Archive - May 2010

The endlessly entertaining Hugh Hendry, who gave Jeffrey Sachs a royal beatdown yesterday and pretty much discredited the Columbia professor for life, is back in this interview with Money Week's Merryn Webb, in which he once again is not afraid to make "bold" statements. Such as that hyperinflation is pretty much inevitable, that China is the functional equivalent of the Next fashion chain in the 1980s, that instead of listening to idiots on TV who just talk their high beta books, investors should buy the largest and safest stocks. Interestingly, Hendry actually suggests a viable way to fix America's problems, which would require China to write off its US debt, thus "securing the health and vitality of China's biggest customer." Alas, we don't think it would be sufficient, as China holds about $1 trillion of US debt (at least officially). For the Hendry plan to work, debt repudiation would have to go viral, with all banks, US and European, writing down foreign debts as well. Of course, this would bring about the crash of the financial system overnight which is why it won't happen. And yes, it still will crash, as the financed assets are bled of all their cash flows, but at least the grind into systemic bankruptcy will be slow, painful (for the middle class) and very drawn out. As for hyperinflation, Hendry's view coincides with that of Zero Hedge: "the current deflationary shock will deepen and then create "political legitimacy to go nuclear with hyperinflation" via the printing press."

In the current environment, where the market's Advance/Decline line is swinging with greater daily amplitude than ever before, the only thing glaringly obvious is that nobody has any clue how to trade pretty much any asset class. Which is why the following presentation by Morgan Stanley's Jim Caron does a great job at summarizing at least some of the core fundamentals in this new, "new normal" where corporate risk no longer exists, only to be replaced with unprecedented sovereign risk and pervasive moral hazard. It is a must read for anyone who dabbles in any market even remotely connected to credit (which implies everyone): 112 pages of no-nonsense (if somewhat biased) goodiness.

It must have been at least a week without the US government announcing some stimulus, subsidy, tariff or other protectionist measure, because today the government just passed yet another$79 billion stimulus bill, extending unemployment benefits and restoring expired tax breaks. The net cost to the deficit: around $30 billion. This really is a drop in the bucket: so far in fiscal 2010, the US budget has already spent over $ 107 billion on unemployment benefits, and $30 billion is less than the government raises in one of its three biweekly coupon auctions. On the other hand, when Obama next wonders why nobody in America works any more, he may want to reevaluate that 6 million unemployed people in the US are now encouraged to be on government payrolls for two years.

The German Economics Minister Rainer Bruederle has just confirmed precisely what many have known and said for years, namely that the US Federal Reserve is active in the secondary markets, in this particular case in FX. While not so much of a secret for some of the fringe players such as a the SNB, BOE and BOJ, the Fed has never had a formal statement on currency intervention, as, of course, it would have been seen as a sign of weakness (and allegedly could be considered an unconstitutional activity). And why would anybody dream of manipulating the world's strongest currency. Of course, if Bernanke manipulates currencies, as has now been confirmed, it is more than clear that he directly buys and sells stocks in the secondary market, and/or Treasuries in the primary. We wonder what other juicy disclosure Bernanke's trans-Atlantic CB colleagues will announce once they are cornered about their recent market manipulative conduct.

CDOs guaranteed by Spain? These must be underwritten by Goldman Sachs.

Fitch Ratings has today downgraded 10 classes of CDO notes and affirmed 14 classes of CDO notes following the agency's downgrade of Spain's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'AA+' from 'AAA'."The sovereign downgrade reflects Fitch's assessment that the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term."

And so it begins. But the Bank of Spain said all is fine..."Despite government debt and associated interest costs remaining within the AAA range, Fitch anticipates that the economic adjustment process will be more difficult and prolonged than for other economies with AAA rated sovereign governments, which is why the agency has downgraded Spain's rating to AA+."

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 28/05/10

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).