Submitted by Michael Krieger of Liberty Blitzkrieg blog,

I’d like to say that the following is unbelievable, but it’s not.  Unfortunately, it is all too believable.

From ABC:

The Internal Revenue Service official in charge of the tax-exempt organizations at the time when the unit targeted tea party groups now runs the IRS office responsible for the health care legislation.

USA! USA!

Sarah Hall Ingram served as commissioner of the office responsible for tax-exempt organizations between 2009 and 2012. But Ingram has since left that part of the IRS and is now the director of the IRS’ Affordable Care Act office, the IRS confirmed to ABC News today.

 

Her successor, Joseph Grant, is taking the fall for misdeeds at the scandal-plagued unit between 2010 and 2012. During at least part of that time, Grant served as deputy commissioner of the tax-exempt unit.

 

Grant announced today that he would retire June 3, despite being appointed as commissioner of the tax-exempt office May 8, a week ago.

 

“Obamacare empowers the agency that just violated the public’s trust by secretly targeting conservative groups,” Rep. Marlin Stutzman, R-Ind., added. “Even by Washington’s standards, that’s unacceptable.”

 

Sen. John Cornyn even introduced a bill, the “Keep the IRS Off Your Health Care Act of 2013,” which would prohibit the Secretary of the Treasury, or any delegate, including the IRS, from enforcing the Affordable Care Act.

 

“Now more than ever, we need to prevent the IRS from having any role in Americans’ health care,” Cornyn, R-Texas, stated. “I do not support Obamacare, and after the events of last week, I cannot support giving the IRS any more responsibility or taxpayer dollars to implement a broken law.”

Pure 100% unadulterated Banana Republic.

Full article here.

    

The following map (via AON) measures the risk of political violence to international business in 200 countries and territories, based on three icons indicating the forms of political violence which are likely to be encountered: Terrorism and sabotage; Strikes, riots, civil commotion and malicious damage; and Political insurrection, revolution, rebellion, mutiny, coup d'etat, war and civil war.

 

click image for huge legible version

 

Notable Risk Trends:

    

Submitted by Adam Taggart via Peak Prosperity blog,

Everyone knows the odds of winning in a casino are worse than 50% (often much worse depending on the game played). So who wouldn't rush to a casino where, instead, the odds were overwhelmingly in the gambler's favor?

That's the promise of today's stock market, which has been experiencing an aberrantly high percentage of up days all year. Toss your money into the market and on any given day, you're much likelier to make money than not.

So far, May 2013 has been a gambler's paradise, in which a whopping 76.9% of the trading days for the S&P 500 have been up:

The chart below shows just how far 2013's up day percentage exceeds previous years:

Of course, none of this boondoggle is merited by the underlying fundamentals, which clearly are not good.

But if you're one of the top 10% of Americans that owns 81.2% of all stock market wealth, send a bottle of Bollinger to Ben and his buddies at the Federal Reserve as thanks for keeping the punch bowl so nicely spiked:

(Source)

However, if you're one of the 9% of Americans who actually understands the concepts of "reversion to the mean" and "overshoot", you may want to run -- not walk -- to cash in any chips you may still have on the table. But if you have to keep money in the stock market, be sure to work with a prudent financial adviser that prioritizes risk management and is skeptical of today's easy winnings.

Like all good benders, this is going to end with one heck of a hangover...

    

There has been a long string of crummy economic data which has largely been ignored (“bad news is good”) by bulls. However, on Friday, bulls jumped on two reports, Leading Indicators and Consumer Sentiment, which released better than expected results (“good news is great”). The most noteworthy regarded the Consumer Sentiment report, which was the largest "beat" in its history. For the most part, the Consumer Sentiment report is less regarded by us than the Conference Board’s Consumer Confidence report since the former is heavily weighted by stock prices. With a rally in stocks, Consumer Sentiment data was likely to beat. And, given that, they tend to feed off each other.

In other news, there wasn’t any slowdown in QE on Friday, with a large POMO action pumping a cool $5.3 billion into the markets, along with options expiration, which generally creates more volatility. We have just another week or so of earnings news left for the first quarter, and as a result, there's not much left from the sector to support prices.

It’s a “risk on” environment for global equities. This is especially so for countries and regions where central banks are busy printing money. For “risk off” sectors, bonds and commodities are not feeling the love. And, those countries not in the QE game, Latin America and Australia for example, their markets are underperforming.

The dollar (UUP) rose substantially Friday as the euro (FXE) and yen (FXY) especially were weak. The strong dollar caused further selling in gold (GLD) and other commodities (DBC), while oil (USO) climbed higher. Though on a Friday, the latter isn’t unexpected with the Middle East still at a boil. Bonds (TLT) fell back as stocks rallied.

Leading equity sectors? Pick one, as everything jumped higher across the board. Lagging were Latin America (ILF) and Australia (EWA).

We’ve focused our ETF positions on sectors within the major indexes rather than the large indexes in isolation largely because we believe that these sub sectors can outperform the major indexes. 

Volume was only slightly higher perhaps due to options expiration toward the close. Breadth per the WSJ was positive.

You can follow our pithy comments on twitter and become a fan of ETF Digest on facebook.

.SPX WEEKLY

INDU WEEKLY

RUT WEEKLY

QQQ WEEKLY

 

XLF WEEKLY

 

XLI WEEKLY

XLB WEEKLY

XLY WEEKLY

XLV WEEKLY

XLP WEEKLY

IYT WEEKLY

ITB WEEKLY

 FDN WEEKLY

IGV WEEKLY

IYR WEEKLY

SOXX WEEKLY

IEF WEEKLY

TIP WEEKLY

DBA WEEKLY

UUP WEEKLY

FXE WEEKLY

FXY WEEKLY

GLD WEEKLY

GDX WEEKLY

SLV WEEKLY

JJC WEEKLY

DBC WEEKLY

USO WEEKLY

XLE WEEKLY

EFA WEEKLY

EEM WEEKLY

EWA WEEKLY

EWJ WEEKLY

EWG WEEKLY

EWU WEEKLY

AAXJ WEEKLY

EWM WEEKLY

ILF WEEKLY

EPI WEEKLY

GXC WEEKLY

NYMO

The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.

 NYSI

The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.

VIX

The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.

...

 

That was the week that was to quote the old TV series. Markets are quite speculative now and the game is being played by hedge funds, banks and overseas investors with free money from the Fed. It’s almost like musical chairs, for when the music stops there will be trouble. This is why you see so much QE pause/start rhetoric which is field testing investor behavior.

Aside from light volume there’s no argument with the tape. It’s quite positive but much overbought. Earnings news is beginning to wane leaving less for bulls to respond to. Many previous reliable technical indicators are succumbing to all the money printing. Looking at those markets where QE is not taking place perhaps reveals the real market conditions.

Next week will yield Fed Minutes, housing data and Durable Goods Orders.

Let’s see what happens.

    

Europe's non-performing loan problem is such an issue that there is increasing bluster that the ECB may take this garbage on to its balance sheet since policymakers realize that bad debts and non-performing loans (NPLs) reduce the capacity of banks to lend, hindering the monetary policy transmission mechanism. Bad debts consume capital and make banks more risk averse, especially with respect to lending to higher risk borrowers such as SMEs. With Italy (NPLs 13.4%) now following the same dismal trajectory of Spain's bad debts, the situation is rapidly escalating (at an average of around 2.5% increase per year).

As we discussed in detail here, the bottom line is that at its core, it is all simply a bad-debt problem, and the more the bad debt, the greater the ultimate liability impairments become, including deposits. As we answered at the time - the real question in Europe is: how much impairment capacity is there in the various European nations before deposits have to be haircut? With Periphery non-performing loans totaling EUR 720bn across the whole of the Euro area in 2012 and EUR 500bn of which were with Peripheral banks, it seems the Cyprus deposit haircut non-template may indeed become the key template.

Simply put, the greater the unemployment the more the strain on banks to generate "profits" by any means possible (GGBS?) to cover the capitalization shortfall from NPLs until at some point liability haircuts have to begin...

Non-performing loans as % of total loans across the Euro area

Unemployment rates across Euro area countries

Via JPMorgan:

It is not surprising that the periphery is exhibiting a rising pattern in terms of NPL ratios. What is worrying is the speed of increase, at 2.5% per year. Within the periphery, Greece is the outlier with a NPL ratio of 25%, and no signs of abating yet. Ireland follows with a NPL ratio of 19%. Italy (at 13.4%) is above Spain and Portugal (at close to 10%)...

 

The German divergence is making the task of the ECB very difficult both in terms of setting monetary policy for the whole region, but also in terms of dealing with an impaired transmission outside Germany. Draghi clarified in its latest press conference that it is not the ECB’s role to clean up banks’ balance sheets, meaning that the ECB is unlikely to deal itself with the €500bn large non-performing loan problem in periphery.

    

Submitted by Lance Roberts of Street Talk Live blog,

I have often spoken of the disconnect between Wall Street and Main Street.   While asset prices are inflated by continued interventions of monetary policy from the Federal Reserve, boosting Wall Street profits and widening the wealth gap between the top 20% of Americans and the rest, "Main Street" continues to suffer a from a rising cost of living and falling wage growth.  Just recently Gallup released the following survey:

"The federal poverty threshold for a family of four is just under $24,000; however, Americans believe such a family unit living in their community needs more than double that -- $58,000, on average -- just to 'get by.' That estimate reflects 29% of Americans saying these families need up to $50,000 in annual income, 47% saying they need between $50,000 and $99,999, and 10% saying they need $100,000 or more."

The problem is that as the cost of living rises over time due to the effects of inflation - median household incomes have fallen.  The following chart shows the seasonally adjusted median household income through March of 2013 as compared to Gallup's poll of family living needs.

 The shortfall is quite evident.  The obvious question that follows is:

"Where does the money come from to fill the gap between living standards and incomes?"

The chart below answers that question.  The chart shows the difference between the $58,000 need for a family unit and median incomes, defined as the "income gap," and then compared to household credit.  

Besides the very brief forced deleveraging of balance sheets during the financial crisis, as households defaulted on debt and financial institutions cut credit lines, consumers have returned to credit to supplement incomes with a vengeance since 2011.

Ample Evidence

There is considerable evidence behind the current dislocation between Corporate America and Main Street.  Real unemployment remains extremely elevated as witnessed by the labor force participation rate and employment-to-population ratio at levels not seen since the early 1980's.

I recently published a piece on the "5 Questions That Every Market Bull Should Answer" discussing the disconnect between the "have's" and the "have not's" stating:

"Suppressed wage growth, layoffs, cost-cutting, productivity increases, accounting gimmickry and stock buybacks have been the primary factors in surging profitability. However, these actions are finite in nature and inevitably it will come down to topline revenue growth. However, since consumer incomes have been cannibalized by suppressed wages and interest rates - there is nowhere left to generate further sales gains from in excess of population growth."

This is why the gap between corporate profits and the number of working employees is the highest level on record.  Fewer workers, higher productivity and longer hours for the same pay, or less, equals higher corporate profits.  This is great for executives, primarily the top 10% of wage of earners, who are compensated from rising share prices, bonuses and other performance related compensation.  However, for the "working stiff," there is little reward for their labor.

"Welfaring Of America"

At $58,000, Americans' perceptions of the amount it takes just to get by in their community is substantially higher that the national median household income.  This level is also well out of reach for a bulk of the lower 30% of American households.

However, this gap between incomes and living standards goes a long way to explaining the "welfaring" of America.  As incomes have waned against a rising cost of living - it is not surprising to see more individuals receiving income supplements in the mail either from "food stamps", social security benefits or disability claims.  All of which are currently at record levels.  The chart below shows the level of social security benefits as a percentage of disposable personal incomes which is currently near the highest level on record.

 

"How long can the disconnect last between Wall Street and Main Street? "

There is no clear answer for that as consumers have shown a willingness to draw down savings rates to historically low levels while quickly returning to cheap credit forgetting the disaster that it caused them not so long ago.  However, in reality, when you have a family to feed, clothe and house - it really doesn't matter what is logical, but what is necessary, regardless of the consequences down the road.  Of course, for many American's today, the only real difference between now and the "bread lines" of the 30's is that the "bread" is delivered in the mail rather than at the "soup kitchen" on the corner.

    

Those who were closely following the S&P cash in the last seconds before the close, and who were eagerly looking forward to a satanic close of 1,666, were likely disappointed when in the last 5 minutes of trading the cash index ramped from 1,665 and easily crossed in and out of 1,666, with the final print pointing to a mid-1,667 close.

And then something happened: instead of a closing print of 1,667.50, over one point of the cash S&P suddenly was wiped out for no reason, in turn leading to the satisfactory 1,666 closing print or exactly 1,000 points higher than the "generational" lows of 2009. Yet, refreshing the settlement of the S&P500 an hour later, showed that the final closing price was, indeed, 1667.47.

So what happened?

We now know that the reason for the however brief close of the S&P at the demonic level was none other than the flash crash of Anadarko Petroleum, which as we noted in today's EOD post, lost $45 billion in market cap in 45 milliseconds (a collapse rate of $1 billion per millisecond), flash crashing from $90 all the way to an (allegedly illegal) stub quote of $0.01. It is this collapse in the entire market's capitalization of $45 billion that resulted in the difference between 1,667.5 and 1,666 for the S&P500 cash. One wonders which is worse: that the market unofficially at 1,666 and officially at 1,667.5, or that such flash crashes continue to be a daily inexplicable occurrence and which nobody has any control over. How long until the same algo that wiped out APC today, decides to shift away from simple stocks and goes for the SPY, or the QQQ, or the E-Mini contract for that matter, and wipes out $20 trillion in market cap in 45 milliseconds?

Once again, here is has APC went from $45 billion in market cap to $0 in 45 milliseconds beginning at 15:59:59:450 (half a second before the close), with forensic detail courtesy of Nanex:

And zoomed in:

 

So how did this single-stock flash crash impact the overall market? Simple.

The chart below shows the broad S&P move higher starting at 2pm when it ramped by 8 points in straight line, in one of the now traditional closing day vertical shoots higher on low volume and no news. What can be seen in this chart courtesy of Nanex, is precisely the 1.5 displacement in the broader markets as a result of the APC flash implosion in the last half second of trading:

And once again zoomed in:

 

This summarizes in a nutshell precisely what the "New Normal market" has become: the same "market" that Bernanke and the administration are so desperate to herd every mom, pop, algo and hedge fund into, in order to enforce "trickle down" wealth effect inflation, now that all other monetary transmission channels are terminally and hopelessly broken.

Luckily for all involved, this time the flash crash was contained, and all the offending trades were unwound. What happens when the flash crash is bigger, becomes un-"unwoundable" and more stocks are involved? the entire market?

    

Submitted by Simon Black of Sovereign Man blog,

Well, you have to admit one thing - the United States Senate certainly has its priorities straight.

Early last week they passed S.743, the Marketplace Fairness Act. This bill requires US-based online merchants to charge, collect, report, and pay sales tax to the roughly 9,646 jurisdictions within the Land of the Free which levy such a tax.

And while grounded in well-intended socialist dogma as a means to ‘level the playing field’, all the bill will really do is stick consumers with a higher price tag on the products they currently purchase online.

Curiously, though, the Senate then introduced S.958 this week. This bill actually aims to DECREASE certain taxes that are currently charged… on beer.

Not to be outdone by such wisdom, though, the government of Spain announced a plan this week to seize homes that have been foreclosed on by banks and developers.

Politicians will then let Spanish families stay rent-free in those homes for up to three years.

It’s a bit of a reverse-Cyprus situation; instead of confiscating assets from bank customers, the government wants to confiscate assets from banks.

Again, well-intended. But this will likely destroy the mortgage market in Spain; who in their right mind would want to make home loans in that country anymore knowing that the foreclosure mechanism is unenforceable?

The plan should also do a great job scaring off foreign investors; remember, the Spanish government is desperate to reduce the excess housing inventory, and they recently announced a program offering residency to any foreigner who spends about $200,000 on Spanish property.

But instead of rolling out the red carpet for foreign investors, they’re now broadcasting a very loud message: “We do not respect private property rights.”

Again, just like the IRS targeting opposition political groups and illegally seizing the medical records of millions of Americans, or the Justice Department seizing phone records from the AP, this sort of Marxist land grab is something that you’d expect in Belarus or Venezuela.

So basically what governments in Europe and the Land of the Free are telling us is – Beer and Populism: good. Private property rights, freedom, privacy, business, price stability: bad.

These people clearly have their priorities straight.

Before signing off for the week, I wanted to give you a few more thoughts on Bangladesh.

Bottom line, there are definitely opportunities in this country. With such a huge population, cheap work force, and abundant resources, the potential is evident.

At the moment, though, most of the great investments in Bangladesh are private deals. This is the same case as Myanmar.

Public market investing in Bangladesh is fairly uninteresting. The stock market in Dhaka trades at about 17-times earnings with no dividend yield. Right now it’s down about 50% from it’s all-time high, but it still doesn’t strike me as cheap.

One lucrative opportunity is in private lending. So many locals have been shut out of the banking system because of bad policy and tight liquidity, but the need for capital is very strong.

For similar reasons, my colleagues in Mongolia set up a private lending business there, and they’re currently making 3% to 4% per MONTH lending to local businesses who cannot obtain loans through the Mongolian banking system.

Given the need for capital and the appetite for development that I’ve seen on the ground in Bangladesh, I suspect that figure can be exceeded here.

Agriculture is also interesting. Land leases are quite cheap. And the soil is incredibly fertile since the majority of the country is in an alluvial floodplain.

But the prevalence of natural disasters and government policy that inhibits large-scale farming operations really increases the risk level. On a risk-adjusted basis, it’s very hard to beat South America for agriculture returns.

    

Here is a price index for commercial real estate that I follow. 

From CoStar: Annual Pricing Gains Seen Across All Regions and Property Types Despite Seasonal Slowdown in First Quarter 2013

PRICING RECOVERY SLUGGISH IN THE FIRST QUARTER: The two broadest measures of aggregate pricing for commercial properties within the CCRSI—the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index—were slightly negative in March 2013, a continuation of a seasonal pattern witnessed in the last several years which contributed to modest declines in the first quarter. Despite the uneven first quarter performance, commercial real estate prices are still up appreciably from year ago levels. The equal-weighted index, which reflects more numerous smaller transactions, increased 5.7% from March 2012, while the value-weighted index, which is influenced by larger transactions, expanded by 8.1% during the same period.

SEASONALITY CONTINUES TO BE EVIDENT IN THE COMMERCIAL REAL ESTATE MARKET: In each of the past four years, a pricing decline in the first quarter has been preceded by a similar pricing increase in the last quarter of the previous year. These year-end spikes have been consistent with elevated transaction volume as investors rush to close deals, while the first-quarter declines have coincided with a return to more typical trading activity. This volatility is a normal and expected occurrence and should not be interpreted as a regression in real estate prices.

DISTRESS SALES DECLINE: The percentage of commercial property selling at distressed prices dropped to 16.4% in March 2013 from 25.5% in March 2012.
emphasis added

Click on graph for larger image.

This graph from CoStar shows the Value-Weighted and Equal-Weighted indexes.  CoStar reported that the Value-Weighted index is up 37.5% from the bottom (showing the demand for higher end properties) and up 8.1% year-over-year. However the Equal-Weighted index is only up 6.8% from the bottom, and up 5.7% year-over-year.

Note: These are repeat sales indexes - like Case-Shiller for residential - but this is based on far fewer pairs.

Much has been made of equity inflows this week (though we note a significant outflow from high-yield bond funds - just as risk-on in its nature) and once again the money-on-the-sidelines fallacy is hawked at every opportunity. Two critical aspects are important to get past this 'fact' as some positive driver. First, money does not 'enter' the market, it is swapped (e.g. Person A's cash is used to buy shares from Person B; after the transaction the roles are swapped with Person B holding cash on the sidelines and Person A holding shares); and secondly, as Morgan Stanley's Gerard Minack notes, despite all the disclaimers – retail flows assume that past performance is a good guide to future outcomes. Consequently money tends to flow to investments that have done well, rather than investments that will do well.

Via Gerard Minack, Morgan Stanley,

Investing is an unusual profession: perhaps the only one where amateurs have a good shot at beating the pros. However, evidence suggests that amateurs don’t: flow data indicate that retail often buys high and sells low.

Amateurs normally stand no chance against professionals. It’s not just that none of us could take a point off Roger Federer, or a hole off Tiger Woods. Investing is different.

It’s not unusual for the majority of professionally-managed funds to under-perform their benchmark.

 

 

The chart above shows the percentage of US large-cap equity funds that under-perform the S&P500 index. On average, over the last decade 60% of  funds have returned less than the S&P500 (after fees) for a calendar year. Moreover, the share of funds that under-perform increases over longer time horizons: 86½% of funds under-performed the S&P500 on a rolling three year basis to end-2012.

 

US large-cap equity investors are not special in this regard.

 

The chart above shows the percentage of funds in a range of assets that have under-performed their benchmarks on a 1, 3 and 5 year rolling basis. This is Lake Wobegone upside-down.

 

The good news for the professionals is that many amateurs persist in trying to beat the market and, in aggregate, they seem to do a significantly worse job than the professionals.

 

In short, amateurs may be able to beat the investment professionals, but most do far worse. This keeps professional investors in business.

    

While many may not recall that the US has been without an official debt ceiling for the past three months, or even that it has a debt target ceiling, the bonus period agreed upon in January to let the nation rake up some $400 billion in addition debt in the past few months, officially runs out tomorrow, May 19, when the debt limit will be restored to its previous level plus the debt that was incurred in the interim, which means around $16.735 trillion in total debt as of yesterday, plus the amount incurred today, excluding the debt not subject to the cap which is about $30 billion. And since no grand bargain is forthcoming in a world in which official governance is now almost universally in the hands of the world's central bankers and out of the hands of the theatrical career politicians, it means that the next deadline in the endless US debt ceiling saga will be the day when the extraordinary measures to extend the debt ceiling run out.

Such a deadline will likely be hit in just over three months. As the WSJ reports:

Mr. Lew said the Treasury would be able to use the same extraordinary measures that the department deployed during the last debt-ceiling standoff at the start of the year. Those include halting investments in government worker retiree funds and drawing down some accounts.

 

“Treasury is not able to provide a specific estimate of how long the extraordinary measures will last,” Mr. Lew said.

 

But because of strong tax receipts and billions of dollars in dividend payments from mortgage giants Fannie Mae and Freddie Mac the U.S. will be able to continue borrowing–and paying all of its bills–until after Labor Day, Mr. Lew said.

September 2 happens to be a rather interesting day: just after the August Jackson Hole symposium where Bernanke will be famously absent, and just before the September FOMC meeting at which the Fed may (or may not) announce it is tapering QE (and when according the current run rate, the S&P should be roughly in the 1800 ballpark).

The song and dance is well-known:

If the Treasury exhausts the extraordinary measures and Congress doesn’t raise the debt limit, the government would be forced to fund its operations with the cash it has on hand, potentially putting Social Security, Medicare, military salaries and other payments at risk.

 

“The global economic leadership position enjoyed by the United States rests on the confidence of Americans and people around the world that we are a nation that keeps its promises and pays all of its bills, in full and on time,” Mr. Lew said.

 

Republicans have argued that the Treasury could prioritize to ensure that the government doesn’t default on bond payments. Mr. Lew rejected such an option, saying it would be “unwise, unworkable, unacceptably risky.”

 

Mr. Lew said that the Obama administration would not negotiate with Congress over the debt ceiling.

The good news is that as a result of an acceleration in government receipts and modest slowdown in spending (however temporary), the immediate cash needs of the government are lower, even though they once again pick up in the last quarter of fiscal 2013 (July-Sept), when marketable borrowings are expected to increase by a fresh $223 billion. The other issue of course is that without the Treasury creating "collateral" (read government debt to fund a deficit) which the Fed can monetize and expand bank reserves in the primary market, the Fed risks to become far too dominant a holder of Treasurys which it would then have to buy from the secondary market, and in the process eliminate even more liquidity from the market. This means that implicitly, Congress will be given a green light to spend away at will, even as Bernanke rages, very theatrically, against the will to generate sound fiscal policy. Bernanke's whole spiel is to create as many billions in excess reserves as he can thus pushing stocks, pardon the "wealth effect" as high as possible, for which he desperately needs a profligate Congress.

Which brings us to the bad news, namely that while many expected a bipartisan compromise on the debt ceiling to be quick and easy, especially in the aftermath of the GOP humiliation from the end of 2012 and early 2013, the events of the past week, which have seen scandal after scandal unfold in the Obama camp, have drastically changed the equation, and suddenly the resurgent GOP may once again play hardball with both the president and the democrats, at just the time when some are starting to throw around the "I" word. And if there is anything that the Obama camp would want to avoid, it is another debt ceiling fiasco at a time when all plates are full as is.

Does that mean a replay of August 2011 is in the cards? It would be oddly symmetric. And yet, that would presuppose that the GOP and the democrats truly have divergent agendas, when in reality both parties are eagerly willing to spend as much as possible in the name of "the people" and both are eager fans of a government that is as big as possible.

And finally, we now live in a day and age when the legislative and the executive are sorry shadows of their former selves, and the only true branch of government, is the monetary (in other words Wall Street). And Wall Street will only let the market drop when it is well and ready, and when it is confident it  has transferred enough paper wealth into hard assets, and not a moment sooner.

    

Succinctly summarizing the positive and negative news, data, and market events of the week...

Positives

1. April retail sales up .1%, although gasoline sales fall hard
2. S&P continues to hit all-time highs as credit plunges
3. Gold shorts at all-time highs, must be bullish…
4. Japanese institutions heart European debt
5. Nasdaq breaks through 3,000 for the first time since 2000. 2000, what was happening in 2000?
6. Oh-Em-Gee does David Tepper love stocks, and the Fed
7. And Tuesday makes 18 -- Dow finishes green on Tuesday for 18th consecutive time
8. Everyone calm down, Kuroda confirms the Nikkei is not in bubble formation. As the smart folks say, "driven by fundamentals"
9. Ramp: ON -- equities continue to soar, PM's getting slammed, TSY yields tick up, and VIX stays asleep
10. You ask for miracles Theo, I give you A.B.E.! Japan's Q1 GDP beats expectations
11. Umich Confidence surges to its highest since August 2007

Negatives

1. JGB futures halted, again
2. No more POMO? Hilsy opines…
3. Industrial production drops in April, misses estimates
4. PPI drops, & the Empire Fed is just ugly
5. Europe Q1 GDP confirms that you should load up on as much European debt as possible, as it is mired in recession
6. Heads Up: Auto loan delinquency balances rise 23.9% YoY
7. Is the market just being driven by short covering? Hint: Yes. But don't just take our word for it
8. Wal-Mart customers apparently unaware there is a ripping bull market. Q1 disappoints, and guides lower
9. Philly Fed mfg outlook for May collapses
10. More Macro-tourist nonsense to be ignored: initial claims, housing starts, cpi all dismal

 

Additional

• Ron Paul: what no one wants to hear about Benghazi
• Support seems to be deteriorating for the great European socialist project
• Marc Faber offers sage advice, and it has nothing to do with the market
• Third Point Q1 holdings update
• ***Are the Japanese banks on the verge of insolvency?
• Worth a watch: dusting off the Michael Burry speech

    

Whoever orchestrated the last two hour closing ramp sure has a satanic sense of humor, opting to close the S&P at 1666 or exactly 1000 points above the "generational" low. A late-day desperation to buy-buy-buy, triggered by an avalanche of stops being triggered in the DAX futures market (as it broke all time highs), sent stocks soaring. Treasuries had been weak all day (giving back yesterday's gains and more). The equity spurt was not accompanied by VIX or Credit or Oil or Copper but JPY's break of 103 was another trigger supporting the rise. But that doesn't matter. The release of weak IP and in-line CPI data on Wednesday seemed to trigger the 'change' as gold and silver diverged lower from copper and oil's surge, Treasuries rallied, and stocks and the USD surged thereafter. WTI crude ends the week unchanged (against a USD gain of 1.37%) with PMs down 6-7%. Volume was light today but that doesn't matter either.

 

It's been quite a ride...

 

And everything enjoyed that last hour or so...

 

Financials smashed everyone else this week...

Interestingly today did not see the 'most shorted' names get monkey-hammered instead just tracking higher in price with the market - it was Wednesday where the monkey-hammering occurred...

 

So what happened on Wednesday?

 

VIX didn't like that late-day ramp at all..

 

Credit remains unimpressed...

Which, if we were gambling men, would suggest buying 3x HYG vs selling 1x SPY to take advantage of what is now a 6-sigma separation...

 

This was - perhaps surprisingly - the worst weekly drop in gold since Dec 2011 (worse than the crash week because we bounced so hard)... Gold closed -6.3%, Silver -7%.

 

But it doesn't matter...

Charts: Bloomberg and Capital Context

    

Succinct Summations week ending May 17, 2013.

Positives:

1. The S&P 500 and Dow continue to hit new all-time highs.
2. Nikkei rises above 15,000 for the first time since Jan 2009.
3. U.S. retail sales grow 0.1% v expectations of -0.4%; Excluding autos and gas climbs by 0.6% v expectations of +0.3%.
4. Japan Q1 GDP increases by 3.5% v expectations of 2.7% (Abenomics is working)
5. The Dow has been up for 18 consecutive Tuesdays, something that has never happened before.
6. NFIB small business optimism rises to 92.1 (expectations of 90.5).
7. U.S Import price index for April fell by 0.5%, in line with expectations.
8. PPI M/M -0.7%, EXP -0.6%, PREV -0.6%, ex food and energy +0.1% in line
9. April CPI comes in at -0.4% v expectations of -0.3%. Ex-food and energy 0.1%

Negatives:

1. U.S. jobless claims increased by 32k to 360k v expectations of 330k.
2. Housing starts fall to 853k v expectations of 970k. This 16.5% drop is the largest one month decline since 2011 (1994 before that).
3. Multi-family housing starts fell 39%.
4. Empire Fed Manufacturing survey slides to -1.43 v expectations of +4, 3.05 in April
5. Empire manufacturing new orders -12 vs 2.2 and em ployment 5.7 v 6.8
6. April Industrial Production fell by 0.5% v expectations of -0.2%.
7. Philly Fed Manufacturing tumbles to -5.2 v expectations of -2.

Since "it just doesn't matter" anymore, we hope that soon financial network TV, plagued by the lowest ratings in a decade for the simple fact that nobody cares anymore what Federal Reserve Capital LP does, will at least invite some funnier guests, such as Bill Murray, to dispense hot stock tips.

 

    

Presented with little comment because frankly everything is now full retard. That is the Dax; This is the Dax on low-volume, mega levitation drugs, at 9pm on a Friday in Germany, when out of nowhere someone goes on a mega buying spree in the Dax futures, and sends global risk assets, and FX pairs, surging. Is Bernanke LBOing Germany? Or is Spain due for junk downgrade and this is the ultimate bad is good trade which sends global risk assets, and FX pairs soaring to fresh record highs across the board.

 

 

DAX takes and blasts through all-time highs..

 

DAX is now up over 14% in the last 17 trading days... (an annualized 466% rate)

    

Inflation slowed in 24 (of 27) EU nations in April to leave the average EU rate at 1.4% (versus 1.9% in March). Greece entered deflation in March for the first time in 45 years and Latvia consumer prices fell 0.4% in April (versus +2.8% a year ago). This notable plunge, while 'helpful' for the average spender in the short-term, is a problem, as Bloomberg's Niraj Shah notes, sustained falling prices will increase the nation's debt burden. At the other end of the spectrum, Romania and Estonia both have inflation running above 4% and 3% respectively. Of course, none of this serial 'depression' matters, since Draghi has your back and Hollande says "the crisis is over."

 

    

Earlier this week, the CIA's Russian outpost was deeply humiliated when (in a calculated move following accusations that the US had not gotten appropriate Russian information on the two Boston bombers, and following the visit of John Kerry whose primary objective was to, unsuccessfully, get Russia to relent on Syria) Russia's FSB exposed and broadcast on live TV the arrest of its agents caught while attempting to recruit a Russian spy.  Back then we suggested to "expect a prompt retaliation by the US" however it turns out Russia was not nearly done with embarrassing the US in what is becoming an obvious campaign to humiliate the US intelligence service, this time by going where very few clandestine operations go, at least during peacetime detente: by publicly exposing the head counterparty US spy. As Telegraph reports, "Russia's Federal Security Service has publicly revealed the identity of a man it calls the CIA station chief in Moscow, in what experts say is a serious breach of intelligence protocol."

Speaking to Russian media about the recent capture of an alleged CIA spy in a wig in Moscow, an FSB spokesman named the CIA "rezident", or station chief, in the capital.

 

A diplomat of the same name is listed as a Counsellor in the US Moscow embassy in the autumn-winter 2012-13 edition of a directory of foreign diplomatic, media and business offices in the city.

With tensions between the US and Russia already at high levels, and with both countries having sent naval support in the vicinity of Syria which is increasingly looking like the next powder keg, the US will not be happy with this dramatic and unexpected escalation in diplomatic warfare:

The naming of the top CIA figure working in Russia is likely to provoke an angry response in Washington, and damage important bilateral links in the struggle against global terrorism.

 

It is common practise for US and Russian intelligence agencies to identify to each other their top officials in their respective embassies, but they are not identified publicly.

 

The exposure appears to be a calculated snub to Washington, a month after the two countries agreed to share intelligence over the Boston Marathon bombing, which was allegedly carried out by two men with roots in Russia's North Caucasus region.

Curiously, and hinting that this action was in response to recent escalations in Syria, the language used by Russia was a carbon copy replica of that used by Obama recently to decry Syrian use of chemical weapons, which is the populist lynchpin of the US narrative in obtaining public support for eventual military escalation:

An FSB spokesman told the Interfax news agency on Friday that the US had "crossed a red line" with Mr Fogle's actions, because the CIA had already been warned to stop trying to recruit Russian citizens.

 

"In October 2011, the FSB officially warned the station chief of the CIA in Moscow, ...... that in the case of continuing provocative recruitment actions with regard to employees of the Russian special services, the FSB would take symmetrical actions with regard to CIA officers," the spokesman said.

 

A spokesman for the US embassy in Moscow was not immediately available for comment on Friday afternoon.

Just like Israel continues to bombard Syria without any consequences, so Russia continues to use the US State Department as a punching bag without fear of retaliation.

Will the US continue taking it, or will it, as the Telegraph suggests, "provoke an angry response in Washington, and damage important bilateral links..." And how long until Israel conducts another overnight raid in Syria, only this time a Syria which as the NYT reported has now received advanced Russian Yahkonts missiles whose main difference from all prior Syrian armaments is that they are outfitted with "offensive radar" and can be used for more than just self-defense.

Unlike Scud and other longer-range surface-to-surface missiles that the Assad government has used against opposition forces, the Yakhont antiship missile system provides the Syrian military a formidable weapon to counter any effort by international forces to reinforce Syrian opposition fighters by imposing a naval embargo, establishing a no-fly zone or carrying out limited airstrikes.

So with Israel suddenly facing the prospect of actual casualties should it engage in more air raids over Syrian airspace, just what avenues are left for telegraphing superiority and supremacy in the latest middle eastern hotbed of future escalation? Or does this mean the days of foreplay are over.

    

 

If you want to get a sense of what’s happening in the world, your best bet is to ignore Government data and focus on corporate revenues.

 

Why revenues? Because earnings can be massaged any number of ways (depreciation methods, laying off staff to cut costs, depletion of loan loss reserves for banks, etc.). But you cannot fake actual money coming in the door.

 

With that in mind, I want to draw your attention to the recent drop in corporate revenues at a number of corporations including Proctor and Gamble, Starbucks, AT&T, CB Richard Ellis, Safeway, American Express, IBM.

 

If this doesn’t serve as evidence that real economy falling to pieces, I don’t know what does. To top it off, we can now add Wal-Mart, the single largest retailer, to the list. Wal-Mart just reported that same-store sales fell 1.4%.

 

This is the first time this has happened in six quarters.

 

So much for the “recovery” theory. If you look at the real economy, things are getting worse and worse. When even Wal-Mart reports that people are spending less (remember that corporate email that February sales were a “disaster”?) you KNOW things are bad.

 

Folks, something awful is brewing in the economy. And yet, against this backdrop, stocks continue to rally hard. This bubble is worse than anything I’ve seen in my career, including the 2007 top.

 

For more market insights visit us at www.gainspainscapital.com

 

Best Regards

Graham Summers

    

It is not just the US that is "silly", the Europeans won't be outdone...

 

 

 

and just as in the US, the equity markets remain in their own little world...

 

Charts: Bloomberg