Archive - Aug 2010

Friday's 2.4% GDP was enough of a stunner (and a plunger after the majorly upward revised Q1 GDP data), that it sent the market pretty much straight line higher ever since, now that QE is virtually guaranteed, as the Fed completes the circle and confirms that Einstein's definition of idiocy is nowhere more evident than in the Marriner Eccles building. So the fact that as JPM's Michael Feroli notes, the real Q2 GDP is actually 1.7% after revised data on non-durable goods, should have long sent stocks at least 1% higher for the day instead of the observed meandering in slightly red territory, has left the Zero Hedge staff scratching its head.

Too lazy to comb through the thousands of disclosures in the Wikileaks data? Shannon Larratt has created the following youtube video of monthly IED events in Afghanistan, in which a monthly tally of injuries and casualties is kept, both "friendly" and "enemy." The results are dramatic, and reminiscent of the clip showing how the US and Russia nuked their own territory several thousand times in the past 60 years. They are also reminiscent of various admonitions (unheeded) from The Prince Bride.

The following chart courtesy of good.is shows the world's largest ever IPOs. Not surprisingly, of the top 10, the peak activity occurred in 2006, while 2010 has been the second busiest year on record so far, courtesy of AgriBank of China and Dai-Ichi of Japan. Oddly enough, Visa 2008 IPO is the only US-based company to make the top 10 IPO list, with Japan having the most representatives (3), the same China, and Italy, Germany, US and Russia all with one company in the top ten listing. Altogether the top 10 primary stock issues have amounted to $156 billion in equity capital raised. In a world in which cost of money has become negligible, this seems like an surprisingly low number.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 03/08/10

According to Charlie Gasparino, Goldman Sachs may soon begin discussions on spinning off parts or the whole of its massive Private Equity arm. From Fox Business: "One of the first casualties of financial reform and its restrictions on banks’ ownership of private equity and hedge funds may soon take place at Goldman Sachs as senior executives there begin serious discussions about spinning off at least a piece of the firm’s massive private equity arm, FOX Business has learned." Intuitively this makes sense: while BHC investments in hedge fund are far more liquid, due to the very nature of the business, when it comes to the 3-7 year investment horizons for private equity, the regulatory uncertainty may be too much for PE LPs to handle, as a result reducing a firm like Goldman's competitiveness when submitting a go-private bid over competing offers (even when accounting for discount window access and zero cost of capital). "Senior executives at Goldman are worried that the mandates of financial reform, namely the so-called Volcker Rule, which severely limits how much a bank can invest in such funds, will create enormous uncertainty and prod investors to flee their investments, or prevent the firm from raising money in the future, this person said."

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 03/08/10

Earlier today, the Middle East again came once step closer to war after the latest Israel-Lebanon clash claimed the most lives since the Second Lebanon War. As part of the escalation, 3 Lebanese soldiers and 1 journalist were killed, as well as an Israeli officer, over what appears to have been a day of gardening gone horribly wrong: Haaretz reports: "The violence apparently erupted over a move by Israeli soldiers to trim some hedges along the border, a sign of the level of tensions at the frontier where Israel fought a war in 2006 with the Lebanese militant group Hezbollah." Surely this latest escalation explains the most recent surge in stocks, as Ben Bernanke will now have an excuse to take his money paradrop operation over to the Middle East, in hopes of keeping everyone occupied through endless amazon.com purchases of assorted useless gizmos.

I query, have we entered into a double-dip recession? I’ll answer my own question here, No! The positive GDP prints and “green shoots” were the direct result of government bubble (re)blowing through fiscal and monetary stimulus, culminating in QE v1.5. As the effects wear off, we start to see were the economy really stands - and which economically and consumer sensitive sectors are flying on borrowed time.

Barclays' Joseph Abate adds to the recent confusion over what path of QE (if any) the Fed will decide on at its August 10th meeting, and flatly disagreeing with Nomura which as we noted last week is now convinced the Fed will advise of further loosening in its language, believes that neither MBS roll offs (telegraphed earlier by Jon Hilsenrath), nor lowering the IOER to 0.00% will be sufficient to do much if anything to boost the economy, and instead he believes that the likely path the Fed will take is to allow the Supplemental Financing Program (which currently holds $200 billion in untouchable reserves on the Treasury's book) to roll off, by ending the 56-day Bill auctions, thus pushing almost a quarter trillion dollars into the banking system which can then be used to buy any combination of beta > 5 stocks. The result of this, according to Abate, "would likely push bill and repo rates well into the single digits." Of course with the 2 Year already at almost south of 0.50% one wonders just how much further along the curve does the Fed hope to have its impact felt. Could the Fed merely be trying to steepen the 2s10s by forcing 2s to zero? At this point, nothing would surprise us.

If One Product Which Was Responsible for 70% of Your Earnings Was Under Assault by the Biggest Tech Companies In the World Through Potentially Better Products Entering Into an Economic Downturn, Would You Bet the Farm on That Stock at a rich PE?

From Bloomberg's Michael Rosenberg: "U.S. bond yields are presently priced for an anemic economic recovery,
consistent with U.S. nominal GDP growth averaging around 3% for the
next two years, which is nowhere near the 5% projected by
private-sector economists and the FOMC. Something has to give here.
Either forecasters will need to revise their forecasts lower, or U.S.
bond yields are at risk of moving sharply higher. All of this suggests that greater caution on the part of investors is
warranted. Indeed, in a world where market expectations are not firmly
anchored and where the economic outlook is “unusually uncertain”, a
defensive posture appears to be the prudent course from here on." In other bizarro words, buy stocks. Below is July's Financial Conditions Watch in which yet another person tries to make sense of what is now a completely irrational and busted market. (and yes, the pageview flipping presentations that some of our competitors will make out of this document will be simply mindboggling)

Someone please slip some lithium to the ES trading desk at Liberty 33. While all of last week the general public had to endure the Fed's various public talking heads' platitudes threatening an imminent round of massive liquidity infusions unless Joe Sixpack went and bought the highest beta stocks available, here come the bipolar futures traders from the FRBNY, saying that Bullard and Bernanke were only kidding, and instead they are about to go ahead and withdraw liquidity in the form of various triparty reverse repos. Only this time the Fed will also allow assorted MBS of dubious quality to be tested for collateral purposes, which we are certain the banks will be delighted to provide the Fed cash against: "Beginning tomorrow, New York Fed intends to conduct a similar series of small-scale, real-value reverse repurchase transactions with primary dealers using all eligible collateral types, including, for the first time, agency mortgage-backed securities (MBS) from the SOMA portfolio." At this point the Fed's behavioral psychology experiment has reached such grand proportions that it is willingly shotgunning the most contradictory statements in the open just to see if the ES will rise a few bps without Liberty 33's intervention.

Retail investors are getting fleeced when playing the agricultural and commodities ETF’s. A harsh lesson about contangos. An entire sub industry of hedge funds has arisen to take advantage of this spread, at the expense of the ETF investor. Morgan Stanley is now chartering more tankers to take delivery of crude than Chevron. Gaming the published “roll dates.”

Look at AUDJPY versus the S&P future. AUDJPY is the poster child of carry trades, and with JPY strength across the board, the pair is diverging quite a bit from the strength of the S&P futures. Here again we would recommend selling S&P futures against buying AUDJPY, unless you prefer selling equities outright but as per my update yesterday we have not seen the upside targets yet (first in line at 1,126... maybe close enough? I will wait to be outright directional but the convergence is a good value play for the day).

Pending home sales came in at -2.6%, on hope and faith of even a modest rebound to the tune of 3.9%. This of course came after last month's plummeting (and revised) -29.9%. Factory orders also dropped to -1.2%, versus expectation of -0.5%, after the prior -1.4% reading. Lastly, the trifecta of ongoing bad news was completed as the June durable goods number was revised from -1.0% to -1.2%. And that giant slurping noise you hear in the background is the printers at the Marriner Eccles building loading up with ink.