Archive - Jul 19, 2010

Two weeks ago John Hussman appeared on CNBC in a segment in which he had the (dis)pleasure of deconstructing Michael Darda's permabullish argument, which has been virtually unchanged and cosmetically rehashed ever since Darda went John Holmes in 2007 at the very peak of the market (Hussman also sparred against James Altucher, but that was pure torture under any iteration of the Geneva Convention or the Basel Treaty, and we will spare our readers the result - masochists can see the clip here). 30% lower and nothing has changed. Which is why in his daily letter, Hussman has some much needed qualifiers to debunk the Darda argument which is as wrong now as it has always been. Tangentially, Hussman has a question for Darda: "just before the market plunged by more than half, [Darda] asserted "the fundamental underpinnings of stocks are superb." He later appeared on CNBC in January 2008 sporting a beard, asserting that all of the recession talk was overblown, and telling a reporter at TheStreet that he would not shave the beard "until the recession talk ends or housing recovers, whichever comes first." As of a couple of weeks ago, he had no beard, which was perplexing." Hopefully Larry Kudlow can ask this question of Darda (and AJ Cohen) next time he has his favorite permabullish cheerleader brigade on deck. The full clip of Hussman's unfortunate encounter with a very clean shaven, and oddly smug, Darda can be seen here.

BP's playbook is so predictable ...

We have been observing the recent collapse of the ECRI index in all its glory over the past several months. As we have discussed previously, this is one of David Rosenberg's preferred leading indicators. Below we present some of his summary observations on the four distinct cycle in the ECRI index, with an emphasis on the current one, which as Rosie highlights is Phase IV - Recession (Zero to Trough), in which the S&P drops by 6.4%, and the worst performing assets are consumer discretionary, industrials and tech, contrary to what has been performing the best over the past six months. Time for some sector rotation.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 19/07/10

The bank that has been bailed out a hundred times before is, shockingly, rumored by Bloomberg to not pass the stress test. In other news, all Greek banks are doing swell for now.

Once again deep value investors vie for the claim they are not only consummate relative value stock pickers (in a time when implied correlation is at all time highs, making relative value as dead a concept as the dodo), but underwater geologists too. At least that was the case until last night, when it was uncovered that (at least one more) seepage near the BP well site may be leaking oil, methane and who knows what else uncontrollably, potentially confirming the running thesis proferred by Matt Simmons that leaks are prevalent and not localized to just the Macondo well. Reuters follows up: "Investors fretted about possible seepage from BP's capped Gulf of Mexico well on Monday and speculation grew about assets the company may sell to pay multibillion dollar costs for its oil spill. A BP spokesman said the seep was detected by its engineers but it was unclear whether the source was the blown-out well, adding that seeps were a natural phenomenon in the Gulf." The stock has sold off appropriately, now that BP trades as a "distressed catalyst" story, with any given day seeing the shares going up or down by double digit percentage. How this stock is still pitched as a relative value play is mindboggling, when one adverse piece of news could send it materially lower.

Hmmm...

What separates the 10% that make money from the 90% that don’t? 10,000 hours.

As we noted over the weekend, there have been some really cuckoo moves in the cocoa curve, now that someone (Anthony Ward) has been doing everything in their power to sequester all the physical cocoa in the world (literally). The chart below shows the recent moves in the July-Sept European contract spread, which exploded over the past two weeks from 150 to 300, doubling profits for those who were positioned properly with advance knowledge of this front-month squeeze. Now that the July contract has expired, look for some comparably odd action to occur in the September-December European pair. Surprisingly enough, none of these oddities are happening on the US side of the cocoa curve. Yet all such forms of blatant market manipulation always end in tears. We remind readers of the sad case of Ebullio Capital Management, which lost 95% in the first two months of 2010, after some comparable shenanigans in the nickel market.

Today's National Association of Home Builders/Wells Fargo Housing Market Index update for July was yet another confirmation of the deterioration in the economic sentiment, and the US consumer's unwillingness to spend on homes absent tax rebates and other forms of stimulus, regardless of mortgage rates. The index came at 14, below expectations of a 16 reading, and a drop from downward revised 16 in June (prior 17). Ben Shalom is looking at all these deteriorating data points and getting closer to QE2 by the hour.

With total cumulative purchases at just over €60 billion since the beginning of its sovereign debt monetization program in May, the ECB purchased just €302 million in (Greek 6 Month) debt last week. As always, tomorrow will see the pyramid scheme of taking the purchases and reliquifying the market in yet another weekly term deposit auction to the tune of €60 billion. If indeed European liquidity is as bad as feared, especially with less than the total upcoming auction size on deposit with the ECB, the bid to cover on tomorrow's latest auction should be another informative data point as to just how bad the EUR scarcity in the eurozone currently is. On the other hand, with the ECB signalling a slow down in monetization, should the ramp in Libor/OIS rates continue, very soon it will be forced to step right back into the sovereign bond purchasing market, confirming the recent solvency lull is only temporary.

3 Month Euro Libor continue rising: for the first time August 2009 the rate is over 0.8%, hitting 0.80813%. More tremblingly, the far less manipulated OIS spread (no trimming of outlier percentiles) also jumped by an even greater amount, thus actually pushing the Libor-OIS spread down to 0.33331%. Another indication of the sudden EUR scarcity which both we and Nic Lenoir discussed in depth last week, is the plunge in the allocation by European banks toward the ECB's deposit facility: after hitting an all time record a month ago at €384 billion, a series of liquidity withdrawal actions have pushed this number to just over €58 billion: the scarcity of euros within the financial system is starting to be felt everywhere as banks no longer even have an excess of cash to deposit for risk free "storage." Market News describes this deterioration in liquidity as follows: "Eurozone interbank markets are likely to be dominated this week
by speculation about, and the eventual publication Friday, of the EU
Commission's bank stress tests. There are concerns Irish banks, German
Landesbanks and the Spanish Caja could all perform badly in the tests." Luckily, all is good in Greece, where one version of G-Pap (the finance minister) announced earlier that all banks are expected to pass with flying colors. Somehow he said that with a straight face, and without breaking out in hysterical laughter.

Is gold really worth $5,000, $10,000, or even $50,000 an ounce?

The first Gold backed Currency was announced last week. This is the road to ruin for the Dollar as global reserve currency: Slow incremental acceptance of alternatives form seemingly meaningless areas of the world. Ranks break first where there is little to lose by change. Last in places that cannot afford it.

• Obama to call for extension to jobless benefits (CNN)
• Yen Surge Puts Investors on Alert (FT)
• Soros Says U.S. Shouldn’t Cut Stimulus as Inflation Contained (Business Week)
• Yuan Drops Most in Two Weeks on Speculation China Will Curb Appreciation (Bloomberg)
• Stress-testing Europe's banks won't stave off a deflationary vortex (Telegraph)
• BP Talks With Apache Said to Stall on Selling Prudhoe Bay Stake (Bloomberg)
• German Industrialists Attack Chinese (FT)
• China Export Growth May Halve to 16% on European Debt Crisis, Tax Changes (Bloomberg)
• How I Stopped Worrying and Learned to Short the Euro (Bloomberg)
• Bankers concerned over stress test results (FT)