Archive - Oct 2009

It is a curious state of affairs when the continuity of the stock market rally, and in fact the validity of its 60% run up to date, lies in the hands of politicians. Yet this is precisely the case with the housing equivalent of the Cash For Clunkers subsidy in the form of the extended or expanded $8,000 housing credit. The expiration of this freebie in November has spooked numerous pundits into proclaiming that it would be sheer lunacy for the government to not continue its communist ways. In fact, very amusingly, none other than the chief equity market strategist overseeing Federated Investors' $400 billion in AUM is putting his career on the line, assuming a continuation of the massive government subsidy.

I do not profess that the main structural arguments of the following essay are mine. Rather they belong to a rather famous former Chairman of the US Federal Reserve named Alan Greenspan as noted in his rather seminal 1966 essay titled “Gold and Economic Freedom”. However, I have taken the specific arguments of that very prescient essay and modified and reinterpreted them to fit into the contemporary situation of our current global and financial crisis (that it its core, is a monetary crisis).

Gold is only about half of its real high.

Overnight, we have learned that multiple Asian central banks intervened to prevent rapid appreciation of their own currencies against the US Dollar. Could we be witnessing the beginning of a currency crisis, or is this simply more water under the bridge?

Retailers are pushing higher on the tried and true platform of ongoing declines in absolute performance and declining same-store sales, yet on the face of yet another round of beating analysts' low expectations, who will likely use today's data to unleash a torrent of upgrades based on optimistic expectations. The question of who is actually doing the buying, as consumers are once again saving more instead of spending, with yesterday's disclosed drop in consumer lending by a greater than expected $12 billion in August, is irrelevant. Also, keep in mind September 2008 is when the shit hit the fan, and the second half of September was a writeoff for most retailers.

Further to his insightful WSJ op-ed, David Malpass summarizes his views on what a declining dollar means to the United States. Gerald Celente also voices in on why it may already be too late to prevent the collapse in the U.S. currency.

• Yields 4.009% vs. Exp. 3.994%
• Bid To Cover 2.37 vs. Avg. 2.59 (Prev. 2.92)
• Indirects 34.5% vs. Avg. 48.03% (Prev. 46.7%)
• Indirect Bid To Cover: 1.51
• Allotted at high 27.53%
• 8.5% of accepted to directs

There has been lots of speculation as to what may happen once Europe and the rest of the world wakes up and realizes they have been had by Bernanke. A useful regression analysis demonstrates the increasing risk to stocks at the moment when/if the DXY rises. While the straight red line is the simple regression analysis, the orange line indicates beta changes only on postive or negative moves. The variation in slopes demonstrates that DXY up days have a disproportionately higher impact to SPX down days than vice versa. Another way of saying this is that to push the market higher purely as a function of its dollar correlation, the dollar needs to devalue more and more for a measurable impact, alternatively when the dollar rises, the drop in the market is more pronounced than on dollar down days.

Not much commentary needed here.

The hot topic of the day is "Inflation or Deflation?" and the camps are firmly divided into the inflationistas and deflationistas. When asked which camp I am in, I reply "Yes." Some would say that puts me in the confusionista camp, but I actually have an explanation for why are living in a world of 'both.' From a technical perspective we are absolutely in one of the most powerfully deflationary periods in history, yet besides housing prices and a few over-produced consumer goods, we find that stocks, bonds and commodities are all well bid at the moment. While we can ascribe some of this to the artificial wall of liquidity (come to think of it, is there any other kind?) being thrown into the financial market(s) by the Fed, it leaves hanging the question of why that money is not being completely swallowed into the bottomless black hole that the deflationist camp says lies at the heart of our current financial system. - Chris Martenson

Steve Sakwa, who we may have had some harsh words for in the past, primarily during his Merrill Lynch tenure, shares some perspectives on Commercial Real Estate. His observation:

"From a financing standpoint things are far worse; from a fundamental standpoint things are certainly getting worse."

The latest trend among financial analysts is the ongoing circular upgrading of banks by other banks. The most recent example is yesterday's report by Morgan Stanley "Q3 remains constructive for wholesale banks." In the piece, analyst Huw Van Steenis sees nothing but blue skies ahead of the financial sector, especially Credit Suisse and Deutsche Bank. The verdict: "We remain positive on some of the wholesale banks as we expect them to be beneficiaries of low rates, steep curves, compressing risk spreads and refinancing needs." The fact that banks are now effectively liquidity proxies for various printing presses, especially that of the Fed, which continues throwing liquidity into the market at a $35 billion a week clip, is strangely missing from the analysis.

In keeping with the warnings presented by Kyle Bass warned that the entire housing bubble is now being ported over to the taxpayer's balance sheet, Edward Pinto, a former chief credit officer for Fannie Mae claims that the Federal Housing Administration will likely require a major taxpayer bailout "in the next 24 to 36 months" as it is likely to incur $56 billion more in losses than it can withstand.

Even as the dollar keeps hitting new daily lows, which continues being seen as a positive for the stock market, if not so positive for what little remains of world trade, not much has been said about the efforts by Latvia to do all it can to devalue its currency in the wake of a failed bond auction. The consequences are already metastasizing, as seen by the increasing volatility of related currencies, particularly the Swedish Krona which has been hit hard against the Euro on concerns of the country's exposure in Baltic states. Proposals by the Latvian government to rectify the lack of trust and to adopt a mortgage holder liability cap have not been met with enthusiasm. According to Commerzbank analysts any improvements attained from this, and other comparable devaluation approaches, would not achieve long-term goals and at best would result in short-term benefits.

"If we do not break and extend, the Elliott wave 5 target of the move extension initiated yesterday morning is 1,075 on the nose, and the target for the move on 10/02 at the lows is 1,073. Given the previous highs are at 1,075.5, barring a break of 1,062 in the next few hours of trading it seems we are due for a retest." - Nic Lenoir