Archive - Dec 1, 2010

The Irish government is doing its citizens a disservice by accepting a bail-out. The “National Recovery Plan 2011-2014? intends to save EUR 15bn (“front-loaded” 6-5-4bn for the years 2011-13) by cutting expenses (10bn) and raising taxes (5bn) in order to reduce the budget deficit to less than 3% by 2014. The budget plan sees GDP increasing by 1.75%, 3.25%, 3% and 2.75% in the years 2011-14. Can anybody explain to me how an economy, which was shrinking by 11% (GNP) last year, that will be saddled with austerity (demand-reducing) measures of another 10% of GNP is supposed to grow? Not only have government tax revenues declined by 33% since 2007 but also will increased interest burden (because of the bail-out loans) eat up 20% of revenues by 2014 (up from 8% in 2009).

The sanity of the authors of this “recovery plan” has to be questioned.

It is not a good week for Wikileaks. Following yesterday's Interpol arrest warrant, also yesterday, Tom Flanagan, a senior advisor and strategist to the Canadian Prime Minister Stephen Harper, called for the assassination of Wikileaks director Julian Assange. On CBS News. On Live TV. As the video notes, "it is believed to be the first ever televised "fatwa" since the edict by the Iranian leadership of the late Ayatollah Khomeini against British writer Salman Rushdie in February 1989." It's a good thing western society, where due process used to mean something, is so much more evolved than that of Iran. Additionally, although news anchor Solomon afforded Flanagan the
opportunity to retract his statement, Flanagan balked at doing so and
instead reiterated that U.S. President should put out a "contract" on
Assange or use "a drone" and that he would not be unhappy if Assange
"disappeared." Flanagan who is a trusted member of PM Harper's inner
circle of Tory strategists joins Sarah Palin in calling for the death of
the Wikileaks director as retribution for the website's release of
confidential diplomatic and intelligence "chatter" this week. How long before any senior political advisor has the freedom to issue fatwas on national TV on anyone who dares to utter or publish something that they consider offensive? 

All Things Digital validates a previous rumor that Yahoo will layoff 10-20% of its employees 10 days before Christmas, on December 13. This means about 2,500 will be likely laid off out of the firms' current 14,100 global employees. Surely this will result in a record NFP number next month as layoffs now result in an exponentially greater positive workforce addition per the latest BLS methodology.

The following video is a must watch 4 minutes of content that will never be seen on mainstream TV. Some jarring images of what US society has unfortunately devolved to. As the narrator says: "This is what a dumbed-down, morally bankrupt, completely broken society looks like, and this is how it behaves. No outrage over the bankers raping them, no outrage over their gutted industry, no outrage over their plundered dollar. Just blind, wanton stupidity. Just bread and circuses."

There was no 60+ ISM print as the whisper number had expected. November ISM came at 56.6 on expectations of 56.5, lower than October's 56.9. Surprisingly, three key categories declined: New Order came at 56.6 vs 58.9 prior, Employment dropped from 57.7 to 57.5, while production plunged from 62.7 to 55.0. Not surprisingly, inventories continued expanding. Exports declined and imports rose: a negative for GDP but who cares: after all the government will pull out whatever GDP number suits it. And probably the most telling admission by respondents is that the margin crunch will lead to higher prices, as expected: "Business continues to improve; however, rising material prices are eroding margin. Increases to the consumer are inevitable in early Q1 2011."

Yet another odd letter comes from under Bill Gross' pen, in which he continues to bash "The Ben Bernank's" Ponzi policies ("policymakers at the Fed write trillions of dollars’ worth of checks under the guise of quantitative easing, a policy which takes Charles Ponzi one step further by purchasing the government’s own paper in a last gasp effort to support asset prices") while making it all too clear that the only beneficiaries are "Newport Beach mega-millionaires." Has Warren Buffet-style self-flagellation become trendy among the billionaire jet set? Lastly, Gross makes it clear that the American economy is doomed in the long-run absent a "policy revolution" in DC: "Unless developed economies learn to compete the old-fashioned way – by making more goods and making them better – the smart money will continue to move offshore to Asia, Brazil and other developing economies, both in asset and in currency space. The United States in short, needs to make things not paper, but that is not likely unless we see a policy revolution in Washington DC. In the meantime, our unemployed will continue to fill out forms and stand in line." And the Newport-beach mega-millionaires will continue to front-run the Fed. Nothing ever changes indeed.

While today's rumor of a massive QE program by the ECB to be announced tomorrow has temporarily stopped the sovereign spread widening, we are skeptical that it will achieve much in the mid-term. As in all other recent cases of CB intervention, the half life of this particular involvement will likely have short-term benefits at best. So what happens when the leakage resumes? The first immediate response will be a hike in various repo margins by LCH. Clearnet, as was the case with Irish bonds. Goldman's European Equity Research provides an overview of the key milestones and trigger events in LCH's methodology as it evaluates who may be affected next.

Will be? Has this woman, or anyone else who is cheering the wonderful recovery in the US economy which is literally based on massive, and unrepayable, borrowing from the future, seen a chart of the exponential US federal debt? And another tidbit from a speech Yellen is currently presenting: "Fed's Yellen says long term securities buys "actually quite similar" to the Fed's traditional monetary policy approach." Well, of course: whenever the Fed does not get the desired result it merely goes in the market and buys various assets, monetary base be damned. As to how distorting the Treasury curve and all equity marrkets is part of the Fed's mandate, we leave to Ron Paul's first debate with Bernanke which is coming up soon.

There is a right way, then there is the wrong way...

From CNBC: UK ‘Vindicated’ for Refusing Euro: Chancellor Osborne... Whaaaattt????!!!! That’s not the way I remembered it.

One part of Mark Pittman's legacy is about to come to fruition. At noon today, the Fed will provide an information dump identifying recipients of $3.3
trillion in emergency aid which it dispensed as per its interpretation of its mandate following the Lehman collapse. From Bloomberg: "The data will probably show the magnitude of central bank support to companies including Bank of America Corp. and General Electric Co. after the collapse of Lehman Brothers Holdings Inc. spurred a surge in private borrowing costs. Lawmakers demanded disclosure after the Fed approved aid dwarfing the federal government’s $700 billion Troubled Asset Relief Program." Not all data will be available, however: all important discount window information will not be included as part of this package: "Congress excluded one Fed program from disclosure, the discount window, which is the subject of a 2008 lawsuit filed by Bloomberg LP, parent of Bloomberg News, against the central bank. A group of banks is appealing to the Supreme Court over lower-court decisions ordering the Fed to identify loan recipients. The program peaked at $110.7 billion in October 2008."  Since today’s information relates to aid from Dec. 1, 2007,
through July 21, 2010, there will be enough information to satisfy the most detail-oriented forensic reverse engineers.

• Euro-Zone PMI Manufacturing for November 55.3 - lower than expected. Consensus 55.5. Previous 55.5.   
• Hopes of ECB bond buying calm markets (FT)
• Fed Will Name Recipients of $3.3 Trillion in Emergency Aid During Crisis (Bloomberg)
• China goes deeper into price controls: "China, the world’s biggest
  cooking-oil user, has ordered four suppliers including Wilmar
  International Ltd. and Cofco Ltd. not to lift product prices to help
  slow inflation, the National Business Daily said, citing people it
  didn’t identify." (Bloomberg)
• The ongoing saga of Sergey Aleynikov: Goldman challenged on trading code (FT)
• Contagion May Force EU to Expand Arsenal to Fight Debt Crisis (Bloomberg)
• The perilous condition of Portugal's banks (BBC)

Another day, another set of completely contradictory economic numbers. First, in an earlier release Challenger announced that employers planned on firing 48,711 people in November compared to 37,986 in October, led by a "surge" in the non-profit sector where 10,761 layoffs were pending. "Government and non-profit job cuts are down 16 percent from a year ago, but that is probably little consolation to employees in the sector, which is still struggling despite signs of recovery in other areas of the economy," John A. Challenger, chief executive officer of Challenger, Gray & Christmas, said in a statement. This was the highest downsizing number reported in 8 months. And then less than an hour later, ADP comes out with its traditionally noisy number that tends to have zero correlation to the upcoming NFP result, and observes that the churn in the labor force is starting to pick up, with a change in private payrolls of +93K compared to expectations of 70K, and a prior revised number from 43K to 82K. This was the highest since November 2007. Net net: more people hired, more people fired. Judging by the futures response, this is good.

Today's much anticipated Portuguese T-Bill auction carried some good and some not so good news. While the Bid To Cover on the €500 million 12 month paper improved from 1.8 to 2.5, the rate on the 1 year issue surpassed 5% for the first time, and came wide of analyst expectations, pricing at 5.281%, compared to 4.813% previously. Per Reuters: " That was higher than the roughly 5 percent that dealers and analysts had looked for ahead of the sale, though the rise in short-term borrowing costs was much smaller than a more than 150-basis point jump at the previous tender in November.  "There is no place to hide on the curve for Portugal anymore. Once again, the auction increases pressure to find a circuit-breaker to limit the damage, which is most likely to mean asking for aid," said David Schnautz, debt strategist at Commerzbank in London." Filipe Silva, debt manager and Banco Carregosa explains why contrary to the EUR's reaction, this is not good news: "This rate is very high and Portugal cannot keep raising its rates at this pace, 47 basis points in just two weeks." Yet despite the weak auction, Sovereign spreads tightened modestly after rumors that the ECB would announce an expansion or a new program to buy peripheral sovereign debt. Which was to be expected: the Portuguese auction was quite irrelevant compared to what happened in Germany earlier, when the country held its weakest 5 Year Bobl issuance in 6 months: in an auction of €4.13 billion in paper, the government saw a mere 1.1 Bid To Cover, the weakest since May, and forcing the government to retain 17.4%, or €0.87 billion of the auction to make it not appear that the auction was a failure.

• API: Crude inventories down 1.14 mln barrels.
• Australia’s GDP expanded 0.2% in Q3 - half the pace economists estimated.
• Bernanke: US growth too slow to dent unemployment.
• China's official manufacturing PMI rose to 55.2 in November from 54.7 in October.
• Consumer Confidence in US rises more than estimated to a five-month high.
• Euro trades near 11-week low as Europe debt crisis prompts risk aversion.
• Real-estate prices in 20 US cities rose in Sept at the slowest pace in 8 months.