Archive - Aug 25, 2010

So you're saying there is a chance for a crash? "There are deep correlations across the asset classes and what U.S. equity investors should probably pay attention to is the fact that the Nikkei is down to levels prevailing on April 30 of last year when the S&P 500 was trading at 870; and the 10-year T-note yield is back to where it was on January 20, 2009, when the S&P 500 was sitting at 805." All this, and much more truthiness from Rosenberg inside...

... Will not commence by looking at this chart of the existing market structure

Debt/GDP ratios are too backward-looking and considerably underestimate the fiscal challenge faced by advanced economies’ governments. On the basis of current policies, most governments are deep in negative equity. This means governments will impose a loss on some of their stakeholders, in our view. The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take. So far during the Great Recession, sovereign (and bank) senior unsecured bond holders have been the only constituency fully protected from partaking in this loss. It is overly optimistic to assume that this can continue forever. The conflict that opposes bond holders to other government stakeholders is more intense than ever, and their interests are no longer sufficiently well aligned with those of influential political constituencies....Investors should be prepared to face financial oppression, a credible threat against which current yields provide little protection. - Arnaud Mares, Morgan Stanley

"Touch-screen technology and person-less check-ins at airports haunt my nightmares. Perhaps I am just a man from a different time. Given these predilections, it is little wonder that I often sit and stare at the farce that passes for modern day investment. The churn and burn of an 8-month average holding period is anathema to me. Call me old-fashioned, but I like to focus on the things that matter, both in life and in investing...To those who charge around in markets trying to guess the next quarter’s make-believe earnings number, the concept of dividends seems wholly irrelevant. However, to those with an attention span measured in longer than milliseconds – who are few and far between, to judge from today’s markets – dividends are a vital element of return." - James Montier, GMO

The Hindenburg Omen was triggered again last week. But before everyone goes running for the exit, the probability of a major stock market crash was only 24%, and it would also help to take a closer look at the significance of the Hindenburg Omen itself.

Another day, another record, this time in European capital flows out of "Europe" and into Switzerland, as Phillip Hildebrand is already one foot out of his Bern office, resignation firmly in hand, as he has lost all control of the EURCHF which for the first time ever dipped below 1.30. So as the world prepares for another round of wax, er, risk off, and major capital flows away from everywhere else and into the US, here are how the FX heatmaps look this morning.

Durable goods orders widely miss expectation, coming in at +0.3%, on a consensus of +2.8%, with the previous -1.2% drop revised to just -0.1%. Durable goods ex transportation came in at -3.8%, on expectations of 0.5% (previous -0.9% revised to 0.2%). And the kicker - non-defense capital goods ex. aircraft came in at -8.0% M/M versus expectations of 0.4% (with the previous print of 0.2% revised far higher to 3.6%). The 10 Year has hit 2.439% on the news. Goldman is pretty laconic: "This report is weak and much worse than expected." Pretty much game over for the reflation scenario. Check to you Bernanke - the only option left is the nuclear one.

• Asian stocks fall on signs global recovery slowing; Yen weakens, Oil gains.
• British nightclubs shut shops as economy forces revelers to stay home.
• Demand for gold surges 36% in Q2 to1,050.3 metric tons: World Gold Council.
• India's Central Bank says curbing inflation is its top priority.
• Japan's July imports rise 15.7% while exports rise 23.5% year-on-year - beating f'casts.
• Japan's Nikkei 225 average falls to 16-month low on US home sales data.
• Markets jittery over growth; UK and German bond yields at record lows.
• US Existing-home sales plunge 27.2% in July.
• Yen falls from 15-year high on speculation Japan will intervene.

The 10 Year continues to burrow ever deeper inside 250 bps, last seen at 2.46% or 8 bps tighter on the day, as now the Greek-Bund spread has blown up: did the fake stress tests buy Europe all of one month of time? A country fully backed by the faith and credit of the ECB is once again imploding - what can we say about the "faith and credit" of the ECB then? The only thing keeping the EUR from plunging at this point is the expectation that the Fed will (soon enough) print another cool $2-3 trillion. And the kicker, for Julian Robertson and whatever the macro hedge fund rumored to be liquidating (aside from the TRS which we pointed out yesterday), the 2s10s has just crossed inside 200 bps, the tightest the spread has been since April 2009. Since at least half the market players are still stuck holding on to steepeners, and are now about 30% underwater from the top 4 months ago, add 10x TRS-based leverage, and you can see why whatever fund is blowing up now won't be the last.

As we earlier predicted, the S&P downgrade of Ireland has thrown all of Europe a curve ball: CDS spreads are wider across the board. Also in cash land, the Irish-Bund spread hits the widest since early May at 335 bps (+17), and its CDS leaking to 315 (+8 bps) while Portugal is slowly starting to catch up, hitting 316 bps in spread to Bunds. Portugal also auctioned off €1.3 billion in bonds maturing 2016 and 2020. The auctions were disappointing with yields continuing to leak wider:the 4.2% €0.628 bn due 2016 closed at 4.371% compared to 4.128% previously, and a 2.1 bid to cover, in line with the previous 2.0, while the 4.8% €0.672 bn due 2020 closed at 5.312% and a 1.8 bid to cover, also closing wider than the previous of 5.225%. Yet the most Yet the most underreproted, and most troubling news, continues to be that one solitary bank persists in taking advantage of the Fed's FX swap line: today it bid for $40 million in a 1.18%-fixed rate USD-based tender. This is an increase from last week's $35 million, meaning that while most banks are still finding themselves in a EUR shortage (3M Euribor was once again wider), one bank has gone completely against the grain and will not benefit from the traditional ECB liquidity boosting measures.

Sprint's ultra high speed 4G cellular service is live in NYC! This rapid deployment of next generation technology combined with the rapid deployment of Android (more next generation technology) puts the competition at a distinct disadvantage. What competition, you ask???

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 25/08/10

The Department of Education says the loan repayment rate at some for profit schools is as low as 25%, and that it would disqualify these schools for future student loans. That amounts to the taking away the punch bowel from a highly leveraged, overpriced industry, a hedge fund manager’s dream come true. Advising students to lie on their loan applications does not turn out to have been such a great business plan. (APOL), (DV), (CPLA), (COCO)

The latest numbers on housing and jobs show that the underlying causes that crashed the economy have not been resolved and the problems that the Feds tried to paper over are re-emerging.

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