Archive - Oct 26, 2010

Add in the cost of our military presence in the Middle East and the true, fully costed price for Saudi crude is a staggering $219/barrel! We are literally spending $100 billion extra to buy $60 billion worth of oil a year. Bail on Afghanistan and Iraq, and oil prices would fall, our military budget would plunge, the federal budget deficit would shrink, and our taxes would likely get cut. Please don’t tell ExxonMobile or BP I told you this.

The market was quiet today as it digested marginal macro news and even more marginal earnings news while it continues to wait for next week's QE2 which promises to be a worse proposed sequel than Amistad II: The Return Trip Home.

Perhaps the biggest, and most overtouted, silver lining of the US depression is the massive (presumably) amount of cash held by corporate America, built up over the past two years thanks to massive headcount reductions, overall cost-cutting, and record drops in CapEx investment. And while American non-financial companies currently do indeed have a record $943 billion of cash (of which however $233 billion is in short-term investments), they also have a record amount of debt to go with the cash: 3,394 billion at mid 2010. In addition, as we have long cautioned, nearly a quarter of this cash is held abroad and can not be repatriated. Furthermore, putting the $1 trillion in perspective, it is slightly higher than the total combined annual corporate capital spending and dividend payments by non-financial companies. As such, the cash buffer is certainly not as big as is touted by assorted permabulls. In fact, as even Moody's, which has just released the most comprehensive analysis on US corporate cash discloses, "companies are unlikely to spend their cash on expansion and hiring until there is greater certainty about the direction of the U.S. economy." The primary culprit: companies are all too aware of the record excess capacity slack, and that there is no need to invest for the future until others do so first. But we already knew that. And since we have already been digging underneath the surface of the US cash hoard, and uncovered a variety of unpleasant facts, it has been remarkable how quickly this topic is no longer a talking point among CNBC's anchors and is only brought up by its most clueless guests who don't realize only the dunces now use this argument (kinda like the whole "green shoots" thing that did miracles for Dennis Kneale's career). So here are all the details about the corporate cash stash, and a whole lot more.

Australia’s CPI data was released this evening at 0.6% with expectations of 0.7% disappointing the computers which instantly sold off the AUD/USD 50pips. …expect ES to follow AUDJPY

Sovereign wealth funds are a force to be reckoned with. Some like Singapore's GIC have started to selectively take on more risk while others, loading up on domestic debt, are in for a nasty surprise...

The US population is starting to get restless: investors are beginning to sue, there are protests over HAMP, and foreclosure probes are happening.

Gonzalo Lira picks up on a topic much discussed on Zero Hedge, if not so much elsewhere: the religulousity (thank you Bill Maher) of the "science" of economics: "It’s no great insight to say that economics—the so-called “dismal science”—has had a dismal track-record in terms of predicting macro-economic events over the last forty-odd years. And as for the last couple of years? Sheesh—a monkey throwing darts would have done a better job of predicting how the macro-economic picture would play out. But I argue that economics is not and has never been a science—what's more, it's become a religion. And just like any religion, it has adepts, denominations, and orthodoxies. Which is why it will fail in its efforts to get out of this Global Depression." —Gonzalo Lira.

The Casey Report provides a useful glance at the real inflation currently ravaging items that are actually purchased by Americans, not those captured by the Fed's BLS statistics: "On average, our basic food costs have increased by an incredible 48% over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23% on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39% higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36% since last October." Of course, the ongoing deflation in items purchases requiring leverage will continue to skew the CPI so far south to make all those who bought 5 Year TIPS yesterday at negative yields end up losing money on the transaction.

EUR posted broad based losses on Tuesday amid a stronger USD and following news that Citigroup has advised its clients to take profits on long EUR/USD positions. As a result, the pair fell below the 10DMA (1.3935), the 21DMA (1.3862) and looks set to make a test on 1.3800 in the coming days. Elsewhere, despite a stronger USD, the GBPUSD rallied and posted gains of over 100pips on Tuesday after the UK's Q3 advanced GDP data beat expectations by a impressive margin and S&P revised the UK's sovereign rating outlook to stable from negative, affirming the country's 'AAA' rating, having been satisfied with the coalition governments performance and budget plans outlined thus far. Finally, the USDJPY pair rose towards the mid-81.00 levels on Tuesday amid a stronger greenback, which gained following renewed concerns over the Eurozone and on the back of much better than expected UK GDP data which lifted GBP across the board.

Jeremy Grantham launches into his most aggressive and succinct anti-Fed diatribe yet. He is a man who gets it. 'If I were a benevolent dictator, I would strip the Fed of its obligation to worry about the economy and ask it to limit its meddling to attempting to manage inflation. Better yet, I would limit its activities to making sure that the economy had a suitable amount of liquidity to function normally. Further, I would force it to swear off manipulating asset prices through artificially low rates and asymmetric promises of help in tough times – the Greenspan/Bernanke put. It would be a better, simpler, and less dangerous world, although one much less exciting for us students of bubbles. Only by hammering away at its giant past mistakes as well as its dangerous current policy can we hope to generate enough awareness by 2014: Bernanke’s next scheduled reappointment hearing." Pretty much all familiar topics to Zero Hedge readers.

Here is my latest article in the October issue of Institutional Investor. But first I want to bring to your attention two articles from the NY Times.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 26/10/10

Now is the time to own gold stocks. Most gold companies will report their Q3 earnings at the end of October. Due to a higher year-over-year average spot gold price (which has increased 27.8% to $1,228/oz in Q3 2010 vs. $961/oz in Q3 2009), virtually every precious metal company is forecast to exhibit substantial net income growth. These fantastic net income results will be augmented by higher by-product prices (average silver, copper, and zinc prices were up 28.7%, 24.2%, and 14.8% year-over-year), which should set the stage for banner year-over-year earnings increases. One of the best axioms for investing is painfully obvious, but so often forgotten by seasoned investors: it’s all about earnings. Earnings are what drive stock prices over the long term. Investors seek out earnings growth wherever they can find it, and we can’t think of a single equity sector that exhibits better year-over-year earnings growth potential than the gold producers. We expect that to change over the next two quarters as investors realize how much stronger gold producers’ earnings will be at $1,350 gold. As countries decide to burn their currencies in the devaluation race, gold has responded, and now it’s the producers turn to perform. We’ll gladly take the earnings. - Eric Sprott

S&P closes up 0.02; ES closes up 0.25. Both were the most blatant token green close merely to force demonstrate that POMO days will always and forever close green. The market has moved from tragicomedy and is now doing stand up alongside Coco. Ignore the fact that VIX is now up two days in a row despite positive stock closes. Shortly, we will update our POMO analysis shortly to see how many sequential green POMO closes today brings us to.

And following up on the previous post demonstrating the escalating war of words vis-a-vis the increasingly hostile stance on Sino-US monetary relations, is the following recently released letter by Paul Tudor Jones in which the legendary traders discusses the critical relationship (among many other things) of the USD-CNY: "As someone who has traded foreign exchange since 1980, I believe the
RMB/USD rate is currently the single most important of all exchange
rates. It not only drives the largest foreign trade relationship in the
world, it also drives virtually every other exchange rate globally.
Dozens of other emerging market countries suppress their exchange rate
against the US dollar because the RMB is effectively pegged to the
dollar. And what is remarkable is the lack of any concrete policy initiative in the US to change this." In other words, we are stuck in an impasse that will not change for a long, long time, as both countries are terrified to really "defect", and neither country has a material advantage in any one regard, plus are entwined, despite all the jawboning, in a symbiotic relationship whose status quo is more valuable than standalone existence. Sorry Schumer.