Archive - Oct 7, 2011

Geithner said US banks aren't at risk, shares spiked. He's considered a (super)hero by some. I say look to track record, TRUTH, facts & actual accomplishments for our new superheroes! Here are some Goldman Sachs FACTS Geithner forgot to mention!!! Must have left them home with his cape...

Every few months we rerun an analysis of how many jobs the US economy has to generate to return to the unemployment rate as of December 2007 when the Great Financial Crisis started, by the end of Obama's potential second term in November 2016. This calculation takes into account the historical change in Payroll and includes the 90,000/month natural growth to the labor force, and extrapolates into the future. And every time we rerun this calculation, the number of jobs that has to be created to get back to baseline increases: First it was 245,500 in April, then 250,000 in June, then 254,000 in July. As of today, following the just announced "beat" of meager NFP expectations, this number has has just risen to an all time high 261,200. This means that unless that number of jobs is created each month for the next 5 years, America will have a higher unemployment rate in October 2016 than it did in December 2007. How realistic is it that the US economy can create 16.2 million jobs in the next 62 months? We leave that answer up to the US electorate.

The rally has been strong across many products, but once again has all the signs of a short squeeze rally.  The weakest and most beaten up sectors and names have performed the best.  Anything that was a "hedge" tool, has also outperformed. This rally seems overdone.  European stocks and credit are sluggish today.  The data, while not bad, seems priced in already, and being long because "Europe gets it" is risky, because even if they finally get it, do they still have the resources to fix it, or a system that is simple enough to let them agree on how to fix it?  I am dubious, and at 1080 was willing to give some benefit of the doubt to the EU, but at 1170, I am happy to bet against them.

As noted previously, one key fly in the ointment in an otherwise better than expected jobs report (in which the participation rate also trended higher for a welcome change) was the manufacturing jobs data, which declined by 13,000. Perhaps at the end of the day this is the most important data point, since while declining government jobs at the end of the day is a good thing, government workers don't actually create anything of value for the economy. And as the chart below demonstrates, the long term trend is certainly not our friend. The second "fly", and the one that will certainly be used as a talking point by politicians, was the average unemployment duration. At 40.5 weeks, it just hit a new all time record.

As usual, Reuters is the first with a compilation of Wall Street's gut reaction to the NFP data.

So much for the recession? September NFP prints at 103,000 on expectations of 60,000, with August revised to 57,000 from that roulette busting double zero. The unemployment rate held at 9.1 percent, as expected. From the report: "The increase in employment partially reflected the return to payrolls of about 45,000 telecommunications workers who had been on strike in August. In September, job gainsoccurred in professional and business services, health care, and construction. Government employment continued to trend down." Average hourly earnings also came in line with expectations at 0.2%, with the previous revised from -0.1%, to -0.2%. Yet not all is good: manufacturing jobs declined by 13K on expectations of an unchanged number. And, oh yes, real unemployment, U6, printed up from 16.2% to 16.5%, the highest since December 2010.

The bank that was selling Dexia shares to its clients all the way down (Goldman Cuts Dexia From Buy To Neutral On Imminent Restructuring And Winddown) and which has the uncanny ability to align its own trading desk with an event's "outcome", at the expense of clients of course, has just done it again. As of this morning it is actively selling Margin Stanley calls to whoever is still left as a client. From a just released report: "Buy calls for a likely relief rally on earnings; sell short-dated CDS as fear falls." Now... just who are these clients buying calls from and selling CDS to?

The continuation of ultra loose monetary policies and new rounds of QE is supportive of gold in all currencies. Negative real interest rates mean that there continues to be no ‘opportunity cost’ to own gold which is a key driver of gold’s bull market. In time, quantitative easing will be seen for what it is - bailing out banks and financial institutions and a form of currency debasement. Developments in gold and wider markets this week are bullish. There are continuing signs of very significant demand in the Middle East, India, Vietnam and China. There are reputable reports of shortages of gold bars in Hong Kong, Singapore and Vietnam, of shortages of silver bars in India and delays in delivery and rationing of silver coins internationally. The CME decision to increase the amount of gold accepted as collateral and the LCH. Clearnet decision to allow gold bullion to be used as collateral shows the financial system is increasingly seeing gold as an asset on a par with cash and bonds.

After three days of tightening across the board borne out of nothing but hope about hope, it appears that the ghost of insolvent European governments is back, as reality starts coming back.

Today's NFP number will be, as usual, critical. On one hand, Obama needs an ugly number to get the bipartisan support urgently needed to pass his jobs bill. On the same hand, Bernanke needs the market to drop, and the short covering rally to end and the market to plunge in order to have a carte blanche backstop for QE3 when the GDP prints negative. On the other, a sub zero NFP will send stocks into a tailspin, and facilitate the drop into a full out recession, with the "wealth effect" disappearing even for the "1%." To make some sense out of what to expect in under one hour, here is Goldman's Andrew Tilton with a full, and surprisingly downbeat, preview of what to expect. "The September employment report should look slightly better than its predecessor, at least on the surface. The underlying trend in hiring still appears very weak, perhaps even weaker than August. But recent US growth data have been mildly encouraging, layoffs have stayed fairly low and the headline payroll number will be boosted by the return of 45,000 striking communications workers. We expect a gain of 50,000 nonfarm payroll jobs, with the unemployment rate holding steady for a third straight month at 9.1%."

• It’s Too Hard to Know Who Is Too Big to Fail (Bloomberg)
• China Currency Bill Passes US Senate Test (FT)
• China Labor Costs Push Jobs Back to US (FT)... one week behind Zero Hedge
• Credit Swaps on Chinese Debt Surge on Slowdown Fears (FT)... three weeks behind Zero Hedge
• America’s Six Key Lessons for a ‘Euro Tarp’ (FT)
• EU Pressured for Bank Rescue Plan Before G-20 (Bloomberg)
• Whitehall Fears New Bail-out for RBS (FT)
• Bank of Japan Keeps Policy on Hold (Reuters)
• Euro-Indebted Emerging Currencies Have Further to Fall on Growth (Bloomberg)
• Moody’s Lowers Its Senior Debt, Deposit Ratings for Nine Portugal Banks (Bloomberg)

Some observations from the front lines and supply trains in the developing saga of society vs itself

This morning Moody's resume its Freudian transference experiment borne out of its inability to downgrade the US by continuing to downgrade insolvent European banks, by downgrading a whole bunch of Portuguese and UK as of several hours ago. Per Bloomberg: "Nine Portuguese banks had their debt ratings cut by Moody’s Investors Service by one or two levels, which cited concern about funding, bad loans and holdings of government debt. Moody’s cut the “standalone” debt ratings of three banks, Banco Espirito Santo SA, Banco Comercial Portugues SA and Banco BPI SA, by two levels, the ratings company said in a statement today." Elsewhere, per BBC, "Moody's has downgraded the credit rating of 12 UK financial firms including Lloyds TSB, RBS, Nationwide and Santander UK. Moody's said it now believed the UK government was less likely to support some firms if they got into trouble. However, the firm emphasised that the downgrades did not "reflect a deterioration in the financial strength of the banking system". Moody's also downgraded nine Portuguese banks, blaming financial weakness. Shares in both RBS and Lloyds were down by about 3.5% in morning trading." Since all of this is certainly pried in (ask Dexia), we expect the weak hands shorting throng to continue its scramble to cover, until the next European bank fails, and the next, and so on until it s the longs turn to realize that not only has nothing improved but things are progressively getting worse.

Simply Must Read report on Volatility.