Archive - Oct 29, 2010

One of Goldman's better technical analysts, John Noyce, has released his latest edition of the Charts that Matter. Among these, the most interesting one is that of the 10 Year, which is relevant since in about 48 hours the entire treasury curve could either flatten and tighten by 50+ bps... or widen by double that. Noyce's prediction that based on the break in the 10 Year yield channel, one could "make a case for significantly higher levels", will certainly be put to the test next week. It is Zero Hedge's conviction that the 10 Year will, unfortunately, tighten aggressively post any QE overtures, once it is made clear that the Fed will not allow rates to go up... ever... dollar be damned.

The President was notified of a potential terrorist threat on Thursday night at 10:35, by John Brennan, Assistant to the President for Homeland Security and Counter-terrorism. The President directed U.S. intelligence and law enforcement agencies, and the Department of Homeland Security, to take steps to ensure the safety and security of the American people, and to determine whether these threats are a part of any additional terrorist plotting. The President has received regular updates from his national security team since he was alerted to the threat.

Who would have thought that Burrito Bowls and Red Envelopes would be hotter than the I-pad in 2010? Sounds crazy but it’s true. By looking at the YTD performance chart from Yahoo! Finance you can see that the stocks for Chipotle Mexican Grill (NYSE:CMG) and Netflix (NASDAQ:NFLX) have significantly outpaced Apple Inc.’s (NASDAQ:AAPL) stock price so far this year.

They Would Have Been Pissed ...

Months of total quiet on the geopolitical front, and then we have bomb threats, a French aircraft carrier joining the US fleet in the Persian Gulf (we have no idea where it will fit), evacuated cars, and now Korean gunfire. Only thing missing is a mushroom cloud (either real or holographic) emanating from one of Iran's nuclear power plants.

Eerlier we pointed out that Goldman anticipated that a surge in the inventory number (which it did, coming at $115.5 billion compared to Goldman expectations of a sub $100 billion change), would simply lead to even more Cash 4 Clunker like forward performance pull, resulting in a collapse in the quarter in which inventory clearances finally took place. It seems the quarter in question is the current one. Indeed, various channel checks have confirmed that inventory levels at assorted businesses have been trimmed aggressively into the year end, and it is not unfeasible that we could see a $30-40 billion drop in inventory levels in Q4. Problem with that is, it will result in a negative GDP print due to the high marginal impact of a swing as seemingly small as the anticipated. Here is Rosie's explanation for why the government can play timing tricks all it wants but at the end of the day, it is inevitable that the economy is now contracting. How long before it is officially disclosed is at this point far more of a political issue than an economic one.

One of the more popular topics recently is the collapse in corporate tax revenues, and the resultant push by the administration to ramp up taxation at the corporate level. As Zero Hedge has been disclosing for two months now, it all has to do with the now discredited concept of the "wall of money", which is mostly accumulated offshore and is thus not only available domestically, but is not taxed by the US. However, one company which has somehow managed to slip through the cracks is the infamous General Electric: the company, that in addition to the banks, has been the biggest beneficiary of Obama's taxpayer largesse. Here are the numbers: in the period between 1991 and 2009 GE's pretax income is cumulatively $293 billion on which however the firm has paid only $25.2 billion in current domestic taxes, or a 8.58% cumulative tax rate. Yet where it gets wild is the narrower period between 2002 and 2009, during which timeframe the firm made a generous $164.4 billion in pretax net income (not to mention $639 billion in domestic revenue, just over half of total revenues of $1.2 trillion) it paid only $5 billion in domestic current taxes, or a 3.17% tax rate! So our question to the administration is how does $639 billion in domestic revenue, and $164 billion in total net income, result in $5 billion in taxes? Perhaps if the desperately broke administration is so concerned about refilling its empty coffers, it should first of all look at the most profitable (presumably) company in America... And perhaps CNBC can share some coverage on the topic of its parent company's taxation strategy.

Sadly only about $4Tn of our debt is owed to China, Japan and our other foreign creditors. While we may be stealing $1Tn from them, at least they get to sell us stuff. The rest of the debt, $11Tn, is owed to ourselves - to all the widows and orphans and pension funds that bought US bonds as "safe" investments as well as the poor suckers who worked their whole lives socking away 12.5% of their wages into a Social Security program whose "lock box" was raided by simply forcing retirees to lend their money to the government at unreasonably low rates and will now be paid back in dollars...

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 29/10/10

Update: Officials are concerned passenger flights presently in the air have bombs on them now; Multiple Flights with multiple bombs apparently, just headlines for now.

In addition to a UPS cargo flight from Yemen to Chicago being diverted to London after a bomb was found in a converted ink cartrige, CNN reports of two other planes being checked for explosives, one landing in Philadelphia, and one in New Ark. Was Cashin's prediction earlier of increased terror alerts ahead of Halloween correct? It is unclear as of yet whether the Yemen cartridge was to be delivered to the temporarily empty printer at the Marriner Eccles building.

In light of all of this, I am officially going on record and forecasting that the Fed will be dissolved within five years. This latest decision to reveal to the public that the Fed takes orders from Wall Street is the beginning of a major PR move in which the Fed sets the stage for its own dissolution.

The Fed and smart money see the writing on the wall, and they’re already preparing the lifeboats for themselves. They know the system is busted and will eventually fail. They’re simply trying to start positioning themselves to make it look like they knew what they were doing all along (and in a way they did, if you count “plugging a sinking ship” as “knowing what you’re doing”).

With the bogey of a minimum QE announcement of $100 billion a month, leading to an in kind purchase of Treasurys, in addition to $30 billion a month from MBS Refis courtesy of QE Lite, a very likely announcement during next week's FOMC meeting, that nobody is talking about, is that the Fed may raise the existing 35% SOMA limit, or abolish it altogether, due to the imminent ceiling hit of purchasable CUSIPs. As a result, as Morgan Stanley suggests, possibly the most profitable Fed frontrunning trade if one wishes to bet on consensus QE, is to buy SOMA excluded CUSIPs as these will be telegraphed to be next in line to be monetized. Of course, in the apocryphal scenario that the Fed disappoints the market and decides to announce a less than $100 billion a month, or, gasp, nothing at all, MS' Igor Cashyn expects a complete bloodbath in rates (and most certainly in risk assets). Then again, the probability of the Fed doing the right and/or prudent thing ever is nil, so we would focus on buying out of favor SOMA issues, because as Morgan Stanley reports: "Net, we like buying what the Fed is buying."And how could one not: after all Morgan Stanley announces that in 2011 net Treasury issuance net of Fed Purchases will be zero!

And with that the economic data barrage for the day is over and we can enjoy the calm before next week's storm: UMich consumer confidence comes at 67.7, missing expectations of a slight pick up to the prior 67.9. But what is most important is that the Hopium is finally wearing off: the Expectations component came at 61.9a large miss to both consensus and previous. Traditionally the "hope" component of confidence is what had consumers going. Not so much anymore. And indeed, the Conditions component rose from both expectations of 73.5 and the previous print of 73 to 76.6. Consumers no longer have much confidence in the future. Additionally, both 1 and 5 Year inflation expectations rose, to 2.7% and 2.8% respectively. Is the Fed succeeding in raising inflation expectations.

Chicago PMI comes at 60.6, beats expectations of 58, and an improvement of last month's 60.4. Shares take a step down as traders, like good Pavlovian dogs, have learned that good news is bad. Nothing too notable within the index itself except for Prices Paid which sure from 55 to 68.9.

Veteran PM expert, Sprott's John Embry, whose observations on the lack of a bubble in precious metals we posted recently, and which came just before the CFTC's own disclosure that there may be extensive manipulation in the silver market, as well as a lawsuit filed against JPM and HSBC for silver price manipulation, shares his latest thoughts with Eric King in a traditionally contrarian insightful interview. In a nutshell, Embry is confident the current Fed policy will lead to hyperinflation, and that he would not be surprised if silver hit $50 within the next few months.