Archive - Aug 26, 2010

POT is the world’s largest fertilizer producer, and with the global population expected to grow from 7 billion to 9 billion over the next 40 years, a takeover seems like a no brainer. Why not buy another product that the Chinese are voracious consumers for? It’s cheaper to take over someone than to hire people. The recent doubling of the price of wheat in a mere eight weeks has been a shot across the bow of investors everywhere that it is time to get on the train before it leaves the station. Suddenly the entire sector is in play. (POT), (MOS), (AGU), (MOO), (DBA).

Governor 'Terminator' meet Governor 'Wrecking Ball'...

An intro for newbies ...

Arguably the one most definitive market top ticking activity of the past month, in addition of course to Tim Geithner's absolutely disastrous "Welcome to the Recovery Pamphlet" issued literally hours before the wave of economic downgrades of US GDP by Wall Street began in earnest, was Mark Zandi and Alan Blinder's even more laughable administrative job cover letter titled "How We Ended The Great Recession" (yes, gentlemen, we remember). Which is why we read with great fascination that not even a month after the paper was released, Alan Blinder told Bloomberg that "Things seem to be losing momentum. The lending part of the financial system doesn’t seem to be curing itself." Actually, Alan, if that is your justification for why the momentum is being lost, you are an idiot - the lending part, or the supply side, is perfectly cured: it is the demand aspect which proud Ph.D.-bearing economists such as yourself always ignore - yes, people, the medium and small businesses, and virtually everyone else, who makes the economy tick (not Wall Street), don't need the bank's steenking money - not at 20%, not at 0.002%, if they don't know whether they will have a job tomorrow, or if upon waking up their stocks and 401(k) won't be worth 50% what they were the night before. And not to be left alone, Mark Zandi, the other member of the permaclown duo, told Bloomberg TV that he now puts the chance of a double-dip recession at 1 in 3. "If you’d ask me 4-8 weeks ago, I would have said 1 in 4, 12 weeks ago, 1 in 5. So it is rising uncomfortably high." How about 15.8 weeks ago: was the chance 1 in 69? What is it with these economists who need to scientificate every bullshit concept of their worthless occupation? Why quantify the merely abstract? Do economists have such a great mathematician penis envy, that they have to cloak their infinite lack of understanding in irrelevant numbers? The fact that this man a month ago said things are all good, and never realized that America had never emerged from the recession, is all you need to know just how much credibility any and every person working for Moody's has. But we knew that already. And just because a Moody's economist sees the only hope left before the country as even more QE, it merely shows that when QE finally does strike (which it will) it will be the end game for America, and its currency. At least we now know that in the meantime Zandi has blown any chance he may have had getting a job with the administration.

I usually don’t do follow-up pieces to any of my posts. But my recent longish piece, describing how hyperinflation might happen in the United States, clearly struck a nerve. There were two issues that many readers had a hard time wrapping their minds around, with regards to a hyperinflationary event: The first was, Where does all the money come from, for hyperinflation to happen? The second question was, Why will commodities rise, while equities, real estate and other assets fall? In other words, if there is an old fashioned run on a currency—in this case, the dollar, the world’s reserve currency—why would people get out of the dollar into commodities only, rather than into equities and real estate and other assets? In this post, I’m going to address both of these issues — Gonzalo Lira

What ZIRP means to me. What it means to the economy.

There is only 1 interpretation for this finding: bear market.

In addition to the traditional (and much discredited) argument of quadrillions of cash on the sidelines (which conveniently ignores the quintillions of debt also on the sidelines), the other last remaining point that bullish pundit like to point out is that the PE on the S&P is oh so very low compared to historical level. Putting aside the fact that the last 30 years of economic data have been perverted by a cost of credit which has declined from 15% all the way to zero, and with no additional place to go, and as such any historical comparisons are now moot as the Fed is pretty much out of options (aside from monetizing of course, and outright debasing the dollar), the primary reason why investors continue to put little credit in the "miraculous" corporate profits explosion, and thus give companies subpar P/E, is that the entire profit recovery has been predicated not on GDP growth (which explains the constant skittishness about macro events), but on declining labor costs, and as the following JPM report points out, "the latest profit recovery (the three red dots) is reliant on declining labor costs like none before it." What investors really want to know is how much more wage deflation can America take before it all collapses into a huge stinking deflationary mess? And by sowing the seeds of deflation at the heart of the corporate economy, who in their right mind would expect a wage-driven inflation (a monetary-event catalyzed hyperinflation, in which the Fed just goes berserk and decides to print $1 quadrillion tomorrow, is a different topic altogether).

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 26/08/10

We have long claimed that the HFT ploy to stuff quotes in an attempt to game other algorithms in pushing the bid or ask side higher or lower would eventually end in tears either for individual stocks, or for the general market, as was the case on May 6. Well, today we just experienced another mini flash crash, after some algo went apeshit and decided to hit every bid on the way down, all the way to 0.0001 (gotta love that sub penny quoting just above zero). Below we show how this algorithm pushed the stock price of Core Molding from its normal price of $4.12 all the way down to $0.0001 in the span of one second, after an HFT program went ballistic, and would have kept on hitting the subpenny $0.0001 bid in perpetuity. It must have been swell to be a CMT holder: one second your stock is worth $4.12, the next, it is worth $0.0001 (and no, not $0.0000, how else will the computers game the NBBO in subpenny increments).

These are not the hyperbolic ramblings of various fringe blogs who have been claiming this for over a year, these are the non-hyperbolic ruminations of Steven Englander, until recently head FX strategist at Barclays, and recently at Citi:"A second round of QE will likely put sharp downward pressure on the USD, to some degree versus the euro and other G10 currencies, with potential for a broader USD sell-off. Foreign investors are likely to view the renewed direct intervention as indicating that the Fed’s balance sheet expansion and implicit monetization of fiscal expenditures are first line approaches to dealing with disappointing recovery prospects, rather than the exceptional measures they were meant to be initially. This could have severe implications for foreign perceptions of the quality of the US assets that they are accumulating in private and official portfolios, and may lead them to draw the conclusion that USD weakness is less a by-product than a desired outcome of these measures...It is difficult to gauge the set of policies that US policymakers will pursue to reduce the risk that the US
slumps into a significant slowdown. In the current environment of extremely disappointing growth and
apparent lack of response to traditional monetary stimulus, policies that are less than orthodox are likely to
be considered seriously. Most of these unorthodox polices are likely to weigh on the USD." Guess what that means for gold...

Now, about that “double dip.”

By now, even the most bullish commentator has begun to acknowledge that the Stimulus high is ending and we are likely entering a “double dip” recession later this year.

It is not difficult to see why, every indicator worth anything is pointing to a massive drop in GDP coming shortly. The ECRI, which has a 100% accuracy rate for predicting recessions has just posted its fastest collapse in history and is already at levels indicating another recession is a “sure thing.”

Quietly and with little fanfare, Gold has made a MAJOR change in its status. The precious metal is largely viewed as THE anti-paper money play by investors. This all changed in November 2009. What happened then? The Sovereign Debt Crisis began in earnest with Dubai asking for a six-month extension on $60 billion worth of debt.

At this point, Gold broke away from its traditional relationship to the US Dollar. Indeed, since then Gold has actually moved in tandem with the US Dollar. The correlation between the two is not perfect, but generally Gold and the Dollar have moved together both to the upside as well as the downside.

So what can we glean from this Crisis and the psychology surrounding it? Well, we can see that Systemic Crises follow a clear pattern when it comes to social psychology and how people react. That pattern is:

1) A minor player goes under and people shrug it off for a few months
2) A larger issue arises requiring a vast sum of money and people begin catching on that something LARGER is at stake
3) Suddenly everything comes unhinged and the entire world panics

Today, no more than two years after this debacle, we are witnessing the EXACT same pattern play out on a sovereign basis.

The earlier post citing Rosenberg's claim that there were no new homes sales in July in the $750,000+ bucket has generated quite a controversy. It appears some are stuck up on the Census Bureau definition's of footnote Z (Table 2 of the linked excel sheet) which is the designator for home sales for June and July, defined loosely as "Less than 500 units or less than 0.5 percent." Since this is an open ended range, and could indicate 0 just as easily as 500, we leave it up to our readers' imagination to draw their conclusion which end of the range is correct. However, what is without question, is that as of July, the combined proportion of new homes sold in the over $400,000 range, is the lowest it has been in a year. For the first time since July 2009, the houses costing $399,999 or under as a percentage of total has crossed 90%. And like the claim that the quality of the New York Times journalists is the best in the world, there is just no debating that (unless of course one wishes to brand all the data emanating from within the bowels of the government's data machine as questionable at best).