Archive - Oct 5, 2011

Well, not quite the discovery of aquatic wetness but close enough.

Earlier today we noted that while the headline Services ISM number came slightly better than expected, if still damn ugly, it is the Employment index which stuck out, coming at an almost 2 year low and which, as the chart below demonstrates has an uncanny correlation with the NFP number. In fact, based on the two series' 5 Year rolling correlation of 0.89, the September NFP is expected to print at just about ~0, unless the establishment survey has somehow joined the Chicago PMI in decoupling from the rest of the US economy. But that's only half of it. As BNY's Nicholas Colas reminds us, a far more important and fundamental driver is the trend in monthly tax receipt withholdings, which actually indicate not correlation (which never implies causation), but true causation: i.e., if less tax withheld, then less people employed - simple. To wit: "If employment is improving on a monthly basis, it should show up the Treasury data pretty quickly. New hires – and existing employees, for that matter – usually receive their compensation in the form of a paycheck. The monies withheld for items like Federal and state taxes as well as Social Security go directly to Treasury from a payroll processing company or employer. There are always adjustments to be made as you analyze the data, of course, as withholding tables are a favorite political tool to juice the economy when things are slow." Unfortunately, the data is far from pretty, and in this case causation does imply correlation.

Financial shenanigans by the Greek government don't surprise anyone anymore ... until there's something that surprises everyone.

Tomorrow, Thursday (October 6th), the Swiss National Bank will report its foreign currency reserves for September at 9am local (3am EST). We will know then how much Euros had to be gobbled up in order to defend the “peg”. Increasing tick volume in recent days looks suspicious – why would there be more volume than on days where the Swiss Franc reached parity? Or the day the SNB introduced the peg? Here is what is going to happen:

•  SNB’s balance sheet will “explode” as they have to buy billions of Euros (a questionable asset, to say the least).
• For every Euro bought, 1.20 CHF are being released into circulation. CHF monetary base explodes, too.
• If the peg falls, the ensuing currency losses might bankrupt the SNB and costing the Swiss tax payer billions of CHF (they already lost 29bn over the last 18 months or 6% of GDP).
• According to rumors, the SNB is so sure about their ability to defend the peg they were selling Euro puts. Those would expire if the Euro did not fall below 1.20, allowing the SNB to keep the option premium. Is this an ill-fated attempt to “make back” some of the losses incurred earlier?
• In order to discourage speculators, the SNB tried floating rumors they might increase the peg to 1.25 or to 1.30.
• As the Euro weakens towards the Dollar, the Swiss Franc has to decline, too (in order not to strengthen towards the Euro). This makes the Swiss Franc cheap vis-a-vis the Dollar.
• A Greek default (or other Euro worries) might make the Euro even weaker, making it harder to keep it stable towards the Swiss Franc.

Where is that beef?

The Associated Press is reporting on an very appropriate comment from Antonio Borges, head of the IMF's Europe program, that he is retracting his earlier comment that they will intervene in bond markets to support Italy and Spain. Sure enough, this will not come as a surprise to our readers, after we said first thing today that "we find that the person tasked with destroying his credibility, after the market no longer trusts anything Lagarde says, is IMF European Department Director Antonio Borges who according to Reuters, said that Europe needs between 100 billion and 200 billion euros to recapitalize its banks to win back investor confidence and should carry out the plan across the continent, not in a staggered process." Consider credibility destroyed. Oh to have been a fly on the phone call from Christine Lagarde to Borges in which she, in a calm, cool, and collected manner, with little to no use of obscenities, and references to the Spaniard's mother, grandmother, and barn animals, explained to him to, very credibly say he was only kidding.

A green day in Europe as last night's superfluous strength in US equities caused reracks in every major European risk class out of the gate. The early strength in Europe was faded quite quickly but the bias was up - even as no new news/plans/clarity was announced and in fact was modestly worse with a lack of capital injection for Dexia noted. Credit and stocks ratcheted higher in three lurches with covering clearly evident in credit as even Belgium and France sovereigns managed small compressions (which makes little sense) though the former remains notably wider on the week (rightly so). FX traded in a narrow range from the US close but the USD was at the stronger-end of the channel as Europe closed (IMF - ECB easing potential comments) but commodities were mixed with lackluster moves overnight though silver and copper sold off the most - not enjoying the excitement in equities - but since the pre-market, all PMs and commodities have pushed higher. TSY yields leaked higher but the curve flattened but we see HY net-selling against IG net-buying (but several major financial bonds being net-sold including MS, GS, and C). We also note that while credit indices do indeed look better on the week, underlying single-names are notably wider which coupled with US corporate bonds suggests many are using strength to cover longs in 'riskier' credits. ES has re-coupled with a longer-term context reducing some of the urgency in equity's bounce though equities remain rich to credit by quite a margin. All-in-all, it seems like we can bleed higher inch by inch as retail gets sucked into another 'recovery/bailout' but under the surface, the 'things' that should be benefiting are simply not as professionals use this strength to rotate hedges or more simply unwind at better marks.

Confirming that one has to be a billionaire or at least a multi-millionaire to be an applicant for the Tax Czar position under the Teleprompted Wealth Readjuster, is the latest sheer class warfare idiocy out of tax expert du jour Harry Reid, who has proposed an overhaul of the Obama tax bill with one in which millionaires end up paying a 5% surtax. National Journal reports: "Senate Democrats will replace tax increases proposed by President Obama to pay for his $445 billion jobs bill with a more politically popular tax increase on millionaires, Senate Majority Leader Harry Reid, D-Nev., said on Wednesday. “When Democrats bring this common-sense jobs legislation to the floor, we’ll ask Americans who make more than a million dollars a year to contribute a little more,” Reid said in a morning floor speech. He said he hopes to set up a vote on the revamped jobs bill "within the next few days." That means he will seek action after the Senate passes a China currency bill and before Senate action on three free trade bills. Reid and Democratic aides have said they planned to alter the pay-fors proposed by Obama to win support of Democrats wary of the tax increases. Reid and other Democrats noted that raising taxes on millionaires polls well, even among GOP voters." Why yes, Harry, please go ahead and create some more class hatred. You should even bring your agenda down to Wall Street and threaten to occupy Wall Street if your demands are not met. But before you do, please make sure you create a poster which highlights not only how much money you have raised from corporate interests during your career, but specifically how much has come from the "Securities and Interest" industry. We are sure you will fit right in with your sincere populist demands.

Today's news that Greek protesters were back and getting occasionally violent caught nobody by surprise. However what may be unexpected is that not only is the Arab Spring back (almost in time for Christmas) but it is in the bastion of "stability", not to menion crude oil, Saudi Arabia. As The Independent reports, "Pro-democracy protests which swept the Arab world earlier in the year have erupted in eastern Saudi Arabia over the past three days, with police opening fire with live rounds and many people injured, opposition activists say." What? Never heard of this before? Yes, amazing how efficient the media veil is when it has an agenda.

Remember when some soon to be without any credibility media outlet (BLOOMBERG - GOLDMAN BOOSTS FORECAST FOR SEPT.PAYROLLS TO 91K:CNBC) reported less than an hour ago that Goldman hiked its NFP forecast? Well, said media "outlet" got it wrong. In fact Goldman's forecast is only for a 50,000 increase in NFP. Just out from Goldman: "The ISM non-manufacturing index was about unchanged in September at 53.0, and close to the consensus forecast (52.8). Encouragingly, the indexes for new orders and overall business activity both increased during the month (the new orders index rose by 3.7 points to 56.5). The new export orders deteriorated, suggesting the improvement in new orders reflected domestic demand. The uptick in orders and overall business activity sentiment are good signs for near-term growth momentum.In contrast, the employment component of the report fell by 2.9 points to 48.7. This indicator suggests downside risks to September payroll employment growth, at least partly offsetting the better-than-expected news from the ADP report this morning. Overall we see a bit of upside risk to our forecast for a 50,000 increase in nonfarm payrolls, but we have not made any changes to our estimate (an incorrect report that we changed our estimate was circulating this morning)." And as Zero Hedge already explained, "Interestingly detailed comments from survey participants suggest that confidence and uncertainty may be weighing on activity, and that firms are downbeat about the 2012 outlook." Sorry guys, Goldman hates this economy, and will not relent until Bernanke launches a $2 trillion LSAP. But feel free to sell your gold to Goldman which is buying up every ounce.

To some, yesterday's ridiculous 400 point move in the DJIA in just over 30 minutes on nothing but yet another denied FT rumor, is still mindboggling. Make that to most. Although making things far easier would be to finally accept that the market is completely broken. It is. But in the meantime, here is one way of enjoying it, courtesy of the perspective of the Fermentation Chairman who summarizes all that happened though his veteran eyes.

With everyone focusing on the jobs number this Friday, following today's two contrasting data pieces from the abysmal Challenger layoffs report and the better than expected ADP report, one can see why the just released September Non-Manufacturing ISM, which came in modestly better than expected, in fact brings less than great news. While the overall NMI came at 53, a drop from 53.3, but better than expected 52.8, it is the Employment index that is attracting everyone's attention, printing at 48.7, down from 51.6: the lowest from March 2010, which has offset an improvement in both New Orders and Business Activity. And the kicker, all the responses in the survey were negative across the board with this one taking first prize: "It appears everyone is waiting to see what happens next. No trust in the economy or the federal government to do what is needed."Q.E.D.

There are only two ways for Apple to proceed (as) successfully in the medium term: 1) cut prices or 2) raise the technological bar. Either way, margins get hit. This is the first time Apple has released a smart product to boos from expectations set by the Android camp!!!