Archive - Sep 2010

Hewlett-Packard Co. slapped Mark Hurd, the CEO it ousted last month, with a law suit soon after rival Oracle Corp. named Hurd as Co-president and Director. HP claims that Hurd cannot perform his job at Oracle without violating a confidentiality agreement.

In recent decades, we have become increasingly accustomed to central banks coming to the rescue when stock prices and the economy slide too far. Despite the fact that economies everywhere have been stimulated fiscally and monetarily on a large scale since the outbreak of the credit crisis, the recovery has only been modest. Worse still, the recovery in the US has already clearly declined again and it looks as if this will shortly happen in Europe, too. On the basis of experience over the past few decades, the assumption is that central banks will come to the aid once more. Especially as it is evident that we cannot expect much further help from the fiscal quarter. In theory, central banks are certainly capable of helping. In practice, however, in our view they no longer have much room to maneuver. After all, the concern is that if monetary policy is loosened much further confidence in the central banks will be lost. That swiftly leads to a currency crisis and soaring long-term interest rates. In other words, a disaster for the economy.Assuming that there, indeed, turns out to be little room left for the monetary authorities, then we foresee the S&P 500 index rapidly falling below the crucial 1,010 level. In our view, this will be accompanied by EUR/USD falling over the coming months to quarters towards approximately parity. We then also envisage yields on 10-year US and German Treasuries falling further by around 0.75% before soaring due to fears of further deteriorating public finances. - ECR Research

This is getting really ridiculous. In the week ended September 1, domestic equity mutual funds saw a near record $9.5 billion in outflows: the biggest one week outflow in 2010 since the $13.4 billion redeemed in the Flash Crash week. The trend developing is simple: retail investors withdraw increasingly greater numbers in weeks in which the market is down even a little, and withdraw just a little in weeks in which the low-volume melt up presents them with an opportunity to get out at a better price level. Of course, the common thread is that as we have said for 18 consecutive weeks, retail just wants out. And now that, courtesy of Mary Schapiro, retail has finally put two and two together, and knows that even the regulators are concerned about redemptions, which are perceived by the SEC as being a function of distrust in market structure, we now fully expect more and more redemptions. Year to Date the total pulled out is a whopping $64 billion, incidentally with both inflows and the market having peaked at the same time in April. On thr other hand, if the market were tracking mutual fund redemptions (whose net liquidity is now down to just 3.5% of assets and getting worse by the day), the S&P would be in the 900 range. Once the destructive impact of the Fed's daily meddling in the stock market is eliminated, it will get there. The longer stocks are artificially held up at current artificial levels, the greater the crash when reality and anti-gravity finally meet.

The third quarter will close in 16 market days and unfortunately for the TBTFs this means that Q3 will be the most disappointing quarter in years, unless market volume picks up dramatically in the next 3 weeks. Alas, due to the double whammy of the flattest yield curve in years, and the wholesale dereliction of stock trading by retail and other investor classes, the recently key profit drivers for Wall Street banks will be most disappointing. Since M&A has not picked up, banks will be hoping that underwriting advisory can fill in the hole. Alas, IPOs never managed to get out of the gate, which means the fate of EPS targets being met lies in IG and HY bond issuance proceeds. However, with underwriting proceeds of just 1% in the case of the former, it will take a lot for this category to recoup even a small portion of lost revenue in the much more profitable market making/flow/prop category. Lastly, the old trick of reducing NPL provisions will not work this time. All in all, if you run into your banks CEO/CFO/COO, stay out of their way: most likely they are not having a good day.

Goldman's Tom Stolper, in the firm's monthly FX Global Viewpoint, is once again bringing up the theme of a biphasic future in the FX world (and thus, in macro in general), which will see an initial bout of strength for the dollar, which would result in a EURUSD all the way down to 1.22 in 3 months, followed by domestic QE and accentuation of US weakness, which would in turn jettison the dollar, and spike the EURUSD to 1.35 and 1.38 in 6 and 12 months. More importantly, the overarching theme of increasing pessimism and general dread in the writings of Goldman research analysts is becoming ever more palpable, having first originated in the works of the firm's economists, and now shifting to salespeople and product strategists. This in itself would be sufficient to make people believe that Goldman has truly turned bearish, although numerous reports out of the open outcry pit that Goldman's rep repeatedly kept forcing shorts at 1,100 to cover their positions during the day, seems to detract from this particular theory... At least in the short-term.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 08/09/10

Ever wonder how Moody's keeps itself busy in all the free time it has when it is not focusing on how to break the news that the US is really a B-rated credit? Here it is: the rating agency is now focusing on the ratings of villages (in this case the Village of Johnson City) with $8.1 million in debt and 14k citizens. And, not too surprisingly, a village somewhere in the bowels of upstate New York was just downgraded from A1 to A3. As to when Moody's will get back to providing a fair and honest rating on he insolvent developed world, they will get back to you.

Consumer credit (SA) came in at $2,418.9 billion, a decrease of $3.6 billion from a revised June number of $2,422.5 billion. The decline came exclusively from revolving credit totals, which dropped from $832.2 billion to $827.8 billion, even as Non-Revolving credit increased yet again, as the government is making auto loan almost as easy as taking out a 150% LTV loan from the bankrupt FHA. And speaking of the government, take one guess which holder of consumer credit was the only one to see another sizable increase in the month of July.... Correct: the Federal Government, which increased (once again) from $222.6 billion to $227.0 billion, even as all other holders of consumer credit declined (especially the Pools of Securitized Assets category as the shadow economy continues to shrink), or were flat, as shown on the chart below. So far the government is able to force (non-revolving) credit down the throats of consumers. Soon, even that will end.

The Minneapolis Fed's recent addition, governor Kocherlakota, gave a speech in Missoula, Montana in which he noted the obvious, that GDP growth and inflation are both starting a decline which, if Goldman is right, will end up very close to breakeven to zero, and most likely will be materially lower. The one part of his speech that bears highlighting is his discussion on the ever deteriorating employment picture, which he classified as "disturbing."What Kocherlakota focuses is the topic of mismatch, which he classifies as follows: "There are many possible sources of mismatch—geography, skills, demography—and they probably interact in nontrivial ways." And on the topic of mismatch, the Fed governor admits that the Fed is hopeless to fix it: "The mismatch problems in the labor market do not strike me as readily amenable to the kinds of monetary policy tools currently available to the Fed." We wonder how long before the Fed realizes that not just the mismatch component of unemployment, but all of it, is not "amenable to monetary policy" tools, now that ZIRP is in session. And yes, fiscal policy during a time of structural unemployment can only provide temporary pull-forward boosts, such as the census and other Cash-4-Clunkers type programs. In other words, 10%+ unemployment is coming and will be here to stay.

This is not what the market wanted to hear: "Reports from the twelve Federal Reserve Districts suggested continued growth in national economic activity during the reporting period of mid-July through the end of August, but with widespread signs of a deceleration compared with preceding periods."

Today we turn our attention to a subject that is very dear to my heart: mass psychology. I want you to notice that in a normal, functioning economy, debt-based money should be created and destroyed at close to the same rate. Provided the population grows and GDP grows, there should be a slight upwards bias in money creation. So why have things gone so crazy in the past 10 years? Let’s look at some interesting data points.

Nanex is out with their latest analysis on what the market would have looked like on May 6 without the quote stuffing impact from HFT. If the market had in place a system such as that proposed by Nanex where there is a 50 ms minimum quote life (instead of the perpetual churning of bids and offers), 40% of quotes would not have been present during the Flash Crash sell off, and likely would not have tripped the NYSE's LRP trigger (if that was at an issue), neither would it have made NBBO arbitrage opportunities available. As Nanex shows in the second chart, the percentage of "fake" trades as a portion of total surges during the Flash Crash interval, yet eliminating those would have effectively cut the quote burden in half, making dilapidated exchanges like the NYSE capable of not losing control of the NBBO dissemination, not triggering its LRP choke points, and not providing a tremendous latency arb opportunity to subscribers of its OpenBook product.

Today's $21 Billion 10 Year auction (technically a reopening of a 9 Year 11 Month Note, cusip NT3) closed at a fresh 2010 low yield, 2.67%, and the lowest since only January 2009's 2.419%. The Bid To Cover jumped from 3.04 to 3.21, in line since the 2010 average of 3.16. Yet the most notable observation, and confirming our expectation that Indirect bidders have a soft spot for the 10 Year, or frontrunning the Fed ever to the right on the curve, was the Indirect take down, which came at the highest number, or 54.7%, since September 2009. Direct Bidders plunged to the lowest since November 2009, which is expected: when every traditional player can't get enough of the auction, there is no need for the mysterious London bidder to emerge. Primary Dealers at 38.3% dropped to the lowest level since May 2010. The auction came in tight of the When Issued (2.685%), meaning there was a selloff into the auction, and now we are likely to see a pickup in bids for the 10 Year into the close, especially with an upcoming Obama address.

While certainly not news to most people, the following visual guides from Mint on the two most critical monetary concepts should provide a vivid explanation to all those who are still confused as to why deflation is good for savers and for the middle class in general, and bad for the Fed, for banks, and for all those who are levered to their gills in toxic, non current debt. As for all those who still think that hyperinflation is a function of rising prices, there are other, more appropriate blogs for you.

But they're still spraying it ...