Archive - Jan 15, 2010

"Now is definitely not the time to live in the moment, to start hyperventilating and to begin to chase this market to a bubble peak; now is the time to think about what the economy is going to look like in a post-stimulus world because the only thing we know is that the Fed and the government, at this juncture, intend to start pulling back on their support for the housing market at the very least at the end of March. At that time, we will see what the emperor — the U.S. economy in other words — looks like disrobed. And think of how ugly that picture is likely to be if the Beige Book can, at best, describe the current macro backdrop as being “at a low level economic activity” in view of all the government stimulus out there in support of a boom." - David Rosenberg

Must read: UBS Macro Sales (note, this is likely not the UBS house view) calls for a peak in Emerging Markets. "To me this is our Bhutan Dry Docks moment. The economic argument supporting EM investment is valid -as I pointed out earlier, you can't create a bubble without something that initially supports investment flows - but its gone too far. When I read market commentary that suggest that
the Shanghai composite share index (see below) is now better value because price earnings ratios have come down from 100 to 50 its like déjà vu all over again. I wrote stuff like that back in 94 - just before the peak - just before the crash - just before the US rate cycle turned. I'm calling a top in emerging markets. Q1 2010 will still see massive money flow into the asset class as portfolio decisions are driven by last year's stellar performance and developed market pessimism, but starting in Q2 as Paul's setting change comes closer, it is time to call a top to the twin liquidity bubble of this cycle - traded commodities and emerging markets."

RANsquawk 15th January US Morning Briefing - Stocks, Bonds, FX etc.

Some more macro observations from Joe Saluzzi: Last "Friday's stock market was the biggest tell: when you saw an unemployment number come out like that, that tells you what an absolute joke the stock market is, and how it's a lagging indicator, not a leading indicator of what's going on... When you're in the basement you can't stay in the basement, you have to walk up the stairs to get out. We aren't walking up the stairs, we just stopped walking down the stairs... a $77 Estimate on the S&P, you are looking at a 15x forward multiple on that earnings, yet you are in an economy which is closer to the 80's which deserves a 10x P/E. Why do you give it a 15x P/E?... If California was a public corporation they would be the next Lehman Brothers: that's how bad this thing is. The government is saying 'We're not going to bail you outCalifornia.' We're they going to come out with the $9 billion that they owe?"

So let's get this straight: you are a CapitalOne borrower, and you have filed Chapter 7 bankruptcy protection. In other words, you are dunzo with paying off credit cards, revolving loans, non-revolving loans, yacht and country club payments, fired the butler, got rid of the underage nanny, cut up the Centurion, and are waiting for the repo men to come and take your outhouse and two donkeys, even as the third wife and kids are garnishing your wages, and the IRS is doing a full-blown tax audit. Yet because of some fluke the check to COF was in the mail, and while the bank was fully aware your FICO score was essentially 0, they still would not count you as a "charge off"...WTF!!!???

Earlier Goldman issued a new report on the homebuilders (found here). Not much in terms of overall macro perspective change, however notable was that Goldman downgraded TOL as the firm "believes that outperformance will be limited in the first half of 2010." However, before TOL management decides it will no longer pick up phone calls by Goldman's Joshua Pollard, GS hedges with: "That said, we still believe that there is significant value in Toll shares for patient investors as Toll has one of the best franchises in homebuilding." So sleep confident dear hedge funds managers - Goldman should still be able to arrange private one on ones with the CEO at your leisure. As for the true reason for the downgrade, whether this is due to most shorts having cleared out of the stock already, much in line with keeping with Goldman's strategy of upgrading stocks that have a substantial short interest (ref. MGM), is unclear.

University of Michigan January Consumer Confidence came in at 72.8, below expectations of 74, which would have been an increase from unrevised December of 73.4. Instead December was revised down to 72.5 to make January seem like an improvement. The Sentiment number was driven higher by better than expected Current Conditions, which came in at 81 (prelim), up from 78 in December, while Expectations dropped to 67.5 from a revised 68.9 in December (69.7 unrevised).Inflation expectations for 1 Year increased from a final December read of 2.5 to 2.8 (which incidentally is the expectation for the 5 Year inflation expectations as well).

The company which came to investors two years ago via Goldman Sachs peddling the biggest turd of a business model caked with 10 layers of lipstick for a global refi, and proceeded to file for bankruptcy before even one coupon payment was made (we hope that's a warning to Hexion 1.5 lien investors... wtf is a 1.5 lien anyway?), is throwing in the towel once again, and preparing to file for Chapter 11 for the second time in as many years according to the WSJ. Sucks for investors Sopris Capital and Aspen. We hope they managed to extract some equity out of this brilliant investment while they had the chance.

Meeting with the head G-Man. FBI Director Robert Mueller gives his take on the Google Affair. Welcome to the new Cold War. Where is my 20 terabytes of data? One country’s criminal is another’s national hero.

• JP Morgan Chase & Co: 51.50, last 46.3 +5.25
• Goldman Sachs Group Inc: 104.50, last 100.5 +4.00
• Merrill Lynch & Co., Inc: 114.50, last 105.5 +9.00
• Morgan Stanley: 119.50, last 113.5 +6.00

JP Morgan earlier reported better than expected earnings on weaker than expected results. While the 9 am conference call will provide additional data, here are the key data points from the provided slide deck.

• As anticipated, China FX reserves surge to $2.4 trillion; no accompanying TSY purchasing (Bloomberg)
• Steven Pearlstein: A transaction tax is the answer (WaPo)
• Stiglitz: Why are we letting Wall Street off so easy? (Mother Jones)
• JPMorgan beats profit, revenues miss; shares, futures fall on cautionary language from Dimon (WSJ)
• Euro falls most in month against dollar on Greece; oil drops (Bloomberg)
• The Greek CDS curve is now inverted (FTAlphaville)
• Brooksley Born wants the public—and Wall Street—to understand unregulated derivatives’ role in the crisis (City Journal)
• Separating investment banks will not make us safer (FT)

• Asian shares were mixed, with tech stocks gaining after solid earnings from Intel.
• China charged US with “backsliding” toward protectionism; warns on Google.
• Chinese equity funds had a third week of outflows as the central bank tightened lending.
• Foreign Direct Investment in China more than doubles to $12.1B in Dec as economy recovers.
• Jobless Claims in US increased 11,000 last week to 444,000.
• Mortgage rates mostly fell in the past week, 30-yr fixed-rate mortgages back toward 5%.

This paper considers the potential liquidity risks related to interoperability ~ the issue at the center of the current multi-jurisdictional regulatory review that has temporarily suspended progress toward increased competition in equity clearing. It discusses several options regulators and CCPs could consider to mitigate the systemic risks that could be triggered from liquidity risks in multi-CCP links, and also presents options to minimise the credit risk to CCPs arising from the failure of an inter-operating CCP.

RANsquawk 15th January Morning Briefing - Stocks, Bonds, FX etc.