Archive - Apr 2010

A casual reminder of what Joaquin Almunia said just over two months ago goes to show the caliber of intellect of those running the show. Needless to say, Zero Hedge was skeptical of Joaquin's bullshit. Speaking of said bureaucrat, we wonder - did he fall off the face of the earth recently? With statesmen like this, who create soundbites such as "We have no Plan B - Plan A is on the the table, it is fiscal adjustment" who needs enemies like Ben Bernanke. Oh yeah, Europe. Nevermind.

Spreads rallied today after positive headlines in Europe and some spread-compressing single-name M&A activity in the US. HY14 closed at its best since inception, below 500bps, as IG closed only at last Tuesday's levels but notably IG outperformed intrinsics and HY underperformed intrinsics suggesting some possible HY-IG decompression was at play.

All-in-all, given the supposed clarification that we got from Europe, today's performance was notably dull with idiosyncratic moves dominating any systemic strength (which is not what many expected). Spreads opened tighter following last night's Greece news (see yesterday's note for our perspective) but it was clear that while the rally in EUR, compression in front-end bonds, and gap in 5Y CDS was exactly what we expected, much as we also expected, these improvements were less than many thought and did not last. 5Y CDS gapped 50bps or so tighter (back only to last Tuesday's levels) and even short-end bonds only managed 100bps compression and around 43bps in GGBs over Bunds (as we pointed out this was not unexpected and does nothing to solve longer-term instability).

We here at Zero Hedge have gotten tired of the endless propaganda and lies coming from the US Treasury regarding its "prudent" cash management. As we demonstrate weekly, gross tax withholdings have collapsed in 2010 compared to the even disastrous 2009. Through the 14th week of the calendar year (not fiscal), cumulative tax withholdings in 2010 are $477.9 billion, $13.5 billion less than the $491.4 billion in 2009. Yet regardless of what the only organic source of revenue for the Treasury looks like, the Treasury (and IRS) are issuing ever increasing tax refunds with the abandon of a drunken sailor. The chart below compares how many more refunds on a cumulative basis have been issued in 2010 compared to 2009. Oddly, it is also $13 billion, however in the wrong direction.

In some parallel universe, the Congressional Budget Office is boasting about how its revenues were only x billion less than outlays. We have not seen these numbers, nor do we care: we always and only look at the cash. And so far in April, things are getting scary (almost as scary as March's $333 billion in net debt issuance): The Treasury just reported that its Federal Reserve Account is down to just $9 billion, after starting the month at $91.5 billion, and the year at $108.3 billion: Tim Geithner has burned over $80 billion in cash in just one week, financing aside. This has occurred even as the Treasury has so far recognized about $53 billion in net settled debt, all of its Bills, for net funding deficit of about $145 billion. As we know that almost a hundred billion in Coupons have been issued and pending settlement, as well as another $100 billion + in Bills will settle after this week, we adjust our estimate of net cash burn and believe that total outlays as funded by cash (not much left) on hand and new issuance will hit $300 billion. This delta is also a function of various Trust programs which are now in net need of funding, courtesy of yet another Ponzi scheme created by the great John Maynard Keynes.

At 27 minutes into his show, John McLaughlin predicts that Obama "will enact a new national sales tax in January, February or March of 2011." As we pointed out recently, tax withholdings, contrary to what the budget office or flawed groupthink will have you believe, were down in February and March compared to 2009. Alas, Obama will have no choice but to institute some form of VAT unless he has absolute faith that China will buy US debt into perpetuity. Yet what people in D.C. should remember, is that Japan's hike of the VAT in 1997 and increase in out-of-pocket medical expenses is often credited with prompting their 1997 recession.

For every question you may have on the outlook for the industrial side of the economy, especially if you are a HY analyst, here is the answer (at least from a groupthink perspective) in 167 pages.

7% top line miss is not easy to explain, as CNBC just demonstrated. The revenueless (and jobless) recovery is becoming even more revenueless (and jobless) and less recovery. When AA is unhalted will likely not be pretty (a statement based on logic and thus about to be thoroughly disproven).

Nothing reall new here, just more confirmation from John Hussman, who tends to be somewhat more diplomatic than us, in highlighting what all those who care already know (the rest are buying AIG, Fannie and Freddie): the banking system is completely insolvent. And to make matters worse everyone in this administration from the very top, to the regulators, to the accountants, to the investors, and to the firms themselves, is in on it. The only thing that makes it palatable - the complete lack of any information about just how bankrupt America is and will continue to be for years, even as we hear every single day from the administration propaganda business stations how everything is doing great. Ignore all the talk about an economic recovery - with the cornerstone of the financial system still in default if it weren't for a variety of accounting gimmicks, not to mention the trillions in fiscal and monetary boosts, and the transfer of resurrection costs from the present to the future via the steep debt curve, real GDP would be down 10% or more, and all public financial firms would be undergoing liquidation (and their management teams likely in prison). Of course, public recognition of just how much of a ponzi the entire economy has become is never a good thing going into midterm elections. And with the Fed directly and indirectly monetizing, with Primary Dealers complicit in realizing full well their 4th Hamptons house would be on the block if they don't, with China forced to keep buying our debt as the alternative is a nor so glorious  revolution, we all not only live in Wonderland, but are fully aware of this sad reality, yet happily will continue to do so until the day this lie can not be rolled into tomorrow.

Another day, another mad rush into financial stocks with the worst prospects ever. And the meltup in airlines, retail, restaurants remains in intact, further boosted by the ongoing drop in commodity prices. But even the energy sector is not immune to the dumpster diving bargain hunters today.

IMF says Italy is right on track. Okay, but which track would that be? More facts thrown at you that probably hurt if you believe the soundbites in the media..

First, Goldman royally raped its clients by losing them a boatload in two sequentially failed EURUSD recommendations (on which the firm, of course, being on the other side of the trade, ended up making a killing). Today the firm is handing out vaseline to clients but not in FX - they are now going after commodities and, specifically, gold. Most relevantly, Goldman is once again starting to accumulate Gold. Three months ago Goldman boosted its forecast price target to $1265/toz in 2010 and $1425/toz in 2011, during which period the firms was likely shorting gold to clients who were buying in expectation of a price hike. Today Goldman has revised its call - no surprise: gold is now expected to drop to $1165 in 2010 and $1350 in 2011. Then again, according to former Goldmanite and current gold "expert" Jeff Christian big banks would never do something as risky and foolish as having a naked short position. So please ignore anything we might have said earlier about GS shorting gold unhedged. Bottom line, clients are now expected to sell their gold to Goldman. Which means Goldman is buying. You do the math.

There is one signal we have been pushing consistently when it comes to picking equity tops and that it buying (selling) on bearish (bullish) reversal candles in the Vix outside the upper (lower) Bollinger band. The Vix daily chart attached shows recent history and how any such signal has generated at least a 5% percent move in S&P. As the Bollinger bands for the Vix have been narrowing of late we have been beating that drum impatiently. Today marks the first day we have an outside candle below the lower bollinger. Ideally we would close today above this morning's open at 15.67. If that is the case then no doubt it is time to sell equities without much hesitation. I have attached for confirmation the charts of the Dax using 3-hours and daily intervals. We see we have a potential 5-count on the Dax completed calling for reversal, and there is strong Stochastic and RSI divergence on the 3-hour chart. On the daily chart we see we should technically at least retest the 100-dma envelope, currently at 5,836, and the daily stochastic is showing a lot of saturation on the upside. - Nic Lenoir

Tomorrow Greece is issuing €600 million of 3 Month and 6 Month Bills each. The latest curve from Bloomberg shows that absent some new bailout between today and tomorrow, Greece will likely be forced to offer a stunning ~6% yield for both issues (assuming these go off at market rates). Without having checked historical records, we are confident that never in its post-EU history has Greece had to issue short-term debt at such record levels. And with the bulk of Greek debt rolling over in 2-3 years, the country will gradually become bogged down in untenable interest expense, even as its overall output is decimated thanks to real (as opposed to imaginary) austerity measures. There is no way that this curve is indicative of a sustainable situation or a situation where a liquidity crisis can be avoided. Greece thought the loaded fire extinguisher of this weekend's announcement would be sufficient to generate a far more aggressive steepening of the curve. It was wrong. It is now forced to activate the EU/IMF rescue plan. Each day it delays results in one day closer to certain sovereign bankruptcy.

The same old song - market melt up, no volume. The algos are sticking to the program: if no volume, then buy. The last particular uptick occured on less low volume than usual. Funds, realizing that the government will never allow anyone to fail ever, see no reason to sell anything. Volume shaping up to be one of lowest for the year. There is no participation in the rally, as has been the case for 2010. There is also increasingly less liquidity in the SPY where smaller and smaller blocks get to push the market in any one direction. Furthermore, the market has once again decoupled from any asset correlations: be it currencies, or commodities.

For today's dose of Alice In Wonderland capital markets, ICI just reported that the week ending March 31 saw outflow, this time -$61 million. Year To Date domestic equity flows are ($3.6) bilion, the same as from the February lows. The S&P has gone parabolic with no retail participation, and in fact, with capital withdrawal by investors. We are confident the Federal Reserve has some good explanations for this rotation out of equities and ever more into bonds.