Archive - Jan 2011

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 26/01/11

Highlights from Netflix' earnings release:

• Subscribers – 20.01 million
• Net Subscriber Additions – 3.08 million
• Revenue – $596 million
• Operating Income – $78 million
• Net Income – $47 million
• EPS – $0.87 per diluted share
• Total subscribers: 20.01MM from 16.933MM Q/Q
• Paid subscribers increased by 2.4MM, from 15.863MM to 18.268MM
• Cancellations per month increase to 857K from 723K Q/Q
• Bust most importantly, free subscriberssurged from 1.070MM to 1.742MM. These are people who are not paying.

Too many investors want a magic elixir that guarantees outrageous profit with no risk, either to their pocket or their brain cells. But it does NOT have to be this way...

Last week, I was forwarded an analysis that really set me on end. According to a report by the American Enterprise Institute, public pensions are under funded by more than $3 trillion nationwide. Illinois pensions alone are $208 BILLION UNDERFUNDED using realistic measures. The overall level of funding is 29% --- the worst in the entire nation. Illinois SERS pensions at 23% of funding is $36 BILLION in arrears, Illinois teachers pensions at 28% of funding is $98 BILLION in arrears, Illinois Universities pensions at 30% of funding is $35 BILLION in arrears, Chicago Teachers pensions at 43% of funding is S16 BILLION in arrears, and Illinois municipal pensions at 47% of funding is $24 BILLION in arrears. To get this money, total population and corporations of the state will have to be taxed. This will not occur without a fight --- so Illinois is looking for an “out” from these obligations and also what it owes schools, health care providers, and nursing homes. Be prepared to get stiffed!

Dow Jones reports that wheat futures just hit a 29-month highs on "strong global demand." Per the newswire, Algeria bought 800,000 tons of milling wheat, with traders estimating the nation's purchases for January at about 1.8M. Turkey and Jordan bought wheat last week after rising food prices helped fuel unrest in Tunisia. "They're saying, 'Boy we've got to eat. We don't know where wheat is going to be in a month,' says PFG Best. CBOT March wheat ends up 18 1/4c at $8.56 1/2 a bushel, while KCBT March climbs 22 1/2c to $9.40 and MGE March jumps 21c to $9.77. The chart below shows the UBS Bloomberg constant maturity Wheat index which confirms the vicious loop of what surging prices and geopolitical instability means to wheat prices. The higher the prices, the greater the scramble by developing (and soon developed) countries to acquire as much wheat as possible and hoard it, hoping to avoid Tunisia's fate, which of course will lead to even greater price surges. And all of this ignores the impact of the Goblin in Chief, whose money printing fetish has earned him, in our books, the adjective 'genocidal'. Once China figures out what is going on, and rice prices finally explode as we fully expect they will, the world will figure out just why...The only silver lining - soon farming will be the most profitable profession in the world. And as bankers only go where the money is, Bernanke's strategy may in fact lead to the first net natural outflow of bankers from Wall Street in history.

Everything is great!

Well, if you are a corporation, that is and that's all the matters in the United Corporations of America, right?

Several days ago we highlighted that wage inflation in China spreading after Shanghai announced it would hike minimum salaries by 10%. Today, through Global Times we learn that this is just the beginning. Or the continuation rather: it seems that 30 provinces had already hiked minimum wages in 2010: "By the end of 2010, 30 provincial-level regions had raised the standard for the minimum wage, with an average increase of 22.8 percent year-on-year., Yin Chengji, spokesman for the Ministry of Human Resources and Social Security (MHRSS), said Tuesday. According to him, 29 provinces have issued the guideline for the minimum wages, and the benchmark line grew about 2 percent. In Shanghai, the local minimum wage was the highest nationwide, totaling 1,120 yuan ($170.2) per month." And 2011 will be even worse: " Also, according to a China Business News (CBN) report Tuesday, in 2011, many areas would continue to raise the standard. A Xinhua News Agency report Wednesday revealed that northern Chinese city of Tianjin is considering raising the minimum working wage by 16 percent this year amid rising inflationary pressure and labor shortages." We are confident America's workers will be delighted to know that Bernanke's massively destructive monetary policies are finally resulting in higher salaries... In China. But wait: this also means US consumer purchasing power is about collapse as since very soon all imported Made in China trinkets are about to get far more expensive as already razor thin margined China producers scramble to raise costs to their primary export market.

The world today is riddled with unique economic, political, and demographic risks. Finding attractively priced assets that will perform well in spite of these challenges is excruciatingly difficult. For investors, though, one segment of the market – the highest-quality stocks – still offers attractive risk-adjusted returns.

Even Goldman is not buying the Fed's (and of course Steve Liesman's) religious and nonsensical belief that only the core CPI is relevant: "To us, the main surprise-and it is a small one-is that the FOMC continued to characterize core inflation as trending downward despite an uptick in the December CPI." We were more surprised that the Fed did not acknowledge its new role as the CIA for the QE generation, where with the push of a (printer) button, Bernanke can now incite revolutions.

There was a time when stocks would make massive moves in the post-FOMC minutes, when there were actually things called "traders" participating in this algorithmic joke of a matrix/market. Not anymore. Which is not saying there is no vol. As we have now long been claiming, the only vol left is in FX and commodities. Observe the reaction in the EURUSD. With 500 margin, someone just got totally wiped out.

Some of the observations in this snoozer: observations on the lack of unemployment improvement, on the less than sufficient household spending, but most notably, the Fed notes the increase in commodity prices, yet still believes longer-term inflation expectations are stable. Notable is the deletion of the $75 billion per month deletion of the monetization run-rate, no reason is given for the change in the runrate purchases. And with Hoenig gone, every voting Fed president is now a docile little lamb. Lastly, there is no discussion anywhere of the Fed's only (third) mandate: that of getting the Russell 2000 to 36,000 in one massive flash smash (see IBM yesterday).

In the 1850s, a small group of investors lead by George Bissell, a New York lawyer, and James Townsend, president of a New Haven Bank, launched a venture that most of their contemporaries would deem ludicrous. Their goal: to see if “rock oil” (as oil was originally called to distinguish it from the oils produced from vegetables and animal fat) could be used as an illuminant or fuel for light.

The world gold council has released its quarterly comprehensive investment digest, as usual chock full of actual data, and not just anti-gold speculation based on myth. Probably most relevant are the core facts: "The gold price rose by 29% in 2010. By comparison the S&P Goldman Sachs Commodities Index (S&P GSCI) rose by 20%, the S&P 500 rose by 13%, the MSCI World ex US Index increased by 6% in US dollar terms, and the Barclays US Treasuries Aggregate Index rose only by 6% over the year." The main reason for the jump: excess supply of paper currency alternatives, and surging investor demand. And while the recent pull back has been primarily driven by the flawed assumption that the Fed will not monetize any more debt and pump the "Yucca Mountain" of excess reserves (it will), many forget that the demand is actually still there. The chart below confirm this, and provide some other observations on the gold market.

Today's $35 billion 5 Year auction closed at a 2.97 Bid to Cover, the second highest following the 3.06 in July of 2010. The bond priced 2 bps inside of the When Issued indicating a substantial interest. The high yield dropped marginally from the last auction which came at 2.041% (29.85% allotted at high), with Indirect Bidders taking down a substantial portion of the auction or 45.0% a major jump from the prior 35.6%. Still there was a little change in the hit rate on the Indirect bid which was 76.6% compared to 80% last time. Altogether just another auction: there are many more to go. We are confident primary dealers will monetize roughly 30% of their allocation at the first opportunity, which will be on the February 9 02/15/2015 – 07/31/2016 POMO.

We can debate whether Wall Street owes society a fiduciary duty. But the Vampire Squid Clause is an affront to the efficiencies and benefits of capitalism. As my boss told me on my first day as an investment banker, “Don’t get a big head. You’re nothing more than a glamorized used-car salesman.” In other words, all I did was repackage and sell interests in used businesses. Goldman is doing just that when they connect prospective investors with Facebook. Nothing more, nothing less.