Archive - Nov 2010

Families stay huddled in their McMansions, protected from phantoms by state of the art security systems. Their interaction with the world is through their electronic gadgets. Neighborhoods of cookie cutter 4,000 sq ft mansions appear deserted. Human interaction is rare. Happiness is in short supply. As I sit in miles of traffic every morning during my soul destroying trek to work I observe the thousands of cars, SUVs, and trucks and wonder how this can possibly work when the peak oil tsunami washes over our society in the next few years. Then I reach the bowels of the inner city and my pessimism grows. This concrete jungle is occupied by hundreds of thousands of uneducated, unmotivated, wards of the state. They live a bleak existence in bleak surroundings and depend upon subsistence payments from the depressed suburbanites to keep them alive. How will they survive in a post peak oil world? They won’t.

The plight of Chinese company RINO International is about to be over. The company has just filed an 8-K which essentially signs its own death sentence (see below). This is a stark reminder of what happens when one deals with companies going public in the US, yet subject to regulations and accounting rules of a different time and place, and we are confident that the recent onslaught of Chinese IPOs on the revenue strapped NYSE (hint: listing fees) will prove to be a complete disaster for everyone who bought into this most recent market top tick. The RINO case study will soon create a cottage industry of micro funds seeking to make massive profits by shorting then destroying the credibility of every Chinese company to have gone public on the NYSE recently. Our advice: get the hell out of dodge. We will shortly present a list of all the sell side analysts who should be summarily fired for recommending a Buy rating on this stock as recently as a month ago (yes, that include Canaccord).

I suspect many in the mainstream academia haven't realized what QE2 is. It is the last use of the dollar's reserve currency status, intended or otherwise. In a fiat currency system, inflation should be the only risk, because fighting deflation should be trivial -- just print money. This is a fundamental advantage of a fiat system over the old gold standard. Unfortunately for the US, the dollar's reserve status means the geopolitical border is not the dam holding the water as in other countries. As Fed pours in more water, it leaks right out to lowlands (good investment destinations) all over the world. Given the current economic prospects in the world, the result is that QE2 cannot stoke inflation in the US, but causes very unwelcome interference in exactly the other places in the world where inflation is a big concern.

With everyone speculating what China's actions may mean, we go to one of the few true experts on the world's most populous country - CLSA Chris Wood (author of Greed and Fear). "The reality is that, for now at least inflation ex-food remains remarkably tame based on CPI inflation data. Still the political sensitivity of food means the PRC is making executive decisions, such as imposing price controls on specific food items or threatening to lock up commodity hoarders. This makes investors nervous. Such measures have put a policy risk on the commodity stocks in the same way that policy risk has capped the Chinese property stocks over the past year and more. Still GREED & fear would use this correction to add to positions in Chinese bank and insurance stocks which would seem to be the beneficiaries of higher interest rates in China. As for monetary tightening in China it is important to remember, amidst the present noise, that the key tightening measure in the command economy system is the loan growth quota not interest rate hikes or increases in the reserve requirement ratio. For now CLSA is estimating that the new loan quota for 2011 will be reduced relatively marginally from Rmb7.5tn this year, or 18% loan growth, to Rmb6.5-7tn or 14-15% loan growth."

I love big arbs. It means markets will be moving.

• Cowen Scorned as Irish Mourn Loss of Sovereignty With Bailout (Bloomberg)
• Irish Bailout May Unleash Vigilantes on Portugal (Bloomberg)
• Spain and Portugal rule out rescue packages (FT)... until they rule them in
• Hong Kong Said to Plan New Property Curbs; Stocks Decline (Bloomberg)
• Andy Kessler: What's Really Behind Bernanke's Easing? (WSJ)
• In Shanghai, prices fly high (Reuters)
• Heat Stays on California $10 Billion Note Offering (WSJ)
• Special report on SAC's "information arbitrage" strategies  (Reuters)
• Pimco Said to Seek $1 Billion to Buy Troubled Assets From Banks (Bloomberg)

• Asian stocks advance for second day on US economic data, Ireland hopes.
• Bernanke takes defense of monetary stimulus abroad, turns tables on China.
• South Korea to reimpose tax on bonds; first of a possible raft of capital control measures.
• Spain sells €3.7B of bonds yielding less than secondary market.
• Treasuries hold gains as Bernanke says job losses may curb economic growth.
• Air China to buy $4.49B worth of aircraft from Airbus at a discount.
• Arthur J. Gallagher announced acquisition of Behnke & Co. Terms undisclosed.

As we speculated yesterday, China has picked the least impactful of all evils, and instead going thru with a rate hike (or the impossible currency revaluation which will never happen as long as the US keeps calling for it) the PBoC has again opted for a RRR hike, which as of Nov. 29 will be at 18%, and have virtually no impact on anything. But at least in a world of posturing, China now has the ability to respond to criticism that it does nothing about its liquidity situation. At this rate the RRR may hit 25% or higher, before the CNYUSD trading range is further expanded or there is any move on the interest rate. Lastly, as the disclosed inflation number comes straight from the propaganda czar at the politburo, we expect to see a below expectations print next month so that China can claim all is well again.

Once again we are left scratching our heads how a market trading near its year highs can constitute a "market condition" out for an IPO, but that's precisely what happened to mega LBO Harrah's which as of this morning is no longer going private. Of course, the only market condition involved is not having Getco as your DMM, which is willing to bid up all shares below a certain threshold, only to subsequently go ahead and cell to Citadel in dark pools. Where those shares go afterwards, only Brian Sack knows. The biggest loser however in today's fiasco is John Paulson who is now stuck with holding $710 million of equity in a company that may or may not be viable post the tens of dividend recap deals that are sure to follow the failed IPO.

Steve Wozniack, Apple's cofounder, was actually quite accurate in his rather stark admission that Android will overcome Apple in the mobile phone market just as Windows overcame Apple. Lest anyone forget, Bill Gates and crew nearly put Apple out of business due to margin compression and the commoditization of Apple's high end - and eventually overpriced products. Android is doing the same, simply on a very compressed time horizon.

RANsquawk European Morning Briefing - Stocks, Bonds, FX – 19/11/10

Retail traders are notoriously wrong at picking market direction/tops and bottoms. Most retail traders very naturally seem to adopt a counter-trend stance and this offers very accurate signals for individuals looking to trade against this group. This daily report is designed to help traders focus their efforts on higher probability pairs.

WARNING: It is strongly recommended that you do not watch this clip after, during or before the consumption of food or beverage!

BOTTOM LINE: Fed Chairman Bernanke delivers a) a strong defense of the Fed’s renewed monetary easing, b) a fairly explicit endorsement of near-term fiscal expansion (coupled with longer-term consolidation) in the United States, and c) a fairly explicit plea to reduce current account imbalances via exchange rate appreciation in emerging market economies.

Futures are currently experiencing a stunning moment of weakness, something not seen unless the entire Liberty 33 trading crew is at Scores. The culprit according to the three sober traders we could track down is the recently unembargoed speech to be delivered by the Bernank tomorrow in Frankfurt. In it, not too surprisingly, the inkmaster considers revealing details of his most recent DNA sequencing result to prove once and for all, that he is not the antichrist. More relevantly, what Bernanke has done to defend his reputation is to claim that QE will work, and that everything is really mercantilist China's fault, and the Fed is just woefully misunderstood. In other words nothing that has not been said before many times, just another overture which will likely precipitate a prompt round of Chinese retaliation in the form of accelerating trade wars, to be followed by further commodity price inflation in the US, leading to another ramp in Chinese inflation, etc. China now will have no choice but to either hike rates (which will pretty much end of the tech bubble), remove even more excess liquidity (real estate bubble burst) or merely export another $20 billion of crap to the US each month, pretending nothing happened (leading to more QE in the US). As Albert Edwards summarized so well earlier, the global game of chicken will continue until either China's or America's population decides it has had enough of being treated like a experimental gerbil in the endgame of failed economic chess.