Archive - Sep 12, 2010

Stocks are headed for a big multiple compression. Go long the beneficiaries of the relentless running of the printing presses in Washington. Once the spike in interest rates starts, it will be “a big, big bear market,” that could go on for decades. An exclusive interview with the legendary hedge fund manager, Bill Fleckenstein, on Hedge Fund Radio. (GLD), (NEM), (AEM), (GG), (TBT), (TMV), (VZ), (AAPL), (FXC), (CYB), (CU).

Another week in which the M2 jumped to a fresh all time high, increasing by $30 billion W/W to just under $8.7 trillion. This was only the fourth largest weekly jump in this broad money aggregate in 2010, with the prior biggest ones clustered just around the time of the Greek "out of court" reorganization and the flash crash in May. This was also the 8th sequential increase in the M2 in a row. Oddly enough this occurred even as the Monetary Base (NSA) declined by $11 billion to $1.983 trillion. Currently, the M2-MB ratio stands at 4.4x, close to its all time lows, with the recent decline purely a function of the modest contraction in the Fed's balance sheet as MBS had been rolling off for the past 4 months. With QE Lite in play, expect the Fed's Balance sheet to remain flat, which will likely mean that the ratio of the Fed's asset to the Monetary Base will remain more or less unchanged at its elevated ratio of 1.15x (with a tendency toward declining), compared to the historical average of around 1.00. Note the (as expected) inverse relationship between the M2-MB ratio and the total size of the Fed balance sheet, as the monetary base has exploded courtesy of excess reserves, without this number actually hitting M2. Is the recent leakage in M2 higher, coupled with a contraction in MB the critical step that all the inflationists have been dreading (yet at the same time expecting)?

It is time for the weekly update of the only financial component that really matters: the composition of the Fed's $2.3 trillion (and rising) balance sheet.

As predicted in May, DB honors its obligation to flush good shareholder capital down the toilet.

Earlier today, the Basel Committee on Banking Supervision committee released Basel III guidelines, which are expected to have a material impact on curbing bank risk appetite... when they are fully implemented in July of 2019. Luckily by then the last thing on people's minds will be whose bank's Tier 1 capital (which includes such intangible "capital" items as mortgage servicing rights and preferred stock) was being misrepresented for the past 9 years, as real cap ratios are discovered to have had a decimal comma following the zero. In the meantime, here is the summary of the proposed changes to bank capitalization requirements, which apparently were so "stringent" that the Fed issued a Sunday afternoon press release patting itself, and the entire financial system on the back, for pulling off another multi-trillion toxic debt David Copperfield disappearing act. So for the next several years, banks will need to demonstrate a stringent 4.5% Common Equity cap ratio, in other, will be allowed leverage over 20x. And this is the "stringent requirement" that has forced Deutsche Bank to sell over $12 billion in new stock to raise capital. Furthermore, the coincident take over of Post Bank will surely allow DB to terminally confuse
its investors as to what its final pro forma numbers are supposed to
represent, and, more importantly, what the unadjusted actuals really
are... Surely this example of just how woefully undercapitalized European banks are (consider the DB action a stark refutation of the "all is clear" statement proffered by the Stress Test farce from July) will be enough to get the EURUSD back to 1.30 overnight.

Last week I forecast that the stock market would likely rally to test its 200-DMA. We didn’t quite get there, but that’s largely due to the fact that no one was actively trading the market last week.

Indeed, thanks to a holiday week that entailed both Labor Day and Rosh Shoshanna, market volume was truly abysmal. In fact, last week saw even lower market volume than during April 2010 top, which should give you an idea of just how few participants were involved:

The key datapoints this week include retail sales, IP, Philly Fed as well as the usual weekly jobless claims. Retail sales appear to have picked-up in August, judging from retailers reports. Other significant information will be the Q2 Balance of Payments data, the July TIC data (watch for continued China selling of Treasuries), DJP elections and their impact on the Yen, and lastly the SNB will meet on Thursday: watch for comments on the record strong CHF. On Friday the completely irrelevant Michigan sentiment will be released which will come far above consensus.

Last week the Chinese Customs Administration released its August trade balance details, which came at a hair over $20 billion, slightly short of analyst expectations. The number was a substantial decline from the July surplus of $28.7 billion, which had also resulted in a surge in the US trade deficit to $49.8 billion in the past month, which subsequently declined to $42.8 billion in July, prompting Morgan Stanley's David Greenlaw to boost its Q3 GDP estimate to 2.4% from 2.1%, after it had reduced its economic forecast three short weeks earlier. Notably the decline in the overall surplus was almost exclusively a function of declining exports, which dropped from $145.5 billion to $139.3 billion, which imports increased modestly to $119.3 billion from $116.8 billion. Most interestingly, for all those who considered this month's US trade data as indicative of a moderation in the reliance on Chinese exports, and a preemptive resolution of upcoming US-China trade wars, may want to reevaluate that assumption in the face of the Customs data showing that US Imports declined just marginally, from $27.4 billion to $26.7 billion, which was still the second highest number ever. In other words, with numbers near all time record on the margin, fluctuations at this point are merely noise as exporters and importers shifts shipments temporally: next month's data will most likely demonstrate a continued deterioration in the US trade deficit, putting further pressure on 2011 US GDP expectations, which an increasingly more pessimistic Goldman will likely soon reduce to sub-1%.

Scientific American has done a great summary of peak commodity levels as well as depletion projections for some of the most critical resources in the world including oil, gold, silver copper, not to mention renewable water, as well as estimating general food prices over the next half century. Generally speaking, regardless of whether one believes in peak oil or not, the facts are that stores of natural resources are disappearing at an increasingly alarming pace. And instead of the world's (formerly) richest country sponsoring R&D and basic science to find alternatives, the US government continues to focus on funding a lost Keynesian cause, debasing the dollar and perpetuating a system that will do nothing to resolve any of these ever more pressing concerns. Furthermore, as by 2020, the US will have around $23 trillion in debt (per CBO estimates), the government will be far too focused on using anywhere between 50-100% of tax revenues to cover just interest expense, than funding science and research. Then again it is probably only fitting that future generations will be saddled with not just $100 trillion in total sovereign debt, but will be running out of water, will see sea levels rising ever faster, will have no flat screen TVs, and will be using Flintstonemobiles to go from point A to point B. All so a few bankers and ultra-wealthy individuals don't have to recognize total losses on their balance sheets filled with trillions in toxic debt.

The current Crisis is deepening day by day. The ninth anniversary of 9/11 is revealing the dramatic mood change of the country. In the days following 9/11 there was little anger against the religion of Islam. President Bush went to a mosque and declared that Islam was a religion of peace. He said forcefully that anyone who attacked Arab or Muslim Americans in some kind of twisted attempt at revenge for 9/11 would be met with the full force of American law. Most right minded Americans agreed with President Bush. After 9 years of waging wars against Muslims, in which victory is unachievable, Americans are weary, agitated and ready to lash out...What is beyond a doubt is that the country is facing extreme peril as it tries to maneuver its way through an economic Depression, a looming peak oil crisis, unresolved long-term fiscal obligations, and antagonism from countries throughout the world. The cycles of history do not reveal the exact nature of the Crisis ahead, but previous Crisis periods give us a flavor of what to expect.

This weeks analysis of the Commitment of Traders and Retail Positioning research. Tools to trade against the herd.

Buying conviction remains a big question as volume was the lowest total for any week since Christmas, 2009.

A bold idea? Or a dumb plan?

Coxe Advisors is out with its latest must read piece, in which Don Coxe tells readers it is time to once again reduce stock exposure, explains why gold will continue to outperform, and thus why it is a better investment than a 10 Year in the mid-2%'s, why fiscal stimulus is now too small to be effective which leaves Bernanke as the only saviour of the economy, and asks what experiments the Chairman has in store next: "Already, economists are discussing which Fed innovations lie ahead if the economy etiolates further. Among the suggestions for neat new ways to debase the Monetary Base: buying up large parcels of credit card and automobile debt. (Who knows? Maybe the Fed will become the nation’s biggest used car dealer. “Buy from Big Ben, Who’s Got the Biggest Deals!”)." All presented in Don Coxe's usual inimitable style.

The bears were certainly back in town for the Euro, news out of Europe has been mixed. German macro data has been disappointing, showing that the overall euro area is entering a period of weaker growth. Also this past week, some European peripheral countries, and especially Portugal, Ireland, Spain and Greece, saw a rise to record levels in their 10-year bond and CDS spreads.