Archive - Nov 24, 2010

The series of increasingly weak Treasury auctions continues with today's 7 Year $29 billion offering, which just priced at a 2.25% high yield. The yield was a materially higher 28 bps compared to October's 1.97%, and shows that the peak of the curve belly, the point that recently was most desired, is now being shunned the most. The Bid To Cover slumped to an 8 month low 2.63, the lowest since March's 2.61. And most notable, indirect bidders have come at an 8 month low as well, taking down just 42.2%, forcing Primary Dealers who have traditionally have a backseat role in stabilizing the 7 Year to step up and buy almost a majority of the auction (and 57.8% when including Direct Bidders). Now that as (so far only) Zero Hedge disclosed the Fed is the biggest holder of US Treasurys, we expect to see ever decreasing interest by foreign bidders in auctions going forward, especially in the belly, where the Fed will soon be the main holder of securities.

A question to ask.

The biggest driver for today's stock market ramp, aside from the initial claims number which next week will be revised substantially worse, was the UMich Consumer Confidence index, which "beat" expectations of 69.5 coming at a five month of 71.6. The fact that a self-referential index can be market moving in the first place is mindboggling: this particular index is mostly driven by moves in the stock market, and any higher read in the index send the lithium addicted stock market higher, which in turn leads to a higher subsequent read in confidence and so on ad inf. This self-recursion probably explains why it is such a favorite of the Fed, which has now openly made clear that it will do anything to facilitate any and every ponzi component to the US economy, of which UMich is precisely one. Yet philosophical matters aside, what is most troubling is the ever increasing divergence between the UMich index on one hand, and another "confidence" index, which is far more comprehensive, far more exhaustive, and far more frequent in its polling: the weekly ABC Consumer Comfort index. If you have not heard of it before, it is precisely due to these three qualifications. And being far more indicative of the true state of how people perceive the economy, it is inevitable that there would be a massive divergence between UMich and the ABC indices. As the chart below demonstrates, this is precisely the case. While UMich is almost back to its December 2007 level, a reading that is so ridiculous when one considers that America now has 42 million people on foodstamps (and had under 28 million in Deceber 2007), the ABC index is now just 5 points away from its all time lows, and its yesterday print of -47 is the lowest it has been since August. All this begs the question: why does the market pretend to trade base off an index as discredited and flawed as the UMichigan Consumer Sentiment.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 24/11/10

The Federal Reserve's VISA credit card account offers a rare glimpse into the inner workings of the secretive Fed. This leaked transcript of the Federal Reserve's VISA credit card account provides a treasure-trove of insight into the Fed's recent actions. Nothing reveals a person or institution quite so indelicately as a list of credit purchases.

The first arrest in the insider trading probe is Primary Global's Don Ching Trang Chu according to a complaint filed by the State Attorney's office. Per his biography, Chu "is PGR’s bridge to Asia experts and data sources. Don was a 25-year veteran in Data Communications Industry. He was with Bell Labs for more than 10+ years in data, wireless, and telecommunications arena. He has great view of technologies sector in Taiwan and China from fab, fabless through OEM/ODM players. Don intimately understands the wireless broadband communications industry, and has deep connections and relationships in the technology industry. Finally, Don is just a fun person to travel with on the highways and byways of Taiwan." Chu promises to be an even funnier bunk mate in minimum security prison, unless of course, he rats out all of his co-conspirators. Which he most likely will. Oddly enough, Chu is not in the biotech space, which is the bulk of the focus of the investigation seems to focus. We expect many more arrests imminently.

As a disclaimer to this update, I just want to reiterate once again that I firmly believe that the Euro is not viable, at least certainly not the way it is designed and I think the flaws in its conception are so profound that dissolution makes the most sense. With this assumption in mind, let us look at what the solutions are to the current woes. The individual bail-out route is not an option. When dominoes fall in panic the speed at which they fall tends to accelerate exponentially. Rewind the tapes to late July 2007: American Home mortgages files. The market goes on to make new highs but in January Bank of America takes over otherwise soon defunct Countrywide and by March Bear Stearns is belly up. The forced hand out to JP Morgan appeases the market temporarily, but by early September Fannie and Freddie are de facto nationalized, and so is AIG, Lehman collapses, Wamu is taken over by JP and at that point the government has no choice but backstop the entire system. Well, this is not unlike what we are witnessing here: We first had Iceland in November 2008, then Greece in the spring of 2010, now Ireland. Make no mistake if you let that fester enough or decide to bail them one by one without attempting a larger scale resolution by January Spain Portugal and possibly Italy will have been downgraded several notches, LCH will have raised the margins on all those bonds, and French and German banks will start dragging their country down the same slope. - Nic Lenoir

The October median new home price of $194,000 was the lowest recorded by the Census Bureau since the start of the Depression in December 2007.

US consumers are confident that their imminent bail out of an austere Europe will boost their living conditions, as austerity is now certain to never come to the US, thanks to the "wealth effect or bust" mandate of the Federal Reserve. Confidence came at 71.6 on expectations of 69.5. Since this number is a catch 22 which follows the respondents response to the stock market ramp it is nothing but a coincident indicator to stocks. Yet an actually relevant economic number, new home sales, came at 283k, on expectations of 312k and compared to the previous print of 308k. This was a 8.1% decline compared to expectations of a rise of 1.6%. The mood of the manic depressive market is now spilling over to virtually every economic category.

Take one look at Bank of Ireland stock this morning. Then read the following October 4 report on BOI from Goldman Sachs, and please join us in extended our congratulations to Goldman analyst Pawel Dziedzic who has joined the prestigious ranks of Cramer and Dick Bove of telling those who care to buy a bank days or weeks ahead of its bankruptcy.

A bunch of completely irrelevant numbers released by Ireland. At best these will achieve nothing but will kick the can down a few more months. At worst violent rioting will be a daily occurrence in Dublin within a week.

And so the downward Q4 GDP revisions begin. "New orders for manufactured durable goods in October decreased $6.8 billion or 3.3 percent to $196.0 billion, the U.S. Census Bureau announced today. This decrease, down two of the last three months, followed a 5.0 percent September increase. Excluding transportation, new orders decreased 2.7 percent. Excluding defense, new orders decreased 2.1 percent." Expectations were for print of 0.1%, with the main culprit for the unexpectedly bad miss being transportation: "Transportation equipment, also down two of the last three months, had the largest decrease, $2.9 billion or 5.2 percent to $52.3 billion. This was led by defense aircraft and parts, which decreased $1.6 billion." Most importantly, new orders declined in every single tracked category. Elsewhere the magic that is artificial growth by inventory restocking, now in its 10th consecutive month, continues: "Inventories of manufactured durable goods in October, up ten consecutive months, increased $1.3 billion or 0.4 percent to $316.7 billion. This followed a 0.7 percent September increase." When the liquidation begins watch out below. Of course, stockpilers will by then be able to sell it to the Fed's QE X.Y bid. While the data will be ultimately good for the final revision for Q3 GDP, it starts Q4 GDP with whimper, just as expected. And should the inventory contraction finally begin, watch out for the November and December data.

At $19.20 a share, Cisco offers a PE multiple of 10 times, versus a market average of 15, the prospect of a dividend next year, and at 12%-17%, one of the most consistent long term growth outlooks of anyone. Did I mention that they get a majority of their sales from overseas, where growth rates are posting white hot double digit rates? Getting in on growth rates are posting white hot double digit rates on the cheap. (CSCO).

In what is now 38 times in 2010 (out of 46), the BLS has revised its prior weekly initial jobless claims number higher, from 439k to 441k. The most recent  number, which is far less relevant (as it will be revised worse next week) and much more volatile due to it being a pre-thanksgiving week, and layoffs plunge, came at 407k compared to 435k the expectations. Most importantly, non-seasonally adjusted claims increased by 45k. But of course, the government's adjustment is where it's at. Continuing claims were of course also revised higher as the BLS' charade of beating instant expectations has gotten boring: the prior number of 4,295k was pushed higher to 4,324k, once again confirming that anything the BLS reports has to be ignored until the next week revision. Lastly, the loss of extended claims started early this year, with those collecting extended claims and EUCs dropping by over 280k.

Somehow the China Daily story we pointed out yesterday morning that China and Russia are expanding their trading terms and will conduct all bilateral trade exclusively in local currencies, thus dropping the dollar as an intermediary, is only today starting to make the rounds. Alas, this story is nothing but more posturing for several reasons: Bloomberg notes: "China and Russia will drop the U.S. dollar for bilateral trade and use their own currencies for settlement, China Daily reported, citing Chinese Premier Wen Jiabao and Russian Prime Minister Vladimir Putin." Oddly enough this is an identical overture from June 2009: yet very little has happened in terms of actual dollar lock out since then. Note the following story from June 17, 2009: "The leaders of Russia and China agreed to expand use of the ruble and yuan in bilateral trade to lessen dependence on the U.S. dollar a day after they took part in the first summit of the so-called BRIC countries." And judging by the market's reaction, and the dollar resurgence overnight it appears that everyone has read through this as just posturing. Furthermore, keep in mind that Russia was not even a top 10 trading counterparty of China in 2010. If China does the same with any of its top 10 partners then there may be a reason to worry. For now, China is merely testing the waters, and has absolutely no intent on isolating the US, nor making its nearly $3 trillion US FX reserves lose a double digit percentage of their value overnight.