Archive - Sep 2010

There are the usual market observations (no volume - shocker), but, for once, Nic Lenoir is getting angry: "People started voting a bit more, and it seems all they want is change, but change they are not getting. You want change? Well how about the truth for a change: we are bankrupt, your investments are in their totality worth 35 cents on the dollar including your house, you need to move in with your parents because we are slashing their pension payments and you can't afford a home. Now start from scratch! To me it sounds better than 4-day school weeks in Oregon where we are not educating the future generation so they can be even angrier and counter-productive revolutionary protesters when they grow up."

More fireworks out of Europe, following in the footsteps of the disclosure about Deutsche Bank's dramatic underfunding and need to raise capital, is JC Trichet's stunning announcement that Eurozone members that break the region's rules on public finances should be excluded temporarily from Europe’s political decision-making, according to the FT. Obviously, where there is smoke there is fire, and the ECB president has sufficient reasons to make this demand. It can only mean that major European political turbulence is imminent, precisely as we had been expecting. That it coincides with the end of vacation season is also right in line with our expectations. In essence, JCT's proposal will make a the explusion of member countries symbolic - they won't be fully thrown out, but for all intents and purposes, will be (while still lacking their own monetary independence: the worst of all worlds). That this will not inspire any confidence in Europe is beyond any doubt. Somehow we don't expect a massive surge in the EUR any time soon (and predict a very stressful week for Phillip Hildebrand who will soon be battling with USDCHF parity and a EURCHF in the mid 1.20s).

One of the biggest bond bulls, whose recommendations have yielded a 25% return YTD, is shifting out of bonds, arguing that continued "deflation is unsustainable." So does this mean jumping into stocks? Not so fast, says Yves Lamoureux and explains why there are several key catalysts that have to occur first before putting any capital into public equities.

Today's auction of $16 billion in 30 Year Bonds came more or less as expected, printing at a near record low 3.82%, highest only compared to the 3.5-3.6% yields achieved in February and March of 2009. The Bid To Cover was 2.73, a decline from recent prints, yet the biggest surprise was the surge in the Primary Dealer takedown, which at 55.6% was the highest since October 2009. In essence the Primary Dealers carried nearly 60% of the auction (and we all know that the PDs are nothing but the Fed lite). The other surprise - direct bidders represented just 8.3% of the take down: this was the lowest since February, even as Indirects were responsible for just 36.1% of the auction. This once again confirms that starving for yield foreigners like the curve, but not so much to bet on inflation staying low in 30 Years.

Rumors circulating in the market that the biggest German bank, the one whose assets are about as large as the GDP of its host country, is considering a share sale of up to €9 billion. DB is rumored to have approached banks about arranging a stock sale, although the firm has still not decided to whether to pull the trigger. This development is nothing less than a direct response to Basel III which is expected to require European banks to shore up tens if not hundreds of billions in new equity capital. And as usual the first one loses the least. This only means that all the ugly toxic waste accumulated under the rug in Europe's financial institutions is about to emerge.

Many skeptics enjoy pointing out that the fear and loathing toward stocks as exhibited by the seemingly endless mutual funds outflows, now in the 18th consecutive week, is nothing but a contrarian play, and when the masses are stepping out is when the smart money should invest. Under other circumstances we would totally agree. However, in this case, we make the argument that it is in fact these "contrarians" (with the assistance of the Fed, the Primary Dealers, and the HFT scalpers) who have ramped the market in advance of this move for many months now, anticipating an inflow which never comes. In other words, the true contrarian move is to fade the market here. Why? Because as the below chart from ICI shows, stocks have experienced the biggest short-term equity return upswing in history on the smallest net amount of positive inflows also in history. The argument would go that the entire upswing is nothing but an engineered push on nothing but momentum, and QE, and that fair values are far, far lower. Once GDP passes below zero, and once S&P EPS forecasts are revised to +/- 60, as the double dip unwinds, and applying an appropriate multiple of 10-12x, the market will be far more credible, and will see far more inflows when it is at 600-700. For now, however, nobody is foolish enough to enter. And those buying on hopes that Joe Sixpack will finally put in his two remaining cents in Amazon will continue to be disappointed, entrusting their entire risk capital to the like of the Federal Reserve, Goldman and Getco.

I gave President Barrack Obama six months to roll-out his doomed Keynesian policies, twelve months to discover they were flawed and eighteen months to realize that the solution to America’s problems must lie within a different economic framework. I had hoped by the end of twenty-four months to see new policies closer to an Austrian economic philosophy emerge. I was wrong. Though, even the Wall Street Journal recently featured an article on the re-emergence of the Austrian School of Economic philosophy, it would appear that President Obama’s administration still neither gets it, nor I am afraid ever will. Key defections by his leading economic advisors, talk of the need for QE II and a Stimulus II, and a political collapse in public confidence suggests a growing awareness that Keynesian policies are not working, as many predicted they wouldn’t. Obama's exciting rhetoric of Hope and Change has left myself and the majority of recent polled Americans disillusioned and disappointed. - Gordon T. Long

This story, more than anything else I’ve seen in recent weeks, sums beautifully the current political/ economic situation for the US today.

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

Today's announcement by the BLS that it decided to flat out estimate nearly a third of all initial jobless claims (courtesy of several large outliers) due to a "clerical holiday" which resulted in a major beat to estimates, caught many offguard by just how tendentious and manipulative the US Department of Truth can be. This is nothing. To visualize just how ridiculous the perpetual upward bias is at the Labor Bureau, we present a chart demonstrating the weekly jobless claim revisions by the BLS: in a nutshell, 90%+ of the time the bureau has revised prior claims upward, meaning it consistently strives to create an optimistic picture at the moment, only to have it revised it to its true, uglier state a week later when nobody cares. The implication is that fraudulent (and we sure hope this is inadvertent, although a 90% error rate definitely would invite a criminal investigation into just who and how stands to benefit from such an manipulative upward bias) data reporting is responsible for a persistent upward bias in data, and that fundamentals have been disconnected from the "government's reality" for years, confirming that the recent pathological breakdown in the market's relationship with fundamentals is not a new development. For example: today stocks would be flat to down if the BLS were to report the initial claims as they really are. Instead, here we are, almost 1% higher on nothing but soon to be revised lies. In other news, the China-US data distribution Joint Venture/Vassal State development is progressing better than expected.

In what can be dubbed the definitive presentation for those pursuing yield (and let's face it, in our day and age when most have given up on stocks as a capital appreciation vehicle, that would be everyone), Morgan Stanley's Jim Caron and team have created "Searching for Yield - What the Bond market is up against." Easily the most comprehensive analysis of even the smallest nuances in rates, corporates and dividend yields, it is chock full of 113 pages of must read data. And while we leave it up to the reader to make their own conclusions on which asset class is most appropriate, it bears to highlight Caron's thoughts on why stock dividend yields are surging, despite Cramer's daily begging to get people invested into companies that may pull their dividend any moment, to go with the whole cash hoarding theme.

Here's the trailer for what will likely be a must watch documentary, Inside Job, directed by Charles Ferguson, opening October 8th in America.

For all those who are wondering why the market may have caught a vapor bid today, here is your answer: the Fed is currently (as of 10:15 Eastern) conducting an auction for Bonds maturing between 2013-2014, which if Morgan Stanley is correct will inject roughly $2.5 billion in new market liquidity. Lever it up 15x and you get some decent market moving potential. And as the FRBNY discloses, the next auction will be on September 13, when the Fed will focus on the 7-10 Year "belly" of the curve. Today's POMO result will be announced at 11:00am: expect no stock weakness immediately following the reallocation of capital from USTs to stocks via the PDs.

Nothing to this at all. Just move on to the important stuff.

It is no secret that money paid to Primary Dealers via the Fed's POMO monetization tends to immediately find its way in risky assets, most notably stocks. Yet one of the major complaints against the Fed's QE Lite by the permabull brigade, is that the amount of weekly monetization is just far too low to make much of a dent on stocks, even assuming massive leverage and the deranged computerized feedback loop algos that take the smallest move and make a tsunami out of it. Well, according to Morgan Stanley, the Fed will make sure that over the next three weeks hedge fund LPs are happy, that redemption requests are sparse, and that September wil be an up month for all those levered to the hilt and chasing beta: for September/October the Fed is now expected to monetize double the amount of bonds in Aug/Sept. In other words, the Primary Dealers, aka Fed Lites, will be using tens of billions of brand new Fed printed money to chase the highest beta stocks they can find. And they will most certainly be using made up government data to facilitate this pursuit.