Archive - Sep 2, 2010

Breaking headline on MSNBC. And didn't the government, pardon, CNBC, just promise that all is contained? Thank god they have learned their lesson with BP...or not

Scott Minerd, CIO of Guggenheim Partners, parses through the years of the Great Depression, and focuses on the pivotal 1936, which contained in it the seeds for the destruction of the period of relative economic growth and stability from 1932 to 1936, and resulted in a plunge in the economy in the second great recession of the Depressionary period: that of 1937 and 1938. While the first period saw "GNP grow at an annualized rate of 10 percent, the Dow rose approximately 20 percent per annum, and unemployment declined from as high as 25 percent in 1933 to as low as 11 percent in 1937" the second and much more dire phase of 1937-1938 . saw a unprecedented plunge in economic data: "national output declined by 5.4 percent, unemployment skyrocketed from 11 percent back to 20 percent, the Dow Jones Industrial Average declined 49 percent, and four years of healthy price recovery receded into 3 percent annual deflation." What precipitated the second collapse? "The short answer is that it was a confluence of factors, a perfect storm of monetary and fiscal policy mistakes" yet the immediate catalyst, if one can be defined was "the fiscal policy missteps of the Roosevelt Administration, who, in an effort to balance the budget after six years of deficits, implemented a series of tax increases in 1936 and 1937 that caused output, prices, and income to fall and sent unemployment skyrocketing." We are currently faced with precisely the same juncture, and unfortunately for America, things now have a far lower probability of occurring "just as they should" in order for the country to emerge in one piece on the other side of the tunnel. Here is why.

We continue with our series of artist renderings of various infamous desktops (previously Barack Obama, Ben Bernanke, Tim Geithner, and Lloyd Blankfein). Today, we focus on that of administration straight shooter Rahm Emanuel.

The past couple of weeks have been extraordinarily interesting and some of the moves appear to be extremely important. Although a lot of people like to point to the treasury market and then extrapolate out as to what this means to equities and the ability of the government to increase spending, I think this is the most USELESS market in the world to watch. If anything is a hologram and a PR tool it is the U.S. treasury market. How can people with a straight face come out and extrapolate anything from a market where the Federal Reserve is buying the debt of its own government! The Fed is merely the fiat drug dealer to a government addicted to spending and false promises. The equity market is the second most useless market in my opinion. There is no doubt in my mind that a huge part of the government’s “strategy” to build confidence is to keep this thing from doing what it should be doing. Thus, I am not surprised at all that since I last wrote the S&P500 was +1.6%, -1.5%, flat, and then +3.0%. So what you have seen is high volatility with no real direction. How can anyone have confidence this that thing is for real? - Michael Krieger

You will pardon us for posting two excerpts from David Rosenberg today, but this one is a must read, and explains more clearly than anything written on the matter why America is currently, and without doubt, in a depression, due primarily to ongoing secular changes in consumer and investor behaviour, something not experienced during mere recessions. As such any intraday or short-term bounces in the stock market that merely confirm that there was a liquidity injection by one player or another, or a successful short squeeze engineered by the wily folks at the custodian firms or due to simple headfakes, are completely irrelevant (especially with record implied correlations), as the long-term trend has only one way to go in the long-run. Down. Of course, those who believe they can time the moment when the last lingering support pillar collapses and everything tumbles down, are more than welcome to keep trying their top-ticking. We are confident that when the mass exodus begins, the HFT liquidity "support" of the market will be alive and well, and provide everyone with a perfectly acceptable exit price level...

Below are the biggest holders of Mariner Energy stock. #1, with 10 million shares, is John Paulson who has bought the stock as part of a merger arb strategy with Apache. Other in the top 5 include Vanguard, Fidelity, Prudential, GMT Capital.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 02/09/10

Update: the explosion is on a Mariner operating platform in the Vermillion 380 field. This is not a rig. From CNN: "An oil rig has exploded 80 miles off the coast of Louisiana, with 12 people overboard and one missing, the Coast Guard said Thursday morning. Rescue attempts are underway for at least 12 people, Coast Guard spokesman John Edwards told CNN. 13 people were on board the rig total, Edwards said, noting 12 have been accounted for, but one person was missing. The accident took place 80 miles off the coast of Louisiana on the Vermilion Oil rig 380, which is owned by Houston-based Mariner Energy. The Coast Guard has multiple helicopters, an airplane and several Coast Guard cutters en route. It's unknown if there are any injuries."

Yesterday, the market surged on an ISM number that was so stretched, and so out of out leftfield, it was higher than the top expectation by the economist panel. The government once again outdid itself in boosting numbers with the hope of surging stocks. It succeeded. Now the question is whether the imminent ISM downward revision have a comparable adverse market effect. And revised it will be: David Rosenberg explains why.

It appears there is a pretty stark difference of opinions on market structure these days, with an increasingly greater majority seeing High Frequency Trading as the devil incarnate, while the HFT lobby, most typically in the face of one Irene Aldrigde, surprisingly defending the practices of the HFT practitioners. Regardless, today's incremental observation on High Frequency Trading fair market practices comes courtesy of Boris Schlossberg GFT Forex, who in a CNBC interview, discussing the massive surge in FX volume which we highlighted earlier, makes the following relevant observation on HFT: "HFT traders have been incredibly destructive to the equity market because they have essentially been doing nothing but frontrunning and quote stuffing." We wonder if Mary Schapiro was watching this particular interview.

This is just getting silly: perhaps the next update on ICI mutual fund flows should occur if there is an inflow for once...ever again. In the meantime, ICI reports we have just recorded the 17th consecutive weekly outflow from domestic equity mutual funds, and what's worse for mutual funds' depleted liquidity ratios, it is now accelerating, hitting a total of $4.3 billion, a more than 50% increase from last week's $2.7 billion. YTD outflows have now hit $54 billion, as ever more capital is going into far safer fixed income instruments. And even as mutual funds are now staring outright liquidations point blank in the face, their actual capital keeps declining courtesy of endless redemptions. As a reminder, here is what Rosenberg said on the issue yesterday: "As for liquidity ratios, equity funds portfolio manages have theirs at an all-time low of 3.4%, down from 3.8% in June. Tack on the fact that there are really not very many shorts to be covered – since the market peaked in April, short interest is 4.3% of the S&P 500 market cap (in August 2008 it was 6%) and there’s not a whole lot of underlying fund-flow support for the stock market here." As for this being a contrarian signal, hopefully all those who see this as a buying opportunity can also find a way to make the now retiring baby boomers about 10 years younger and force them away from fixed income capital reallocation. Oh, and fix the broken market and restore investor confidence that the casino is only modestly rigged.

Yesterday’s opening in Gold was suspicious, as it tracked stocks for a while. Seems like the Risk-On crowd thought Gold was a “risk” asset, not a safety asset. Oops, they were wrong. Bonds got hammered so maybe it was the inflationistas out in force buying the beginning of the new Weimar republic monetary system (free wheelbarrow with every 1 Milliard Marks). Oops that didn’t work either. Smells a little toppy here, might be a good play to short with a stop out on a gap higher. Or sell a rally as it comes back into yesterday’s range. I’d buy calls if bullish, futures seem prone to liquidity gaps.

As day two of the FCIC hearing into why the Fed flips a coin, and/ore answers a call from 200 West, to decide which bank is TBTF and which isn't, watch Ben Bernanke's tenuous dance with truth and reality at the following FCIC link.

• Headline of the day: Economy Avoids Recession Relapse as Data Can't Get Much Worse (Bloomberg).... yes, this is headline news
• Could investors fleeing stocks become a lost generation? (USA Today)
• Will the White House have to replace its recovery blog with a double-dip one? (Telegraph)
• Ozawa Pledges Yen Intervention, Futenma Rethink in Japan Leadership Race (Bloomberg)
• Fisher `Reluctant' to Ease Until Fiscal Action Taken (Bloomberg)
• South Korea's Won Rises to a 2-Week High as IMF Says Currency Undervalued (BusinessWeek)
• Japan dilemma as economic dependence on China grows (Reuters)
• European Exports, Investments Spur Economy's Recovery (Bloomberg)
• But it is all fake and due to the ECB's ongoing life support: ECB holds rates, tipped to extend liquidity lifeline (Reuters)
• Summer of Economic Discontent (WSJ)
• Outgoing economic something or another Romer has some Keynesian parting words: "U.S. Must Find Will for Further Stimulus" (ABC)

Jobless claims are unchanged from last week, and come in line with expectations. Continuing claims came higher than expectations at 4,456K on expectations of 4,450K, with the previous print revised higher to 4,479K. Non-farm productivity much worse than expected, at -1.8% on expectations of 1.9, previously coming at -0.9%. Labor costs come at 1.1%, on expectations of 1.2%, a notable increase from the previous read of 0.2%. Knee jerk reactions by the market all around.