Archive - Jan 18, 2011

No surprise from the NAHB, whose Housing Market Index came at 16, unchanged for a 3rd consecutive month, missing expectations of 17. This is not surprising as the housing double dip is now fimly in place, and the only way to resolve this issue will be for the Fed to validate Bill Gross' MBS purchasing thesis and refresh QE2.5 with a fresh purchasing of MBS. We are confident the headline scanning machines will find some correlation that translates this into a massively bullish number and close stocks at multi-year highs.

A portfolio manager submits the following modest proposal on how to fix a centrally planned, and utterly busted and discredited, stock market: "Here is my proposal. Starting from the assumption that the equity market is probably a tad expensive on fundamentals, like the chocolate bar that prices at $1.20 even if really it should only be priced at $1.10, then governments should introduce “sale periods” and stock promotions. Sale periods would attract retail buyers “en masse”, awakening in them their “bargain hunting” animal spirit. Exchanges should be able to organize these sale periods in pre-market trading hours, on a quarterly basis. If shoppers are forming night queues for Iphone 4s, I am sure that they would turn on their laptops at 4am for a heavily discounted stock sale. Shares should be allocated on a first come first serve basis, like ticket concers on ebay, for limited amounts only. Companies that allow their shares to trade in this sale windows, should be granted presidential mention and a medal for helping to build their nation wealth. Stock promotions would instead be managed by company directors on a discretionary basis, and could be associated to disposal of personal holdings in the stock by the very same directors. Stocks sold on promotion would carry the same voting rights than any other stock. There should be a collateral agreement in place that as soon as promotion ends, those market participants that have deep enough pockets to “BUY THE FUKCING DIP” should intervene to readjust market prices. "

As we get Treasury International Capital data for one more (delayed) month, we realize just why QE will be a part of our financial landscape for a long time. In November, the formerly largest US credit (before it was overtaken by the Fed), lowered its Treasury holdings by $11.2 billion from $906.8 billion to $895.6 billion. And while overall there was strength in purchases of domestic securities by international entities, both private and official, which came at $93.9 billion in the month, split $61.8 billion in UST, $14.2 billion in agencies, $4.7 billion in corporate bonds and $13.3 billion in equities, the inflow into equities from foreign sources is far less than US sourced equity purchases of foreign stocks. But once again the biggest threat continues to be the rotation by China out of US Treasurys and into other securities... unless of course the UK continues to do China's bidding. UK holdings of US debt surged by a ridiculous $34.2 billion as direct bidders consolidated their holdings. Somehow the UK now holds $511.8 billion in US debt compared to $477.6 billion in October. What is troubling is that at this rate China will drop below Japan in total US holdings, a differential which has dropped to just $18.4 billion.

The road to ruin ahead of us is clearly laid out. US debt is about to exceed 100% of GDP for the first time since WWII. By 2020, the Treasury will have to pay a staggering $5 trillion a year just to roll over maturing debt. The capital markets will emerge as the sole source of any fiscal discipline, with the return of the “bond vigilantes.” Will China and Japan demand a retreat from our $150 billion a year commitments in Iraq and Afghanistan to protect their bond holdings? (TBT), (TMV).

In the past few years, the concept of economic globalism has revealed itself as quite the Trojan horse; once posing as the next step in the evolution of “free market” capitalism and the savior of third world nations striving for development status, now revealed as a fiscal plague spreading delirium and destruction wherever it touches ground. There is no denying that the economies of the world are irrevocably tied to one another, but until recently, this was always thought of as a “good thing” in mainstream financial circles. Today, the great failings of engineered interdependency are painfully apparent. The EU’s many peripheral nations are dropping one after another like flies in a fog of DDT, rising economies in Asia are bloated with investment capital escaping from debt default in the West, causing impressive levels of inflation, and the U.S. is on the verge of a currency implosion as the Federal Reserve opens the floodgates of fiat in a bid to hide our system’s extreme destabilization and maintain what little international faith is left in our ability to service our rampant liabilities. Globalism has led us to disaster…

• One in three Hackney families too poor to heat their homes (Hackney Citizen)
• Just modestly inflationary: Wheat Advances, Corn Reaches 18-Month High on Rising Demand, Lower Stocks (Bloomberg)
• CDS continues to be the most predictive instrument around: Default Swaps Outshine Bonds at Highlighting European Stress (Bloomberg)
• US public pensions face $2,500bn pensions shortfall (FT)
• Borrowing Returns from the Future (Hussman)
• Fed Officials Signal Growth Pickup Won't Alter Bond Purchases (Bloomberg)...oh so the stimulus induced pick up in fudged numbers will not lead to a removal of the stimulus? You don't say
• Citi posts $1.3 billion profit as revenues fall (Reuters)
• Apple's Cook Faces Product Development Challenge, Google (Bloomberg)
• China’s lending hits new heights (FT)

US Empire Manufacturing (Jan) M/M 11.92 vs. Exp. 12.50 (Previous number getting the traditional BLS treatment and being revised from 10.57 to 9.89 to make the number a beat). Important Empire index components: Employment: 8.4 vs. Prev. -3.4; an improvement in New Orders: 12.4 vs. Prev. 2.6; and the most critical and inflationary one: Prices Paid: 35.79 vs. Prev. 28.40. Also no surprise: inventories, that good old stand by jumps from -15.91 to 4.21. From the release: "the most widely cited factor restraining hiring plans was low expected sales growth (31 percent)."

The data calendar is very light this week. The most of important piece of data is the Empire manufacturing survey which will or will not confirm recent uptick in industrial production. Claims will be of note as well after last week's uptick. We are still far from seeing a trend confirming the job market is on stable footing. If this continues we will end up with yet another disappointg NFP headline and lower unemployment rate as the participation rate in the active population keeps dropping. Most of the focus will be on the international scene: food riots in Algeria and Tunisia where it led to the ousting of the president are not without reminding me of those observed in 2008. As I was in France over the weekend I did get much closer to the situation with Tunisian protesters creating havoc in Paris and gruesome scenes of violence. The level of public anger is scary and there is little doubt that this is something a lot of political leaders around the world should watch and reflect upon: it could happen to any of them faster than anyone thinks. - Nic Lenoir

Goldman pulls the Facebook IPO, I mean private offering from US investors. They don't know how luck they are! Now, how do we educate the foreign gamblers?

Citi stock sliding (and below the $5 "psychological barrier") following poor earnings which miss EPS big, coming at $0.04 on expectations of $0.08. Q4 revenue USD 18.37 billion vs. Exp. USD 20.36 billion. Tier 1 common ratio of 10.7% at quarter end. Tier 1 capital ratio 12.9% at quarter end. Company says provision for credit losses and for benefits and claims declined USD 25.7bln, the provision for credit losses and for benefits and claims declined by USD 25.7bln for FY 2010 to USD 26.0bln, and the allowance for loan losses was USD 40.7bln at quarter end. According to the company the economic environment 'remains challenging.' And all this happens even as the FASB continues to give banks a green light to pull numbers out of thin air.

Markets mostly bullish this AM following the holiday weekend in the US. Friday’s CPI print seemed reflective of inflation, showing increases in core and non-core metrics, while retail sales was mixed relative to expectations. We fear the real demand rally might well be short lived. Today’s Empire Manufacturing and November TIC flows will be watched closely for forward indications in the US, while the story out of Europe continues to be the market’s focus.

About a month ago, some took offense at our characterization of the Chair-hewlettpackard-man as a "bearded mutant-cum-supreme genocidal overlord" after we predicted to the dot that his monetary policy would eventually lead to a global, well, genocide, presumably first in the developing world. Following riots, self-immolations and outright revolutions in Algeria, Tunisia, Morocco, Jordan, Yemen and Egypt, in the span of a few shorts weeks, we believe we have been once again validated. Putting the period in any debate of what Bernanke's runaway money printing means to the life-expectancy of increasing number of people, is the latest news coming out of Sudan where "security forces on
Tuesday arrested opposition leader Hassan al-Turabi and eight other
party officials after they called for a "popular revolution" if Khartoum
did not reverse price rises." And since economic slack in Sudan is roughly in line with that of the abovementioned other 5 countries, it is safe to say that the bulk of this move is speculation frenzy related, which in turn is purely a function of pervasive and free global liquidity. And this is still just the beginning. As Bernanke will not stop before the Dow hits roughly 36,000 expect these kinds of headlines to be an hourly occurrence.

With the algos having promptly switched to trade stocks higher with dollar weakness (unlike on days when a strong dollar also somehow miraculously leads to stock strength), the world was looking for some data point to validate this morning's ramp in futures, timed perfectly to further neutralize Apple's holiday announcement. The catalyst ended up being the latest ZEW numbers of German and Eurozone economic sentiment, which came so strong in spite of ongoing European insolvency, that all one can do is laugh. These printed as follows: Eurozone ZEW Survey (Economic Sentiment) (Jan) M/M 25.4 vs. Prev. 16.6 (Prev. 15.5); German ZEW Survey (Economic Sentiment) (Jan) M/M 15.4 vs. Exp. 7.0 (Prev. 4.3). Once these hit overnight, the EURUSD went balistic and, of course, futures surged, completely eradicating any threat of a market-wide circuit breaker being hit, which would have been the case hat Apple made the Jobs announcement during regular market hours. On the other hand, how Europe, er, Germany is supposed to preserve its export-led miracle in light of a 500 basis point surge in the EURUSD in just one week, is something only Goldman's Houdini economic team can explain.

Empire index, TICS, builder sentiment, and the weekly confidence poll….Most importantly, it seems that the only thing that matters, is that POMO is back, although we have just a piddling $1-2 billion in Sack Frost initiated AMZN purchases by way of TIPS monetizations.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 18/01/11