Archive - Oct 2011

Gold bottoms when the Dollar Index embarks on an uptrend.

The calendar effect

From the mind that brought you the Great Vega Short comes the next masterpiece on liquidity, volatility, contagion and everything else. "Volatility is change and the world is changing. The truth is that Greece will default. The truth is that if our leaders continue to deny our problems history tells us the US will eventually default. These shocking events will hurt many people, markets will collapse, life savings will be lost, there will be violence, upheaval, and massive political change but you know what? The world will not end. When it is all said and done people will work, they will spend time with their children, they will cry, laugh, and love... life will go on. We will find a way to prosper if we relentlessly search for nothing but the truth, otherwise the truth will find us through volatility."

Several years ago Paolo Pellegrini, Kyle Bass, Michael Burry and several other visionaries were well ahead of the conventional wisdom groupthink curve by not only sensing that the housing market was massively overvalued and riding on the crest of a huge leverage bubble (many others agreed) but by finding a ridiculously cheap, low theta way of expressing an uber-bearish long-term outlook with negligible downside and virtually unlimited upside by purchasing billions in ABX index notional at a cost of a few basis points, and watching it explode as one after another asset manager figured out just what "subprime" means and why it may not be conducive to a healthy career in finance. Virtually all of them ended up being very, very rich in just a few short years having had the foresight and, more importantly, the way to express that vision. Lightning may be about to strike twice as the Subprime implosion of 2007 becomes the Prime implosion of 2011. Back in December 2009, when musing on the very interesting topic of the advent of a new ABX-like index, this time tracking Prime mortgages, we asked, rhetorically as so often happens, "Will The New ABX Prime Index Be The Reason For The Next RMBS (And Thus, FHA/GSE) Collapse?" (for more on this index which MarkIt now markets as PrimeX see here). And while the rest of the world is fretting about Europe, Morgan Stanley, lack of decisive political decision-making in a pseudo union of 17 different countries, lack of decisive monetary intervention, a Chinese hard landing and everything else that makes front pages these days, slowly our prediction is starting to come true. But you won't hear about it anywhere else, because if the market understands that in addition to a global solvency crisis, America has another Subprime contagion on its hands actually being expressed in the markets as we type, and potentially costing banks, pension funds and various asset managers billions in losses behind the scenes, that may well be the last straw.

The headline wholesale inventories number missed +0.6% expectations, rising only 0.4% (from 0.8% prior) with its lowest build since Nov 2010. Under the covers though, non-durables were the most troublesome - unless of course the spin is that a falling inventory implies future growth as inventories 'have' to be rebuilt, right? Non-durables inventories dropped 0.6% - its biggest drop since Sep 2009.

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%."