Archive - May 28, 2010

You have reality, and then you have Central Bankers and their presentations. In a failed attempt to misdirect attention away from the crumbling Spanish banking system, the Banco de Espana has issued a 45 page presentation, "The Spanish banking sector: outlook and perspectives" which concludes that "The sector is resilient overall." We would be the first to drink that particular Kool Aid although we distinctly recall how comparable reports were being floated by the Greek National Bank about a month before NBG started its 70% price descent (a process culminating with the sick joke of JPM downgrading it from Buy to Sell a few days ago), and Greece itself ending up bankrupt only to be bailed out by the same central bankers who said all is good. Look for a flurry of Spanish bank upgrades imminently courtesy of your favorite conflicted Wall Street sell side analyst.

In early April, we noted that the IMF was preparing for something big when we observed that the IMF was launching a new credit facility, the New Arrangements to Borrow, with $550 billion in total commitments (of which the US was at the top in terms of funding responsibility). Incidentally this was before the Greek parliament storming led 2 year spreads to jump to 20%+, and the announcement of the biggest bailout in history by the EU, and came at a time when the IMF's rescue contribution was expected to be a paltry $10 billion, only to end up well north of $200 billion. Indeed, the IMF knew all too well what was coming. And judging by what the IMF is doing behind the scenes with its new alphabet soup of rescue facilities, things are about to get much worse once in the sovereign arena yet again.

Ignore stocks, the only thing to follow today is the AUDJPY chart, which stocks will have no choice but to follow momentarily. After experiencing a massive, near 400 pip short covering orgy, the critical carry trade is once again rolling over. With numerous attempts to defend 77 failing, the pair is now starting to look like a mirror image of yesterday's action. Another solid attempt at retaking 77 will likely follow, and in case of failure, the wheels off of today's non-existent stock market may just fall out, and totally ruin the weekend for all those already partying it up on Long Island's southern shore.

As usual, Hillary Clinton does a bang up job of putting the world on the edge of a tactical nuclear exchange. Bloomberg reports: "North Korean Major General Pak Rim Su refuted the results of the international investigation into the sinking of a South Korean warship and said "any accidental clash that may break out in the waters of the West Sea of Korea or in areas along the Demilitarized Zone will lead to all out war," at a press conference today, according a KCNA statement."

With Greece now a distant, proforma bankrupt memory, rubberneckers have finally started paying far more attention to the Spanish slow motion trainwreck. And things in the Pyrenean country are deteriorating: earlier, Market News reported that the market's reaction to Spain's austerity package was one of ridicule, and its credibility will be further eroded now that Spanish bilateral labor reform talks have ended unsuccessfully , leading the way for general strikes as early as next week. Pouring even more gas into the fire is the just released announcement by the Spanish government that earlier economic forecasts were too optimistic: a hallmark of any floundering Keynesian state (and all of this even without the ongoing liquidity crisis as seen by rumors about BBVA's CP access and the ongoing flash merger rage among all the insolvent savings banks). The government, which is currently saddled with 20% unemployment, said that the economy will grow by 2.5 percent in 2012, down from its previous forecast of 2.9%. GDP growth in 2013 is seen at 2.7%, down from 3.1% previously. And while a realistic unemployment picture courtesy of austerity is now in the upper 20% range, a step in the right direction was the revision to the unemployment forecast, which was pushed higher to 18.9 percent in 2011, up from the 18.4 percent previously seen.

The Chicago PMI (whose early release to subscribers pushed the market lower as usual), dropped by the biggest amount so far in 2010: at 59.7, it saw its largest decline YTD, at -6.4%. The only item that rescued the PMI was the ongoing surge in inventories as end demand collapses. How much longer can the inventory rebuild continue? Aside from the inventory "junk food" restocking, all other PMI components tumbled, with the Prices Paid, Order Backlogs and Employment all coming in at 2010 lows, in signs that the fiscal stimulus benefits are all virtually over. Once the inventory inversion begins, look for the overall business barometer to make a sharp correction to the downside as the sugar high is on its last fumes.

Remember the prediction that CajaSur was Spain's New Century? Yup, it's accelerating: keep an eye on this trend as it will soon become an avalanche. Can Goldman reverse merge its FDIC subsidiary over to Madrid, to "prevent" the imminent implosion of that banking system?

Don’t kid yourself, Google didn’t leave China, it was booted out. Blame Sergei. Google is increasingly being priced like a public utility it has become, not the hyper growth super nova it once was. Investors are growing less tolerant of the firm’s quixotic forays into other money losing business. Did I mention that they have a space program? (GOOG), (BIDU).

I am about to head out on the road (not to serfdom hope!) and before I do I want to issue a rallying cry to everyone that craves freedom both politically and economically. We must all at once stop identifying ourselves as Democrats and Republicans. The elites use these definitions as part of a divide and conquer strategy. In any event, Bush and Obama seem pretty similar to me anyway. Two thugs. We must get back to our roots and what made this country great. The enemy is not someone from a different political party or a “capitalist” or a “socialist.” The enemy is collectivist thought imposed on humanity from the top down. Top down collectivist thought has taken on many forms whether it is Communism or Fascism but in the end what happens is a small ruling elite run the lives of 99% of the population. Those that resist are killed or imprisoned. I certainly do not think I have all the answers. What I do know is that freedom loving people the world over must shed their prior false political identities and together agree on certain key principles. There is a battle going on between a small highly organized group that wants a collectivist top down structure of world government and they are rushing to put these plans into action. This is not conspiracy theory it’s very obvious if you open your eyes. Get your money into real assets and get prepared so that you are not destitute when it comes time to stand up and rebuild. We can make this world a better place but it’s not going to be easy. - Mike Krieger

A lot of people have been attributing the bounce in risk to end of month rebalancing by mutual funds. If that's the case even better it means it's "static" portfolio rebalancing providing us better levels to sell. Fixed percentage asset allocation is a prehistoric investing strategy and it's only fair for other market participants to be able to make money off it. I am sure all the market making equity desks had another perfect week trading! The funding story is not going away, European banks have loan books that require uncollateralized funding in USD they cannot access right now, nothing has changed there. We are watching a repeat of 2007 in slow motion and market participants better acknowledge it. - Nic Lenoir, ICAP

According to the BEA's April consumer income and spending data, personal income increased by 0.4% in April, in light with expectations and the same as in March (revised). Expenditures, however were flat with March, after posting a 0.6% increase in current dollars in March, and below expectations of 0.3%. May data will likely demonstrate increased frugality courtesy of the explosion in market volatility, the flash crash, and the market correction. The only favorable outcome of this data is that the US personal savings rate increased from a revised 2.8% to 3.2% in April, which however is still in line with the lowest readings since late 2008. Another good data point: "Government wage and salary disbursements increased $1.9 billion, compared with an increase of $2.9 billion." Stunningly the centrally planned state allowed the salaries of its workers to increase less than those of the private sector: "Private wage and salary disbursements increased $24.4 billion in April, compared with an increase of $13.7 billion in March."

At the request of one of our Professional Subscribers, we performed a preliminary analysis of Force Protection, Inc. While it doesn’t suit our needs, I have decided to put the summary out in the public domain. This company is a text book business failure waiting to happen, and is a monument to the consequences of not diversifying your revenue stream.

• Asia stocks rise for a third day after US shares rally; Euro declines.
• China's foreign-exchange regulator denied it is reviewing its holdings of euro-zone debt.
• European banks are increasingly hoarding cash while borrowing far less.
• Greece may yet have to restructure its debt, despite assurances to the contrary from EU, IMF.
• Japanese prices decline, unemployment rises in signs recovery is slowing.
• Workers protested French govt plans to raise the retirement age past 60 years old.
• BP puts total cost to date at $930M; 'top kill' may take another 24 to 48 hours.
• KKR, Bain Capital hire Goldman Sachs for a $1B IPO of Toys R Us Inc.

Faber's latest market call in a Bloomberg interview on May 24, plus my comment and a technical look of the SPX and gold.

Lipper FMI reports that investors pulled $5.3 billion from equity mutual fund during the past week, the largest outflow since March 2009.  Including ETFs, the outflow was a massive $16.7 billion, the largest since 2002. And now, back to your regularly scheduled futures ramp, where courtesy of Ben Bernanke's bizarro supply-demand curve, selling begets higher stock prices.