Archive - Sep 23, 2010

Guess the old man is not going to fill Larry Summers sweaty shoes:

• Volcker: "So Difficult" To Dig Out Of Recession
• Volcker: Will Take "Long Time" To Repair Economy
• Volcker: "Underlying" market problem is "too big to fail" issue

and FTW:

• Volcker: Mortgage market is "absolutely broken"

For anybody that values results over brand names, the housing market has a much rougher road ahead than many presume and banks are literally the walking dead! Having accurately called the fall of the WaMu, Countrywide, Bear Stearns, MBIA, Ambac, Lehman, residential and commercial real estate I am confident that the list of big name failures WILL EXPAND! Every single variable that can be plugged into a housing value equation is explicitly negative, save the manipulated mortgage interest rates (meaning another bubble to burst).

Let’s be honest. Forget recessions, forget even Depressions, the US is an empire in decline.

You can literally see it crumbling right in front of you. Just start looking at how people live, eat, and act on a day to day basis. Look at how our Government runs itself, how it manages our affairs, how it spends our tax Dollars. Look at how our justice system works, who it protects and who it punishes.

It’s all out there, right in the open for you to see. You don’t need an expert degree or some kind of advanced education. It’s OBVIOUS to anyone who bothers looking around.

The fact we don’t admit it doesn’t mean it’s not true.

Yesterday's Microsoft issuance of $4.75 billion in new debt, of which the 3 Year maturity portion priced at the lowest yield ever for a corporate bond of 0.875%, came at the pristine, and much discredited AAA rating. Yet what this little experiment revealed, in addition to confirming that the corporate bond bubble has never been greater, is that the cash on the sidelines argument used by every single permabull on CNBC is sorely lacking in some factual details. Namely, that a dollar at home is worth more than a dollar abroad, as BofA's Hans Mikkelsen puts it succinctly. Let's back up for a second: the primary reason why investors are funneling their capital in droves in tech and other companies that have key foreign operations is precisely due to the fact that while their domestic subsidiaries may be expiring, it is the foreign subs that are generating the bulk of the revenue, profit and thus, cash. Yet what very few have considered, is that repatriating his cash to the good old USA would cost companies hundreds of billions in US corporate taxes. That's right: even though companies are taxed abroad, the issue of double taxation is resolved by subtracting foreign taxes paid from the US tax liability. However, because foreign corporate taxes are typically lower there is an adverse tax consequence associated with remittance to the parent company. In other words, of the $1.2 or however many trillions in total corporate cash on balance sheets, a good 30% chunk of this belongs to Uncle Sam if these companies wish to use it for domestic IRR purposes. And yes, just so there is no confusion: using foreign cash to pay dividends or share repurchases is considered repatriation from the perspective of US tax regulations. Enter Microsoft: most of its cash resides abroad and is essentially useless for dividend purposes, unless the company wishes to see its net cash position cut substantially upon repatriation. Yet with everyone now clamoring for increased dividends and stock buybacks, the company is forced to access domestic capital markets and use that money for shareholder friendly activities. This is a capital mismatch fiasco just waiting to happen. The only possible winner out of this - Uncle Sam, who may soon order foreign cash to be repatriated over corporate pleas otherwise.

Courtesy of Damien Cleusix, here is the much anticipated Q4 update in his must read series on Global Tactical Asset Allocation, this one focusing on currencies (the other updates in this series are coming soon).

Seeing headlines that the United Auto workers says union will announce intention to withdraw funds from JP Morgan chase. Next up, Jamie Dimon blamed for 30 years of shitty-ass car production. Next next up, UAW to fire half its member in protest over receiving tens of billions of direct and indirect bailout funding from the JPM-Obama complex.

For now it is merely a reduction in the IPO size. Next it will be postponement due to "market conditions." And as a reminder Government Motors owes taxpayers $49.5 billion. "GM shares must be sold at about $133.78, before splits, if the U.S. is to recoup its investment, Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, said in a letter, the Wall Street Journal reported today." Good luck with that, especially once the SEC announces HFT operations need to be curbed, if not pronounced outright illegal, in under 10 days.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 23/09/10

This is rather adverse development, as it means some form of non-resolution stalemate on the tax issue will now most certainly be the final outcome: there is very little time in the chaos after elections to actually implement wholesale tax reform. As Goldman highlighted yesterday, the likely adverse impact of the wholesale expiration of tax cuts will impact US GDP adversely by an additional 2% in 2011. Yet Corporate EPS are now completely disjointed from the host economy, as earnings are now completely predicated on wholesale deleveraging. What companies seem to forget is that eliminating the tax shield of debt interest will mean hundreds of billions more in taxes paid to the government. Or perhaps, that has been the government's ploy all along.

One of the most interesting stories in the last few days, has little to do with finance and economics (at least right now), but arguably very much to do with geopolitics. A fascinating report which cites computer security experts claims that the recent uber-cryptic malware worm Stuxnet is nothing less than a weapon designed to infiltrate industrial systems, and based on attack patterns, the ultimate object of Stuxnet may be none other than Iran's Busher nuclear reactor, which could be targetted for destruction without absolutely any military intervention. Has modern warfare just become obsolete courtesy of a computer virus?

Adobe Systems Inc. (ADBE) shares got slammed big time on Wednesday in heavy volume plunging 19% and touched a 52-week low. While some analysts said the company's longer-term prospects remain solid as the economy recovers, there are warning signs indicating otherwise.

"Borrowing a quote and an idea from Winston Churchill, we would argue that the current and future EUR/USD rate is “a riddle wrapped in an enigma inside of a mystery.” Why an ‘idea’ as well as a quote? Well, Churchill used this phrase to describe the Soviet Union, a conglomeration of states managed by an opaque bureaucracy that was challenging the global capitalist system. The Eurozone is surely more benign and not quite as opaque, but their ambition is challenging the global dollar standard, a critical component of the current global capitalist system. Churchill concluded that the Soviet Union would do what was in its national interest. That made Kremlin watching easier than understanding the interplay among the many power centers of Europe. As it is clear that the Eurozone does not actually have a national interest because there are so many nations involved and that the answer to this is a conundrum, the value – and the future – of the euro is extremely hard to predict." - John Taylor, FX Concepts

Nothing good in the home sales front: per the NAR: "Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 7.6 percent to a seasonally adjusted annual rate of 4.13 million in August from an upwardly revised 3.84 million in July, but remain 19.0 percent below the 5.10 million-unit pace in August 2009." Expectations were for a SAAR of 4.1 million so basically the number came very much inline, yet the computers go apeshit. And here is good ole' Larry Yun's spin on things: "The housing market is trying to recover on its own power without the
home buyer tax credit. Despite very attractive affordability conditions,
a housing market recovery will likely be slow and gradual because of
lingering economic uncertainty." Some other observations: "The national median existing-home price for all housing types was $178,600 in August, up 0.8 percent from a year ago. Distressed homes rose to 34 percent of sales in August from 32 percent in July; they were 31 percent in August 2009." And yet the most important metric is the months supply: "Total housing inventory at the end of August slipped 0.6 percent to 3.98
million existing homes available for sale, which represents an
11.6-month supply at the current sales pace, down from a 12.5-month supply in July." So yes, there is a year's supply of existing homes. And this does not account for the shadow inventory.

The traditional response by all septics who see spot inches away from $1,300 (in addition to you can't eat it of course) is that it is in a bubble. Where do they get the basis for this conclusion? Irrelevant. It is up. It must be in a bubble. So for all who actually do care about factual justifications, here is a case by case comparison of all other assets that have previously been in a bubble compared with the levels achieved by gold and silver in the recent move (which courtesy of the race to the bottom, or two bottoms as we will shortly highlight courtesy of John Taylor, will go much higher, as devaluation on an absolute basis relative to something tangible means gold has only one way to go). So courtesy of Sharelynx, here is gold/silver vs 50 historical bubbles.

The hands on, from the trenches view from Oracle of Omaha Warren Buffet’s personal agent. The number of existing homes on the market is climbing from the current 4 million units to 5 million, versus a ten year annual trailing average sales of 2.5 million units. Record foreclosures are forcing reasonable sellers to compete against distressed sellers, driving prices down. The hurricane force headwinds of the retirement of 80 million baby boomers, the parsimonious attitude of banks, and the harsh reality of continued falling standards of living in the US aren’t helping. Do bank stock investors know this?