Archive - Sep 2010

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?

The biggest melting ice cube (since Movie Gallery) has just melted: Blockbuster finally accepted the inevitable and filed for Chapter 11 in New York Southern (Case 10-14997, legal: Weil Gotshal, CRO: Alvarez & Marsal). As part of the "pre-arranged" (but not "pre-negotiated") bankruptcy process, "the recapitalization plan would substantially reduce the Company's indebtedness -- from nearly $1 billion currently to an estimated $100 million or less when implemented." The Company has secured a commitment of $125 million in new "debtor-in-possession" (DIP) financing from the Senior Noteholders, chief among who is Carl Icahn, who has built up a major stake in the company's $675 million Sr. Secured notes, which will be converted into post-reorg equity. As the attached affidavit demonstrates, the company had 3,306 total video stores in the US (including franchises), and 2,333 international ones. We are confident that the company's renegotiation of lease payments much lower will only force REITs to surge to all time astronomical highs, because after all, who needs cash flow?

Fiat Currencies are circling the drain boys and girls. How else can you explain Stocks, Bonds, and Gold going up while the dollar craps the bed? You cannot fight the fed. Just position yourself for the pop in the liquidity bubble. Perhaps a minor bout of Hyper-Inflation would cure this. Anyway, we are rolling some Gold profits into Grains now.

• Wen Says 20% Gain in Yuan Would Cause Social Upheaval (Bloomberg)
• Amid Tension, China Blocks Vital Exports to Japan (NYT)
• Is the PBoC Deregulating Chinese Bank Deposit Rates? (Seeking Alpha)
• The "Deleveraging" Deception (Michael Pento)
• German Union Mobilizes Over Pay to Avert "One-Leg" Recovery (Bloomberg)
• Waaaaah Street: Executives, Emotion, and Outbursts of Obama Rage (NY Observer)
• Retirees Duped by Derivatives With Structured Notes Sale Surge (Bloomberg)
• Did the Fed Really Say Inflation Isn't High Enough? (Minyanville)

I was pushing longs at 1040. Now I think 1150 will mark the top. For a while.