Archive - Jan 19, 2011

Are California's giant pensions about to be overhauled?

Earlier we reported that based on a leak to Phoenix TV, "China's
inflation hit 4.6% in December, pushing the full-year 2010 consumer
price index up 3.3%, while the national economy grew 10.3% last year,
Hong Kong-based broadcaster Phoenix TV reported on its website
Wednesday, without citing any sources." Guess what: it was spot on. Just released CPI comes at 4.6%, just below the "official" estimate, and down from 5.1% before, while GDP of 10.3% came above expectations (and in line with leaks) of 9.5%. Lastly, the PPI came in at 5.9%, to pretend to offset some of the consumer price inflation, also spot on with the leaked number. Which begs the question: why was this data, as bogus as it is, leaked? Actually, that question, along with the data, is very much irrelevant. In the meantime, the AUDJPY and AUDUSD couldn't care less, both having barely budged by 10 pips.

While it is fun to blame Cramer for all the problems, and worst stock calls in the world, we certainly would not want to leave his co-enablers out in the dark. Behold the four sell-side research "advisories" who have just confirmed that the only thing they know is to look for momentum stocks, goalseek their models, and do absolutely no diligence. We urge readers to completely ignore what the 4 analysts behind the below recommendations propose as target prices for their coverage universe going forward, and to actively do the opposite of what their stock advice is.

The week's most important economic data comes out in just over an hour, at 9 pm Eastern, when a battery of Chinese December datapoints are released, including the all important CPI (exp. 4.7%, 5.1% previous), GDP (9.5%, 9.6%), Industrial Production (13.3%, 13.3%), PPI (5.8%, 6.1%), and Retail sales (18.7%, 18.7%). Then again with Hu braving the barren wasteland of Chicago, it is extremely unlikely that China will continue with its symbolic slaps in the face of Bernanke's monetary policy. Or maybe it will, who knows. If inflation comes above the expected 4.7% level, then Hu will likely be forced at least bring up Bernanke's dirty laundry in public and put the blame where it deserves at least 50% to be. Luckly, we know that this most certainly will not happen. According to a central bank leak reported by Phoenix TV, CPI will come at 4.6%, while PPI will take the slack, coming just above consensus at 5.9%. Attached is detail of said leak, as well as the now traditional beatdown of Chinese economic data by Andy Xie.

Yup ...

From the WSJ's article about record flows into equity funds "Here Comes the Dumb Money!" (I totally dig the title btw!):

In the past several months, energy traders have been scratching their heads over the curious and disturbing divergence between Brent and West Texas Intermediate. At last check the spread between the two was over $6 per barrel. And while some have tried to explain the delta through a fundamental difference in qualities between the two products, the answer may be far simpler, and mirror comparable behaviour seen recently in the "cornering" of various precious and industrial metal markets. As Reuters reports, "oil trader Hetco has taken
control of the first eight North Sea Forties crude oil cargoes
loading in February and two Brent cargoes, giving it significant
influence over the spot market, trade sources said on Tuesday. Brent and Forties are both part of the BFOE North  Sea
benchmark, which comprises Brent BRT-, Forties FOT-E,
Oseberg OSE-E and Ekofisk EKO-E and acts as a basis for the
settlement  of ICE Brent crude futures LCOc1. The BFOE benchmark is also used to value millions of barrels
per day of physical crude oil in the Atlantic basin." This makes sense: after all what better way to shift the supply/demand equilibrium than to drastically limit supply. And in a market in which demand is increasingly irrelevant (it will pick up... eventually), a real supply shortage may very well lead to accelerating draw downs in inventories, which is the surest way to get crude into the triple digit range.

The 2011 edition of European bail outs has begun. The WSJ has just announced that the Spanish government is about to inject a fresh round of billions of euros into its insolvent savings banks (cajas) sector. This is not at all surprising. Back in July 2010, Zero Hedge penned the following article, "The Ticking Time Bomb That Are The Spanish Cajas" which predicted just this development, and it is troubling that it has taken the country this long to acknowledge just how bad things are. We can only speculate that in the meantime the fundamentals have deteriorated materially. Bottom line: Europe is getting tired of kicking the can and may be forced to come to grips with reality far sooner than Ben Bernanke hoped. As for the question where all this bailout money is coming from... it is better left unasked.

The trade imbalance between the US and China, a hot button between the nations for the last decade or so, is finally going to start to stabilize in the summer of 2011. However, it is doing so with a de facto devaluation of the US dollar and its buying power.

After plunging 30% after hours, F5 Networks is just the latest "story" stock confirming that companies that melt up on nothing but hype and hopium, take the escalator up, and the express elevator down. We can't wait to hear how Cramer explains the complete wipe out in all of his favorite names today. Also included are the top 50 holders who can proudly say: "momos'R'us"

As China's president heads over to Barack's home town, we wonder if he is aware that according to the market, Chicago is in a state whose credit risk is about 100 basis points wider compared to a post-revolutionary Tunisia. Despite the country's recent presidential coup, and subsequent downgrade by Moodys to Baa2, the African nation's CDS, which spiked from 120 to 180 bps, is still just 100 basis points inside the CDS of Illinois. And this still assumes 80 cent recovery. We wonder how long before one or more Vallejo precedents reprice the entire CDS muni curve. Should the default recovery be dropped from 80 to, say, 20, it would get very interesting...

Just guessing....

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 19/01/11

But, but, munis always pay back almost 100 cents on the dollar, even in bankruptcy, right? Wrong. Bankrupt Vallejo just filed a POR to pay back unsecured creditors between 5 and 20 cents. "The city regrets that it cannot pay a higher percentage,” Vallejo officials said in the court filings. “The city lacks the revenues to do so while maintaining an adequate level of municipal services, such as the provision of fire and police protection and the repairing of the city’s streets." Just wait for the reaction when holders of unsecured debt all those other (hundreds of) insolvent cities, towns, and states realize that a 5 cent recovery is all too possible...

It is only fitting that the biggest equity sell off in stocks in almost 2 months should coincide with the biggest equity inflow in years (which is not saying much: it is still in a net outflow position for the year). In the week ended January 12, domestic equity funds per ICI saw an inflow of $3,765 million following last week's outflow of $4,229. Yet this still makes it the largest inflow going back to 2009. And with everything now happening in real time, with the market having an attention span measured not in milli but nano-seconds, it will be funny if, should this sell off actually persist into the close (never underestimate the NYU business school students in charge of POMO) flows imply become a tracker of the concurrent week's market move. And yes, bond fund flows in everything but Munis were positive. Non-taxables saw another whopper of an outflow, this time for a total of $2.4 billion. Perhaps it is time for the propaganda crew to give stocks a breather and get the lemmings into the doomed municipals space (where at most recent check Illinois CDS at 280 bps were trading 100 bps wider of mutinous Tunisia at 180).