Archive - Jul 2010

• Jim Willie: Road to Perdition (Financial Sense)
• Paper gold versus the dollar? Interview with Jim Rickards (Institutional
  Risk Analytics)
• Reid so toxic his son campaigns without last name (Bloomberg)
• ECB holds rates at 1%, faces liquidity grilling (Reuters)
• And somehow the IMF raises growth expectations as the world enters a
  double dip (Bloomberg)
• Hedge funds "frozen in headlights" cut trading as markets swing (Bloomberg)

Initial claims dropped to 454k from 475k. Continuing claims drop by 224,000 to 4,413,000. This is as expected courtesy of the end (for now) in unemployment benefits for many cohorts of unemployed. Of course, with claims over 400k it means continued losses in the broader work force. Also, Not Seasonally Adjusted Claims Rise by 22,560. Most notably, this has impacted EUC claims which plunged by 368k to 4,147,551 for the week ended June 19. Look for EUC to drop by up to a million as the delayed EUC data thru the end of June trickles in.

A few months ago we disclosed that based on its campaign contributions in Q1, Goldman Sachs had turned from Democrat to Republican, as "its campaign spending favored Republicans over Democrats by a margin of 58 percent to 42 percent both for March and the first three months of the year." Furthermore the animosity between the firm and the president is not exactly top secret. So, being the smartest guys in the room, would it not behoove Goldman to endorse precisely those policies which while unlikely to have much economic impact (for the growing futility of Keynesianism see here), are most at odds with prevailing popular opinion of what next steps for the economy should be? We pointed out first two days ago that Goldman is now openly rooting for QE 2.0 and another round of unbridled fiscal stimulus: precisely the kind of behavior that increasingly more people realize is the primary reason why this country is in its current sad place. Today, Goldman economist Alec Phillips continues the shadow attack on the administration, pointing out in excruciating detail what will happen if unemployment benefits are not extended (a topic also discussed previously here), and that some form of passage of the bill is critical, in essence putting the high hurdle strawman before the administration, and boxing it in a lose-lose corner. Regardless of the political sideshow, and we will keep an eye on it, with this week's Initial Claims out due later today, and a likely collapse in Extended Unemployment Compensation and Extended Benefits now that there is, at least for now, no extension, here is how Goldman envisions the over 4 million plunge in those eligible to receive benefits, and the implication of this to the economy.

• Asian stocks rally as growth in US retail sales eases concern.
• China bought a record $7.9B in short-term Japanese debt in May
• EU stress tests will cover 91 banks, accounting for 65% of the area's banking industry. Assume bond value drop.
• Hoenig, Fisher say stimulus isn't needed to assure recovery.
• IMF sees rising risks slowing recovery pace.
• Japan's Machinery orders slump 9.1%, most since 2008.
• AES Corp announces a $500M stock repurchase program.
• BP aims to fix leaking Gulf of Mexico oil well by 27 July

For all those who need confirmation that i) Keynesianism does not always work and that ii) we are living through an economic outlier, take a look at the below chart. While it is obvious that all previous recoveries used to "bloom" on their own after a modest debt/GDP increase, in essence validating the musing of John M Keynes, this time sure is different: the change in the ISM manufacturing, widely seen as a precursor to economic growth, will just barely surpass the increase in the debt/GDP, confirming that no more marginal debt will stimulate the economy. Extending this chart also shows that shortly the marginal change in the debt will surpass that of the ISM. This begs the question: why keep drowning the country with new and more debt when it is now obvious that incremental debt is no longer creating a virtuous growth loop?

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 08/07/10

As the heat wave sizzles North America and Europe, global pension heat is rising. Let's hope stock markets keep sizzling instead of fizzling because at this rate, it won't take long before we reach the pensions boiling point.

The gap between the truth vs. the lies that pass for truth in the media has never been so wide. But living a lie is very destructive, so it’s important to cross this gap. Today I want to clear up one of the most important lies reinforced by the media–the idea that we have sovereign countries.

No doubt most of you have heard of the sovereign debt crisis that so many countries are facing. We hear endless economists, reporters, and billionaire hedge fund raiders talk about it. But the phrase they use is fictitious. It is a fabrication of the Ivy League, Wall Street, and erudite periodicals like the Financial Times of London. Sovereign debt is an impossibility. It cannot exist.

"I posit that the invention of the corporation made the progress of our civilization—and the explosion of humanity’s numbers—possible. I would argue that without corporations, the Enlightenment would not have happened, and the civilization we currently enjoy would not have come into existence. I would further argue that, without the concept and practice of the corporation, today we would be living the bad bits of the Middle Ages."

- Gonzalo Lira

Asset prices staged a healthy rebound across a broad swath on Wednesday, with a strong finish by the DJIA at 10018.28, up 274.66 on the day. Commodities were also being added to investors’ portfolios again, with gold, copper and oil all staging powerful advances on the day. Only natural gas prices, which decided to ignore the best fundamentals in weeks, were lower on Wednesday. The euro was also fractionally higher, although it no longer seems to be synchronised with anything else. For months, it was the leading factor in higher oil prices and then its weakness helped push both equities and commodities lower. Now, it seems to be marching on its own flank, across the river. Crude oil prices broke a six?day skein of lower prices, and traders seem to have been following equities for
the most part yesterday. There were reports that some traders were buying oil futures as an early attempt to get long in front of major support, in anticipation of a possible shortcovering rally in front or immediately after this week’s reports. Many more observers cited some encouraging quarterly earnings forecasts (State Street was mentioned by Dow Jones) and there was merger activity reported in the technology sector, which has continued to attract investor attention throughout the recession.

ICI reports that topping off the underperforming H1 market action was yet another equity market outflow, this one to the tune of ($227) million. This represented the ninth sequential domestic equity mutual fund outflow in a row, and accounts for fund flows of over ($30) billion YTD. This follows on the heels of last week's once again deteriorating AMG/Lipper HY fund outflow report. Retail investors are not only not participating in the market, but are actively continuing to redeem capital out of any form of equity, transferring it into taxable bond funds. Mutual funds continue to not only be low on cash, but facing ongoing redemptions. Luckily, HFTs have none of these problems: all they need is to sniff out a major block bid from a dealer with discount window access, front run it while blowing up the NBBO via subpennying, accelerate the momentum, without needing any actual material capital, and end flat on the day. Mutual Funds will of course take the pick up in price levels and thank HFTs kindly, knowing full well they are unable to be marginal price setters any longer. So aside from the logistics of ramping the market on capital liquidations and margin calls, 4% market surges such as those seen in the past two days make perfect sense.

Bank of America, via economist Ethan Harris, has joined the chorus of large banks reducing economic forecasts, and as a result has reduced its GDP projections for 2010 and 2011 to 3.0% and 2.6%, from 3.2% and 3.3% respectively. The inflection in 2011 is notable as now the bank sees a material slow down in the economy where before it saw growth. Also, BofA is now expecting that the Fed will leave the Fed Fund language unchanged unchanged for 18 months, until March 2012. This is not surprising: with QE2.0 around the corner, it means that the Fed will soon be implicitly lowering rates. Of course, should the Fed find some naughty pictures of Barney and Chris, it may soon pass laws that allow negative interest rates for the first time. Of course, nothing at this point would be surprising.

It looks as though we are getting the over due bounce in the stock market everyone has been anticipating. The large rally today (Wednesday) has covered most of the ground as it has moved up over 3% today. Overhead resistance looks to be only 2% away before sellers step back in and try to pull the market back down.

If the market goes up for another couple days then gold should have a small pullback to test support. When the equities market starts to drop again money should flow back into gold and send it higher as the safe haven of choice.

As the chart below indicates, the past two months have seen some dramatic moves in the market, beginning obviously with May 6, and continuing through today. As the highlighted long white candlesticks demonstrate, which are basically the 4 huge meltup days in the last 45 days, the volume associated with said melt ups has been occurring on increasingly lower volume. Of course, this is not surprising, and is occurring as a consequence of two trends i) ever fewer stocks determining the general direction of the market as pointed out yesterday, ii) implied correlation and stock dispersion at all time records or the "no alpha all beta" trade and, iii) generally declining volume with the bulk of it driven by HFT-dominated positive gamma ETFs such as top market volume SPY. As for those interested the actual numbers, the volume associated with the candlesticks left to right was 500.9 million, 395.5 million, 240 million and 248 million today. At this rate the next 300 move in the administration favorite Dow, or the next 40 moves in the ES will be on half the last melt up, then half of that, etc. Of course, all this means that very few if any retail investors benefited from today's move which, as always, was purely beta, and thus leverage, driven.

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