Archive - Jul 2010

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

When I was traveling a few month ago I gave a presentation called "As Good As It Gets" in which I outlined how I believed Q2 would mark the cycle high in the global economy as the inventory cycled peaked. I then showed a few charts relating to the National Federation of Independent Business survey, which outlining why I so was so concerned about the sustainability of the recovery in the US. Well the NFIB survey was out this morning so I thought I'd see if the outlook had changed? Unfortunately, the survey that covers 99% of all US firms and claims that its members have created 65% of all jobs since to 2000 still just looks crap.

Rosenberg argues the nominal yield curve would be inverted right now if it were not for the fact that short term rates are essentially at zero.

Media and real estate tycoon Mort Zuckerman, who recently admitted he helped write Obama's speeches in the past, has come out blazing with easily the most damning missive of the president and his legacy to date. Mort joins such other distinguished and notable CEOs as Steve Wynn to openly blast the administration and its policies. In the meantime, the president has surely not made many new friends in the executive offices of the E&P space. Before all is said and done, look for letters such as the one attached to become a daily occurrence.

Another day, another accounting debauchery by Europe. In the latest development, Reuters reports that as per the recent JPM "suggestion" posted previously on Zero Hedge, Greek debt is now expected to be haircut by 23%, or to reflect current market prices. Allegedly this is yet another failed attempt to restore some confidence in the entire farcical process. There is, of course, one caveat: the haircut will only pertain to trading books. In other words this is Europe's equivalent of FASB 157: everything that banks hold "to maturity" will not see a major haircut, and very likely not see any haircut at all. Which simply means that all European banks that hold such debt will merely reclassify their Greek exposure from trading to a "held to bankruptcy at par" category. The surreality of European banking assets (which as we pointed out previously is a $100 trillion circle jerk where one bank's assets are another bank's liabilities) has now passed well into the twilight zone. But never fear, the ECB is here. Which begs the question: will JC Trichet's books also be exposed to some sort of stress test? After all Europe's central bank is on the hook for over $1 trillion in impaired debt now - does this mean the central bank will in no way be subject to any haircuts or other viability tests? Why of course, how else will flagrant lies about financial system's stability be perpetuated for at least one more year.

For the first time in history, the world is attempting to pull off an economic recovery without an engine. Except for the US, every major economy is now simultaneously cutting spending while raising taxes, with hugely deflationary consequences. What are the consequences for asset prices everywhere? The oceans of red ink bleeding from your screen last week told the whole story.

For what it's worth, here is the take of BofA's Kuni Chen on Alcoa, with a very surprising bearish read through: "We reduce 2010E EPS from $0.50/sh to $0.31/sh. Lower EPS outlook is driven by seq lower metal prices and seasonal demand. We are using avg 3Q aluminum price of $0.88/lb in our model. Our low-end estimate for 2011 is based on a $0.95/lb metal price. We lower our PO to $11/sh as lower 2H EPS impacts year end net debt position. The implications of Alcoa’s quarter may be a negative for Century Aluminum and Noranda Aluminum as the Street revises down estimates on lower metal prices." Not surprisingly, it is AA, KALU and NOR that are surging as the HFTs are once again being drawn to some Lorenz Attractor with the firm push of the PDs and the FED. Of course, BofA's most recent cut simply means that when AA posts 2010 EPS of $0.310000001, the stock will promptly hit infinity.

If we see retail sales follow the same precipitous one month drop of NFP, the YoY rate should drop from last months 6.9% to ZERO. Last June the index of retail sales was 343.1 vs. last month's 362.52 so zero YoY would mean that the monthly rate, expected to print -0.3% on Wednesday would in fact print -5.4%. Now that frankly seems like an inconceivable no. as it would be the worst number we've seen since the series started in 93. However, I have to think that even if we make up the divergence over a couple of months something like -2% tomorrow would cause people to fundamentally question the recovery. Personally, I think all we are doing is remove a lot of the noise created in the data by the census jobs and we should see retail sales drop back to the levels suggested by claims and possibly even the ABC consumer buying climate question. Unfortunately, that should cause people to question the recovery!

This morning we observe two very interesting resistances for risk. First AUDJPY tried yesterday and overnight to bypass its 50dma without success. Secondly we note on the S&P chart that the 50-dma for the continuous future is at 1,087 and we had the 61.8% retracement of the last sell off at 1,080. Similarly the Nasdaq is approaching the 61.8% retracement at 1,850. While I must admit the Dax does look bullish here, probably because the lower Euro provides some tailwind for German exporters, there is bearish divergence on the hourly there, and we can observe the same for the S&P here. We have retail sales tomorrow which I am told by my friend Julian Brigden of Calyon could well come in very weak. Similarly CPI could well disappoint and revive the deflation scares. On the flip side it's earnings season and the market loves to celebrates non sustainable earnings attained via cost cutting with weak consumer demand... - Nic Lenoir