Archive - Aug 2, 2010

It appears to be official. Apple’s iPhone is no longer the fastest growing smart phone in the world’s largest and most important smart phone market – the US! Considering the iPhone is 45% of revenues and nearly 70% of profits, Appolytes, should take notice. The Android Now Cometh!

While hardcore readers will be quite familiar with the observations presented in the attached paper "Yield Curve and the Economic Cycles", by reader Kiril Yoradnov, novice bond enthusiasts should note the presented correlation between the shape of the yield curve and the phase of a particular economic cycle it resides in. Of note is that while the 2s10s was recently at all time record highs in the 290 bps range, the curve has since collapsed and was trading at 239 bps earlier even as the 2 Year is once again near all time record tights, an observation which in itself makesabsolutely no sense considering the stock market action, and is merely another validation of a market ill with Schrodinger's syndrome, where we now have inflation and deflation rampant concurrently, and, frankly, idiotically. Perhaps it is time to move on from colored swanreference when discussing the market, to those of felines caught in parallel states of existence until the vigilantes wake up and finally collapse Bernanke's middle-class theft function. Regardless, the question is whether the collapse of the 10 Year will continue, further flattening the curve, and setting of alarms everywhere (while illogical and manipulated stocks will no doubt be hitting 36,000 at about the same time just to prove to the world that Fed Chairmen see record stock levels and record economic output as precisely synonymous).

The attached slide deck from Morgan Stanley provides a convenient 5 minute summary of the current state of the global financial and economic picture. Discussing everything from fund flows (nearly $300 billion in domestic equity outflows since the beginning of 2007: strong like bull), to equity hedge fund outflows in Q2 (and fixed income and macro fund inflows), proceeding to the US economy, where the dip in final domestic demand is expected to follow the GDP inflection point shortly (does anyone even remember the disappointing Q2 GDP number posted a long, long time ago last Friday?), a consumer spending number that based on the current saving rate is unsustainable, to the endless rally in corporate profit margins as firms fire any and all non-essential overhead, to China's PMI drop, to Morgan Stanley's reiteration of the bullish Chinese groupthink, to observations of the exquisite correlations between the US ISM, China's PMI, and the MSCI EM Total Perf, the unprecedented decline in US manufacturing as a share of total world manufacturing (charted below), to a hockeystick projection for Emerging Markets where decoupling this time is most certainly different, and other useful, if not particularly original, tidbits of data.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 02/08/10

Certainly today started with a very strong risk appetite, and the ISM release will help carry the momentum with PMI/ISM giving the markets an excuse to shrug disappointing GDP data. It also feels like there is a buildingconsensus that going into the fall elections markets will have a strong bid. It makes sense to expect all sorts of stimulus, stimulus promises, and information spin, given that a populist approach where major equity indices are the benchmark of success for politicians has been the mantra for Western democracies over the past 30 years. Basically monetary expansion and propping of financial assets has been the response to the shocks of the 70s after the end of the fight against inflation, and please keep in mind when thinking about this issue that creditexpansion and monetary expansion are very different from rates policy, though both have been used to achieve the same goals over the past few decades. In that sense comments by Mr. Greenspan that a rally in equities would be more beneficial to the economy than anything else is very revealing, if not incriminating in my opinion...

Nothing notably new here from the man who has called for a Chinese crash in as little as 12 months. Now that the Chinese PMI came at the lowest level in 17 months (in line with the drop in the US ISM but completely the opposite of Europe's PMI as everyone makes up their own data on the fly now with no rhyme or reason), Faber seems to have mellowed out a little on the Chinese end-play. He now sees the China government stepping in and prevent a collapse of the economy when needed, as the economy has dropped from a near 12% GDP growth to a collapse in the PMI in the span of a few months, even as Chinese banks lent another quarter trillion renminbi billion in July, and issued who knows how many hundreds of billions in CDOs to keep the ponzi afloat.

Goldman's Jan Hatzius continues to be one of the most skeptical people when observing recent economic data. His interpretation of today's ISM is no exception. In the meatnime, the market once again doesn't care about anything than a forced headline number (sub 3% 10 Year be damned): "Although the ISM manufacturing index came in higher than our expectation and the median forecast, the composition was weaker than implied by the modest setback in the headline. In particular, the orders index fell 5 points to 53.5 and the production index fell 4.4 points to 57.0. Meanwhile, the inventory index rose 4.4 points to 50.2. Although this algebraically added 0.9 points to the change in the composite index, the combination of a falling orders index and a rising inventory index is clearly not positive for future growth in manufacturing output. At 3.3 points, the difference between the two is the smallest since February 2009, four months before the recovery got underway. On the basis of this composition, we have judgmentally reduced by one point what otherwise would be a US-MAP reading of zero."

Is the first collapse in history of a bond market in a non-inflationary environment coming? At some point, the world runs out of buyers. If short interest rates double from the current levels, so does America’s debt service, from the current 11% to 22% of the budget, possibly as early as 2014. (TBT), (TMV).

From comments earlier by the Fed Chairman:

10:10 08/02 BERNANKE: 100,000/MONTH JOB GAIN INSUFFICIENT TO CUT UNEMP MUCH
10:10 08/02 BERNANKE: SLOW LABOR MKT RECOV,JOB UNCERTAINTY HURTS CONF,SPNDG
10:10 08/02 BERNANKE: TO TAKE 'SIGNIFICANT TIME'TO RESTORE 8.5MLN LOST JOBS
10:10 08/02 BERNANKE: SMALL BIZ HARD HIT BY TIGHT CREDIT; BANKS MUST LEND
10:10 08/02 BERNANKE: BANKS BETTER BUT MUCH TROUBLED LOANS, TIGHT LEND STDS

The PMI came in at 55.5, a smidge better than expectations of 54.5, yet worse than June's 56.2, and the lowest since December 2009, yet expectations set by a roundtable of Ph.D.'s are all that matters. Among the various indices, New Orders came in at 53.5 versus 58.5, the lowest since Junr 2009, while both Employment and Prices Paid came in better than before at 58.6 and 57.5 respectively. Deterioration was also spotted in Production, Backlog of Orders, and Imports. Yet this seemingly "better than expected" report was overshadowed by the sampling of negative responses:"Business in July was strong, the best month since October 2008." [don't tell this to Arcelor-Mittal] (Fabricated Metal Products), "Slow economy has killed sales for new equipment orders." (Machinery),"Quoting activity and sales are slow, and backlog is dropping." (Computer & Electronic Products),"Business continues to be sluggish and has fallen slightly as the economic ills continue." (Nonmetallic Mineral Products),"Retailers are still unwilling to gamble on inventory." (Printing & Related Support Activities).

The Goldman Markets team has put together this handy analysis on a proposed set of metrics that could be used to spot capitulation days, based on such inputs as VIX, options skew,daily trading volume relative to the 50 DMA, magnitude of sell-off, return from S&P’s intraday low to close, and the Fama-French winner/loser momentum. Based on the correct spotting of true capitulation days, Goldman predicts that those buying stocks following dramatic sell offs leads to abnormal profits. On the other hand Goldman refuses to mention the alternative: shorting the market on dayswhen stocks, which now have an implied correlation of about 1 and no associated volume, melt up alongside the risk-FX squeeze. Furthermore, there is no accounting of those situations where after a several hundre d point drop, the Federal Reserve refuses to get involved, which as Alan Greenspan pointed out, is unlikely, due to the Fed's perception that the market is the one true indicator of economic health (and nothing less than a case of the tail wagging the dog.) Lastly, one should not forget the abysmal track record of Markets' group top 2010 trade recommendations, presented below as of today: with 2 out of 9 top recommendations profitable, clients who have bet against Goldman's sell side advice have made a mint.

Last weeks activity in Gold was a welcome respite from the last month’s blood bath for the longs. What we are curious about was the reason for last week’s rally. Was it:

1. Small short squeeze on the physical side, and a sign of things to come?

2. A Technical dead cat bounce before the trend lower continues?

3. The market reassessing the BIS swap deal somewhat?

4. QE2 beginning to be priced into the markets?

Things in the middle east are back to normal (which means the usual deadly massacre), although with a twist. An earlier rocket attack on the Israel port city of Eliat missed its target completely, and instead slammed into Aqaba, in neighboring Jordan, located 6 miles away just over the border. Instead of firing the rockets from Israel and prompting immediate airborne retaliation, the launch point for today's attack was Egypt, which prevent Israel (or should that be Jordan) from retaliating. Sky News reports that the reason for the shelling is connected to a recent agreement that will see the Palestinian authorities talk face-to-face with the Israelis, and radical elements, who do not want that to happen, are escalating the violence as a means to stop it. It is unclear if Jordan will also escalate now that its own territory has been impacted in the ongoing conflict, and it is also to be seen how Egypt will react should it become perceived as a peripheral zone of cross-border attacks.

Markets in a Flash

· Asian equity markets closed higher this morning. The Hang Seng Index was higher by +1.82%, while the Japanese Nikkei 225 was higher by +0.35%.

· European equity markets have retraced Fridays losses and all higher. The FTSE 100 is up by +1.89% at lunchtime in London.

· Commodities are pushing higher at the start of the weak as investor look for more risk. Oil has broken above $79.50. Gold is falling as investors avoid its safety, and it is now below $1180.

• U.S. Spies Buy Stake in Firm That Monitors Blogs, Tweets (Wired)
• Analysis - FX intervention may be a losing game (Reuters)
• Big investors fear inflation (WSJ)
• Time to Buy Dollars as Euro Economies Reach Limits of Austerity (Bloomberg)
• Japan Limits Forex Trades of ‘Mrs Watanabes’ (FT) perhaps the record vol in FX seen over the past 2 months will finally decline, although nobody is holding their breath
• Bernanke recouped personal losses in 2009 (Reuters)
• Talk On High-Speed Trading Hacks Pulled From Security Conference (Forbes)
• Just because generating profits based on "optimistic projections" about debt writedowns is a guaranteed way to generate value, HSBC and BNP profits "beat" forecast after bad debts tumble (Reuters)
• For good economic forecasts try flipping a coin (Bloomberg)