or provocative actions. The participants strongly condemned and rejected all expressions of extremism,  racism  and religious intolerance, including anti?semitism.


    All illegal armed groups must be disarmed; all illegally seized buildings must be returned to legitimate owners; all illegally occupied streets, squares and other public places in Ukrainian cities and towns must be vacated.


    Amnesty will be granted to protestors and to those who have left buildings and other public places and surrendered weapons, with the exception of those found guilty of capital crimes.


    It was agreed that the OSCE Special Monitoring Mission should play a leading role in assisting Ukrainian authorities and local communities in the immediate implementation of these deescalation measures wherever they are needed most, beginning in the coming days. The US, EU and Russia commit to support this mission, including by providing monitors.


    The announced constitutional process will be inclusive, transparent and accountable. It will include the immediate establishment of a broad national dialogue, with outreach to all of Ukraine’s regions and political constituencies, and allow for the consideration of public comments and proposed amendments.


    The participants underlined the importance of economic and financial stability in Ukraine and would be ready to discuss additional support as the above steps are implemented.”

    And a take from the WSJ:

    The U.S., Russia and European Union agreed to a framework of steps to de-escalate tensions in Ukraine, including demobilizing militias, vacating seized Ukrainian government buildings, and establishing a political reform program, U.S. and Russian officials said Thursday.


    The agreement was reached during more than six hours of talks in Geneva and marked the first tangible step to defuse the political and security crisis in Ukraine since Russia annexed the Crimean region last month, said U.S. and Russian officials.


    "The Geneva meeting on the situation in Ukraine agreed on initial concrete steps to de-escalate tensions and restore security for all citizens," the participants in the talks said in a joint-statement. "All sides must refrain from any violence, intimidation or provocative actions."

    In other words, virtually a carbon copy replica of the diplomatic coup that was achieved... just before Russia annexed Crima.

    Big Blue: Stock Buyback Machine On Steroids

    Submitted by David Stockman of Contra Corner

    Big Blue: Stock Buyback Machine On Steroids

    The Fed’s financial repression policies destroy price discovery and honest capital markets. In the process these deformations turn financial markets into casinos and corporate executives into prevaricating gamblers. To be specific, most CEOs of the Fortune 500 are no longer running commercial businesses; they are in the stock-rigging game, harvesting a mother lode of stock option winnings as the go along.

    Those munificently rising stock prices and options cash-outs owe much to the Fed’s campaign to suppress interest rates and fuel stock market based ”wealth effects”, but the CEOs are doing their part, too. They have become full-time financial engineers who use the Fed’s flood of liquidity, cheap debt and soaring stock prices to perform a giant strip-mining operation on their own companies.  That is, through endless stock buybacks and M&A maneuvers they create the appearance of “growth” while actually liquidating the balance sheet equity and future asset base on which legitimate earnings growth depends.

    The poster boy for this deformation is IBM which for all intents and purposes has become a stock buyback machine on steroids. It had a bad hair day yesterday, reporting still another year/year decline in sales, but that goes right to the heart of the matter. During the last seven years IBM has been a stock traders dream, climbing an almost picture perfect chart from $94 per share in March 2007 to a recent peak of $212.

    But as shown below, those gains had nothing to do with what has been a historic ingredient of stock appreciation—-namely, expansion of its asset base and revenues. In fact, sales revenues in Q1 2014 clocked in at virtually the same number as Q1 2007:

    So how has IBM and its ilk achieved revenue-less earnings growth? After all, reported EPS has gone from about $7 per share to $15 during the period. The short answer is that its executives and board have utilized every accounting and financial engineering short-cut in the book to disguise an equity liquidation campaign as a splendid strategy for “growth”.

    During the 7-years ending in 2013 IBM booked about $100 billion in net income, and spent virtually every single penny on share buy backs. So the once and former king of the global high-tech industry had nothing better to do with its cash than shrink it equity base. Accordingly, its share count dropped by 20% over the period, thereby accounting for about 45% of its EPS growth.

    Moreover, it also distributed another $20 billion in dividends over the 7-year period. In all, it delivered cash into the maws of the fast money and hedge fund complex that amounted to 120% of its net income for 2007-2013. Needless to say, the robo traders can never get enough of this kind of “shareholder friendly” action at any given moment in time–no matter that it amounts to corporate liquidation eventually.

    Coughing up rivers of cash was only one arrow in the quiver of  IBM’s shareholder value enhancement strategy, however. Its lawyers and  accountants weighed in smartly, too. During fiscal 2007 Big Blue’s tax rate was already low at 28%, but by dint of the best tax maneuvers money can buy, IBM’s tax provision dropped to just 15.5% last year. So if you hold constant IBM’s tax rate and share count at the 2007 level, EPS would have been about $9.50/share in 2013, not the $15 reported.

    Yet even that modest 5% growth rate since 2007 isn’t all that. IBM also spent nearly $25 billion on “acquisitions” during the period—financing these deals with the kind of ultra-cheap blue chip corporate debt issues that has been on fire sale since the Fed lowered the boom on the government benchmark rate under QE. Consequently, IBM’s acquisitions are inherently and prodigiously “accretive” to per share earnings not because they make any economic sense, but because its after-tax cost of debt capital is nearly zero.

    It might wondered, however, why a globe spanning company with $100 billion in revenues, top-drawer facilities, limitless professional  talent and a huge legacy of intellectual capital needs to shuffle around Wall Street making two-bit M&A deals on a continuous basis—that is, why it doesn’t build rather than “buy”.

    But then just check out the “cookie jar” of accounting reserves it establishes on each deal completion along with its near zero-cost of debt capital. It becomes quickly evident that EPS “accretion” on an accounting basis may have virtually no relationship whatsoever to genuine corporate value creation–the ostensible point of the mindless M&As that preoccupy the C-Suites of corporate America.

    Indeed, IBM’s financials make it self evident that its stock rigging strategy is not about value creation thru “investment”. Thus, during the past seven years IBM has consumed about $35 billion in DD&A charges, but invested less than $30 billion in Capex. Even if IBM has gone the “services and software” route, it might by questioned how a technology giant can prosper over time by consuming 15% of its capital assets each and every year.

    And that’s especially true since its R&D expense line is going south even faster. In 2007 it spent about $6.2 billion generating new products, processes and intellectual capital; last year in inflation-adjusted dollars it spent $5.5 billion or nearly 15% less.

    In short, IBM is a poster boy for the deformation of American capitalism that has resulted from monetary manipulation and central planning. Today it carries nearly $40 billion of super-cheap debt—up by nearly 21% from 2007. It has used that gift from the Eccles Building to make ends meet—that is, carry on operations while it steady liquidates its capital and feeds prodigious amounts of cash into the Wall Street casino.

    Yes, IBM is a buy back machine on steroids that has been a huge stock market winner by virtue of massaging, medicating and manipulating its EPS. But eliminate the accounting razzmatazz, M&A tricks and under-investment— and IBM’s true earnings might be fairly estimated at $8/adjusted share.

    That means that even after today’s hit Big Blue is valued at nearly 24X. And that’s for a company that has not grown in 7 years; which has had a weak-dollar tail-wind inflating its earnings; and has now become personae non-grata in much of the BRIC world due to its service to the Spy State in Washington.

    Under those circumstances,  the next “M” may stand for monkey-hammered.

    Below is an excerpt from ”The Great Deformation: The Corruption Of Capitalism In America” where this baleful tale of corporate self-liquidation was first exposed(pp 563-565)



    IBM’s huge share buyback program, by contrast, shows that financial engi- neering does not always produce such immediate untoward results. Yet it is nonetheless a dramatic illustration of how the Fed’s bubble finance régime enables companies to literally “buy” themselves a higher stock price, at least temporarily, by plowing massive amounts of cash into share repurchases, thereby creating the false impression of robust earnings growth.


    Big Blue’s reported earnings thus surged 16 percent annually from $7 per share in 2007 to $13 in 2011, but those results were not apples to apples by any stretch of the imagination. The company’s stock buyback program re- duced its net share count by 22 percent, and profits on its massive overseas operations had been artificially boosted by a double-digit decline in the dollar. IBM’s reported results also reflected a 12 percent reduction in its tax rate and $16 billion of acquisitions, all highly accretive mainly because they were financed with ultra-cheap long-term debt.

    In the absence of these one-timers and financial engineering maneu- vers, however, the picture was not so buoyant. Based on organic revenues, constant exchange rates, and no reduction in tax rates and share counts, earnings per share grew by about 5 percent annually, not 16 percent, over the past five years. It is far from evident, therefore, that IBM’s true mid- single-digit growth rate justified the doubling of its share price during the period.


    Upon closer examination, in fact, IBM was not the born-again growth machine trumpeted by the mob of Wall Street momo traders. It was actu- ally a stock buyback contraption on steroids. During the five years ending in fiscal 2011, the company spent a staggering $67 billion repurchasing its own shares, a figure that was equal to 100 percent of its net income.


    This massive and continuous stock-buying program brought approxi- mately 550 million, or 36 percent, of the company’s 1.5 billion of outstand- ing shares into its treasury, but needless to say, they did not all stay there. Nearly two-fifths of these shares reentered the float, mainly to refresh the management stock option kitty.


    It goes without saying that in this instance the interests of stock traders and top management were aligned—perversely. The steady, deep shrink- age of the IBM float kept a bid under the stock and thereby delivered a “perfect” price chart, rising almost continuously from $100 to $200 per share over the past five years. It was a carry trader’s dream.


    Likewise, top executives got big-time pay packages they may or may not have deserved, but in any event they were dispensed in envelopes marked “tax once over lightly.” Former CEO Sam Palmisano, for example, cashed out $110 million worth of stock options a few weeks after his retirement party.


    This rinse-and-repeat shuffle of stock buybacks and options grants is undoubtedly a significant source of left-wing jeremiads about executive pay having gone to three hundred times the average worker’s compensa- tion when, once upon a time, allegedly, the ratio was more like 30 to 1. But the issue is not simply whether this kind of financial engineering has con- tributed to the sharp tilt of income flows to the top 1 percent in recent years. There can be little doubt, on the math alone, that it has.


    The more crucial question, in this instance, is whether the massive CEW evident in IBM’s numbers is setting up another of the great iconic American companies for a fall sometime down the road, similar to Hewlett-Packard. The data on this score are not encouraging. Total shareholder distributions, including dividends, amounted to $82 billion, or 122 percent, of net income over this five-year period. Likewise, during the last five years IBM spent less on capital investment than its depreciation and amortization charges, and also shrank its constant dollar spending for research and development by nearly 2 percent annually. Neither of these trends is compatible with stay- ing on top in the fiercely competitive global technology industry.


    Most especially, however, IBM’s earnings—like nearly all the big cap global companies—could not be flattered permanently by the Fed’s bubble finance. Already, the plunge of the euro has taken a toll on the company’s reported results, causing the artificial translation gains it booked on its huge European businesses during the weak dollar cycle through 2011 to now unwind. Indeed, with nearly two-thirds of its sales outside the United States, the company’s sales are now actually falling in dollar terms, and will likely continue to do so for the indefinite future.

    John Kerry Speaks On Ukraine De-escalation: Live Webcast

    First it was Lavrov announcing the "roadmap" to de-escalate Ukraine tensions. Now it is the turn of John Kerry.


    Some of the highlights via Bloomberg:


    Russian Foreign Minister Announces Four Party Agreement On Steps To De-escalate Ukraine Crisis

    Considering how successful diplomatic "solutions" to the Ukraine crisis have been in the past, it is no wonder almost nobody was paying attention to Geneva where today the four parties were holding talks to resolve the Ukraine situation, and moments ago they released, via Russia's Lavrov, a joint statement on "de-escalating the situation." From Bloomberg:


    And, approrpiately enough, the Easter Egg:


    In other words, more referendums? For now stocks aren't reacting exactly bullishly (perhaps because as UBS recently suggested, with a straight face, "war may be bullish for US stocks"), however, oil is lower on the news.

    We wonder how long until this too "diplomatic" solution is promptly ignored and forgotten: days or hours?

    The Lavrov conference is here:

    Housing Bubble 2.0 Veers Elegantly Toward Housing Bust 2.0

    Wolf Richter

    They’re not even trying to blame the weather this time. “Housing affordability is really taking a bite out of the market,” is how Leslie Appleton-Young, chief economist for the California Association of Realtors explained the March home sales fiasco. “We haven’t seen this issue since 2007.”

    In Southern California, the median price soared to a six-year high of $400,000, up 15.8% from a year ago, as San Diego-based DataQuick reported. It was the 24th month in a row of price increases, 20 of them in the double digits, maxing out at 28.3%. Ironically, prices per square foot are increasing fasted at the bottom third of the market (up 21%), versus the middle third (up 15.9%) and the top third (up 14.3%).

    Ironically, because at the bottom 65%, sales have collapsed.

    People, wheezing under the weight of their student loans and struggling in a tough economy where real wages have declined for years, hit a wall. Private equity firms and REITs, prime beneficiaries of the Fed’s nearly free money, gobbled up vacant homes sight unseen in order to convert them into rental housing, and in the process pushed up prices - exactly what the Fed wanted. But now high prices torpedoed their business model, and they’re backing off. So sales of homes priced below $500,000 plunged 26.4%, and sales of homes below $200,000 collapsed by 45.7%.

    These aren’t poor people who stopped buying them but two-income middle-class families who’ve been priced out of the market. Thanks to the Fed’s glorious wealth effect, however, sales of homes ranging from $500,000 to $800,000, increased by 2.9% from a year ago, and sales of homes above $800,000 increased by 5.4%. In total, 35% of the homes sold for $500,000 or more. But combined sales, due to the collapse at the low end, dropped 14.3% from a year ago to 17,638, the worst March in six years, and the second-worst in nearly two decades.

    “Southland home buying got off to a very slow start this year,” said DataQuick analyst Andrew LePage. Among the culprits: the suddenly absent large-scale investors, the jump in home prices, and the increase in mortgage rates [read.... Hot Air Hisses Out Of Housing Bubble 2.0: Even Two Middle-Class Incomes Aren’t Enough Anymore To Buy A Median Home].

    And he put his finger on a new culprit: potential move-up buyers were stymied because they’d refinanced their current home at a “phenomenally low” interest rate. They can’t afford to abandon their relatively low payment, which they already stretched to reach, and buy a much more expensive home – a move-up home during a pandemic of inflated home prices financed at a higher mortgage rate. They’re trapped by the consequences of the Fed’s policies:

    They could sell, but they can’t afford to buy!

    “Lately on Saturdays and Sundays, you see open house signs everywhere,” Carey Chenoski, a real estate agent in Redlands, told the LA Times. “The houses that last spring would be gone in the first day are sitting maybe 60 days.” That’s at the low end. At the high end, at prime beachfront locations in Manhattan Beach, the wealth effect runs the show. Agents are getting “multiple offers on just about everything,” said Barry Sulpor, with Shorewood Realtors. “The market is really on fire.”

    In the nine-county Bay Area, the median price paid for a home in March jumped  to $579,000, up a bubblelicious 23.2% from a year ago, the highest since December 2007, according to DataQuick. In my beloved San Francisco, the median price jumped 14.6% to $937,500. In Solano County, the “cheapest” county in the Bay Area, the median price soared 30.4% to $300,000.

    Alas, sales plummeted 12.9% to 6,308 houses and condos in the Bay Area, the worst March since 2008, and the second-worst in the history of the data series going back to 1988. And the debacle was concentrated at the lower end: while sales of homes over $500,000 rose 5.2%, sales of those under $500,000 collapsed by 32.9%.

    The same phenomenon is playing out across the nation.

    Redfin, an electronic real-estate broker that covers 19 large metro areas around the country, saw year-over-year price gains of 9.9% in March, after 17 months in a row of double-digit gains. Las Vegas topped the list with an annual gain of 20.8%.

    But home sales in these 19 markets dropped 11.6% year over year, the fifth month in a row of sales declines. Beyond California, where sales fell off a cliff, sales in Washington DC tumbled 13.5%, in Las Vegas 15.8%, and in Phoenix 17.3%. It's tough out there.

    Some analysts, tired of looking silly blaming the weather, started blaming low inventories. So inventories were flat in the 19 markets overall compared to March last year; no reason for plunging sales. In Boston, Portland, and Austin inventories dropped. But in the cities where the sales plunge has been particularly nasty, inventories skyrocketed: up 41.9% in Phoenix, 28.9% in Ventura, 25.7% in Riverside, 24.8% in Los Angeles, 23.1% in Sacramento, 21.3% in San Diego.

    And the number of new listings across the 19 markets rose by 6.3%, the first year-over-year growth in March in three years. The usual suspects in California saw the largest jump, with listings in Ventura up 13.1%. But they were up elsewhere too: in Long Island 12.7%, in Las Vegas 11.9%, in Chicago 10.6%, in Phoenix 7.8%, etc.

    You get the idea: rising inventories, rising new listings, soaring prices, and plunging sales. Something has to give.

    Unlike stocks, housing is subject to the real economy. When the price at the bottom half of the spectrum soars beyond what people can afford even with today’s still extraordinarily low interest rates, and beyond what makes sense for speculators that fix them up and rent them out, then demand stalls. Homes sit. Sellers get frustrated. People who need to move can’t move because they can’t sell their house for the price they want. People who want to move up can’t. Pressure builds. And eventually, the prices that the Fed conspired to inflate into the stratosphere, well.... This is like so 2006.

    A report from the asset management and investment banking division of Groupe BPCE, the second largest bank in France, predicts what daredevil voices at the maligned margin of financial analysis have worried about for a while: another global financial panic. Read... What Happens When ‘All Assets Have Become Too Expensive?’

    Weibo Opens Way Below IPO Price

    Moments ago Weibo opened at a price that shocked pretty much everyone following the story of "China's Twitter", which had already cut overnight the number of shares it was taking public:

    • WEIBO CORP OPENS AT $16.27, IPO AT $17.00

    However, within moments of opening the underwriters did everything they can to avoid another Facebook and defended the IPO price, promptly sending the stock above $17.00 where it was trading as of this second.

    Will they succeed in keeping the most watched social network IPO of the week above its IPO price, or will the Chinese social networking craze also be Candy Crushed? The next few hours should give the answer.

    Obama To Provide More Non-Lethal Aid To Ukraine Such As Helmets And Sleeping Bags

    Moments ago, in a show of continued solidarity with the people of (West) Ukraine, US Defense Secretary Chuck Hagel announced the latest batch of "non-lethal" aid to Ukraine. Among the items that would be shipped are:

    • Sleeping mats;
    • Water purification systems;
    • Medial supplies; and of course
    • Helmets

    What, no healthcare plans? Also, one wonders: is the procurement price billed to US taxpayers for every helmet shipped to Ukraine above $5,000 or above $10,000?

    Hagel added that while US actions are "provocative" and "heighten tensions", the US supply of equipment to non-NATO member Ukraine is not meant to "provoke or threaten Russia" and will review providing Ukraine with more support, also saying that the US is offering "planners" to help NATO update plans. The same NATO which as we reported yesterday, is preparing to expand its air and water presence around Russia... also obviously in a way that is not meant to threaten provoke Russia.

    And while the US is providing helmets and sleeping bags, Canada, which has a substantial Ukraine population, is also jumping in, this time by providing 6 F-18 Hornet fighter jets to the NATO "reassurance mission" in Poland:

    BREAKING:Canada to contribute 6 CF 18s to NATO reassurance mission, they will be based in Poland + 20 officers to Nato Supreme Command (CBC)

    — Just Hovens Greve (@JustHovensGreve) April 17, 2014

    Or this:

    This delivery of lethal "reassurance" support to a country in immediate proximity to Russia is surely also meant to neither threaten nor provoke Russia. That said, any response by Russia to this clear NATO escalation will promptly be branded as both threatening and provoactive. Stay tuned.

    And The Highest Returning "Asset" Class In CNBC's 25 Years Is...

    Today, in celebrating its 25th birthday, CNBC will have you know that stocks, which have generated returns of over 500% in the past 25 years, are the best asset because, well, "where else are you going to put your money." So if you said the S&P500 is the best performing "asset" class in the past 25 years you would be... wrong.

    Q1 Earnings Season Summary: More Than Half Have Missed Revenues

    When it comes to Q1 earnings expectations one thing is well known: they are low. Very low. So low in fact that as we showed earlier this week, Q1 earnings growth is now projected to be the lowest since Q3 2012, a dramatic change from EPS expectations at the start of the first quarter when it was optimism, all the way.


    The reason for this collapse, as is well-known, is that after starting off the year on a massive euphoria binge and forecasting that this will be the year when growth finally takes off (after 5 years of false starts) companies quickly realized the economic growth is just not there, and whether one blames it on the weather, or on Russia, or - the real culprit - the sad state of the US consumer and thus, the Fed, it was time to greatly lower EPS forecasts.

    Sure enough, this is what EPS expectations for Q1 looked like during Q1. A disaster:

    So with the bar set so low, it is no surprise that most companies, or 65% of those reporting Q1 earnings so far, have beat EPS expectations (perhaps what is disturbing is that as much as a third have missed).

    But what about revenues.

    As it turns out, in their euphoria to lower EPS estimates, the sellside lemmings forgot all about revenues. This is confirmed by the chart below, showing that while EPS expectations were plunging, sales estimates were largely flat.


    Because according to the Deutsche Bank Q1 earnings tracker, while two thirds may have beat earnings, a stunning 51%, or a majority of the reporting companies have missed Q1 revenue estimates.

    That's ok: the top-line recovery will come in the second half of 2014. Or the third. Or the fourth. One thing is certain: by the 10th half of 2014, the economy will be in "escape velocity."

    Just joking - as long as the Fed is around, and as long as it is more attractive for companies to buy back their own stocks and reward their "activist" shareholders instead of planning for long-term growth, and investing in Capex instead, there will be no revenue growth. Period.

    Snowden Calls Into Putin Telethon To Discuss Legality Of Mass Surveillance

    While the western media paints Vladmir Putin as some cross between Napoleon and Hitler marauding across Europe breaking international laws willy-nilly, there is one red line he is apparently unwilling to cross. In a somewhat surprising turn of events, none other than Edward Snowden called in to a Putin live telethon and asked the Russian President: "Does Russia intercept millions of citizens’ data?" Putin's response (whether true or not) is worth paying attention to by his opponent on the world stage: "Russia uses surveillance techniques for spying on individuals only with the sanction of a court order. This is our law, and therefore there is no mass surveillance in our country."

    Via RT,

    Russian intelligence agencies use special media to tap and spy only after a court decision, says Vladimir Putin, answering the question by former NSA agent Edward Snowden on whether the Russian government spies online.


    The Russian president said that he like Snowden used to work as a former intelligence officer and said that there is no mass scale or uncontrollable surveillance in Russia as there is in America.


    “Russia uses surveillance techniques for spying on individuals only with the sanction of a court order. This is our law, and therefore there is no mass surveillance in our country”, Putin said.


    Edward Snowden, the whistleblower who leaked detailed National Security Agency documents on how information is stockpiled on millions of Americans as well as world leaders, appeared via a video link from an undisclosed location to ask Vladimir Putin his question.

    It seems even Putin won't publicly cross that red line...

    A Ramble on PR


    To me, the big, big, big Macro economic factor is population growth (or the lack of it). Coupled with population growth is the rate of aging within the population. I don't care what the Fed and all the other CB's do to push back on the deflationary consequences of demographics. Those forces of will trump the CB's efforts, it's just a matter of when.

    Japan is the poster child for this issue. Zero immigration and a declining indigenous population will overwhelm Abenomics. Europe has the same problem, it's about 10 years behind Japan.

    And then there is the USA - we are about 20 years behind Japan. The forces of an aging population are already being felt. In March, Social Security paid out a record $70B. It took three years for SS to go from $60B to $70B a month. In about 18 months we will hit $80B, in March of 2022 the nut will be $120B.


    I've been having deep thoughts on population because I've been watching Puerto Rico and its bond market. PR did a mega bond deal ($3.5B) a few weeks back . Before the issue was floated I wrote about it (Link) and suggested that the deal would be a big success - (the price of the bonds would rally post issue). And that's exactly what happened. In a matter of days the bonds rose 7%, bringing a paper gain of $200+m for the fat cat hedge funds that cornered the deal.

    Then someone hit the 'sell button' (PR hired some restructuring lawyers and everyone freaked out). There has not been a solid bid for weeks. This dog is now trading at 87.50 - plunging below the the issue price of 93 - the yield is pushing 9.5%. There is no real exit for the holders of these bonds. There is no new money chasing after the high yield as the bonds can't be sold to retail investors. So the current holders of this swill are also the future owners. In between, it's just passing the trash.

    If I was stuck with these bonds I would be worried. This bond issue looks like the Facebook IPO - investors loved it in the first hour, and then hated it for a year. If things get sloppy, and some hedgies are forced to vote with their feet (AKA-Vomit) where might this bond trade? How about 12%?

    Finish this circle with PR's population status. This slide looks at the data from 2000 - 2010:

    Total population for the island was down 100K (dispora of 1.2m - 30%!). Since 2010 the population has declined by an additional 110k.



    PR is also aging rapidly. The natural demographics are exaggerated by the fact that PR's young go to NYC for employment.

    The CIA (link) has the Medium age for Puerto Rico at 39. Japan is at the extreme at 46. But the median age in the USA is only 37.6 years, younger than PR. France's Median age is 41, not far from PR. The median age in Mexico=27, Columbia=29, Panama=28. Pretty much anyway you look at it, PR is old.

    So, if you believe as I do, that population is the horse, and everything else is the cart, then don't buy PR bonds just yet. And if you're the fixed income guy at a hedge fund that is stuffed to the gills with this problem deal, well there's always the next job...

    My concern is that some guys do get forced to sell, and the bonds go bid-less for awhile. I'm not worried about the hedge funds, but if there's blood in the $3.5B special deal, then it's going to leak into the $70B PR Muni market. That $70B is largely held by retail. A bust up in PR munis would be a mini-crisis that would require Treasury to get involved. (Treasury's is already worried: WSJ Link). So there is plenty of headline risk in this story. (Question: Did the lawyers who dreamed up the retail exclusion in the PR deal really believe it would work? Do they not understand markets?)

    On 3/9 I opined that the $3.5B deal would buy PR a year or so of market peace. I believed that the bond deal created enough cash to payoff maturing debt and fund the government (I was not alone in that bit of wisdom). It appears that I was absolutely dead wrong on that. This is looking more like a here-and-now problem. I think a lot of folks are surprised by that.



    Goldman Reports Worst Q1 Results Since Lehman, Average Employee Pay Drops 7% To $376,840

    Moments ago Goldman reports its first quarter earnings, which beat expectations that had been drastically lowered into this quarter. Specifically, total Q1 revenue printed at $9.33 billion, beating expectations of $8.66Bn, while EPS, which declined 6% from a year ago, also beat Estimates of $3.49 at $4.02. Looking at the key operating segments, the all important FICC revenue was $2.85Bn, also above the sharply reduced estimate of $2.63Bn, while IB was $1.78Bn, more than the Wall Street estimate of $1.52Bn. That was the good news.

    The bad news: Goldman's first quarter results were the worst since the Lehman crisis, and just to put the critical FICC group's revenues in perspective: at $2.9 billion they were less than half what FICC recorded in Q1 2010 when people apparently still traded. And whether due to Volcker or not, Goldman's prop group (Investing and Lending) reported just $1.5 billion in revenue - the worst also since Lehman.

    Despite the rhetoric, one can certainly see the trends here and so can Goldman management, which explains why the firm is launching on a market structure overhaul crusade which as recently as five years ago, was reserved for tinfoil hat conspiracy blogs.

    Finally, and worst of all, if only for Goldman employees, the average compensation for the firm's workers, dropped to $376,840, down 7% from a year ago, and the lowest comp, based on accruals, since Q2 2012.