Recap 10-31-12: Apple, Yen, ECB Loan Officer Survey


Hope everyone got through the storm OK. That was a rough one.

Apple: at 4.5% of the S&P, it now takes a lot of money to increase the stock’s PE. That is probably a key reason why Apple’s robust earnings the past few years have coincided with a sharply declining PE. There are also a lot of stale hedge fund longs, which is also likely contributing to the recent move. Additional substantial rallies from here in excess of a broader market rally is likely to require that cash be returned to investors, in the form of a share buyback or higher dividend. However, another possibility is that Apple intends on using its cash hoard to fund an unusually ambitious project. As Asymco notes, Apple has been spending enough on capex to equal both Google and Intel combined. Although it is unclear what the project is or how successful it will be, the economics of scale suggests that the return on that capex is likely to be lower than the 8.5% yield that the market is pricing in.

Yen: The brewing battle between the Japanese government and the BoJ will likely result in the BoJ losing as long as Noda is in power. In other words, there is now two way risk in USDJPY through at least 2Q 2013. (Elections are likely to be called by August next year, and the PM is not popular) However, the battle to weaken the Yen is likely to be one that both authorities lose. The deflationary effects in Japan are secular, and building. My estimate of fair value for the cross is now almost 10 figures lower.

The ECB survey showed that while lending standards across the EU all tightened somewhat, there is a start difference on the demand side. (Charts from Barclay’s) German demand for mortgages, for example, has barely moved over the past 2 years, although capex related borrowing remains in marginally concretionary territory.


  • Chicago PMI was stable at 49.9 vs 51 exp and 49.7 prev
  • US Senior Loan Officer Survey shows that lending standards tightened marginally in Q3, while loan demand broadly improved.
  • BoJ did not ease as much as expected, but the twist is that there appears to be substantial political pressure building on the BoJ. The BoJ will now regularly report on deflation conditions to the “Ministerial Council on Exiting Deflation,” which is chaired by not the Financial Minister, but the Economic and Fiscal Policy Minister, who is one of the strongest proponents of additional monetary easing.
  • SNB diversified aggressively away from euros in Q3. Total reserves rose by EUR CHF 62bn in Q3 yet holdings of euros fell by an unadjusted CHF 8.8bn. This marks a radical departure from Q2, when the SNB invested three-quarters of its new reserves, or CHF 101bn, in euros. As a result the share of the euro and dollar in the SNB’s portfolio are now back to where they were in 2008. In other words, SNB reserve diversification appears to be largely complete.
  • The SNB increased its equity holdings from 10% to 12%, worth CHF 51.5bn, up from CHF 36.5bn in Q2
  • Berlusconi said “we will decide in the next few days whether it is better to immediately withdraw our confidence in this government or keep it, given that elections are scheduled.” Withdrawing confidence in the Monti led government would lead to a collapse of the present organization.
  • ECB Oct bank lending survey – According to the October 2012 bank lending survey, the net tightening of credit standards by euro area banks for loans to enterprises increased in the third quarter of 2012 (15% in net terms, up from 10% in the second quarter of 2012).
  • Norgesbank expects to maintain policy rates through 2013
  • Japan Mfg PMI fell 1.1pt to 46.9 in October as expected
  • GM: EPS 93c vs 60c exp; Rev 37.6B vs 35.9B exp; NA EBIT 1.8B, Europe EBIT -478MM, sees ’12 Europe EBIT loss 1.5-1.8B
  • Federal Reserve San Fran: Only 30% of borrowers who defaulted in 2001 had taken out another mortgage in 10 years. The best predictor is the change in the borrower’s credit score. The average increase was 100pts +
  • GS: spd btn Mtge current coupon and effective rate (primary-secondary mortgage spd) is at 120bps, the widest level in >25 yrs. They expect that it will tighten no more than 35bps because of reduced supply (i.e. zero non-GSE supply) and sustained refi demand. Owing to the greater uncertainties facing the mortgage origination industry, we expect investments in new capacity and hence spread compression to play out more tentatively than in the past. We forecast that primary-secondary mortgage spreads will mean-revert, but slowly, compressing by no more than 35bp over the next two years.

Upcoming Data:

  • Wed: China Mfg PMI, HSBC Mfg PMI
  • Thu: US ADP Employment, ULC, Jobless Claims, ISM Mfg,
  • Fri: ItalyMfg PMI, UK Construction PMI, US Employment, Canada Employment
  • Mon: China HSBC Services PMI, UK Services PMI, ISM Non-Mfg PMI, RBA
  • Tues: Italy Services PMI