Archive - Sep 2010

Initial claims not only missed consensus by 15K, jumping by 13K to 465K, but the previous number was of course revised higher from 450K to 453K. And a far bigger revision was in the continuin claims number, where the previous print was pushed higher from 4,485K to 4,537K. The current weekly number of 4,489K missed expectations of 4,473K nonetheless. Once again the BLS' endless "downward" revisions to prior economic data continue to misrepresent the economic at T-0 with impunity. But who cares about truth when patently wrong headlines is all that matters to the binary pirates. The only "good" news: EUC and Extended claims recipients jumped by over 200K in the past week, somewhat countering the prior week's plunge by over half a million as ever more claimants exhaust their full 99 weeks of various Tier benefits.

Another reason why Angela Merkel is furiously contemplated just how to kill the EUR next, was this morning's German manufacturing PMI which came at a far wear weaker than expected 55.3 (on expectations of 57.6). Same thing with the services PMI which missed a consensus reading of 57.0 to land at 54.6. Even Goldman's Dirk Schumacher who has long been screeching about the imminent second coming of the Sun King who will make all things well, is starting to realize that in the central bank FX game, economic outlooks now change intervention to intervention.

Irish bond spreads are back in the spotlight, with Bund spreads jumping by over 20 bps  to over 415 bps, although not on the heels of a failed auction (the country did auction off €400 million in February and April 2011 bills earlier, which was less than sought), but rather on news that Ireland is the first country in Europe to officially double dip back into negative growth. Ireland was also the first European country to dip into recession what may seem like an eternity ago. The stunner is just how vast the difference between the expected and the actual economic reality was. As BBC reports: "The Irish economy shrank in the second quarter
from the previous three months, surprising analysts who had been
expecting growth. Gross domestic product (GDP) fell 1.2%, the Central
Statistics Office said. It also revised down its measure of growth in
the first quarter to 2.2% from 2.7%." So poor Ireland not only has to deal with a drunk PM, insolvent bank system, and, what is not surprising a new economic crunch, but what is far more concerning, a Department of Truth and Unicorns, which is unable to lie its teeth off and paint a rosy picture when the feces are already in process of being fanned.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 23/09/10

Why S&P 1150 is a more significant level to watch than you may think.

Retail Traders as a herd are wrong...most of the time (sorry guys its true).

This daily report is designed to help traders find opportunities to trade against this group. The premise is very simple we are looking for 66% of retail traders to be trading either long or short a currency pair, we then look for opportunities to fade (trade against) this group. For example if 72.99% of traders are long the USD/CHF we look for opportunities to short that pair.

"Incentives are part of total compensation and critical to the fund's long-term success as well as recruitment and retention of skilled investment professionals," Pacheco said in an e-mail.

Google unveiled a “transparency tool” that gives information about requests it receives for user data or content removal from government agencies. The most recent data set--Jan. 2010 to Jun. 2010--the U.S. reign supreme this time around with 4,287 data requests, up almost 20%.

"Wax on, Wax off", "risk on, risk off", whatever you want to call it, the most prevalent phenomenon in capital markets over the bear market rally of the past year has been the gradual yet relentless rise in cross asset correlations. As we reported earlier, hedge funds are now openly returning capital due to their inability to properly hedge positions and execute on traditional long/short strategies, which in turn is wreaking havoc on the entire 130/30 or 130/70 model (which also means gross leverage for most rational hedge funds is reduced as those who do gross up, are effectively betting the farm on market moves with an increasingly shorter and more volatile even horizon). Long before this became a daily topic on CNBC, we were warning about the dire implications of alpha extinction, and the impact it would have on hedge funds. And with the opportunity to diversify away risk increasingly taken away from investors, we expect that this trend will result in ever more capital fleeing the stock market. Yet the question remains: what has caused correlations to surge to current levels? If these reasons can be identified, it should be easy to eliminate them one at a time until some semblance of a rational market returns (at least on paper). Luckily, Nicholas Colas of BNY has once again beaten us to the punch, and has compiled a list of the top 10 reasons for increased asset price correlations. So without further ado...

Chris Martenson is one of the few visionaries who has long been warning about the disastrous effects of out of control spending and debt monetization (as well as unmasking the shell game the government has been engaging in for the past two years as it attempts to sequester foreign MBS holdings and exchange them for Treasury securities by tracking the TIC-custody account divergence), and his blog should be required reading for all interested in the intricacies of Fed intervention in rates. Today, Martenson has a post which, however, touches on something completely different: survival. In his words: "I was interviewed by Jack Spirko of The Survival Podcast. We had a meaty exploration of the core tenets of the Three Es (Economy, Energy, Environment) in light of recent developments, then delved pretty deeply into strategies for building personal resilience, which is the main focus of Jack's regular podcasts. I enjoyed myself and think the discussion is worth listening to." Yet this is not a bunker survivalist manifesto: "A note on TSP: while it has a "survival" theme, it's not "survivalist" in its approach. Jack is focused on helping his audience learn how to increase their degree of personal preparation - much in the same way we're focused on it here at CM.com. His mantra is "Helping you live the life you want, if times get tough, or even if they don't." Like me, he's interested in guiding people to take steps that will improve their quality of life no matter how things unfold in the future. Speaking with him before and during our interview, I found him to be thoughtful, measured, and passionate about making a positive difference."

With mid-term elections a month and a half away, and the expiration of the Bush tax cuts approaching at a rapid pace, the stakes for Obama's dwindling administration on the tax cut extension issue loom. And as Goldman's Alec Phillips demonstrates, the costs of either decision are huge: on one hand, should Obama go ahead and relent to extending all the tax cuts, he will almost guaranteed not be around for a second term due to the avalanche of disappointment in his electorate as he relents on this key promise. On the other hand, should he and the republicans be unable to find a compromise and all tax cuts expire, the impact to the economy could be so vast that America's breezy depression will become a full blown hurricane, possibly worse than anything the nation has ever seen. Phillips' succinct summary of the downside case is as follows: "Letting all of these provisions expire would subtract nearly 10 percentage points from annualized disposable income growth in Q1 2011, which could translate into a nearly 2 percentage point decline in final demand and nearly that large a drag on GDP in the first half of 2011." And it is not just the Bush cuts that are at steak: the year end "cliff" also sees the expiration of the “Making Work Pay” (MWP) payroll tax credit enacted in ARRA, and the relief from the alternative minimum tax (AMT). Yet with such key tax "experts" in the administration as Romer, Orszag and now Summers all gone, Obama will be very much clueless to evaluate the dramatic impact of all these "cliff" developments until it is likely too late. One thing is certain: if a stalemate prevails, GDP for H1 of 2011 will be wildly negative. The summary of the case by case impact can be seen on the chart below.

Since the beginning of the greatest depression, US household net worth has plunged nearly 11 trillion dollars. All the while we continue to experience price inflation and expanded government spending. In a normal economy that isn’t run by a bunch of criminals, we should expect to see price deflation as malinvestment is wiped out. Since our money is based on debt, as debt is reduced though defaults and write-downs, the monetary base should contract, thereby leading to price deflation. Of course, this is not what we are actually experiencing at the present moment since the criminal central bankers and politicians have decided to prevent the liquidation of malinvestment through a nearly endless series of bailouts, guarantees, and deficit spending.

On one end, you have the destruction left over from the extinction of US auto manufacturing. On the other end, you have PIMCO. And inbetween the two, there are 294 home markets, which make up the exponential curve of US real estate prices. It is not surprising that the non-normal distribution in home prices follows quite closely the Talebian extremistan distributions expected (even though the last word is an oxymoron in this context) out of modern day markets. We wonder which end of the curve the President has got his eyes focused most on these days for "excess efficiency" retention purposes.

Just thinking out loud...

Jeff Gundlach who has been spot on with timing his calls for Treasury inflection points, did a quick Q&A with Morningstar summarizing his outlook on the economy. In a nutshell while the DoubleLine manager is still skeptical that inflation may strike, he is convinced deflation is pervasive. To wit: "markets and the economy to date have offered scant evidence to support
the inflation case. Stocks are down over the past 10 years. Real estate
is down hard over the last five years. Commodities are down sharply over
the last two years. Instead of spiking to double digits, bond yields
are hugging the ground. M3, which is now calculated only by private
economists, is down nicely over the past year. And of course money
velocity is moribund: Society has looked into the debt abyss and decided
enough is enough with the debt-based consumer economy. So, deflationary
forces still prevail. What could shift the balance of forces in favor
of inflation? A well-meaning movement to cut the deficit has at long
last arrived, maybe. But cutting the deficit that is supporting the
consumer economy will directly depress gross domestic product. If that
causes not just a look but a step or two into the deflationary abyss,
then maybe the inflation case will move to center stage." Sure, let's not forget the collapse in the shadow economy. But let's also not forget that the economy is in a vacuum, and were the Fed not in the picture, we would totally agree. But because the most irrational human being in the world is in charge of said world via his control of the US reserve currency (and irrational because he promotes exclusively policies that benefit the vast minority over the majority), we will have to disagree. And so would the price of gold.