Step Inside The Factory Where Steinway & Sons Makes Its Gorgeous Grand Pianos (LVB)

Steinway Musical Instruments is about to be taken private in a $438 million deal with an affiliate of Kohlberg & Company, a private equity investment firm.

Last year we toured the Steinway & Sons factory in Astoria. The company is a subsidiary of Steinway Musical Instruments with two factories: one in New York, the other in Hamburg.

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Steinway prides itself on having retained manufacturing jobs in the U.S. since all its Grand pianos are made here.

It does however manufacture and market its two lower end Boston and Essex pianos in Asia.

Sales for the company were hit in the New York area and across the world during the recession, with 'hobbyist' buyers cutting back on spending.

At the time, Steinway cut a third of its New York staff, reducing the Astoria factory head count to 215, from about 300.

But the New York market recovered quickly. In fact, in 2011 the company sold 2,013 Grand pianos, not including upright pianos. In the last decade the company averaged about 3,300 grand pianos a year.

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This Chart Shows How Unhappy Zynga Employees Have Been With Their Boss, Mark Pincus (ZNGA)

Looks like a lot of Zynga employees might be cheering the news that Mark Pincus is out as CEO, replaced by Microsoft Xbox chief Don Mattrick.

Pincus will become chairman and chief product officer of Zynga when Mattrick starts as CEO next week.

Job hunting site Glassdoor put together a report that shows Pincus' approval ratings by employees dropping like a rock.

That's not surprising considering that the company has been laying off some 18% of its workforce, slashing over 500 jobs.

A year ago, Pincus had a 70% approval rating. Flash forward to last quarter, and it's down to 23%. Ouch.

Glassdoor

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Buying Gold Mining Stocks Today Could Be Like Buying Bank Stocks In 2011

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In a financial era defined by a more visible hand of the central banks, asset classes are bouncing with great frequency between the emotional poles of euphoria and gloom. As our work tends to focus on what lies ahead based on what has come before - the recent historical narrative has provided prescient context and analogy for previous asset movements echoing current market behaviors.

From our perspective, climate change is here - and appears to have brought all the trauma and collateral damages we routinely find within our own backyards these days.

Over the past two years we have read countless research reports, both from technical and fundamental perspectives,  advocating positions in the precious metals sector - specifically, their underperforming miners. Just last December, when the XAU gold and silver index and corresponding ETF's such as GDX were twice what they currently fetch, they were heralded as great value plays by the media darlings and fast money crowd eager to catch the next wave.

Thankfully, we took a less than favorable opinion on them as well as their denominating backdrops and rightfully saw them as the enormous value traps (see Here) they quickly became this past year.

Today, as the sentiment pendulum within the sector has accelerated with great inertia towards the depressive side of the continuum, those same advocates who recommended positions at less than favorable valuations and vulnerable technical underpinnings have suffered such emotional and monetary duress, that they simply don't want any part of them and see further weakness on the horizon.

If it wasn't so predictably tragic - it would almost be funny.

While we recognize our opinion and posture for the sector has pivoted before the prevailing winds have materially shifted (see Here), this is typically the case for us - considering our process tends to be proactive towards major pivots and our timeframes old fashioned. For us, timing is a relative phrase as buying and selling into market extremes is one of the few occasions where dexterity doesn't count for much - assuming you are positioned on the right side of the tracks and are not day trading. While we can appreciate a quick intraday trade as much as the next guy, we've always found our most profitable ideas have horizons a bit longer than the average news cycle. This was the case for us in April of 2011 with silver's blatant parabolic top, and believe the same execution methodology and perspective will work on the dark side of exhaustion with a clear waterfall structure now in place. Keeping it simple  - sell euphoria and buy hysteria. Certainly easier said than done, but if you step back from the emotional undercurrents that have drowned countless participants over the past two years, the structures left behind in the charts are all too obvious.

Moving further down the road to the bear den we once inhabited, we see that the Nouriel Roubini's of world are likely following the same fallacies they applied towards downside targets in the equity markets in 2009, in extrapolating the culmination and capitulation of positions in precious metals - likely at or near the bottom. Far from absurd, we can recognize aspects of their logic in seeing spot prices significantly below where they currently reside. As example, we had up until recently expected the bear market in metals to extend far into 2014.

What changed for us?

Market structure and momentum went from a gradual and erosive decline - to a full waterfall cascade.Ratio expressions for the sector have extended beyond historical extremes.Both the currency and interest rate backdrops have shifted: We have a less favorable opinion on the US dollar; & interest rates have spiked - relieving yield differentials unfavorably impacting the sector.Anecdotal evidence of prominent gold bulls capitulating and despondent conditions within the sector.

As evident below, the value trap comparative that we have worked with this year for guidance as to how far the miners could fall relative to gold has fulfilled its proportional equivalent with the banks "generational low", circa 2009.  Outside of the comparative, the correlation relationship with the banks is following the previous cycle pivot in 2000, where the banks relative to the SPX washed out before the miners relative to gold bottomed.

Despite marching to different rhythms, it has paid very well to buy both the banks and the miners when their respective ratio expressions (now flipped) have reached parabolic extremes. As noted in the first series, they have proportionally exhausted along similar lines. What is particularly interesting is the miners are completing the same exhaustion parallel that the banks navigated in the first half of 2009 - despite putting in a higher high and higher low. It had always bothered us while we were negative and short the sector that the miners had never strongly outperformed spot prices during the span of the entire bull market. Historically speaking - it was a rather large outlier. While outlandish as it seems right now - perhaps their best days are yet to come. Considering the write downs and efficiencies now dictated by current market conditions - lean and mean for the next leg higher just may provide those conditions.

Back in 2011, a similar market and sentiment environment was spawned in the financial sector as the banks careened lower and tested participants moxie in the shadow of the financial crisis. As we recall, the general sentiment at the time - both within the trading and the pundit class, turned overtly bearish on the banks just as they were completing their cycle lows. The thought of buying Bank of America and Citigroup for anything more than a quick trade was seen as reckless and foolish by analysts and pundits so keen on extrapolating current market conditions forward. From a purely psychological perspective,  the retest is often as difficult to navigate and appraise as the initial crisis itself - due to the long tails of the recency effect.

In terms of market structure and momentum, the parallels are evident in the symmetrical and positive divergent nature of their RSI fingerprints and the deeper imprints they recorded versus even during the crisis lows in 2009.

For the broad equity indexes, the cascade in 2011 marked a complete retracement of gains recorded in QE2.

Similar to the equity indexes in 2011, gold and silver have now retraced all of their gains recorded subsequent to QE2.

Like the financials in 2011, the more emotionally traded miners have exhibited disproportional losses to their denominating asset class. Our expectations - and similar to the financials circa October 2011, is once the retest is successfully completed, the miners will once again lead the sector higher.

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Let's Take A Second To Remember How The American Banking Landscape Has Changed Since 2006 [CHART]

REUTERS/Shannon Stapleton

Employees of Bear Stearns watch as demonstrators from the Neighborhood Assistance Corporation of America protest inside the Bear Stearns headquarters lobby in New York March 26, 2008.

It's been just over five years since we last heard from investment banking giant Bear Stearns.

As the financial crisis escalated, banks like Bear Stearns were dropping left and right.

Even the survivors saw their stock prices plummet.

Unfortunately, only a few were able to make their shareholders whole again.

The chart below comes from Morgan Stanley's Asia / Pacific research team led by Jonathan Garner.

Here's some commentary:

It is noteworthy that during the US financial crisis the initial phase was characterized by sharp equity price declines in more peripheral institutions which were wholesale funded and / or exposed to the most risky assets in the system. Later on the stock prices of even the largest and most financially sound participants came under pressure for a relatively brief period of time, prompting in part the policy action which was the turning point of the event (TARP, Stress Tests and QE1). For these larger institutions prices fell 50% in 2 to 3 months prior to policy action before regaining all those losses in the subsequent 6 months (see Exhibit 25). For the weaker financial system participants significant dilution occurred and / or they were absorbed into stronger firms or otherwise wound down.

Morgan Stanley

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How The Fed Made The Markets Tank

Markets have calmed down since the spasmic trading from a couple of weeks ago, when Ben Bernanke's "taper" talk sent interest rates spiking, and stocks diving.

Still, there's a lot of talk about what exactly happened, and what it all meant.

In an email blast to clients this weekend, SocGen's Kit Juckes summarized the debate and discussion:

 The weekend press has seen a caravanserai of commentators question either the markets' understanding of what Ben said, or Ben's understanding of markets, or both. Gavyn Davies, Paul Krugman, Phillip Coggan, the Guardian, the FT, and more. The basic line is that markets over-reacted and the Fed needs to be careful. And despite one of the aforementioned having a Nobel prize in economics, I mostly disagree with the interpretation.  I may only be a fool on a hill, but if markets go a bit crazy when the Fed merely invites us to imagine what might happen if they stop buying bonds, I think that is rock solid evidence of over-correlated positions. The Fed is right to try and let some air out of the balloon. Back off now, and we'll really be in trouble.

The best explanation for what happened comes from Felix Salmon, who notes that the "taper" is just the McGuffin, and that the real story is what's happening in the Fed Funds Futures market, which, post-Bernanke, has really moved up its date for expectations of the first rate hike.

This chart comes from Goldman Sachs:

Goldman Sachs

Says Felix:

Put another way, you and I and Ben Bernanke might think that QE works because when you drop money from helicopters and that money is used to buy bonds and take them out of circulation, the price of those bonds goes up and their yield goes down. But in fact, the main reason that yields fell has nothing to do with the mechanistic consequences of buying bonds — as generations of investors have found out, buying up assets generally has only a very short-term and modest effect on the price of those assets.

Rather, QE turns out to be a surprisingly effective way of signalling to the market that rates are going to stay at zero for a very long time. And when you say that QE isn’t likely to stay in place much longer, the market takes that as tantamount to saying that rates are not going to stay at zero for nearly as long as they had thought.

This is the story.

People see the "taper" as a signal of a rate hike not that far behind it. The Fed has tried to dissuade people from that notion (through the press and through speeches) but that's why the market got worked over.

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Check Out The Parabolic Surge In Texas Oil Production

Here's some more data from AEI's Mark Perry showing the insane surge in Texas oil production:

The state now produces more than 2.4 million barrels of oil a day — a level not seen since the mid-'80s.

And it got there in the span of about two years.

Here's the chart:

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ISM Report Contains Worst Employment Figure Since September 2009

The latest ISM survey results on the health of the American manufacturing sector are out, and the report contains mostly good news.

(Production and new orders are both growing, and the rate of growth for both accelerated in June. Same goes for imports and exports.)

Despite seemingly improving conditions, the ISM report's employment sub-index sank to 48.7 in June from 50.1, marking the lowest level since September 2009.

Any reading below 50 on the index indicates contraction, so the 48.7 ISM employment print suggests that in June, employment contracted at the fastest level in nearly four years.

Both stocks and bonds are moving higher on the release. Lately, good economic data have been bad news for the bond market because good data suggest that the Federal Reserve may be closer to ending its open-ended bond buying program. Given that bonds aren't selling off, it could be that the market is pricing in quantitative easing over a marginally longer timeframe than before, given that the labor market comprises the most important set of economic indicators influencing the Fed.

"The report smacks of recovering health for the broader economy, yet on the other hand, the labor market continues its struggle," says Andrew Wilkinson, Chief Economic Strategist at Miller Tabak. "But let’s not overplay this theory because, as we have recently noted, manufacturing activity accounts for only a small portion of the economy and employment gains often come secondary to plants simply levering up to meet firmer demand."

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