Archive - Jul 2010

The CSX earnings surge can be easily explained now that the rail company has cornered the China-US transportation corridor (what's that, it's an ocean? that's ok - the president will enact a law changing that). Because goods transit sure isn't using the dry bulk shipping sector, where the Baltic Dry has plumbed to a fresh 14 month low, continuing its longest drop in 9 years, down for a 33rd sequential day to 1,790 from 1,840. Don't look for any record numbers out of the China Customs agency or the US trade deficit in the next month.

• The spin is just hilarious: Alcoa profit surprise bodes well for economy, stocks (Bloomberg), Euro stocks gain on Alcoa earnings (Reuters) - so let's get this straight: a $30 million marginal "beat" in Alcoa Net Income is sufficient to push hundreds of billions in global market capitalization higher... brilliant
• The US Consumer is once again the driver of the world economy: the US May Trade deficit increased to $42.3 billion, far beyond expectations of $39 billion; also as reported, China trade deficit was worst since October (and ever, from the Chinese perspective) (Bloomberg)
• Abu Dhabi may make another "successful" investment, this time in BP (Bloomberg) - is this a precursor to another hang gliding incident?
• Extend and Pretend European edition - yet another confirmation that all European banks are insolvent, as they are all about to win a "reprieve" on Basel capital rules (Bloomberg)
• Satyajit Das: Debt shuffling will be a self-defeating exercise (FT)
• Goldman may seek another extension in SEC fraud case (Reuters)

In staying with the once again popular trend of beating much lowered expectations (see Alcoa), Greece, which had previously decided against auctioning off 1 Year Bills for fear of lack of interest, managed to place €1.625 in 6 month bills in which local institutions purchased the bulk of the auction as foreign interest was muted. According to the PDMA who apparently still tracks the charade of ECB bailed out Greek banks recycling ECB money to then buy sovereign debt, the auction produced a yield of 4.65 percent for 26-week T-bills, up from 4.55 percent in a previous April 13 auction. The bid-cover ratio was 3.64 versus 7.67 in the previous auction.

• Asian shares mostly lower despite Alcoa's positive earnings report.
• Avg housing prices in China fell in June for the first time in 16 mos, as govt checks speculation.
• China reiterates policy-tightening bias on property sector.
• Euro drops down to $1.2550 in early European trading.
• European banks poised to win a reprieve in Basel as regulators shape new capital rules.
• France's Sarkozy rejects tax increase, retreat on raising retirement age.
• Japanese stocks rise on profit expectations; metals retreat on fears of slowing China demand.
• Moody's downgrades Portugal's bond ratings to A1, growth prospects to remain weak.

Just headlines for now. According to Reuters, Israeli troops have not boarded the Libyan aid ship yet. We will provide more as we get it.

Moody's believes that the Portuguese government's financial strength will continue to weaken over the medium term, as evidenced by the recent and ongoing deterioration in the country's debt metrics. "The Portuguese government's debt-to-GDP and debt-to-revenues ratios have risen rapidly over the past two years," says Anthony Thomas, Vice President - Senior Analyst in Moody's Sovereign Risk Group. "This deterioration came about due to the government's anti-crisis measures and the operation of the budget's automatic stabilizers, such as higher unemployment benefits, when the economy went into recession." Looking ahead, Moody's expects the government's debt metrics to continue to deteriorate for at least another two to three years, with the debt-to-GDP and debt-to-revenues ratios eventually approaching 90% and 210%, respectively, before stabilizing once the budget has moved back into a primary surplus position.

Another real-time business index comes in well-below expectations, but nobody cares: all the market is pathetically focused on is that Alcoa "beat" a consensus EPS that it would have missed as recently as a week ago. As for those lucky few who still care about the fundamentals that are pushing the economy right back into the depression, perhaps the chief economist of the National Federation of Independent Business William Dunkelberg says it best: "The U.S. economy faces hurricane force headwinds and the
government is at the center of the storm, making an economic recovery
very difficult." Please don't let this prevent robots from gobbling up futures as AA manages a stunningly manipulated earnings beat. Some more on the NFIB from the release: "The
Index has been below 93 every month since January 2008 (30 months), and
below 90 for 23 of those months, all readings typical of a weak or
recession-mired economy. Seventy percent of the decline this month
resulted from deterioration in the outlook for business conditions and
expected real sales gains. Owners have no confidence that economic
policies will fix the economy." But who needs reality when you have companies gaming EPS, the FED buying futures, and HFT breaking markets on a regular basis.

A Chinese credit rating agency downgraded the U.S. sovereign debt rating to AA with a negative outlook, along with other major Western nations, while slamming its Western counterparts.

Why isn't the popular financial media reporting the fact that Greece's funding costs increased after the $1 trillion dollar bailout? Why isn't it pointed out the Portugal's credit rating has been dropped - post bailout? Exactly what is $1 trillion US dollars good for these days - trick question, but I dare 'ya to answer :-)

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 13/07/10

Score one for the Constitution ...

Up until recently, any debate between proponents and opponents of High Frequency Trading would typically be represented by heated debates of high conviction on either side, with discussions rapidly deteriorating into ad hominem attacks and the producer screaming 'cut to commercial' to prevent fistfights. Luckily, all this is about to change. In a research paper by Reginald Smith of the Bouchet Franklin Institute in Rochester titled "Is high-frequency trading inducing changes in market microstructure and dynamics?" the author finds that he "can clearly demonstrate that HFT is having an increasingly large impact on the microstructure of equity trading dynamics. Traded value, and by extension trading volume, fluctuations are starting to show self-similarity at increasingly shorter timescales. Values which were once only present on the orders of several hours or days are now commonplace in the timescale of  seconds or minutes. It is important that the trading algorithms of HFT traders, as well as those who seek to understand, improve, or regulate HFT realize that the overall structure of trading is influenced in a measurable manner by HFT and that Gaussian noise  models of short term trading volume fluctuations likely are increasingly inapplicable." In other words, the author finds ample evidence that during the past decade (on the NASDAQ) and especially since the 2005 revision of Reg NMS (on the NYSE), stock trading increasingly demonstrates "self similar" fractal patterns, resulting in volatility surges, recursive feedback loops, and a market structure which is increasingly becoming a product of the actual trading mechanism. In the process, as demonstrated by a Hurst Exponent gravitating increasingly further away from 0.5 (i.e., Brown Noise territory), the Markov Process nature of stock trading is put under question, and thus the whole premise of an efficient market has to be reevaluated. Simply said: HFT has been shown to affect the fairness of trading.

What crisis? Pensions are diving back into alternatives...

Progress?

Thus far, the NBER
has been unwilling to proclaim an end to the recession
that started in late 2007. This may partially reflect
the fact that the ratio of people employed to our total
population has fallen from 62.7% in December 2007 to
58.5% today. Although the recent low in this measure
was 58.2%, touched just a couple of months ago, our
present level is no higher than it was in 1983. This
measure is a proximate indication of our country’s
overall standard of living and interestingly over the
last twenty years has declined as the U.S. economy has
become more indebted (Chart 1). Although the four
coincident indicators that the NBER utilizes in judging
recession troughs have turned positive, two of them
(income less transfer payments and employment) have only marginally shifted upwards and are subject
to significant revisions. Thus, history may come to
judge that the NBER was very wise to hold off making
this end of recession call. Four major considerations
suggest that the past several quarters may be nothing
more than an interlude in a more sustained economic
downturn, with further negative quarters still ahead.
Such an outcome will suppress inflation further and
quite possibly lead to deflation. Thus, history may come to
judge that the NBER was very wise to hold off making
this end of recession call. Four major considerations
suggest that the past several quarters may be nothing
more than an interlude in a more sustained economic
downturn, with further negative quarters still ahead.
Such an outcome will suppress inflation further and
quite possibly lead to deflation." - Van Hoisington