Earlier we presented a Bloomberg op-ed by an increasingly pessimistic Mohamed El-Erian. For those too lazy to read it, we recommend the following 4 minute interview by Bloomberg's Tom Keene of the Pimco skeptic. In a response to what policy recommendation El-Erian would suggest, the humble ex-Havard endowment head(who sure got out when the getting was good) who prefaces his response by saying he is not smart enough to propose policy (so who is - Tim Geithner?), says America should expect a bumpy journey as the economy resets "There is no silver bullet." Those mid-term elections are looking uglier by the minute.
Now that American equity markets are controlled by Atari and Commodore, which in turn means stocks go up or down purely based on nanosecond colo lag variations, investors who wish to invest in stocks based on this crazy thing called fundamentals are forced to look elsewhere. One such place could be Europe, and now that the Baltic states, Greece, Portugal, Spain, Iceland and Ireland are literally living on an IMF's prayer, the first market which will take a big leg down will in all likelihood be Europe. Starting with that bearish assumption, we present several ideas out of Morgan Stanley's "Sellers' Compendium February 2010" by Ronan Carr. As the title of the report indicates, Europe bulls may want to skip this post. For everyone else, let's dig in.
Last October the BLS announced it would revise historical payrolls lower by 824,000 on February 5 (this Friday's NFP release). While this number will not impact the actual January NFP report (a loss of nearly one million jobs in a month would probably even take out the persistent SPY algo that has been hugging the bid for the past 10 months), it will be prorated across all months in the 2008-2009 reporting period. The reason for this adjustment has to do with a huge glitch in the birth-death model, which is exactly the same problem that the rating agencies faced when housing prices plummeted : the birth/death model assumes, in the long-run, jobs are created, not destroyed. Any period of excess volatility in the stock market therefore translates into major prior downward revisions to already disclosed payrolls. And while we know what the current revision will be, the scarier prospect is that the next historical adjustment, due out in early 2011, will be even larger, at least 990,000. This means that the government has overrepresented running payroll data by over 1.8 million jobs over the past 20 months.
Deep thoughts from T.P. Raman, Managing Director of Sundaram BNP Paribas Asset Management (and others).
Just headlines crossing at this time:
- SR TSY OFF'L: CHINA FX POL TO BE ON AGENDA AT G7 MEETING
- SR TSY OFF'L: CHINA CURRENCY 'SUBSTANTIALLY UNDERVALUED'
- SR TSY OFF'L: CHINA CURRENCY ISSUE ON 'EVERYBODY'S MIND'
- SR TSY OFF'L: CHINA FX NEEDS MORE FLEXIBILITY
- SR TSY OFF'L: ISSUE OF GREECE WILL BE TOUCHED ON AT G7
Rep. Paul Ryan Slams Geithner, Tells The Secretary He Should Be Most Concerned By "Bond Vigilante" CriticismSubmitted by Tyler Durden on 02/03/2010 - 13:05
Today's Geithner drubbing comes courtesy of Sen. Paul Ryan, who in a brief 3 minutes presentation indicates why the proposed budget is not only a joke (the fact that he compares it to a box of cigarettes in light of Geithner's associated disclaimer speaks words for the future health of this country. Only only wonders if it is Ben Bernanke or Goldman Sachs who has assumed the role of Surgeon General), but why the bond vigilantes are just waiting in the corridors to see the Fed and PD's control over the bond market slip before they bring the house down.
After the earlier announcement of record risk in Portugal, it was only a matter of hours before the epicenter would feel an aftershock. Indeed, Greece CDS is now back to over 400 bps, after tightening under 370 bps yesterday. Those poor protection sellers just can't catch a break. The dollar flight to safety trade is on again. Lack of robotic, or otherwise, volume means the stock market has yet to digest what all this means. Lastly, in pursuit of an efficient sovereign risk market, STUPIDity is now back to April 2009 levels.
US Tries To Maximize Its Equity Return In Bankrupt Automakers, Tells Americans Not To Drive Recalled ToyotasSubmitted by Tyler Durden on 02/03/2010 - 11:57
This whole Toyota recall thing has had us puzzled. The scale of the recall keeps getting bigger and bigger, the hit to Toyota stock greater with every single day. This is extremely uncharacteristic for a company that has taken PR fallout containment (not to mention quality) to an artform. Which, one would speculate, may implicate other forces in this dramatic collapse in everything that Toyota has stood for. The just released announcement from the US Government, in which the government is telling Toyota Owners to "stop driving the recalled vehicles" (can Congress quickly make this into a law please?) which is a defacto endorsement of buy American, and not just any American, but cars made by bankrupt and spun off automakers, in which the country has a major equity stake in via TARP and loan facilities, could be a big clue as to what the behind the scenes play here is. As everyone knows, Cash For Clunkers was a benefit exclusively to Japanese automakers, with Ford barely sneaking into a top 5 spot for cars sold. Well, now it's time for Uncle Sam to demand his pound of flesh; if that involves a "recall" and a huge hit to Toyota's sales and market cap, so be it.One thing for sure: with the various spending freezes , we won't be seeing another Cash For Clunkers for years to come, if ever... Or we may, if and only if, Toyota's reputation has been destroyed beyond measure.
Portugal Bund Spreads Even Wider Following Substantially Reduced Bill Auction And Much Higher Auction Yield, CDS Hits RecordSubmitted by Tyler Durden on 02/03/2010 - 11:34
Europe bailout tracker update: Portugal edition. Hey Almunia, is there anything to be concerned about in Portugal? We thought so... The country's 10 year spread is now 18 bps wider to 147 bps after the country just had an almost failed BILL (12 months) auction. The country had previously announced an indicative offer of €500 million in 12 month bill to be auctioned. The result- a sale of just €300 million at yields over 50 bps higher compared to just two weeks ago. Oh, forget Greece, Portugal CDS is now trading at record wides.
As David Rosenberg points out, "what a difference a year makes." Here is the compare and contrast. And some observations on why real GDP, absent non-recurring stimulus benefits, was more than 7% lower in Q4 compared to the disclosed number.
Mutual fund flows, or the absence thereof, have drawn some recent attention as related to the price movement in the domestic equity market. The following analysis looks at this topic in addition to some other useful observations including seasonality, historical net new cash inflows, taxable bond funds, corporate spreads, and treasuries.
Treasury's Quarterly Refunding Statement Released, $81 Billion In Refunding Auctions On Deck, Second Reopening Of 10 Year TIPS ComingSubmitted by Tyler Durden on 02/03/2010 - 10:34
The Treasury has just released its Quarterly Refunding Statement which indicates that refunding auctions will amount to $81 billion, the same as the amount announced in the November refunding. Furthermore, the auctions sizes are also unchanged from November. The UST noted that after increasing consistently, auctions sizes will finally "stabilize at current levels" and that it is also weighing eventual cuts in coupon auction sizes. With individual tax collections plummeting we wish them all the best as they try to plug the balance with hot air. Notable was the announcement that the UST is considering raising the frequency of its TIPS auctions, as well as a reopening the 10 year TIPS.
Never a boring day for Joaquin Almunia. Over the past two weeks, the commissioner has been busy trying to persuade anyone who is willing to listen that not only would Greece not be bailed out, not only would the country somehow reconcile its 140%+ Debt/GDP ratio and record budget deficit in order without a civil war, not only are various €40 billion GGB certificates popping up all over the price irrelevant in the grand scheme of things, but that the EMU is actually a viable concept, long after anyone who does not believe in the tooth fairy realize that it is only a matter of time before fallout in the periphery tears the Union apart. And highlighting the amount of tragicomedy in Europe's "connected vessels" alchemy-risk experiment is the symbiosis among PIIGS risk: indeed, as Greece Bund spreads have tightened by 10 bps to 343 bps, those of Portugal have widened by a much greater proportional level, and are now 15bps wider at 144 bps. Europe is now one big, cracking dam, holding back a toxic surge of mismarked securities, and a scurrying Almunia is using each and every available finger to plug the PIIGS holes. We wish him all the luck in the world.
Pimcos' El-Erian Warns About Irrational Exuberance, Sees January Sell-Off As Harbinger Of Things To ComeSubmitted by Tyler Durden on 02/03/2010 - 09:52
"Judging from market valuations, I sense quite a gap between consensus market expectations and key political and economic realities, especially in the U.S. If the gap isn’t bridged by the validation of the more optimistic expectations, investors may well find that January’s global equity sell-off was just a precursor to a disappointing year for several asset classes, including stocks." - Mohamed El-Erian
If only there were more journalists like Dylan, the vast majority of America's population may well have been on its way to grasping the gravity and the real implications of our current unprecedented wealth transfer paradigm, which the President, despite increasing "political points" rhetoric and recent attempts, such as the Volcker Rule, to if not stop then at least delay (thank you teleprompters), has been instrumental in blessing. Between TARP, guarantees, direct cash investments, and the trillions in implicit benefits from the record steep yield curve, the only beneficiary from the existing financial environment is the banking system, period. That this money could be put to much greater use elsewhere is without question: if these trillions had been invested in education, tech and research, America could now be on the verge of another technological revolution. But it is now too late (and, yes, this does account for marvels such as the Kindle - now if there was only a cool looking gadget that would force more Americans to learn to read). Looking back many years from now, the sad legacy of this administration will not be some vaunted healthcare reform, but the unprecedented amount of capital that shifted away from the nation's working class to the nation's "financial innovation producing" class.