Archive - Aug 9, 2010

Kurt Brouwer highlights something that may substantiate the claims of those who claim there is a treasury bubble in the forming. Using the suddenly all too popular ICI data (which we have been presenting for well over a year), JPMorgan has tallied the total flows into stocks in advance of the tech bubble (April 1998 through March 2000) and compared it to the period since the Lehman collapse (July 2008 through June 2010), the result is surprising: there has been over $50 billion more allocated to bonds in the past 2 year period ($476 billion), than to stocks in advance of the biggest market bubble pop before the housing/credit bubble popped in 2007/8. Is this indicative of anything more than just everyone going on the same side of the trade? Not at all, however even that in itself should be sufficient for bond bulls to reconsider pushing every last cent of capital into what at least on the surface has all the makings of a an even bigger bubble than tech stocks in 2000.

A quick look at market volume: in a word - deplorable. It confirms what Gillian Tett said last week piggybacking on our ongoing fund outflow observations, that there is "a loss of confidence – not merely in the idea that the future will be a brighter place, but also, most crucially, about whether anybody is able to predict that future at all." She concludes: "it is bad for investors to feel confused about the outlook for government regulation or deflation; but it seems that nobody really understands how the basic mechanics of the equity market work any more, it is hard to trust that the stock markets are a good destination for your money. Little wonder, then, that those US equity mutual fund outflows have accelerated." Presenting exhibit A of precisely this phenomenon: today's ES volume is about the worst it has been in, well, ever, at 50% below average!

John Taylor was on Bloomberg TV Friday, and in this extended version of his interview, the head of the world's largest currency hedge fund said that the euro will fall, equities could head lower, credit spreads will widen sharply and government bonds will rally.

Last Friday, the Bureau of Labor Statistics announced the unemployment rate remained flat in July. Since we entered August, Federal Reserve Chairman Ben Bernanke and US Treasury Secretary Tim Geithner have been repeating the mantra that job growth may still be farther off than we’d like. But is the truth we have finally made a more meaningful shift to a perma-temp society of workers?

As Automotive News points out in its expose on better than expected volume and top line results at GM and Chrysler, "Reports of robust post-bankruptcy sales at General Motors Co. and Chrysler Group need an asterisk." The reason, based on internal documents obtained by the publication: digging behind the headlines indicates that retail sales, or those that actually matter and are indicative of a vibrant end consumer (with or without rebates), are actually down year to date: 1% at GM, and 19% at Chrysler. "Essentially, GM and Chrysler regained the fleet business they lost during their troubled 2009 trip through bankruptcy. Counting fleet of all types and retail sales, GM is up 13 percent this year, and Chrysler is up 11 percent. That's close to the industry's 15 percent gain." So basically if one were to strip away the rental companies, all of which themselves were on the verge of bankruptcy in early 2009, and have recently found themselves in a position of strength, courtesy of cheap floorplan financing and various cheap ABS conduits, the two bankrupt auto companies are doing worse off YTD than they did in 2009. If this is not indicative of the "strength" of the US consumer when it comes to medium-ticket purchases, little else is.

Last week the Treasury Secretary penned an Op-Ed titled "Welcome to the Recovery" which in retrospect now appears was a terrific top tick indicator. First, the NFP number immediately following was a major disappointment and confirmation that the economy continues to follow a downward path despite trillions in fiscal and monetary stimulus. It has gotten so bad that if the Fed does not announce some form of new QE tomorrow, stocks will likely experience an unpleasant downward kneejerk reaction. The alternative, of course is just a bleak: once input prices surge, should QE2 be enacted, and banks use a new influx of risk-free reserves to bid up commodities of all shapes and sizes, currently record corporate margins will plummet, and corporate earnings will suffer correspondingly. Yes, this will occur 1-2 quarters in the future, and with a market preoccupied with the here and now, and a once-over scan of rosy headlines, the realization of what QE will do to earnings will be appropriately delayed. Yet a more notable indication of just how ill-timed Geithner's pamphlet is, was today's announcement by Freddie Mac that lost $4.7 billion and needs a fresh $1.8 billion from the Treasury. This follows last week's Fannie report of a $1.2 billion loss and a request for another $1.5 from Mr. Geithner. So yes: welcome to the recovery indeed - make sure you have your begging hat in hand when you visit the SecTres to congratulate him on a job truly well done.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 09/08/10

We already noted that last Friday's NFP number was a major disappointment for everyone objective enough to acknowledge it for what is was. Here is David Rosenberg's even more aggressive condemnation of the continuous lack of economic recovery in this country, whose only impact it appears is to drive futures higher (not regular hours trading mind you - it is far easier to push the market in a desired direction when there are ten people and a few computers trading).

Barclays' head of quantitative strategy Matt Rothman provides some additional information on one of the most notable facets of the current market regime, namely the record implied correlation and thus, near record low stock dispersion, in other words, the phenomenon that all stocks trade as one, regardless of fundamental differences across different publicly traded companies. While nothing a slight dip in 1 month implied correlation from all time records near 70% hit in the past month, Rothman observes that "low levels of stock dispersion generally correspond with difficulty in picking individual stocks...This high level of cross-sectional correlation also has implications for how certain characteristics are being priced. For if stock return dispersion is low but underlying fundamental (economic) performance of factors remains relatively constant then it would appear that mispricings in the market may be beginning to take root." In other words, as we noted last time we observed the record low stock dispersion a month earlier, alpha (continues to be) dead. Yet for those who are eagerly anticipating the dispersion to finally rise, Rothman says that the market is basically back to mid-2009, when high quality stocks were largely undervalued compared to low quality: "High Quality companies are cheap right now relative to low Quality companies. We believe this is due both to a compression of returns in the market and because of the current macro-economic environment that has favored lower Quality stocks." Of course, shorting high beta names in a Fed-mediated market, has led to nothing but implosion.

CNBC notes the apparent cause of death of the recently popular BP skeptic was a heart attack. More details as we get it. A conflicting report according to WLBZ cites the source of death as drowning.

The Thrill is Gone, Baby!!!

A potential new addition to the lineup of Chinese public transit system - the straddling "3D super bus" (????), proposed as a cheaper, greener and fast alternative to ease traffic jams and air pollution.

Wheat prices may be lower now that the dramatic spike higher has seen various speculators coming out and betting on a reversion, but little has been resolved yet, as Russia now debates extending the grain export ban beyond the December 31, even as fires in the Russian countryside continue to burn, and a record heatwave and lack of winds have concentrated a huge toxic cloud of carbon monoxide above the Russian capital. To be sure, some development has been noted with fires now affecting "only" 170,000 hectares of land, compared to the peak of 190,000, although firefighters are still having a difficult time materially containing the blaze. The worst consequence of the inferno: the mortality rate in Moscow has doubled as a result. The FT reports: "The death rate in Moscow has doubled due to the toxic smog hanging over the city from wildfires raging around the Russian capital and the worst heatwave since records began, a senior city health official said on Monday. Andrei Seltsovsky, the head of Moscow’s health department, said the number of people dying daily in the city had now reached about 700, while the death rate normally averages about 360 to 380 people a day. “The mortality rate has doubled,” the official told reporters." And taking things from bad to worse is the breaking news that Russia has just declared a state of emergency in Ozersk, where one of the largest nuclear storage and fuel-reprocessing center Mayak is located.

The problem that nobody is talking about, yet everyone continues keeping a close eye on, namely the trillions in commercial real estate under water, is quietly starting to reemerge. In the attached letter from the Commercial Real Estate lobby, it reminds politicians that the hundreds of billions in loans that mature in the next several years won't roll on their own, and we see the first inkling of the lobby asking congress for much more taxpayer aid, in this case in the form of Shelley Berkley's proposed legislation to "enable banks to convert troubled loans into performing assets through modest tax incentives to attract new equity capital to existing commercial real estate projects." The letter tacitly reminds that there are thousands of regional banks whose balance sheets are chock full with underwater commercial real estate (and for the direct impact of this simply observe the 100+ banks on the FDIC's 2010 failed bank list). So in case taxpayers are wondering where the next fiscal stimulus will end up going, wonder no more: "The new investments would be specifically used to pay down debt,
resulting in lower loan-to-value ratios of existing loans as well as
improved debt coverage ratios." As the CRE lobby concludes: "By giving lenders the ability to responsibly refinance debt and
rebalance capital reserve levels, the CRE Act will provide the
opportunity for additional lending capacity that will help stimulate
lending to small businesses, job formation and economic growth in
communities across the country." In other words, it is time for taxpayers to help purge banks of existing toxic debt, so that these same banks can resume lending like drunken sailors, in unviable commercial real estate projects just to guarantee that the next major market blow up also destroys the regional banking system, in addition to the TBTFs.

USDX at important pivot point-- markets will be finding direction soon and USDX will pave the way.