Archive - Oct 2011

In today's weekly dose of BS from the BLS, we get the previous week's massive beat of 401K revised to 405K, cutting the 410K estimate beat in half. But what is important is that the expectation for this week of 405K was once again "massively beaten" by a whopping 1K at 404K. Of course, next week this number will be revised to 408K meaning the consensus was  missed but no robots will care. As for the non-noise, non seasonally adjusted claims soared by 66,442 in the week from 332,394 to 398,836. Spin cycle to commence imminently. In some modestly good news, the "cliffers", those on EUCs and Extended benefits, which have declined by 1.3 million in the prior year, increased modestly by 2K, meaning those playing Xbox and collecting benefits actually rose for the week. In other news, the Trade Balance came in line with expectations, at a deficit of 45.6 billion. However, last month's number which gave all the banks hope that Q3 GDP was going to be a whopping beat and got so many Lemmings to re-revise their GDP forecast higher, was reduced from -44.8 billion to -45.6 billion, meaning Q3 GDP is right back down where it belongs. Most notably, the Chinese trade deficit hit a politically convenient record, increasing from $27.0 billion in July to $29.0 billion in August. Exports increased $0.2 billion (primarily soybeans, fish and shellfish, and nonferrous metals) to $8.4 billion, while imports increased $2.2 billion (primarily other household goods and toys, games, and sporting goods) to $37.4 billion. Expect Chuck Schumer's head to explode in 5...4...3...

The European CDS rollercoaster has troughed. And now it goes back up...

• Political and debt concerns surrounding Italy together with a downbeat ECB’s monthly bulletin promoted risk-aversion
• Gilts received support following a well-received conventional Gilt auction from the UK, together with comments from BoE's Bean in favour of further QE
• The USD-Index gained amid risk-averse trade, which in turn weighed upon EUR/USD and GBP/USD
• The third quarter corporate earnings from JP Morgan beat on the EPS and revenue

• EU Bank Risks ‘Rapidly’ Growing, Andersson Says (Bloomberg)
• Inside the Fed Fight Over Bond Buys (Hilsenrath)
• France ready to give banks public capital (FT)
• Berlusconi Will Defend Government in Parliament as Confidence Vote Looms (Bloomberg)
• Germany urges treaty to strengthen bloc (FT)
• China's Appetite for Commodities Wanes (WSJ)
• China Exports Slow on ‘Severe Challenges’ (Bloomberg)
• Fed’s Plosser: Operation Twist is fiscal policy (Reuters)

Today we get jobless claims and the trade balance, both largely irrelevant as they will merely confirm the downward trajectory of the economy. What matters are flashing headlines, HFT kneejerk responses, lies, rumors, innuendo, and endless bullshit.

Developing China’s M2 money supply has been rising by a large 20% and Russia’s by a very large 30%. Even developed countries such as Switzerland have seen money supply growth of 25%. Japan’s M2 is gradually moving higher after the ‘Lost Decade’ and after recent events exacerbating an already fragile situation. Global money supply growth is increasing by 8%-9% per annum. Meanwhile annual gold production is less than 1.5% per annum. We looked at money supply growth and charts regarding global money supply, debt levels etc in a comprehensive article in early August (‘Is Gold a Bubble? 14 Charts, the Facts and the Data Suggest Not’ - http://www.goldcore.com/goldcore_blog/gold-bubble-14-charts-facts-and-da... ) when gold was trading at $1,670/oz or much the same price level as today. The charts and conclusions remain apposite. In order to fight economic problems brought about due to too much debt, debt based paper and electronic currency has been created at historically high levels. There is no sign of this abating any time soon given the scale of the global financial and economic crisis.

A quick look at the JPM earnings this morning would indicate all is well and that the company beat on the top and the bottom line: after all the company generated $23.76 billion in revenue on expectations of $23.26 and EPS of $1.02 relative to an expectation of $0.92. So far so good. The only problem is that unlike in previous quarter, when the primary driver of the bottom line was releasing reserves, this quarter, when everything blew out and blew up, that would have been seen as massively disingenuous, even by such permaclown as Dick Bove (which nonetheless did not stop the bank regardless, and JPM did take a $170 million reserve release, granted less than the $1.2 billion in Q2). So what does JPM do? Why it pulls the "Fair Value Option" card, discussed recently in the context of Morgan Stanley when we speculated whether the bank's biggest asset was their debt. Turns out we had the concept right, but the bank wrong, because $0.29 of EPS Net Income, or $1.9 billion pretax, was a "benefit from debit valuation adjustment (“DVA”) gains in the Investment Bank, resulting from widening of the Firm’s credit spreads." That's right: the fact that JPM spreads blew out in the quarter, and its default risk soared, for one reason or another actually served to "generate" not only net income but also revenue!  And now you see why American banks can never lose - in a good quarter, they release reserves; in a bad quarter they take FVO benefits in the form of Debit Valuation Adjustments, or in this case both! Winner, winner, always a chicken dinner for Jamie Dimon. Expect every other bank to do the same accounting BS this quarter to pad their numbers.

All you need to read.

The People's Bank of China set the yuan's central parity rate against the U.S. dollar at 6.3737 on Thursday, a second sequential major drop and down from Wednesday's 6.3598. This follows a weakened fixing of 6.3598 on Wednesday, down from the record high fixing of 6.3483 on Tuesday, just before the Senate decided to launch the first salvo in the Sino-US trade wars. Surely news of the collapse in Chinese exports will merely reinforce the theme that the USDCNY is in sudden need of devaluation and be a loud slap in the face of the Senate which will now come face to face with its utter worthlessness.  In Hong Kong, the offshore yuan spot rate was fixed at 6.4407 against the greenback on Thursday, compared with Wednesday's 6.4923. The fixing is based on an average of bids from 15 participating banks and is calculated by the Treasury Markets Association, a Hong Kong-based industry group. We are hardly the only ones who noticed the escalation in spot USDCNY wars by the PBOC, which now appears hell bent on showing the US its peg can go lower in addition to higher (inflationary consequences be damned) - from the WSJ: "The yuan fell sharply against the U.S. dollar in early Thursday trade, after the Chinese central bank surprised the market by guiding its currency weaker for the second consecutive day despite the dollar's global weakness." So even as the USD is plunging against the hope-driven Euro, which has soared 600 pips in the past week on nothing, the USD is now jumping against the CNY for no other reason than mere demagogic policy. And this environment in which central bank decisions are all that matter is the one in which traders hope to make a living based on rational market decisions (as otherwise one can flip a coin in Vegas)? Good luck.

• The Greek January – September budget deficit was EUR 19.16bn versus 16.65bn same period last year (+15%). This only includes the central government.
• The initial deficit target for 2011 was EUR 17bn. We blew past that after only 8 months. The revised target (July) is now 22bn (9.5% of GDP).
• Latest estimate from the Greek government: 8.5% deficit (19.5bn) for 2011 (instead of 7.6% or 17bn).
• While 2011 revenues are trending below 2010, expenses are trending higher.
• Despite all the austerity measures, Greece is still spending 150% of its revenues.
• Of course, the Ministry of Finance sees a reduction of the deficit to a miniscule 2.6% of GDP by 2014 as revenues rise and expenses come down.
• How is that possible? Somehow, after spending four consecutive years in recession (2009-2012), the economy will rise like a phoenix and grow by 5.8% in 2014.

Last month, now-retired Chairman of the Joint Chiefs of Staff Admiral Mike Mullen testified to a U.S. Senate panel that Pakistan’s Inter-services Intelligence Agency backed the terrorist group Haqqani in its attack on the U.S. embassy in Kabul, Afghanistan.  Never heard of Haqqani?  Don’t worry, you probably never heard of Al-Qaeda prior to 9/11 either.  According to Mullen, “the Haqqani network…acts as a veritable arm of Pakistan’s Inter-Services Intelligence Agency.” The Haqqani network was founded and is lead by the newly dubbed public enemy No. 1; Jalaluddin Haqqani.

America, meet your new boogeyman.

For the Van Hoisington fans out there, his latest quarterly letter is short and sweet, and as often happens, rather realistic. The long bond afficionado cuts to the chase: he says the economy “is worse off today than it was prior to the onset of the previous recession" and predicts that "negative economic growth will probably be registered in the U.S. during the fourth quarter of 2011, and in subsequent quarters in 2012." Incidentally this matches our call, and we expect that when Q4 GDP is re-revised some time in April it will have been found to be a decline. As for the reasons: "Though partially caused by monetary and fiscal actions and excessive indebtedness, this contraction has been further aggravated by three current cyclical  developments: a) declining productivity, b) elevated inventory investment, and c) contracting real wage income."

The most bullish thing that could happen is for this system to come to a final end.

I'm fighting this tape.