Archive - Dec 22, 2010

Now, many commentators have pointed out the various ways in which this policy has endangered the US’s balance sheet, economic clout, and currency. However, there’s one element that NO ONE seems to have picked up on. That is…

You, me, and everyone else in the US, is now PAYING the Fed for its insane, anti-Middle class policies.

Remember, we are continually paying the debt via interest payments drawn up from tax receipts. Thus, by buying up US Treasuries, the Federal Reserve is in effect reaping interest payments from the US populace.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 22/12/10

And people thought the onion's reality is applicable only to the stock market and economy. For today's WTF moment we head to the CIA where we find the latest Frankenstein monster, titled, literally, WTF. Meet the WikiLeaks Task Force. Per The Guardian: "The group will be charged with scouring the released documents to survey
damage caused by the disclosures." One can just imagine the DOJ's WTF hearings that will likely involve an extradited Assange responding to WTF charges. And with the line between reality and editorial sarcasm blurred beyond recognition, we expect the imminent announcement of a Fed directive titled Preventing Peasant Tensions (acronymed appropriately) whose sole function will be the creation of an imaginary wealth effect for the peasant population, and an all too real escalation in cocaine habit formations among the country's financial "elite."

Confused by how what's left of the stock market is levitating with the reckless abandon of a manic-depressive teenager high on ecstasy and shrooms, even as it hits a fresh record bullish sentiment levels? Don't be: after all it happened, virtually tick by tick, at precisely the same time last year. David Rosenberg reminds us of everything that happened, together with the end of 2009 resurgent economic optimism, which proved being hollow and a re-recession (now that the ECRI made the word double dip no longer fashionable) was certain, only to be prevented by the last course monetary stimulus intervention in the form of QE Lite and QE 2. He also goes on to show what the key challenges for Brian Sack's trading desk will be in the coming year.

We traditionally enjoy the periodic letters by Guggenheim's CIO Scott Minderd. His latest piece, "The Opening Act to the Broader Crisis" is no exception. In it, the strategist dissects the European crisis, compares it to the subprime debacle and sees it as the precursor to the eventual downfall of the euro, a surge in the dollar, the "federalization" of Europe and the adoption of QE by the ECB. The key must read item in the current report is Minerd thought experiment of what a  wholesale bank run, first in Ireland, and then everywhere else in Europe, would look like. This is especially important as one could, as Scott claims, start at any moment. What does this mean for investments? "If we are on the brink of crisis in Europe, which I believe we are, then there are several expectations we can draw about the investment landscape. First and foremost, the dollar will strengthen rapidly against the euro; U.S. Treasuries will rally; equity prices in Europe will fall; and credit spreads will widen, at least temporarily. In general, risk assets will experience choppier waters, especially as the crisis intensifies." Yet somehow this is a disconnect with the Guggenheimer's recent Barron's round table bullish statements on stocks and high yield bonds: "Let me be clear, I am not changing my mind on any of these investment theses, but a crisis in Europe will likely interrupt, but not derail, certain bullish trends at some point in 2011." It is ironic that Minerd brings up subprime as an analogy to Europe: after all his response is precisely the same that everyone else who appreciated the gravity of the subprime contagtion used at the time, starting with The Chairman. To wit "it is contained." All else equal, and it never is, we fail to see how a surge in the world's funding currency, the USD, will not generate an all our rout in every single risk asset, The Chairman's gushing liquidity notwithdtanding, due to trillions in short dollar funding positions.

Perhaps this year Goldman's Thomas Stolper will get one finally right: "After some large moves in EUR/CHF to new record lows in recent days, we revisit our analysis published earlier this year. Overall it appears there is still no end in sight to the unwinding of legacy EUR/CHF carry trades, but maybe the start of a new fiscal year may offer some respite from January onward." And as we have said, the Swiss economy is about to be whacked as a result: "The wild card however is the extent to which the exchange rate starts to hurt the Swiss economy. In that respect the recent November trade numbers are quite interesting as they indicate a notable volume decline. Export volume growth has declined to only 3% yoy in November from as much as 14% yoy last May. Not all of this is necessarily due to the exchange rate impact as the global inventory cycle also slowed over that period, but the 14% trade weighted appreciation of the CHF has certainly not helped." Alas, for now there really is no respite: the EURCHF just hit another all time record low: 1.2475. Time for the next "parity" meme?

Here come the requisite "I told you so's", but before we get to that, here's an IQ test for anyone who feels the NAR or their chief economist deserves ANY airtime or media representation whatsoever...

After WTI passed the $90 barrier with firm determination, as we highlighted earlier, the most recent DOE Crude Oil Inventories number confirms that the far larger than expected draw down is accelerating. As readers will recall, after last week's massive drawdown of 9.854 million barrels which was the largest in 9 years, today's number was another stunner, coming in at 5.333 MM on expectations of 3.4 MM. The result: WTI spikes and is last seen at $90.64. And as a reminder every $1 rise in oil decreases U.S. GDP by $100 billion per year and every 1 cent increase in gasoline decreases U.S. consumer disposable income by about $600 million per year. The move in oil in the past week alone has almost entirely wiped out the most recent stimulus. Furthermore, as we suggest earlier, now that $90 is in the history books, $100 is coming, and may be here within a few weeks. At that point Bernanke may have some problems explaining how he is "100% confident" that the surge in gasoline prices is completely and totally not as a result of his deranged genocidal tendencies.Don't worry though, hedge fund managers around the world will be more than happy to afford the surging prices. Remember: wealth effect!

Stocks are up which means another fundamental data indicator must have missed expectations (following the earlier GDP miss). Sure enough, the NAR just reported November existing home sales, which came at 4.68 million units, a slight improvement to the almost all time lowest number posted in October (4.43 million), a miss to expectations of 4.75 million, and 27.9% off the cyclical peak of 6.49 million from November 2009, when the first-time buyer tax credit expired, and was shockingly not extended. The data follows this morning atrocious MBA numbers which showed a plunge of 18.6% in mortgage applications, and 24.6% drop in refinancings. But if you listen to Goldman, the recent surge in mortgage rates is actually beneficial for everyone involved and just buy the f#&$ing dips! Sure enough, the ever cheerful Larry Yun had this to say: "Continuing gains in home sales are encouraging, and the positive impact of steady job creation will more than trump some negative impact from a modest rise in mortgage interest rates, which remain historically favorable." Um, continuing gains from all time record low levels? Also, the part-time job creation which is the only thing that is being created on steady basis is sure to be the ground for a fertile surge in home prices. And with that the sarcasm is off.

Last week, we pointed out when the BDIY dipped below 2000 for the first time since August. In the next three days, the index slide has accelerated and after dropping 3% just overnight, is back to 1830, just 130 points away from the 2010 lows printed in July. And while the index topped in early September following a brief and uninspired climb, it has since been a one way downward pointing slope. Whether the BDIY is a leading indicator to anything is debatable: some believe it is a completely irrelevant indicator. Others disagree. A rather strong case for the former camp was made last week by Nordea which demonstrated, in its chart of the week, the average speed of its vessel fleet. One thing is certain: for whatever reason, demand for trans-Pacific cargo shipments is once again plunging.

We are not as big as we think.

We find few things quite as entertaining these days as watching Jan Hatzius, and the entire Goldman economic team, squirm, as he is forced to admit (repeatedly) that economic data does not support his suddenly ridiculous outlook on the economy. And following numerous mea culpas after the November NFP report, here is his latest admission that not all is quite as rosy as he hopes it should be. 'The Great God Offset strikes again as weaker growth in consumption of
services offsets most of the expected increase in inventory
accumulation. So we end up with a GDP picture for Q3 that undoes most of
last month's upward revision to domestic final sales.. Because the inventory accumulation rate now looks even more rapid
than before, this will likely be a bigger drag in this quarter or the
next."

As West Texas Intermediate is now holding steady over the psychological barrier of $90, more speculators will shift their attention to this latest commodities market, which rumor has it has not been cornered by JP Morgan just yet. As Bernanke's liquidity gushes with no sign of stoppage, expect to see a prompt move into triple digit territory here. For those seeking a good overview of what is happening in he crude space, we provide the following summary note from FMX connect...

Disappointing Goldman which had expected a far higher number, the third Q3 GDP revision came at 2.6%, 0.1% higher than the second, but lower than the 2.8% consensus. In other words, the PCE surge which drove stocks higher on the second GDP revision has now been eliminated post re-revision, yet its impact of spiking stocks back then naturally lingers: surely our ministry of truth has learned from the best. And, as we expected the inventory artificial growth push continues to accelerate, after there was a substantial drop in the far more important Personal Consumption component which misses not only consensus of 2.9%, but the second revision of 2.8%, coming at 2.4%. From the BEA:  "The "third" estimate of the third-quarter increase in real GDP is 0.1 percentage point, or $1.1 billion, higher than the "second" estimate issued last month, primarily reflecting an upward revision to private inventory investment that was largely offset by a downward revision to personal consumption expenditures." And even uglier: corporate profits were up a meager 0.2%, compared to expectations of 1.3%, compared to a previous revision estimate of 1.0%. We are confident Jan Hatzius will spin this favorably shortly, and will bring you his "analysis" asap.