Archive - Jul 13, 2010

The funded ratio of the typical corporate U.S. pension plan fell 6 percentage points in June to 74%, its lowest level since February 2009, when the funded ratio was 73%.

As we reported earlier, the June US budget deficit came in around as expected, at $68.4 billion. Yet an interesting observation that we have touched upon previously, is that over the same period, the US borrowed a whopping total of $210.9 billion. Once again, as has been the case over the past four years, the US borrowed far more in any deficit month, then it needed simply to close the deficit. Case in point, the June differential was $142.5 billion more borrowed than "needed", the YTD (fiscal) differential is $290 billion, and the cumulative differential since the beginning of the 2007 Fiscal year (October 2006), is a whopping $1.5 trillion. Over the past 3 years and 9 months, the US has accumulated an incremental $4.7 trillion in new debt, even as the budget deficit has grown by "only" $3.2 trillion. One wonders just what the reason for this differential is, which amounts to half the cumulative budget deficit over the same time period? The cumulative data, as well as the stunning differential between the two time series is presented on the attached chart.

Remember when a week ago the world was slowing down? Apparently all it takes to forget reality is for Europe to sweep the fact that its banks are insolvent under the rug courtesy of a systematic farce conducted by the very system the banks are part of, rendered even more "credible" since as of today it appears no banks will fail the stress test. On the US earnings front, a materials company beating reduced expectations and a chip maker having just record the best quarter in its history (what growth next for Intel: 80% margins? 90%? every household in China buying an i7 980 for their 7th toaster in their 5th house?), even as global trade is paradoxically stalling following an all time record month for Chinese trade? Americans may be unemployed and homeless but they sure like their iPads and their fast PCs. Either way, to remind readers that despite the latest market run up on no actual positive economic data, here is Dominic Wilson, Director of Global Macro & Markets Research at Goldman, with advice to clients on how to navigate the "slowdown."

After he read a book that he didn't understand, David Brooks came up
with another crackpot distortion of capitalism. This time, he finds a
sharp contrast between bankers and hedge fund managers, whom he lumps
together all other business entrepreneurs. In his latest column he writes:

The smooth operators at the big banks were playing with
other people's money, so they borrowed up to 30 times their investors'
capital. The hedge fund guys usually had their own money in their fund,
so they typically borrowed only one or two times their capital. The social butterflies at the banks got swept up in the popular
enthusiasms. The contrarians at the hedge funds made money betting
against them. The well-connected bankers knew they'd get bailed out if
anything went wrong. The solitary hedge fund guys knew they were on
their own and regarded their trades with paranoid anxiety.

Because they weren't playing with other people's money, hedge fund
managers were more careful than the big banks? How fatuous is Brooks'
analysis? Let's count the ways:

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 13/07/10

Broke US states are probing new lows with each passing day, as money continues to stubbornly refuse to grow on trees (unless you have discount window access of course). The latest funding fiasco comes from Texas, which Reuters reports is planning on selling $2 billion in debt just to refill its empty unemployment trust fund. We are confident that bondholders will be ecstatic to put their money into a extremely rapidly amortizing "asset" that will begin depleting from day one and will likely have no collateral recourse in under a year. But after all, it is other people's money, so we are confident this particular Citi/BofA led bond offering will close and price and sub Treasury rates.

At this point there is little one can add or say. Today the marching orders were for an S&P 1,100. And we will get it. One way or another.

Welcome to reverse distribution. The Bid-Offer stack in the ES is telegraphing the intentions of market participants who can't wait to offload positions, yet are doing so in a way that is pushing the market higher: any bid-side interest is occurring via market trades lifting the ES price courtesy of a massive ask-side inventory which however is locked into limit positions and refuses to go VWAP or market. Yes - sellers outnumber buyers two to one, but unlike panicked shorts who are urgently covering exposed positions, are willing to wait to get their desired price. And with every lift, the NBBO ratchets up one notch higher, creating a feedback loop. The more ask side interest, the faster the market rips, even as the imbalanced market with much greater sell-side interest clears progressively higher! Nothing like selling causing rising prices in this latest installment of the bizarro market. 

June budget outlays came in at the largest ever for the month. Also 2010 Federal individual income tax collections are running 4.4% lower, or $31 billion below 2009 levels: the economic "recovery" sure isn't causing greater tax receipts. And from the report: "The federal government incurred a deficit of just over $1.0 trillion for the first nine months of fiscal year 2010, CBO estimates, $81 billion less than the roughly $1.1 trillion deficit incurred through June 2009. Revenues so far this year are slightly higher than they were last year at this time; outlays are about 3 percent lower. CBO estimates that receipts in June were $36 billion (or 17 percent) higher than collections in June 2009. Morethan half of that difference stemmed from an increase of $19 billion (or almost 60 percent) in net receipts from corporate income taxes. Gross receipts from those taxes rose by $15 billion (or 37 percent), primarily because of higher estimated payments for the current year; a $4 billion decline in corporate income tax refunds also bolstered net corporate receipts."

It seems everyone is perplexed by the most recent irrational bout of July market action. Like clockwork, once July rolls in, the market surges, no questions asked. This year, the ramp is particularly blatant because as the attached chart demonstrates, bonds, which are a far more credible barometer of market (in)sanity, indicate the S&P is rich by at about 50 points. As this spread will most certainly converge eventually as we discussed previously, a short stock, short bond position would generate some much needed P&L in this world of deranged fractal algorithms. As to what may have caused the most recent bout of irrational exuberance, David Rosenberg has the most logical, and generic solution: excess liquidity and a short covering spree, and "nothing fundamental here."

The iPhone 4, arguably Apple's most important launch since the original iPhone in 2007, may very open the door to competition that Apple doesn't want and very well may have a problem pushing back if they get their foot in the door.

The second of this week's coupon auctions closed, with the Treasury placing $21 billion of 10 year Bonds at 3.119% at a 3.09 Bid To Cover. It was 77.69% allotted at the high yield. The Average Bid To Cover on the 10 year has been 3.21, and the last one came in at 3.24. Indirect Bidders were roughly in line with historical, coming in at 41.7 compared to 40% previously and 36.35% on average. Direct Bidders and Primary Dealers came in at 9.8% and 48.6%, respectively; this compares to 13.5% and 46.4% previously. Due to technical problems we will not have the monthly chart breaking down the auctions until later in the day. Incidentally with the 10 Year still trading just north of 3%, the equity-bond disconnect continues to diverge, with the 10 Year continuing to impy materially lower equity levels.

No notable news yet except for a bit in the WSJ that a seismic run testing the integrity of the well is currently in progress, and if it is found that the pressure in the well is too low, then BP may have to change its well capping strategy. If anyone has heard any other material news, please chime in. The other news seen is this bit from Fox News stating that Senator Lautenberg is now questioning ties between a BP oil contract and the released Lockerbie bomber. Lastly, just crossing the wires, is confirmation from BP that its contract to supply Iran air with jet fuel at the Hamburg airport, has expired.

There is a lot to like about the 10th largest bank in Texas, but concerns about their Commercial RE portfolio are increasing. Nonperforming loans increased dramatically and early stage delinquencies have risen as well.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 13/07/10