Archive - Jan 5, 2011

How will all of this play out? I don’t know. But one thing I DO know is that German Chancellor Angela Merkel’s political party faces seven state elections in 2011. Losing these could mean no additional term for her in 2013.

With economic numbers in the US on the rise and surprising the market ever since the last Empire survey, the USD is on the rise. Many have placed bets on a weaker greenback and higher commodity prices. The rational is certainly understandable. I have been rather skeptical. While there is no doubt that the only way for the US to be competitive in the global economy would be a significantly weaker USD or protectionism, along with some reconsideration of certain social programs or union agreements, I have favored a stronger dollar because of the weakness of the USD and because I am highly doubtful that the current recovery is sustainable at all without massive stimulus. Truth be told it is the failure of QE 2.0 to bring lower rates in the US that made the USD turn. So I must admit while I had my eye on the right horse the catalyst was not the one I expected. - Nic Lenoir

A bit of this and that.

After we read earlier that according to CRE experts TREPP, CMBS delinquencies have hit an all time record, we were confident that somehow Wall Street would do everything in its power to offload as much toxic crap from its books (and if inventory was missing, it would do its darnedest to create some) as possible, and start selling the most worthless piece of paper imaginable (see Howard Davidowitz). Sure enough, not much searching confirmed just that: per Bloomberg "Deutsche Bank AG, UBS AG and JPMorgan Chase & Co. are preparing the year’s first bond sales tied to commercial property loans, according to people familiar with the transactions. Deutsche Bank and UBS are teaming up to issue as much as $2.5 billion in commercial mortgage-backed securities linked to loans on office buildings, shopping malls and hotels in what would be the largest offering of its kind since the market froze in June 2008, according to a person familiar with the deal. JPMorgan plans to sell $1.5 billion in similar debt, a person familiar with that sale said." And investors, giddy with new costless capital and generous to waste 'other taxpayers' money' will line up in droves and gobble it up (many on margin), looking for a quick flip. Cue in the summer of 2007.

Political change flows from shared awareness. If one million people have acute situational awareness but remain isolated in their insight, then nothing happens on a political scale. When those same one million people become aware that a million others share their situational awareness and the understanding that the other million people are also aware of each other being on board, then a political movement is possible. The stock market is an interesting example of this phenomenon. Small investors (so-called retail investors) have been exiting the U.S. stock market for 34 straight weeks, pulling almost $100 billion out of the market. They are voting with their feet based on their situational awareness that the game is rigged, and that the rigging alone greatly increases the risks of another meltdown.

RanSquawk reports that the European Union has priced the marketed EUR 5bln 2015 bond, 2.5% interest, at 99.594 reoffer, swaps +12 BP, according to Leads. As a reminder, this is what Brian Yelvington had to say about this notable issue early today: "The €5B EFSF debt sale scheduled for today was reportedly 3x
oversubscribed with pricing expected to be mid swaps +15bp.  The
markets should keenly watch the actual pricing of the deal and its
secondary trading as well as the knock-on impacts on traditional Euro
sovereign issuance.  We still believe that a finite capped facility
that effectively crams down traditional issuance will cause further
pressure on spreads.  A new EU draft proposal suggests that bondholders
take losses on ailing banks rather than upstreaming the responsibility
to the sovereign level and bailouts being taxpayer funded."

In our now globally accepted bizarro world, where problems are priced in before they even appear, disclosing swans of assorted colors becomes a moot point. After all, all the bad news in the universe couldn't possibly matter as long as the irrational exuberance persists. That the higher stocks go, the farther they will crash eventually (and for those with their finger on the sell buttong, good luck selling into a bidless market) is a given, but maybe, just maybe the laws of gravity are different this time. On the other hand, maybe they are not. For those who are convinced that no matter the amount of data fudging, accounting fraud, and dollar debasement that the Fed endorses, nature will eventually take its course, may want to take a look at the below chart of 1 week, 1 and 3 month SHIBOR. In a nutshell: there is no marginal liquidity left in the world's fastest growing economy. Eventually this will dawn on the world. Until then, BTFD.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 05/01/11

Another reason to buy silver!

After Muddy Waters came out with research two months ago that singlehandedly destroyed recent Chinese NYSE IPO, RINO, we predicted that there would soon develop a cottage industry of micro investment firms who do diligence on various Chinese frauds (and there are many of them), establish a short base, and subsequently release a research report in the name. Today we get the latest such possible casualty: meet China Green Agriculture, a Xian, China firm founded in 2000, which "engages in the research, development, manufacture, and distribution of humic acid based compound fertilizers in China... The company also engages in the development, production, and distribution of agricultural products, including fruits, vegetables, flowers, and colored seedlings." Sure enough the company IPOed on the NYSE in mid-2008, and if the just released research report by J Capital Research is correct, the firm is about to join such other disgraces as RINO in the NYSE IPO dunce corner. To wit: "In this report, we present compelling evidence that China Green Agriculture (NYSE:CGA) has significantly over-stated its true revenues and earnings. We estimate that CGA’s value is no more than $2.85 per share, as opposed to its current market price of $9."

David Rosenberg, who has very patiently taken the peanut gallery's swipes at him for the past month during the latest bear market rally bout (of which Japan had roughly 25 as the broader secular one took its market about 75% lower over two decades), finally lashes out at all those who still fail to see that there is nothing organic about the US economic recovery, and the only reason the numbers are "better" is due to the $4+ trillion in fiscal and monetary stimuli: "What we have on our hands has been an economic revival and market bounce back premised on unprecedented monetary and fiscal stimulus. How the Fed and the federal government in the future manage to redress their pregnant balance sheets without creating a major disturbance for the overall economy is a legitimate question and, sorry, does not deserve a double-digit market multiple, in our view." That is about all that needs to be said on the matter of the economic recovery. But we will immediately grant that there is an organic economic boom if the Fed removes QE right now, and the economic data points over the next quarter continue trending higher. Somehow we don't think this will (ever) happen...

The biggest spin master in the Obama administration, Press secretary Robert Gibbs, who obstinately had refused to answer Zero Hedge questions about the economic "recovery" in his daily tweetersessions , has joined pretty much everybody else in dumping the titanic that is the Obama administration. There is one thing we can be sure of, however, Tim Geithner, the only man who is officially on economic retainer (yet gets about 1% the use of Goldman's Jan Hatzius when it comes to monetary and fiscal policy) will be forever by Obama's side.

Following the too good to be true ADP number, the December Services ISM number came at 57.1 on a 55.7 consensus and an improvement from November's 55- a multi-year high. Yet the usual casual glance behind the scenes confirms once again that disparate economic data series are in complete contradiction with each other: the employment index declined from 52.7 to 50.5, which makes absolutely no sense in light of the alleged surge on ADP service-related jobs. Even Goldman has nothing good to say: "The decline in the employment index, however, suggests that the
strong ADP employment number has considerable statistical distortion
and should therefore be interpreted with care." But such is life when one runs a ministry of truth with far too many controllable variables. Furthermore, the economic growth through inventory accumulation is continuing, as inventories increased from 51.5 to 52.5. And most importantly for EPS numbers, kiss those margins good bye: prices paid increased from 63.2 to 70.0. 

Don't say I didn't tell 'ya so!