Archive - Apr 2010

A few days ago we highlighted Richard Koo's most recent media appearance here. Below we provide his most recent presentation extolling the virtues of unbridled Keynesianism. Keynes' ideas may have been an operable theory when the world was not leveraged 100% debt/GDP (and 400% total debt including assorted off balance sheet items). Now, it is not. And everyone who blindly pushes for endless stimuli will find out that the endplay to Keynes' fatally flawed economic theory is sovereign default. And yes, that certainly includes the default of the country which is pring the most paper.

The only primary driver to market movements, the carry trade, especially as visualized by the JPYEUR, just got poleaxed. Equities, which operate in a universe of their own when they so choose, are not following. Yet. Gold is rallying as all "carried" currencies suddenly feel weak.

According to the Defense Intelligence Chief, Iran could produce enough highly-enriched uranium for one nuclear bomb in as little as a year and has stated that all options to rein in Iran are on the table but military options are not preferable. This is happening as Iran has complained to the UN over a nuclear attack threat by the United States. According to Reuters, "Iran complained to the United Nations on Tuesday over what it called a U.S. threat to attack it with atomic weapons, accusing Washington of nuclear blackmail in violation of the U.N. charter." This ties in rather well, with our report from a week ago in which the Former Deputy Defense Minister of Israel said that Israel may have no option but to attack Israel (with nuclear weapons) by November. After yesterday's evacuation of Israeli citizens from the Sinai Peninsula, the Middle-East is once again heating up... Hopefully it does not reach 6 milllion Kelvin.

The National Federation of Independent Businesses (NFIB) issued its March survey Tuesday morning. Optimism in the small business community fell again. It dropped to a nine month low of 86.8. The last time it was at this level was April of 2009 (one month after the great March rally began).

Businesses of this size produce more than half the GDP and provide nearly 70% of the private sector jobs. To put the pessimism level in perspective, in the three prior recessions, the index always bottomed out above 90 (2000/2001 – 96.3; 1990/1991 – 91.4; and 1981/1982 – 94.4).

Virtually all of the component sectors fell – employment, job openings, wages, sales, capital expenditures, earnings and credit conditions. For every company planning to raise prices, three were cutting prices. Deflation, anyone?

Nothing to see here. Go back to buying stocks.

Click here for a webcast of the Joint Economic Committee's Q&A with Ben Bernanke live and commercial free. Note - there is no mention of "extended period" in Bernanke's prepared remarks. Watch for a discussion of just that, as well as questions on asset sales, debt levels, GSEs, inflation, and, of course, when interest rates will be raised. Full Bernanke testimony in which he sees a "moderate recovery."

Click here for a webcast of the Joint Economic Committee's Q&A with Ben Bernanke live and commercial free. Note - there is no mention of "extended period" in Bernanke's prepared remarks. Watch for a discussion of just that, as well as questions on asset sales, debt levels, GSEs, inflation, and, of course, when interest rates will be raised. Full Bernanke testimony in which the Chairman sees a "moderate recovery."

SocGen's Dylan Grice is out with another must read report summarizing the Greek situation: in short, so much time and effort is injected in preserving the Greek status quo (so far unsuccessfully, even after 4 rounds of bailouts) as it is small enough that it could, in theory at least, be helped. If it goes, the next countries to follow will be simply too big to be bailed out. Just recall the $500 billion expansion in the IMF's NAB. The world is slowly realizing the dominoes can not be stopped, and as much capital must be locked away as possible in advance of the next major risk flaring episode. Which is also why stocks are currently going to the moon: the resultant crash in the stock market once the reality of just how ugly the global mess is will lead to large double digit drop in the market. Which is why getting to the highest possible level from which to plunge makes all the sense in the world...

Have the problems at the troubled stock peddler just gotten too much for the existing management team? A better title for the job posting would have been "Will Trade EBITDA Adjustments For Food."

As we expected last night, G-Pap's latest round of commentary was certain to set off fireworks in today's bond arena. Sure enough, at last check the 10 Year spread to Bunds had blown out by 40 bps to almost 400 bps, this is approaching the record wides seen during the duration of the entire crisis. As usual, the collateral damage is a drop in the ASE which was about 2% lower for the day, as well as Greek banks, mostly in the red. The primary source for the weakness was Moody's (which is now about 4notches behind Fitch) statement that "there is a 50% chance that Greece's credit rating could receive another downgrade in the next 12 to 18 months if fiscal consolidation falls short of goals. If Athens falls short of perfection, the Greek rating will be downgraded, a Moody's spokesman said" as reported by the WSJ. Additionally, a new round of strike is once again paralyzing the country. And confirming our observations that the half-life of any good news out of Greece is now less than 24 hours is Brown Brothers Harriman, which sent out a note to clients saying: "The afterglow of yesterday's Greek T-bill auction has faded." Lastly, CDS are back over 400 bps. The "speculators" are closing in on the kill... or at least the formal announcement of the bailout mechanism's activation by G-Pap. The loaded fire extinguisher is about to become a loaded gun, to be used shortly in a fatal game of Greek roulette (Russian roulette variation, where all the chambers are loaded).

From the Census Bureau: "The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for March, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $363.2 billion, an increase of 1.6 percent (±0.5%) from the previous month and 7.6 percent (±0.5%) above March 2009." The biggest component to the increase in March was the traditionally noisy and excluded Motor Vehicle and Parts Dealers, which increased from $53.4 billion to $69.9 billion. What we find surprising is that in light of all the rage over tech, sales at Electronic and Appliance Stores declined by -1.3% from $8.4 billion to $8.3 billion. How this is possible with ever increasing "strategic" mortgage defaults is beyond us. We can't wait to see the latest consumer savings ratedata.

• Market should prepare for autumn rate "exit" (Reuters)
• In the meantime, using the diagonal curve, JP Morgan net rises 55% on fixed income, provision cut (Bloomberg, Investor Presentation)
• CIT bond comeback sets stage for debt sale (Bloomberg)
• Unless pension costs can be brought under control, the city may face bankruptcy (LA Times)
• Contrarian alert: everybody hates Treasuries (Barrons)
• German roots of Greek crisis remain (Guardian)
• Yes 47% of households owe no taxes (NYT)

Add bad banks, high NPA to GDP ratios, dramatically overly optimistic growth assumptions, and unrealistic perspectives on taxation, and you get a capital "I" in the PIIGS acronym!

Reuters reports that according to two "sources" the Chinese economy grew at a 11.9% rate in Q1, compared to expectations of 11.5%. Of course, the rate of growth is 10 bps below where the economy is considered to be in the official redline, and rates hikes become inevitable. And even as the economy surges, inflation is somehow supposed to come in under expectations: "Consumer price inflation in March was roughly 2.4 percent, one of the sources said. That would be a deceleration from the 2.7 percent rate in February and below forecasts of 2.6 percent." As the source of the leak appears to have been greenlighted by China, we should expect the daytrading algos which trade only on leak catalysts, to have a field day frontrunning each other on all Chinese issues, as they leave the Ambac corpse behind. "The numbers heard by Reuters matched those reported earlier on Wednesday by China Business News, a Chinese-language newspaper which cited an unidentified source."