Archive - Jun 2010

A must read presentation from UBS' global commodity research analyst Julien Garran and PM trading srategist Edel Tully. Their summary view: "How should we think about gold? This has to be one of the favorite questions of nearly every investor we encounter, and despite our lack of specialized knowledge and our relative focus on the emerging universe we very often get dragged off into speculative discussions on the nature of gold demand and what gold prices are “telling us”. If we had to summarize the conclusions on gold in a single phrase – keeping in mind that this is a bit of an exaggeration, and one to which Julien and Edel might well take exception – we would say “forget about the fundamentals”. When we talk about investment demand, there are two main drivers: inflation and risk. I.e., gold does well when buyers are worried about inflation prospects, debt monetization and the debasement of national currencies, and also does well in an environment of heightened volatility and fear about the global economy."

The currency is in free fall, and the continent is about to enter a new dark age, as enforced deleveraging brings economic collapse and widespread civil unrest. To me, this all means it’s time to start sifting through the wreckage, looking for potential buys in Europe. Suddenly, Poland is more than just a joke.

Last weeks weak retail sales already suggested that next months NFP may underwhelm with a headline of sub 300k including the census jobs next month. That would naturally suggest poor private sector employment and with the Empire data out this morning that indeed appears to be increasingly the risk. Indeed, that relationship supports the roll we have already seen in the Chicago and Philly data…..Strike 3?

The NAHB Home Builder Survey reported a massive 5 point drop, reaching 17, on expectations of 21. The reason for the plunge - concerns about the end of the tax credit. Not even Goldman could spin this news favorably: "Housing market index 17 in June vs. median forecast 21. The National Association of Home Builders reported a 5-point drop in its housing market index for June, pushing it back below the 20 level that had been the low prior to the latest housing market recession. The main driver of the decline was the assessments of current home sales, which dropped 6 points; assessments of future sales and of buyer traffic were down less substantially (-4 and -2, respectively). All four regions suffered declines, but the biggest by far was in the Northeast, where the index had surged to 35 in May only to come back down to 18."Metric by metric, the double dip become increasingly more appreciated.

Watch the Gulf Oil spill hearing live and without permabull voiceovers at the following C-Span link.

Nouriel Roubini was on CNBC earlier, sparring with Mohamed El-Erian, providing a very indecisive prediction about the future of the US economy. The RGE economist who previously would say the depression is only just starting, is unwilling to commit to a prediction of a double dip for the US, and barely do so for Europe. His anticipation of sub 2% GDP growth in H2 is... higher than that of perpetually optimistic Goldman Sachs, which sees 1.5% H2 growth. So much for swinging for the fences. But when existing subscribers expect to a given set of data, it is quite understandable. It is, nonetheless, good to see that the Doctor read the ConvergEx report we posted some time ago indicating how the Fed, and everyone else calling for a projected reduction in unemployment, are pathological liars: "With 130.2 million people presently employed, that works out to an addition of 385,000 jobs in each month, May through December – and that’s just to reach 9.4%. The low-end Fed projection is 9.3%. Considering the economy added 290,000 jobs (more on this later) last month, 385,000 seems a touch ambitious to say the least." And this does not include the atrocious May report, which means the economy has to add over 400k real private, non-census jobs a month. This is impossible. At least Roubini admits: "eventually even the US can't outrun a trillion budget deficit for the next ten years." To all speculators: good luck timing the turning point into the last crash. An oddly unsatisyfing clip, but the head to head between Roubini and El-Erian 5 minutes into the clip is amusing: Keynesian vs. non-Keynesian.

According to the latest Treasury International Capital release, total foreign holdings of US debt in April increased to just under $4 trillion, or $3,957 billion, a $73 billion increase. This represents 47% of total debt held by public at the end of April of $8,434 billion. And while two of the three usual suspects increased their US debt holdings marginally, China buying $5 billion and Japan buying $11 billion, the "UK's" purchases of US debt continue to grow at an exponential phase: these have now hit $321 billion in April, having tripled over the past 6 months ($108.1 billion in October 2009), and increasing by a whopping $42 billion month over month. We put the UK in parentheses as the end purchaser in this case is anyone but an an austerity-strapped and deficit reducing UK. Whether this is the domain of the mysterious direct bidders, an offshore FRBNY holdco, or just Chinese buyers domiciled in the UK, continues to be unknown. Yet one look at the chart of UK holdings below demonstrates that something is very much wrong with this series.

This week's "The Good, The Bad & The Ugly" from BankRegData.com reviews Fifth Third Bancorp. The Good is that Nonperforming Loans are coming down, The Ugly is their reliance on Loan Sales to prop up Net Operating Income.

There has been so much written of late about gold, most of it sensationalist crap, which is a related in part to the difficulty for analysts to put a financial measurement on it. We like that. Because it makes it harder for the sell side investment banks to brand and own it as their recommendation. In some ways it is truly a populist product. Sure, launched ETFs are not unlike IPOs that have been branded by the banks that underwrite them. But we are increasingly seeing a diversification within the move to Gold. As the trend becomes more secular, the public is putting money into gold ETFs. Meanwhile, those with ETF holdings and the financial means are rolling their positions uphill to physical gold. Our own evidence is the increase in commission rates coin and bar dealers are charging on top of spot. It is increasing due to “demand”.

The bankruptcies and debt collapses are coming as a result of overcrowding in the sovereign and public debt markets. This series aims to prepare you for the coming collapse... The Doo Doo 32 revisited!

• Traders play around with stocks, then leave 'em (Post)
• BP lining up GBP5 billion war chest from banks to help meet costs of oil spill (Sky News)
• Another Spanish auction, another record new issuance yield (Reuters)
• Empire state manufacturing index comes in below expectations at 19.6, higher than prior 19.1 (Bloomberg)
• New York Fed's enhanced power come with reduced autonomy (Bloomberg)
• Farrell: 7 signs toxic partisan politics is killing capitalism, democracy, your retirement (Market Watch)
• Angela Merkel's government threatened with collapse (Guardian)
• Gundlach: Generating high cash flows and managing risk with deflation or inflation (Pensions & Investments)

The primary indicator used by Jim Caron in his daily letter to assuage client fears about contagion, 3 month Libor, has taken a step for the worse. As Market News reports: "Dollar and euro 3-month LIBOR both rose Tuesday, with the dollar rate at its highest since July 6 last year and the euro rate at its highest since Dec 29 2009. The euro overnight LIBOR rate rose 32.13 basis points, due to the end of the European Central Bank maintenance period, while the 3-month LIBOR rate was up 0.19 points." Adding to increasing short term funding concerns was the fact that going forward the ECB will take a 5% haircut on all Greek bonds posted as collateral with the ECB. As this amount has surged recently, Greece will be now forced to post yet more bonds just to cover the spread. Luckily, Greece is allowed to post any collateral at all, as the once-prudent ECB now allows for any worthless collateral to be pledged for cash on its balance sheet. Very much like our own Fed. Lastly, yesterday's Greek downgrade by Moody's drew harsh criticism by Europe. As Reuters reports: "Moody's decision came at quite an astonishing and unfortunate moment" according to Olli Rehn, who added "the downgrade had not taken into account latest developments in Greece." On the other hand, seeing how much credibility (none) the Greek government has, after having been caught lying about its deficit for years, is this really a surprise?

A new to be released EU report warns that far more deficit cuts will be required. The report focuses on Spain and Portugal, and especially on the year 2011. According to the report a "snowball" effect may hit Spanish and Portuguese debt, and that the fiscalchallenges for the two countries are "daunting." And as the se kinds of reports tend to be self-fulfilling prophecies, Portuguese bonds have shot lower, and the spread to Bunds is +12.5 bps at the day's wides, or 271 bps. We anticipate many more such reports to come out about every country in Europe that has been forced to establish austerity measures, which basically means every country in Europe. And somehow the force is still strong with Keynesianism in the US, which is still deluding itself into believing it will be able to squeak through the cracks with no deficit cuts.

• Asian stocks reverse loss on recovery signs; bond risk falls.
• BoJ will make $32.8B of low-cost funds available to private banks to lend to companies.
• Brazil, China, and India to see strong growth in agriculture as output remains stagnant among big importers in Western Europe.
• China's Bank Regulator warns risks growing from real estate 'chain effect'.
• Euro down to $1.2182 in morning European trading due to Greek finance worries.
• Fed weighs options in case growth ebbs.

More imminent concerns of counterparty collateral calls: BP Plc’s long-term issuer default rating snd senior unsecured rating were cut to BBB from AA at Fitch Ratings. The rating watch was changed to Evolving from Negative. BP is now just barely investment grade to Fitch, the rating agency that has the highest Greek rating.