Archive - Oct 15, 2010

A new report by MainFirst Bank provides more ammo to the China bears. In "Why China's Growth Rate May Halve" author Bijal Singh has a very gloomy forecast on the country's growth rate, concluding it may "struggle to grow faster than 6%, given that China is now fully employing the vast bulk of its available urban labour force, and given that the Chinese working age population has stopped growing and is on a declining path." Singh takes Rosenberg's earlier rhetorical question about why collapsing profit margins have not yet impacted prices and believes that increasingly more companies will be forced to rationalize their operations, driving a stake straight through the heart of all those pushing for the tech bubble part 2: "Demand growth of 4%-6% may cause Chinese firms to shift focus from growing capacity to better management of existing capacity. Rather than capex equipment providers, computer service firms may be the winners in China over the next five years." The main driver for the GDP growth is that, due to the GDP being a function of job growth and productivity growth, it is the latter of the two which casts the assumption of GDP growth of 8% in perpetuity in doubt. "Over the last decade, productivity growth in China may have been no different to that experienced in the developed world. But China has been able to throw capital at the economy to grow its workforce at a rapid rate without incurring inflationary pressures." Said inflationary pressures are precisely the reason why the country is so cautious to do anything material about either its exchange rate (and today we yet again got confirmation of just who wears the pants in the Sino-US relationship), as well as its interest rate. All in all, changing demographics and economic conditions will make it increasingly difficult for China to manipulate its way into the required growth curve, which may well be the biggest risk to not only the BRIC growth story, but to that of the developed world as well (because now, unlike before somehow, decoupling is expected to work).

• Head of Turkmengaz Fired and Replaced with Deputy
• CYBERCOM to Go Operational This Month
• Govt Takes over Hungarian Plant after Deadly Toxic Spill
• French Transport and Oil Industry Strikes Risks Radicalization
• Bolivia to Start Lithium Production in October
• ISAF's Torkham AfPak Border Crossing Reopened
• Iran's President Visits Lebanon in Clear Attempt to Boost Hezbollah

The September budget deficit came at ($34.5) Billion, missing expectation of $32 billion, lower from September 2009 which was revised ($46.6) billion (which was revised worse as usual). Total September receipts were $245 billion, on $280 billion of outlays. Both numbers were an increase compared to 2009. Also, last month the US paid $18.2 billion in interest on its debt, of which an increasingly greater portion is now going to none other than the Federal Reserve which will soon be the biggest holder of USTs in the world.

Who cares what Benny and the Inkjets blink in morse code when you have the one and only Bill Gross. As we said last month, the best and only necessary and sufficient tell to decide what the Fed will do on November 3 is to keep track of the Total Return Fund's composition. Today, TRS just released its updated September holdings, and for all those hoping to see that Pimco Billy is betting the farm on QE2 - that's a bingo. Pimco has just increased its MBS holdings to the highest since July 2009, when Gross was already dumping MBS on the tail end of QE1. The biggest tell however, is that just like before QE1 abd QE Lite were announced, Bill has once again gone on margin, reducing his net cash exposure from $5 billion to ($7.6) billion. And keep in mind this is September: we are certain that once the October results come out, a few weeks after QE2 is effective, TRS will have a material margin position of more than $20 billion, and will have pumped up its MBS holdings up to $100 billion. So now that we are certain that Gross just telegraphed that QE2 is imminent, that leaves us with two questions: 1) why MBS and not USTs? Is Gross saying that Bernanke will once again be forced to come out and buy MBS in addition to USTs? or 2) did Gross just get screwed on his doubling down MBS? With fraudclosure forcing such reputable MBS managers as Gundlach to claim that it will have no impact on their business model, we are also certain that the entire Fashion Island campus is sweating bullets currently. If the entire MBS model is indeed unwound as some speculate, this could well be the end of PIMCO (and how poetic that would be). Yet these are considerations for the future. For now - anyone who may have had an ounce of doubt as to Bernanke's FOMC announcement intentions, can now put it away.

In plain terms, corporate insiders, the folks who know their business and its prospects better than anyone are dumping shares as fast as humanly possible. They are literally putting their money where their mouths are when they say the US economy is AWFUL and business prospects are on par with those of February 2009 (before Bernanke even thought up that stupid “green shoots” nonsense).

Who could have imagined that the topic of the Speech you give on options expiration day with the dollar making new lows would just so happen to drive the dollar even lower and squeeze the markets higher - that is just a gosh-darn freaky coincidence!

Despite every commodity opening limit up virtually every day for the past two weeks on expectations of a free money tsunami about to be unleashed (and a 14th weekly increase in M2 which we will describe shortly), David Rosenberg still adheres to the belief that deflation is not only here to stay but get worse. And, frankly, we don't disagree. It has long been our contention that the sublimation from deflation to hyperinflation will not pass through the inflation phase at all (or it may, but will last for exactly one millisecond as $3 trillion, by then, excess reserves are released and send every price up by a few quadrillion percent). In the meantime, the input cost-price mechanism is still broken, which leads Rosie to believe that the fact that the 30 Year just closed at an increasing inflection point with the rest of the curve going tighter, is to be ignored. Alas, with corporate margins approaching zero (and if you are Amazon, probably already there) companies face one of three choices: become banks, and borrow at ZIRP, and lend money to their customers via private label credit cards (unlikely), shut down, or raise prices. The last one is what will happen, and will finally put an end to the ridiculous consumer disrectionary rally that has perplexed humans (but not robots) for quarters on end. Furthermore, as to Rosie claims: "For all the talk of how higher Chinese wages were going to be transmitted to higher prices of these imported items, it does not seem to be happening" we will shortly post some thoughts which confirm that this is precisely what is happening.

According to Reuters, a senate aide has confirmed that Tim Geithner has pissed his pants and seeing the sudden surge in the dollar following rumors that a bunch of hapless politicians were about to blame America's depression on China and call it a manipulator even as the US prepares to print $1.5 trillion in new paper, has delayed the currency report until after the G20 meeting in November. One wonders just what telephone conversations occurred between Geithner and Wen Jiabao in the past 20 minutes, and what the mutual assured destruction trump card (or 850 billion) used this time was.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 15/10/10

Update: Now it is getting really interesting - Reuters reports that according to a Senate aide, the currency report will be delayed. If all was to be smooth sailing, one wonders why...

Today, the Treasury will finally come out with its currency report, which will conclude whether China is or isn't a currency manipulator. While the fall out from the former could well be dire, and result in various political and fund flow consequences, it appears that this is precisely what will be the outcome. Attached is a note from RHM Global according to which the adverse outcome is all but certain.

And another banks loses its clients a boatload as Bank of America is forced to close out its long bank rish vs IG trade after the stop loss gets hit. With bank CDS surging the negative convexity is sure to send spreads in the sector even wider, rivaling only the stupidity exhibited by Apple which is now over $310 and has entered its parabolic move, as everyone is now in the stock. At this point look no further than the dot com crash to see how the move in the Nasdaq, better known as Apple, will end, and why deep OTM puts will soon rule the day. Back to BofA, Jeffrey Rosenberg instituted a $20MM short risk protection in IG15 last night. Hopefully that isn't stopped out imminently, on nothing more than intraday OpEx-POMO Vol.

An intro for newbies

Today's POMO closed and it was a whopper, coming far higher than expected, at $4.690 billion. Oddly enough, this was a minute 3.2 Submitted to Accepted ratio, indicating that even with everyone and their grandmother buying the belly, very few are willing to still put it to the Fed, which simply means that most PDs are waiting for far higher prices at which to sell the Fed's fat back to it. Worse: the market seems to think that even $4.7 billion worth of free money leveraged 30 times is insufficient to get the S&P back to the green (although the day is still young - with volume starting to drop, here comes the HFT permabid scalpcrew).

Why a rational being would long equities, especially financials, at this juncture is beyond my limited imagination. Even gold is vulnerable to a correction should QE2 be judged a disappointment by the market. I remain very bullish on gold longer term. But I've taken profit on most of my GLD calls recently. This (Friday) morning's Bernanke speech should be interesting. He has a hell of a fine line to toe in rhetoric and expectation management, or else he may make history today. We'll find out soon enough. But isn't there something wrong about the system when one person should have such a huge impact on the market? Prior examples of such overwhelming prominance include Hitler, Mao, and Greenspan.

It seems like yesterday that David Tepper uttered the famous last words: "What will go up? EVERYTHING." Too bad, then, that one look at Mr. Appaloosa's holdings today shows a complete bloodbath (yes, don't adjust your monitor, that IS an 11 handle on BAC). Unless, of course, between June 30, and just after his now legendary CNBC interview, the Chatham, NJ-based hedge fun manager was actually selling his positions to the creme of the crop of CNBC viewer gullibility. But that would of course never happen. That said, we can't wait for his Q3 13F to be proven right. Oh, and John Paulson's recovery fund is fast approaching 2010 P&L lows. Presenting, for your gloating enjoyment, Tepper's top 25 holdings. Note holdings #1, #2, #4 and #5. As a reminder, CapitalIQ has Tepper's equity holdings at $2.5 billion.