Archive - Jun 2010
Here we go again. "Spain's growth prospects are weaker than those of other Aaa-rated sovereigns," says Kathrin Muehlbronner, a Moody's Vice President -- Senior Analyst and lead analyst for Spain. In the short term, the government's accelerated fiscal consolidation combined with the higher borrowing costs currently facing the government, consumers, and businesses will likely depress growth.
At Kerrisdale Capital, we've written about the housing market before, but estimating the fair value of the US housing market is difficult. Two of the best ways to estimate fair housing prices are to compare housing costs to household income or rental rates. Obviously people can only spend so much on housing relative to their incomes, but secular trends in spending, tax rates, and cyclical trends in income make the data difficult to interpret. Likewise, comparable rental rates do a good job of showing the relative cost of ownership, but in an inflated market, rental rates are likely to be inflated as well. A third way to estimate the fair value of the housing market is to look at the replacement cost of existing homes. If the cost of building a home is equal to the cost of buying a home, then the price to cost multiple is 1x, implying a breakeven level of profitability for homebuilders. If homebuilders can build a house for $300k and sell it for $400k (a 30% return) they will continue to build homes until they can only sell them for around $330k (a 10% return).
Ten days ago we reported the most recent data on gold reserve holdings as presented by the World Gold Council, where we pointed out that Russia had purchased 27.6 tons of gold in the most recent reporting period, bringing its total to 668.6 tons. It appears Russia is only getting started. According to the latest IMF data, in the period between April and May, Russia added another 22.5 tons, bringing its May total to a fresh record of 703.1 tons. As BusinessWeek reports, Russia "has added gold every month since at least February." At the same time, The International Monetary Fund’s gold holdings fell by 15.25 metric tons (490,286 ounces). "Reserves of gold at the IMF were 2,951.58 tons at the end of May compared with 2,966.83 tons at the end of April, data on the IMF’s website show." Good thing the world's bailout cop is doing all it can to keep gold prices low by transacting in the open market instead of in prenegotiated transaction. Again, per BusinessWeek, this “is an indication that they will continue to sell the remaining 137.5 tons on-market as opposed to via off-market transactions with other central banks,” said Daniel Major, an analyst at Royal Bank of Scotland Group Plc in London. “Indeed the decline in gold sales from European central banks and purchases from India, Russia and China in recent years demonstrates gold’s growing popularity with central banks.” Well, all Central Banks except those that are printer happy of course, and are now loaded to the gills with toxic debt that will continue to impair their currencies until the bitter Keynesian end.
Bill Fleckenstein Says You Can't Trust S&P PE Multiples As All The Financials' Earnings "Are Pure Nonsense"Submitted by Tyler Durden on 06/30/2010 12:12 -0500
"I don't see how the market can go up and make new highs" says Bill. As for the allegedly cheap 13x that the market is trading on, and that David Kostin likes shoving down every Goldman client's throat on a daily basis, Fleckenstein says, "13 times is only cheap relative to the last decade and a half. In the 70s and 80s, the market was trading at 8x and dividends were double where they are. I don't know how much of those S&P earnings are due to financials: all the financial earnings are pure nonsense, they are making it all up, we don't know where assets are priced necessarily and they are bailed out on the back of the Fed putting rates at zero. So I don't believe the earnings and I don't know what the multiple's going to be. It could easily trade at ten times."
The "fat pitch" that was looking good has fizzled into a stinky, foul ball. In all likelihood, we are looking at a bear market.
And you thought our own Christina Romer was somewhat "out of touch" with reality for noting that the higher unemployment gets, the worse the economy is, the more people stockpile on spam and pitchforks, the better a job Obama is doing. The Brits once again prove that when it comes to Keynesian reality shifts, they still have no equal.
Today's lower than expected interest in the 3-month LTRO operation was supposed to indicate a sign of stability for European banks. Nothing could be further from the truth. In an article which recaps a variety of data points presented here previously, the FT summarizes that European banks continue to exist solely due to a record and unprecedented $1 trillion in emergency loans issued to Europe's commercial banks. In turn, almost 40% of this liquidity is then recycled, and stored back with the ECB, as the very same banks have no trust whatsoever in any of their peers. In short: no matter what the Stress Tests indicate, the European financial system is now in a worse condition than ever in history, including the days just after Lehman.
In the meantime, the market is perfectly ok, and 8 thousand shares can never trade through Reg NMS, and put a hold on billions of shares of Citi traded daily. Of course, what this does allow is some very serious horse trading over the next several weeks, to strip FinReg of any actual regulations.
Courtesy of reader Apocalicious, we present the following piece of technical analysis from Goldman's Tony Pasquariello. According to the technician, a critical level to watch is the 12-month moving average, which many consider a critical indicator of upward (or downward momentum). According to Goldman, "unless S&P recovers the 1083 level today, we will have crossed down and through the moving average. On this simple basis, the technical signal is to be short the market." In any other market we would say a 40 point ramp in the S&P on a day such as today when the ADP came in so far below expectations would be simply insane... But not in our market. After all, the best traders taxpayer money can buy reside at Liberty 33. And they are on a mission.
RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 30/06/10
Watch 10yr yield, AUD/USD, S&P neckline... and GS agrees.
After yesterday's calamitous market selloff, the decoupling in various asset classes indicates just how great the degree of confusion in the market is. The AUDJPY is now indicating once again overbought risk assets, at least on a relative basis. As this is now the only relevant carry trade driving the market, a convergence pair trade here appears an opportunistic entry point to pick a few points. As for the EURJPY, forget about it. The pair is now decisvely correlation with pretty much nothing. The euro has now fallen out of all carry trade favor.
The German presidential election is heading for a third round, after Chancellor Merkel's presidential candidate Christian Wulff was unable to generate an absolute majority in the second round against opponent Joachim Gauck. Even though this position is largely a figurehead, it is another symbolic slap in the face of the Chancellor, who finds herself navigating increasing dissatisfaction over her austerity measures, coupled with the controversial decision to bail out Greece and Spain, and French banks, further augmented by an increasing German desire to pull away from the Euro. In the third round candidates need only a simple majority to win. Voters consist of a special assembly that elects the head of state, made up of members of parliament and delegates from 16 states.
IMF Discloses Ongoing FX Reserve Rotation Out Of "Developed" Currencies Into Yuan, Ruble And Other CurrenciesSubmitted by Tyler Durden on 06/30/2010 09:56 -0500
The latest IMF Currency Composition of Official Foreign Exchange Reserves report was just released. In the quarter ending March 31, the biggest relative drop occurred in central bank holdings of Dollars, declining as a percentage of total reserves from 62.2% in Q4 2009 to 61.5% in Q1 2010. This is the lowest ever relative holding of US Dollars by foreign banks. Oddly enough, the euro was not the biggest beneficiary of this loss of confidence in the dollar (it also declined on a relative basis by 0.1% as a % of total holdings to 72.2% in Q1), but the "Other" currency category. We assume that the Chinese Yuan is the dominant currency in this particular basket. Other reserves increased from 3.1% of total to 3.7% in just one quarter. Central banks are starting to rotate holdings out of Dollars (and after this quarter, certainly out of euros) and into non-traditional, non-developed currencies. Are China and Russia slowly becoming reserves?
The positive goal seeking data bias continues: after a horrendous ADP jobs report pushed futures lower earlier, the Employment component, a far less relevant metric in the Chicago PMI released at 9:45 (and 5 minutes earlier if you are a subscriber), the Employment index, came in at 54.2, an improvement of 5 points over the 2010 low of 49.2 in April. And somehow this number is supposed to reverse all the negativity associated with not only the ADP, but the very large likelihood that Goldman may be well on its way to revising its NFP (+150k) expectation lower. Otherwise, the actual overall reading of 59.1 came in right at expectations of 59.0, and marked another yet another monthly decline, from April's 59.7; the Business Barometer index is now at a three month low as can be seen on the chart below. Of 7 components in the index, just employment, as noted, was Higher: everything else was flat or negative, with both the Inventories and the Supplier Deliveries subcomponents plunging, by 9.9 and 4.4, respectively. Inventories is now at the lowest reading since February 2009. Restocking is now over - no more GDP gains will be seen courtesy of this economic gimmick.