Archive - Jul 2010

The ten year Treasury bond yields we saw at a stunning 2.91% are telling us that the government can borrow nearly infinite amounts of money at the lowest interest rates in history. The expiration of the Bush tax cuts next year and recovering economy will bring a return of tax revenues, eliminating 79% of this year’s deficit, even is Obama does nothing. This is the writing on the wall the bond market is attempting to focus our blinkered eyes on.

The ECRI Leading Indicators just can't stop falling. From a revised annualized -7.6% drop last week, this week the index dropped to a fresh low of -8.3%. Should be sufficient for another major leg higher in stocks. Of course, the funniest thing is listening to the index creators describe how while the index was a perfect leading indicator on the way up, it is completely useless on the way down. With an attitude like that, one would almost think Columbia is part of the Ivy League, and status quo perpetuation is a prerequisite for not losing tenure. But yes, according to the index the probability of a recession is now about 90%; compare this number to that spewed forth by Goldman's Recession Prediction Eight Ball, which has the risk of a double dip at just about precisely 1.6%.

Capital Markets 101 - Futures surging as volume plummets. Computers subpennying any and every VWAP order far above fair execution price. Rinse repeat. Any questions?

This it the kind of bad news that is now sufficient and necessary to send stocks higher: wholesale sales have plunged from a revised 0.9% to -0.3%, missing the consensus 0.5% by about a mile, and the first decline since March 2009. Yet wholesale inventories were in line, coming in at 0.5%, compared to expectations of 0.4%, even as the prior month was revised to 0.2% from 0.4%, thus washing the two month benefit as well. In sales, the biggest hit was felt by lumber which went from +8.6% to -8.7%, automotive from 1.8% to 0.6%, computers dropped from 3.5% to 1.8%, electrical goods from 3.1% to 0.6%, and hardware from 3.1% to 1.0% And as we see huge mutual fund outflows, stocks rip on this latest batch of bad news. After all QE 2.0 is now getting priced in and the cost of cash will soon be negative all over again.

I was talking with a friend who was telling me that it was the absolute perfect time to buy a house because housing prices have tumbled and interest rates are low. I asked him, "What happens to housing prices if there is inflation and rates go up?" "Housing prices should go up with inflation as they do for all goods. Housing is a natural hedge for inflation" Did my friend have a point? Yes and no. Yes, he was right that in a high inflationary environment, housing prices should rise with all other assets. Rents will go up, as will the price of all the inputs into housing such as lumber and labor costs. Obviously, housing prices will go up to reflect this reality. But no, when inflation and thus nominal interest rates increase, housing prices tumble. When rates fall, housing prices tend to increase.

"As we enter the second half of 2010, it is increasingly clear that the S&P 500 is unlikely
to return to the 1200 level HCM anticipated earlier in the year. HCM now expects the index to
remain in a lower trading range for the remainder of the year bounded by 975 on the
downside and 1150 on the upside (admittedly a wide range, but this is a volatile market driven
by computers). Based on the sharp drop in Treasury yields, we expect the market to occupy the
lower rather than the higher end of this range. The markets are wrestling with the reality of slow
growth in the U.S. and Europe, a relapsing housing market, public and private deleveraging,
higher taxes in 2011, more regulation and an increasing acknowledgement that our political and
business leaders are hollow men." Michael Lewitt, HCM Market Letter

And the leading indicators continue collapsing (ECRI later today): the BDIY has posted its 31st sequential decline, and has closed just barely above 1,900, at 1,902, and back to March 2009 lows. One wonders when the BRICmaster, Jim O'Neill, will ever put the appropriate spin on this particular statistic in his weekly permarosy missives.

• Immediate leak to refute that Postbank, or any other bank, will fail stress tests. Can't have a failure of confidence in a massively insolvent bank can we (Bloomberg)
• Computerized stock trading leaves investors vulnerable (USA Today)
• Biggest defaulters on mortgages are the rich (NYT)
• US will not brand China a currency manipulator, US exports now have no excuse to continue sucking (Reuters)
• Google says China renews its internet license (Google), sending Google stock higher, BIDU lower
• Dumbest money clinging to shattered V-shaped dreams like Moody's to AAA rating of subprime (Reuters)

Just like the daily occurrences of dislocations in the carry trade and risk assets, another major divergence has developed in the market, this time between bonds and stocks. As the following chart from Goldman points out, over the past month, stocks and 10 year yields have diverged quite notably, with a convergence of the two series implying an up to 60 S&P point disconnect. As these types of convergences are by far the least risky trades available (or most risky, depending on the amount of leverage), a recoupling bias would suggest shorting the broader market and selling the 10 Year (betting on a yield increase). Either way, it is obvious that the credit market, which is inevitably always right compared to the computerized pandemonium of stocks, suggests a substantial overpricing in equities.

• Asia stocks rise to two-week high, Won gains on rate increase.
• Australia delays proposed mandatory Internet filter; 3 ISPs agree to block child porn.
• Bank of Korea unexpectedly raises its policy rate by a quarter point, cites rising inflation.
• China reduces rare earth export quota by 72%, may cause U.S. trade dispute.
• China shares rebound on government pledge of easy credit, end week up 3.7 percent.
• China weighing nationwide resource tax to channel funds to help develop impoverished western regions.

So the Greek debt agency, headed by a former Goldman banker, sniffed around, did some reverse inquiry, and discovered that nobody wants to be locked into its debt for more than 6 months, not even with the explicit backing of the ECB. The result: the widely fanfared Greek auction on July 13 which was supposed to indicate some return to capital markets access, and had been planned to be a combination of 6 and 12 Month Bills, will now be just 6 Months. So explain to us again what the point of the whole "confidence boosting" exercise is again?

Does Jim O'Neill take sugar with his tea? No thanks Turkish, he is sweet enough.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 09/07/10

The good folks over at numismaster.com report that, starting on January 1st in 2012, U.S. federal law will require coin and bullion dealers to report to the Internal Revenue Service all gold and silver coin purchases and sales greater than $600. The report is written by David L. Ganz and is headlined "$600 Sale? Get Ready for Tax Form." Apparently this little jewel was an add-on to the national health care legislation. But there’s a new bill being introduced by Rep. Dan Lungren (H.R. 5141), which has gathered over 80 members of Congress as co-sponsors to repeal this section... so we'll see how that turns out. According to the author of the article Ed references, the rationale for the new regulations is that the taxocrats believe that people conducting off-book trading in precious metals are chiseling them out of $17 billion in lost revenue annually. The net result, however, will be that the government will soon know who’s got the gold. We reached out to another well-informed source who confirmed that the new regs would apply to all businesses. For example, under the new regime a plumber who does work for you in excess of the $600 threshold would be required to file a 1099 report. The implications of this move transcend just the precious metals. Rather, this is a deliberate step in the direction of implementing a VAT – once the government has everyone reporting essentially every transaction, taking the next step is a snap.

Today's Lipper/AMG fund flow data confirmed the ICI data disclosed earlier: in the week ended July 7, in which stocks have rallied by who knows how many percent - nobody without Gallium Arsenide logic gates really keeps track of the market anymore, equities saw outflows of $11.6 billion. We'll repeat it because it bears repeating: stocks have surged as mutual funds have seen one of their biggest weekly outflows in 2010. Will someone with a Ph.D. from a reputable institution please explain that one to us. Furthermore, HY fund lows saw yet another exodus, this time of $166 million, following last week's $322 million. On the other hand, things in IG land are back to normal: after seeing their first outflow in 69 weeks last week for a tiny slip of $32 million, investors are back to dumping all their money in investment grade corporates, with inflows of $896 million. And most notably, money market funds saw their biggest inflow in 2010, at $18.5 billion, following last week's outflow of $11.6 billion. So yes, money was actively being allocated to cash yet somehow the powers that be managed to ramp the computerized stock market farce that is the Dow by something like 500 points in 4 days. Whatever. Will the three blind mute retarded monkeys who actually still have any faith left in our ridonculously manipulated market please follow all the other lemmings over the cliff, not forget to pay Goldman Sachs the $200 suicide fee, and shut the light on their way out.