Archive - Jan 30, 2011

Citi's head of FX, Steven Englander, has some contrarian observations on the fate of the US dollar, which a more nuanced read may even indicate a slightly conspiratorial bent, namely that in order to cut the surging global inflation dead in its tracks (alas, too late for the regimes of Tunisia and Egypt), the dollar will have to surge even more. To wit: "If the world’s inflation problem is primarily derived from rising commodity and food prices, it is very likely that a stronger USD will help mitigate this inflation quickly and efficiently. There is a well established relationship between USD strength and weaker commodity prices." Of course, with the Printing Dutchman at the helm, what hope is there for a sustainable strong USD thesis: "The problem is that there does not appear to be a market driver for USD strength." Yet this could very well be the contrarian trade going forward as the G-20 looks aghast at events in Africa and realizes that the "last case" scenario just seems that much more credible. If this happens and there a concerted effort to reincarnate the dollar, look for the EURUSD to plunge, and all USDXXX pairs to surge in the following days, especially as the carry funding shorts realize that they will once again, just like in late 2008, be the sacrificial lambs at the altar of "Kicking the can down the road one last time"-dom. Quote Englander: "During a similar high commodity price episode in mid-2008, we saw some evidence of high reserves growth, which is unusual when the private sector is buying dollars. Moreover, then as now, market macro investor positions appeared to be long commodities. While it would be unusual for reserve managers to buy USD for inflation stabilization reasons, as a quick solution to a major problem it may be more effective than most."

It seems that Mr. Moraitis is more concerned that our judiciary become an auction house instead of a place where constitutional rights and due process of law is upheld.

Events are moving very quickly in Egypt...

Sean Corrigan's weekly "Material Evidence" is always a must read. In his latest edition, the uber-eloquent Brit puts simplistically worded Fed bashing to shame with an anti-Fed manifesto masterpiece that is off the charts on the Flesch-Kincaid reading level. While we will post the full piece shortly, we wanted to bring attention to one particular chart which has not received any prominence in the past, namely the S&P adjusted for business revenues, which appears to have an 18 year periodicity, and whose mean reversion implies that we are only half way through the correction phase. In other words when all is said and done, when the Fed's POMO gun is finally out of bullets, Albert Edwards' and Nic Lenoir's S&P targets of ~400 will be spot on.

So far all attempts by the flailing Mubarak regime to stem the revolution and return life to normal in Egypt have failed, and at this point the fate of the president appears to be sealed, with its final resolution just a matter of time. The one key trade off to delaying the inevitable, however, is that the US, and specifically its Egypt-centered policies, which had far has been largely absent from the rioters' rhetoric, is starting to appear more and more often as a subject of discussion.... and not in a flattering way. Opposition leader Mohammed ElBaradei, who has just joined protesters in Cairo's main Tahrir Square, is expected to have a major speech in which he may or may not focus public anger on duplicitous US policies, which at that point will crystallize the Obama administration's hypocrisy in the eyes of Egypt. This will certainly not make progressing US national interests in the region any easier. And if ElBaradei's earlier remarks are any indication, the US is about to become very hated in Egypt. Per Agence France Presse: "“The American government cannot ask the Egyptian people to believe that a dictator who has been in power for 30 years will be the one to implement democracy,” ElBaradei told US network CBS from Cairo. “You are losing credibility by the day. On one hand you’re talking about democracy, rule of law and human rights, and on the other hand you’re lending still your support to a dictator that continues to oppress his people,” added ElBaradei, the former head of the UN’s International Atomic Energy Agency. His recommendations to President Barack Obama’s administration were blunt: “You have to stop the life support to the dictator and root with the people." On the other hand, with the US favorability rating in Egypt at an all time low of 17% in 2010, there just may not be much room to fall for the way the US is perceived by the broader Egyptian population.

Should we get the headline that the Swiss have acted against another leader I would recommend getting long physical gold, fast. If hot money is not safe in a Swiss account it will go into physical gold.

This week's key themes presented by Goldman's David Kostin: "The weak fiscal condition of federal, state and local governments, and corporate tax reform dominated our discussions this week with hedge fund and mutual fund portfolio managers. So far, 207 firms in the S&P 500 have reported 4Q results (55% of total cap). 45% of companies reporting have beat consensus earnings estimates by more than one standard deviation (above the historical average of 41%) and 9% have missed estimates (vs. average of 14%). The average EPS surprise has been nearly 10%, above the 4% historical average. Excluding Financials, there are fewer positive surprises (44%) and fewer negative surprises (6%)." For now Kostin is still sticking to his 1,500 forecast: "The S&P 500 rose 1.5% this week. Industrials was the best-performing sector (+3.0%) while Consumer Staples was the worst-performing sector (-0.5%). We expect the S&P 500 to rise to 1500 in 12 months (+15%)." We give this forecast three months max. After all, the path for QE3 must be paved with good intentions. And the kicker: "We expect a  combination of 8% sales growth and 30 bp of net margin expansion to 8.8% will combine to boost EPS by 14% to $96 per share." Ongoing margin expansion as most companies are prewarning about maring collapses... This is beyond painful. 

It was touch and go this week, but in the end and as suspected in last week's comments, the "this time is different" scenario will not play out.

Holy(land) shit did the market sell off on Friday as civil (or more exactly, uncivil) unrest overran the streets of Egypt like...

Looks that way ...