Existing Home Sales Plunge 27.2%, Record Drop, Trounce Expectations Of 13.4%, Lowest Number Since May 1995Submitted by Tyler Durden on 08/24/2010 - 10:01
Hello Double DIPression my old friend. 3.83 million sales on 4.65 million expectation. Previous 5.37 million revised to 5.26. The chart says it all: lowest sales since May 1995, months supply largest since 1999.
Well, we sure hope you, ahem, bought the dip. A $17 vertical move in minutes is an appetizer of what will happen when Bernanke says the wrong word at J-Hole (and he most likely will).
The main (and lately only) bullish indicator that everyone seems to be focused on (for all the wrong reasons), continues to telegraph ongoing distressed for the financial segment: the 2s10s part of the Treasury curve has tightened to 206 bps (this was nearly 290bps a few months ago). At today's rate of flight to safety it is possible the key psychological (whatever that means - computers need therapy if Fib levels are brached?) support level 200bps will be taken out. This means all the leading indicators will soon reorient downward yet again, which also includes the ECRI LEI, which is once again due for an inflection point. And the recently far more critical from a funding standpoint, 2s10s30s butterfly, which we have discussed extensively as the primary carry driver of stock purchasing ability, has just gone double digit again.
The often ridiculed (for some incomprehensible reason) John Taylor of FX Concepts is once again proven spot on with his EUR top call, which came when the European currency was at 1.33, at about the time when Goldman reinforced its long EURUSD call. A few weeks and 6% lower, here is Goldman explaining what they really meant (again). In a nutshell - despite the transitory economic boost driven by a plunging EUR export-boom is over, Goldman is hopeful the lingering effects will remain forever. And Goldman continues to be very bearish on the dollar, for one simple reason: "Our expectations for sizeable additional QE by the Fed will only add to the Dollar negative mix towards the end of the year." We are waiting for the Jackson Hole announcement with bated breath: rumor is the Chairman has mastered the alchemy process of converting linen to gold, and will commence printing the shiny metal shortly.
- Deflation: the Neutron Bomb of Balance Sheets (and why Bernanke will destroy the dollar before he allows it) (Barrons)
- Captain Obvious headline of the day: Asia Slowdown to Have "Serious" on Affect Europe, Economy Chief Rehn Says (Bloomberg)
- Kan Says Yen Move Undesirable; Union Urges G-7 Action (BusinessWeek)
- BoE's Weale Says Britain Faces Recession Risk (Reuters)
- European Banks May Face More Frequent Stress Tests (Bloomberg)
- Libor Volatility is Price of Disrupted Credit (FT)
- We need more TBTFs around the world stat: Greek Banks Pressured to Merge as Economic Slump Hurts Profits (Reuters)
- Housing Slide in U.S. Threatens to Drag Economy Into Recession (Bloomberg)
- Asian stocks fall on economic growth concerns; Yen, Dollar gain.
- Coffee futures flirt with 13-year high on crop troubles.
- Greece asks EU, ECB for $8.2B loan disbursement as part of accord.
- Nikkei dips to 15-month low, with yen strength as 'usual suspect'.
- Obama may propose any federal backing of mortgages be paid for through fees on the lending industry.
- Oil falls a fifth day on concern over US supply gains, slowing recovery.
The title of Jan Hatzius' latest piece pretty much says it all, although here is the punchline: "We continue to believe that the risk of a renewed technical recession—defined as a return to quarter-on-quarter declines in real GDP—is an uncomfortably high 25%-30%. In our view, this exceeds the likelihood of the trend/above-trend growth scenario envisaged in the consensus forecast." So just as the Great Depression v2 is now called the Double Dip, Goldman now calls the Double Dip a "Technical Recession." Surely that will make everything better again.
As the USDJPY is currently probing fresh 15 year lows of 84.24, various London desks, Nomura, BNP and UBS are reporting that the last central bank bastion, the BOJ, is about to intervene. This despite Japanese Finance minister Noda earlier making no specific comment on FX intervention, although noting that the government needs to be flexible on policy response. Yet sending a somewhat contrary message, PM Kan said that sudden currency moves are not welcome and is watching the FX market closely. Also, the head of Japan's Rengo union has now called for a G-7 response to the near record JPY: looks like scapegoating the central banks' (transitory lack of intervention) for all economic ills is becoming a pandemic. Reuters is attempting to moderate the story somewhat by pointing out that some in the BOJ feel more evidence needed on damage from a surging JPY before easing policy. Yet the Yen vigilantes are out in full force, with the most recent 90 pip move driven by a push to force the BOJ's hand: at this point the likelihood of a bank intervention before September is material. Watch the Yen crosses for that very indicative V-fib 200 pip move that will signal that the BOJ has officially entered the currency destruction race. Elsewhere, the flight to safety and to bond bubbles continues, as the both the 10 and 30 Year German yields have fallen to fresh record lows of 2.237%and 2.894%, respectively.
RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 24/08/10
The debate over whether bonds are in a bubble is very much the topic du jour, and while some deflationists like David Rosenberg believe that not only is there no bubble, but the 10 year will soon slide inside of its all time tights at under 2.1%, others believe the 30 years bull run in Treasuries is the dumbest thing since the dot com bubble, and that if anyone is hoping to make money, it should be on the countertrend. Two such Treasury bears are Marc Faber and Peter Schiff, both of whom were on CNBC tonight, and both were dissecting what in their view is the fallacy of the long-UST trade. As for the Faber-Schiff view, no surprise: Peter encapsulates it best: "the bond market is the mother of all bubbles right now, and when it bursts the losses will dwarf the combined losses of the stock market bubble and the real estate bubble. There is no way for the government to pay this money back." And echoing a topic Zero Hedge has been warning on extensively, namely the maturity of trillions in short-term debt that rolls every month, Schiff notes: "I am afraid is that when people realize we can't pay this money back, we aren't going to be able to roll over all this short-term debt. And so it's not just paying the interest, we are going to have to retire the principal." Peter Schiff is correct that inflating our way out of this debt bubble is a lose-lose proposition. Schiff also notes the stupidity of crowds, by highlighting that 10 years ago everyone was chasing risk, by piling into stock market funds, followed by everyone knows what. The outcome for bond investors is clear: "this decade is going to be the worst decade for bonds in US history. Bond holders are going to get wiped out. Either the government is going to default, or it is going to inflate, but either way the people holding the bonds, are holding the bag."
The insolvent state of California which, just like the country of the USA, is operating without a budget (and who needs a budget when the Fed-PD complex will buy the bulk of anything and everything needed to fund ongoing daily operations), has once again ended up on the verge of bankruptcy. As a result, it has just passed a measure which for the second time in as many years (going all the way back to the Great Depression), will allow it to use IOUs in lieu of payment on everything from supplies to contracted services and health-care costs, so it can actually preserve cash to make payments to its generous debtors. On the road to banker serfdom, California has once again reached its goal.
Spreads closed marginally wider, at the worst levels of the day, after an anemic volume day that only picked up in activity when we weakened. Overnight angst from Australia combined with some weakness in EU data was marginally trumped early on by M&A chatter and headline spin on US ECO data but further evidence of a deflationary view of the world (NSC 100Y issue) seemed to provide some downward pressure and despite valiant attempts to steepen the curve or drive AUDJPY up, stocks ended at their lows of the day as did spreads at their wides.
We have had a number of clients asking about our views on the forthcoming GM IPO. Suffice it to say, and in the interests of brevity, we are not overly impressed and worry about this on many fronts as anything but a flipper's fantasy (drop us a line for somewhat more coherent thoughts). Most notably we have noticed something rather fascinating in the Auto sector. The relationship between GM's 2016 bonds and the Ford Equity price has been amazingly (and we mean incredibly) consistent for many months now - a simple arb at around 2.5x Ford's stock price explains huge amounts of variance in the GM bond price and we suggest tracking this going into the IPO for any signs of a preference. One we would expect is selling of Ford to buy into the GM IPO in hopes of flipping soon after and still leaving the manager equally exposed to the Auto sector - this would also be interesting as the GM bonds have residual ownership in the new GM and may be a decent hedge here should the deal be 'better' than many expected. Just thinking out loud on this but we will keep an eye on it.
Goldman Sachs has put together a very informative chart, as part of its European chart of the day series, which shows the discrepancy between household accumulation in domestic and foreign denominated debt. While HUF-denominated debt is a mere 12% of GDP, FX-denominated is at almost 50% of GDP. Most of this debt is CHF-based, and with the CHF hitting fresh record highs, the pain for debtors is becoming unsustainable due to the relative FX strength. And while, as Goldman points out, new FX debt accumulation has plunged, the legacy positions will be there for a long time. For this debt to clear out, the Balance of Payments for Hungary and other non-euro countries will enforce a very prudent deleveraging regime, and will require that the economies grow, not contract. The last is something that is very much in question for Hungary, which as we pointed out recently, has decided to go it alone with IMF assistance, and thus without a safety net backstop should things not work out as expected. Either way, the bottom line is that as European countries loaded up on EUR-, and especially CHF-, denominated debt when the currencies were cheap, the current violent swings with a rising bias, will make the pain for the peripheral countries all that much more pronounced.