Archive - Sep 2010

One can just smell the revulsion emanating from the pages of David Kostin's writings these days. While his predecessor, Joseph Cohen, can serve the crazy juice on CNBC on a daily basis, Goldman's strategist is forced to follow the grand master plan and telegraph to clients just how ugly the future seems. And with prop allegedly no longer a main revenue driver, and thus holder of securities, Goldman better hope volume makes up for the loss in directional bias - what better way to score volume than to incite some fear and loathing. As Kostin said: "We shifted to a more defensive sector allocation this week in anticipation of slowing economic growth indicators and downward revisions to consensus earnings and real GDP forecasts. These changes put us at odds with bottom-up consensus EPS and large cap core mutual funds, particularly in our Consumer Staples Overweight vs. Discretionary Underweight where mutual funds hold the opposite position." Goldman's 2011 earnings forecasts are most below consensus in growth-sensitive sectors such as Consumer Discretionary which is 23% below bottom-up consensus while both Energy and Materials stand 10% to 15% lower. Whether this means to buy every Consumer Discretionary share or sell, depends on just how quickly the Goldman prop roll off is proceeding. All this and all the other must see weekly charts included.

My thoughts on last week's action.

Many of America's largest pension funds are sticking to expectations of fat returns on their investments even after a decade of paltry gains, which could leave U.S. retirement plans facing an even deeper funding hole and taxpayers on the hook for huge additional contributions.

This is the final part of two parts of "The Economics of Mass Destruction." I examine the fallout of globalization of bad economics. At the end there is a link to a PDF of the entire article that you may download.

BNY's Nicholas Colas is once again delightfully insightful with an explanation for the "cash on the sidelines" phenomenon so simple, and so elegant, no wonder it has eluded all the neosophists on CNBC for so long. "One of the lingering questions about U.S. equities remains the conundrum of “cheap” price earnings valuations on so many high quality stocks. Perhaps estimates are too high, but after several quarters of generally in-line-or-better earnings reports, that doesn’t seem to be the worry (at least for now). We think the DuPont model, an old (ancient, really) financial analysis model highlights why multiples are as low as they are. Problem #1 – cost cutting only takes you part of the way to maximizing shareholder returns in a cyclical downturn. Problem #2 – investors need to see a resumption of corporate investment growth to allow valuations to return to more normal, long term levels." Perhaps, in a wholesale revulsion to the Frankenstein monsters of modernity, starting with a thoroughly roboticized market, and quadrillions in capital flows each year in the form of electrons, investors have subconsciously reverted to the simple days of yore, in investing analysis as well as in everything else...

Continuing the analysis of today's Z.1 report, we next focus on recent developments in the shadow banking system. And it's a bloodbath: total shadow bank liabilities dropped by $680 billion in Q2, and a massive $2.1 trillion YTD. If one wonders why Ben Bernanke (yes, it's technically TurboTim) continues to print trillions and trillions of debt, and it is still doing nothing (yet) to stimulate the system, here is your answer.

Last week the government released the latest unemployment data. Bloomberg, always ready to roll up the sleeves to help its friends in government (get reelected), was running a headline that “Companies in U.S. Added 67,000 Jobs in August.” While I haven’t had time to go through the minutiae of the report, I find myself scratching my head at Mr. Market’s rather positive reaction to the report, given the bullet points...

A brief word on stocks: Ever since the VIX posted a reversal outside the lower Bollinger band I am very cautious and bearish on stocks. We tested this morning the key upside level in S&P and so far rejected it. I have included the chart of the Nasdaq here to show that a weak trading session Monday would complete an evening star on important levels. The Shanghai composite is also sitting on a the 50- and 100- DMA ad a break would be very bearish. So I stick to my bearishness and will look for a break of 1,105 in S&P futures to confirm downside acceleration. - Nic Lenoir

A continuation of recent strength in Aussie Dollar / US Dollar (AUDUSD), above major overhead resistance at its 0.9380 November 2009 benchmark high, would indicate that the Aussie's larger October 2008 major uptrend versus the US currency is resuming. Considering the tight and stable positive correlation between AUDUSD and commodity prices, and more specifically with economically-influential copper prices, continued strength in AUDUSD would indirectly suggest increasing economic demand and the likelihood of a similar rise in the Dow Jones Transportation Index

A couple of weeks ago, U2 performed in front of more than 100,000 fans at the Olympic stadium in Athens. Listen to Bono's comments on the Greek economy...

Citadel is no stranger to headlines: in late 2008, the firm was a prominent fixture in the news, typically mentioned in the same paragraph as some (now long former) LP who had attempted to redeem capital from Ken Griffin's firm only to hear redemptions were indefinitely, and without warning, halted, followed up by an expletive laden tirade. After all it is only called a hedge fund: in reality it is merely a levered bet that Moody's assumption that nothing can ever go lower, is correct. Well it wasn't, and as a result in 2008 Citadel lost more than half of its assets. The net result is that with profits of 62% in 2009 and 4% YTD, the firm (and, incidentally most other funds) has no chance of hitting its high water mark for a second year in a row.  Which brings us to today's surprising news that Ken Griffin (allegedly perceived in the industry as arrogant beyond comparison, so this must hurt overtime) has finally decided to eat humble pie and to lower its management fee. As hedge fund veterans know too well, this is often the first step of the beginning of the end, as it may indicate either a i) liquidity shortage, ii) a surge in redemptions, iii) a performance that is far worse than officially represented, iv) a megalomaniacal dictator at the head of it all, or  v) all of the above. Most of all, it indicates that very soon every LP in Citadel will demand the same terms, making profitability for the hedge fund turned market market turned investment bank turned FRBNY collaborator into a living hell of razor thin margins. As for the title, it is rhetorical.

Another day demonstrating just how pathetic stock trading has become. Up until the close, the NYSE was on track to record the lowest quad witching volume in history. Fast forward to 1 minute after the close, and the machines kick in, sending in almost one billion shares down the frontrunnable chute known as the NYSE pipeline. Too bad most retail investors still don't understand that the only time when trading actually occurs now is after the market is officially closed. And even with the post-close spike, this was still arguably one of the lowest quad witching days ever.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 17/09/10

Pento's earlier return to CNBC can only be attributed to the ratings surge resulting from the episode of him being "rude" and kicked off by Erin Burnett, after he dared to question her assumption that the world will continue to fund US debt in perpetuity. Nonetheless the tension (of somewhat ambiguous origin) between the two remains which may explain why Mike Pento appeared on the Kudlow show to discuss how Obama can satisfy Wall Street. Pento was sterling as usual, saying Obama's best bet is to convert to the tea party, but absent that he "should remove Ben Bernanke, and put the head of the Fed should be someone who is not so enamored with counterfeiting, and put someone who believes in markets. That would help to a great degree." Yet today's moment of insight comes from Keith Boykin who points out that the conflict between Wall Street and Main Street continues, in that the former couldn't care less about jobs (unlike the latter), and are much more fixated on the bottom line. Although obviously without jobs, the economy will crumble, which explains why Pento once again points out the obvious that America, to be competitive with the Chinese, should "lower taxes, lower wages, and reduce regulations" - all three of which have virtually no chance of passing in a country used to being coddled by cheap credit and ever rising wages, even if this money continues being devalued day to day. And while Boykin seems unable to grasp the concept that a bottom line has an expense component to it (i.e., cutting record bloated government spending), the line of the day goes to him: "We are all greedy and selfish." And there you have it - Americans can look at the administration for answers, at Wall Street for scapegoating, but fundamentally, when it comes down to actual change, this can only happen at the individual level. And deluding oneself and preventing any real change is what the average American individual excels in, more than anyone else in the world.

Economic Patterns: What we now call “economics” determines power and conflict patterns because wealth, or the deprivation of it, determines survival, and, for those who survive, “economics” determines the relative control they may have over individual and societal destiny. Thus social behavior determines economic viability, and the failure or success of economic patterns determines social corrective or compounding action. We are about to see an acceleration of social reaction to economic failure - a reaction to the inflexibility of policies which have failed to adjust to changing circumstances.