Archive - Sep 2010

I mention all of this, because the European banking system seems to be repeating the exact same policies today, only two years later.

We’ve already seen the phony “stress test” charade along with the “all is well” proclamations. Now, the largest, most venerable European banks are starting their own version of the “we need capital, but all is well” tightrope act.

US Retail Sales came essentially in line with consensus at 0.4% versus expectations of 0.3%. As usual, the downward prior revision game continues, as the previous number was revised from 0.4% to 0.3%. And once the latest number is revised lower again next month the impact on the market will be actually positive as the next month once again come better then "prior." Retails sales came in at 0.6% on expectations of 0.3%, with the previous also getting revised lower to 0.1% from 0.2%. And auto sales dropped both M/M and Y/Y. And not surprisingly, this number completely disagrees with Gallup polling, which showed August declines of 5.9% and 7.2% on the 14 Day and 3 Day rolling averages, compared to July.

Goldman refuses to turn optimistic, and once again chief equity strategist David Kostin follows in the footsteps of Jan Hatzius, this time telling clients to shift to a defensive mix of stocks after recently downgrading his 2010 S&P target to 1,200. "We shift to a more defensive sector allocation in anticipation of slowing economic growth indicators and downward revisions to consensus earnings and real GDP forecasts." Just as all Wall Street economists followed Hatzius in lockstep, so all equity strategists will now begin dropping their S&P targets, especially since from this point on corporate margins can only go down.

• Japanese PM wins party vote; will stay in power.
• Asian commodity stocks rise on growth hopes; Japanese shares fall on Yen.
• China's currency advances to a fresh high against the U.S. dollar; CB sets the yuan-dollar parity rate at 6.7378.
• China plans to introduce credit-default swaps by year-end, Official says.
• Euro rises against dollar in morning European trading to $1.2877.
• European industrial production stagnant in July.
• EU raises 2010 growth forecasts; warns growth likely to slow in H2.
• German investor confidence may decline to 18-month low as economy cools.
• Bank of America should repurchase $20B in mortgages, Insurers say.

Retail sales are the key focus, with data also on small business sentiment, business inventories, and the weekly confidence report….

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 14/09/10

What are Gold Wars? Gold Wars are between governments and gold. This ultimately restricts the constitutional rights of the people. Gold is the vital barometer of the health of a nation’s currency. The suppression of gold by government allows them to mask the mismanagement of their currency. - Hinde Capital

Take a guess...

Exactly a week from today, the FOMC will meet on September 21, to decide whether or not to go from QE Lite to a full-blown QE 2 regime. And while most pundits had previously lost hope that the Fed will go full retard in its dollar destruction ways as early as next week, instead opting for the November 2 meeting if not wait for 2011 entirely, Morgan Stanley (specifically Jim Caron) came along: "We see considerable risk that the Fed may open the door to QE2 at this September 21 meeting despite the stronger-than-expected August payroll results and even if upcoming economic data stabilize. We believe that QE2 may come in the form of a vague outline for a plan to buy assets, expand its balance sheet and keep interest rates low conditioned upon economic data." Why the sudden change in opinion?  "We believe that the Fed may be reluctant to act aggressively after September 21 so as not to influence the election outcome. However, if deterioration in economic conditions warranted it, then the Fed may uncharacteristically act close to the election date. Acting sooner rather than later would be consistent with Bernanke’s plan to stave off deflation risks before they arise." Right or wrong about the Fed's choice (and with Caron's recent track record, one may be tempted to choose the latter), Morgan Stanley does correctly observe that volatility will likely jump in the weeks and months ahead, even as its has been moving progressively higher lately: "Interest rates have been subject to big daily swings." Curiously, as a hedge to surging rates vol, Morgan Stanley proposes the opposite Variance Swap trade that caused a massive loss for Goldman in Q2, and was Goldman's Top trade of 2010. Let's see who blows up first: Goldman, which still expects a decline in vol, or Morgan Stanley who is on the other side. Perhaps the two firms can just trade with each other (that wouldn't be that much of a change from the current regime).

What's next? A thought.

It’s all over but the crying. Online betting site Intrade is giving the Republicans a 70.9% change of taking the house in November, and 47.5% odds that they grab 50 seats or more. Harry Reid’s job is safe, and Carly Fiorina can forget it in California. Get used to Obama. He’s in for two terms. Until November 2, it is the only game in town.

I liked our present method of valuing options pretty well right up until the moment when it was finally time to put some of my own hard-earned money at risk by selling one. I could still understand the logic of the mathematical argument, but somehow the idea of selling an uncovered call, or even an incompletely covered call, myself, just seemed crazy to me. There are ideas we can advocate in public without looking foolish, and then there are ideas we would really act on in private, even if nobody else could see what we were doing. Somehow it suddenly seemed to me, then, that Black-Scholes, like so much of the rest of modern finance theory, actually belonged in the first category but not the second.

As everyone knows by now, Goldman's (now former) top economist (and creator of such K-11 magic as BRIC and N-11) Jim O'Neill has auspiciously found a new role at Goldman Sachs, as Chairman of Goldman Sachs Asset Management (proverbially, the place which will house all remaining 99.9% of the firm's prop traders, and which with $802 billion in AUM should have enough money to pay all of the Goldman hedge funders' salaries no matter how badly they perform), even as in a completely unrelated departure, Eileen Rominger, the global chief investment officer of Goldman Sachs Asset Management is planning on retiring at the end of the year. The two are obviously completely unrelated. What can we say: on behalf of the bear (or is that realist?) community we will miss Mr. O'Neill taunts, just as he will sorely miss the "few incoming hostile emails in response, and references to some weird blog sites who apparently opine on my views." All in good humor, Jim. That said: after succeeding in (at least on the surface) eliminating Goldman Prop, Zero Hedge will next focus its attention on all the juicy gossip, innuendo, and endless fun emanating out of Goldman Sachs Asset Management. We are sure that Jim will find our continued interest in his activities almost as delightful as a ManU come back victory from 3+ goals down. And now, without further ado, here is Jim O'Neill's farewell letter...

Businesses make decisions about capital investment based on demand, profitability, and credit availability. Under the current taxation regime, capital equipment is already fully written down over time. All the new Obama plan does is accelerate that write-down to the current year. The cost savings that will result will be purely the product of discounting. Additionally firms which believe their taxes will go up, will want to forestall the benefit of equipment depreciation to later years so as to better match up with their anticipated tax liability. For a company paying no tax at all today due to negative earnings, Obama’s plan will not be beneficial. Altogether, I have no reason to believe that Obama’s Capital Investment Write-off Plan will do much to spur businesses to purchase durable goods.

All eyes are glued at Japan tonight to see who the new DPJ leader will be. As of last check the race was in its photofinish stages, with both Kan and Ozawa having an identical number of supporters. Should Ozawa win, there is an expectation that the new PM would engage in major Yen intervention, and rescue the toothless BoJ from the peanut brittle of its utter worthlessness, and since the volumeless and robotized 2nd derivative of the AUDJPY known as the US stock market trades tick for tick with the JPY, the first indication of Ozawa taking a decisive lead should send the futures limit up at 9Gs. Regardless, even if Kan remains in power, with so much of the fate of the free world dependent on the most irrelevant variable imaginable, here is an outlook on the Yen from Marc Chandler, head of Global FX Strategy at Brown Brothers Harriman, who however sees continued strength for the JPY in the near future, which means that even more stat arbs will explode over the next few weeks as stocks continue to correlate only with the Ambien consumption of one Phillip Hildebrand. "The unwinding of the previous yen carry trade is playing out and although the private sector is purchasing a large amount of foreign assets, roughly the same amount was tried previously (by the BOJ) and, it too, did not work. The stemming of the yen’s appreciation will require greater export of capital from Japan. Short-term speculative capital flows and other flows not picked up in this sketch are difficult to ascertain, leaving it difficult to generate an estimate of the magnitude of capital that needs to be exported from Japan. However, if the will was there, the Japanese government could step in to address the market's failure to sufficiently export Japan’s surplus capital."