Archive - Jun 7, 2010

Contribution from BoomBustBlog reader: EVI is a well run company with 60%+ of shares owned by management that has an absurd amount of cash on the balance sheet, no debt, and trades at a ridiculous valuation with a few likely catalysts.

Falling stock markets in May sent pension plan assets lower, resulting in the worst funded status for the typical U.S. corporate pension plan since October 2009, according to monthly statistics published by BNY Mellon Asset Management. The funded status in May declined 4.3 percentage points to 82.0 percent.

Whether you hate enviros or are an environmentalist ... peak oil is the real issue.

As someone once said, the only man who can tell a room full of people they are doomed and get a standing ovation, Marc Faber, gives a terrific hour long presentation to the Mises Circle in Manhattan on May 22, discussing the economy, interest rates, markets, why having massive output gaps (see previous post for Bernanke's most recent dose of lunacy on the matter) and hyperinflation can easily coexist, why the Fed will never again implement tight monetary policy, why Greenspan is a senile self-contradictor, why Paul Krugman is a broken and scratched record, and the fact that pretty much nothing matters and we are all going to hell. Little new here for long-term economic skeptics, but a must watch for all neophytes who are still grasping with some of the more confounding concepts of our dead-end Keynesian catastrophe and not only why the world can not get out of the current calamity absent a global debt repudiation, but why gold is the asset to own, even though one must not be dogmatic and shift from asset class to asset class in times of tremendous currency devaluation (i.e., such as right now). 2010's must watch Marc Faber presentation.

Traditionally the primary metric watched by Fed Chairmen when determining changes to monetary policy, especially on the tightening side, has been the observation of a contraction in the "excess slack" component in the economy, defined rather loosely, but primarily in terms of excess unemployment over the dogmatic steady-state unemployment rate in the 5-7% range. Today, in a Q&A at the Woodrow Wilson International Scholars dinner, Ben Bernanke joined Hoenig and other Fed members in stating that the Fed will no longer await a "sizable" drop in the jobless rate before raising interest rates. This is good, because as the San Fran Fed discussed in an analysis from exactly a year ago, the unemployment rate is not going down any time soon. Does this also mean that the Fed is no longer wed to the worst, and most procyclical indicator imaginable, i.e., economic slack? The answer of course, is no. And the only reason Bernanke is pretending to care about tackling the issue of inflation in advance, is due to the sudden and dramatic focus the ECB's policies have gotten in Europe, coupled with the dramatic politicization of Trichet's bank. It is ironic, that in the US the Fed is using the "political" card when demanding free reign in its complete opacity to do precisely the things that in Europe bring about screams of central bank politicization. But then again, they can't print a reserve currency, can they. Thus, the use of a double, and a 180 degree opposite at that, standard is not only welcome but expected.

As Hamas quietly imports its culture and policies with much-needed goods into Gaza, international tensions surrounding Israel are exploding and the relevant parties are all taking stances on the eve of the flotilla raid. The USA finds itself in a bind to position itself properly, with time being the most important factor of all.

True story.

A team at Goldman, decidedly different team from the one which this morning said the EUR could drop to a 1.16 level shortly, looks at recent fund flow data and notes that with the US now perceived as a safe haven to the rest of the world, particularly Europe, a fact which implicitly is a huge benefit to the treasury supply onslaught as buyers for USTs no matter the yield or maturity, are easily found in this environment of insecurity. No surprise there: it is almost as if Europe's problems were engineered, courtesy of a EURUSD which was kept too high, for too long, by too many market participants. Goldman's conclusion is that the dollar is not the fundamental safe haven it is portrayed to be, but is, once again, merely the best of the worst. As Goldman's Robin Brooks highlights: "non-Treasury portfolio inflows are still falling short of covering the monthly trade deficit, in contrast to before the crisis when they were more than enough. This is consistent with our often repeated view that the BBoP (broad basic balance) for the US remains weak and is why – even in the face of strong foreign inflows into Treasuries – we remain cautious about the USD outlook." The primary reason for the increasingly strong bid for gold is explained by Brooks' observation: while unwinds in existing FX carry pairs continue to implicitly benefit the dollar, when it comes to allocating capital to a safe haven, the only recourse continue to be gold. And as FX is fickle, all it takes is one massive short covering spree to invert the balance of power once again in the direction of the EUR: all that would be needed is a wholesale realization that the consolidated US balance sheet is in far worse shape than that of Europe, and for the herd to shift from one side of the boat to the other.Yet should more volatility come into FX markets, gold would benefit even more.

Even though the numbers above show the last prices, rather than the settlements, we now know that July crude ended Monday’s session with a 7-cent loss in a quiet trading day during which traders covered shorts and tried to figure out what shoe would drop next. Investors, those holding oil as an asset, seem to have been liquidating long positions nearer the day’s highs, while traders who had gotten short - based on heavy supplies in the oil market - were lightly covering, taking profits and talking about events in the US Gulf, where the BP oil spill continues to taint the picture moving forward for offshore drilling.

The pain for the onshore drillers is just starting. Following last week's explosion of an EOG Resources nat gas well in Clearfield County, Pennsylvania, the Department of Environmental Protection today ordered the firm to suspend gas well drilling activities in the state indefinitely, "until DEP has completed a comprehensive investigation into the leak and the company has implemented any needed changes." Somehow we have a feeling after today's follow up, and much more visible explosion in Texas, the reaction by the government will be exponentially worse for the nat gas drilling industry.

Update: The pipe belongs to Enterprise Products Partners LP. Bloomberg reports: "Enterprise Products Partners LP shut a portion of its 36-inch natural gas pipeline after the line was struck by a fire. The line stretches from Waha in West Texas to the Carthage Hub in Panola,  Rick Rainey, a company spokesman said in a telephone interview."

Following up on last week's explosion in Pennsylvania, Fox News is currently tracking a massive gas well explosion near Granbury, Texas. The fireball is so large (and currently blazing as the Fox News video below attest) that it can be seen 30 miles away. 3 have been reported dead, 6 are injured, and 10 are missing.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 07/06/10

The latest HSBC hedge fund performance report is out, this one including P&L through the end of May. In short, a bloodbath. Some notable performers for the month of May:

• RIEF B: (4.46%)... and just 0.74% YTD
• Moore Global: (9.15%)... now that's a pounding.
• Tudor: (2.26%)
• Fortress Drawbridge: (1.31%)
• Millennium: (1.31%)
• Pershing Square: (2.20%)
• York: (4.80%)

And much more.

With this Thursday's roll from the June to the September contract, the volume in the futures is playing tricks on robots and speculators. As the volume in the on the run June (M) contracts begins disappearing, the volume in the September (U) contracts is picking up (although in the chart below the cumulative divergence is pretty much meaningless as there has barely been any volume in this contract prior to today). As such, a big factor for today's late day sell off, which did not occur on any material adverse news, is very likely related to the ES contract roll. If this is the causal factor, look for ongoing roll-related weakness over the next few days. In the meantime, today's weak US close will continue to pressure both Asia, China and Europe overnight, leading to additional spookage in Treasury auctions in Europe, which already has various unrelated liquidity concerns to deal with.

April consumer credit came in slightly above expectations, at $2,423 billion in April, compared to $2,421.8 billion in March. The March number was interesting as it was revised notably lower from +$2 billion to -$5.4 billion, a revision the likes of which we can probably expect for April once next month's data is released. The April improvement was entirely due to non-revolving consumer credit, as revolving credit declined once again, this time from $835.7 to $829.4 billion. Non-revolving credit increased $1,586.1 to $1,593.6 billion. In terms of MoM changes to key credit holders, the bulk of credit increase came at the Pools of Securitized Assets, which increased credit holdings by $3.9 billion, while Commercial Banks reduced the most of their existing consumer credit. Alas, we don't see how the latter is in any way conducive to reflating the economy if the primary source of consumer credit continues to contract lending.