Archive - Jan 2011

Today the republicans have proposed an amusing list of items to be cut from the Federal Budget, whose total amounts to just over $2.5 trillion over the next 10 years: an admirable if futile and pointless gesture. After all, never in the history of US government has spending been actually cut. And while among the proposals are such rhetorically pleasing if practically unfeasible suggestions as "Eliminate automatic increases for inflation from CBO baseline projections for future discretionary appropriations" and "Eliminate automatic pay increases for civilian federal workers for five years", some things the market may frown upon include: "Eliminate all remaining "stimulus" funding. $45 billion total savings" which means the Fed will once again be forced to pick up the slack, which it can courtesy of its recently disclosed third mandate. Yet what is shocking is the list of sundry token programs to be eliminated: we wonder just how many American are aware that currently the government's mohair subsidies amount to $1 million, that in addition to ECB FX swaps, the US actually has an international fund for Ireland (costing $17 million per year), that the USDA's sugar program whatever that is costs $17 million per year, or that apparently the US government spends hundreds of millions for not collecting unpaid taxes by Federal employees. One thing is certain: these cuts, if even implemented even one tenth of the way, will result in massive federal worker layoffs: probably not what the country needs as it scrambles to come up with every possible way to present data in a way showing the unemployment rate is tumbling.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 20/01/11

Google trading in afterhours is like a ritalin-fueled, amphetamine-infused roller coaster ride. After opening $25 higher, the stock subsequently turned red. And while results were great, the executive shake up which sees Eric Schmidt becoming Chairman and Larry Page CEO is spooking the stock. Perhaps that explains why GOOG has been one of the biggest insider sellers in past months...

When we first reported on the rumored "confiscation" of 1.5 tons (or is that tonnes?) of gold by deposed Tunisian surging food inflation beneficiary Ben Ali we joked that the next WGC update of Tunisian gold assets would be strangely lower by 23%. Once again, the Onion reality sets in as we uncover we were right. Dow Jones reports that "Tunisia's central bank this week said it held about 5.3 tons, but dismissed reports that the family of ex-leader Zine El Abidine Ben Ali had withdrawn the gold, saying the bank vaults were "under draconian security measures." Um, yeah, that's just off by the amount that Ben Ali is now desperately trying to eat...

Jeremy Grantham with some hard-hitting soundbites ...

It was just one month ago that the 2s30s hit a fresh high. In the meantime, things for Blackhawk Ben have not gone quite as QExpected: the 30 Year has just hit 4.6%, which with the 2 Year still remaining relatively flat, has led to some dramatic fireworks in the 2s30s curve which just hit a fresh 30 year high of just under 400 basis points. Ben is starting to lose control of tail end inflation expectations, and with that he will soon be forced to intervene much more forcefully in managing prices and yields: small POMOs like today's $2.2 billion which focuses on bonds with a 17-30 year maturity just won't cut it. We expect that either QE2+ will focus much more on the long end (in addition to MBS and Munis) or, in the least, the POMO group will need to reshuffle its purchasing schedule and buy far more tail end bonds than in current schedules.

After denying for months that surging food prices will eventually come to the consumer, hoping that instead food companies could absorb the margin drop, sellside research is finally capitulating to the reality of what is really happening in the retail store. In a note discussing General Mills, Goldman Sachs says the company raised prices on snack bars some 7% last week. Goldman further clarifies that "this reportedly followed a comparable increase taken by K on its snack bars in mid-December. In addition, KFT has reportedly announced a 6% increase on select Planters branded nut products. We expect more price increases to be announced by the food  companies in the coming weeks." Maybe, but the Chairman sure doesn't. And the Chairman is always 100% correct.

Some odds and ends from the "spooks".

Who says the bears have a monopoly in explaining arcane economic concepts, from CDS to QE? The following cartoon from the geniuses at Next Media Animation depicts without any reservations the theater behind the theater, and shows what happens when your biggest creditor (after Ben Bernanke of course), comes to check in on you (in a stealth fighter jet)... Let the "Hu" jokes begin.

Research in Motion's market share has actually eroded far more than even my bearish estimates, yet it's share price has spiked nearly 30%. This was a profitable short in 2010 and the bear story has not changed. If anything, it has been affirmed and is stronger than ever. Let's take a closer look at the 3rd quarter market share metrics.

Marc Faber appeared yesterday on CNBC and explained why he is the latest adherent of the "reverse decoupling" theory, whereby the emerging markets are to underperform the developed countries. Of course, anyone who has seen the action in the Shanghai Composite in the past 3 months does not need to be convinced of this. Faber, then proceeds to share some perspectives on Chinese geopolitical ambitions in light of the Hu visit (thank you $19 billion China-US Boeing arrangement which has already cost 1,000 US jobs), and evaluates the impact of rampant money printing on the cost of living in developing countries. To the latter recent riots, and occasional revolutions, across Africa and the Middle East probably frame the issue best. Here is Faber's take: "My concern is this - we have money printing around he world, and in particular in the US, and that has led to very high inflation around the world, and in very low income countries, energy and food account for a much larger portion of disposable income than in the United States. So these countries are suffering from high inflation and that reduces the purchasing power of people, so I think that monetary authorities in emerging economies will have to tighten, or they will have to let inflation to accelerate, both of which are not particularly good for equities." Well, yes, but who cares: after all it is only a matter of time before someone on CNBC pitches the tremendous stock market return in such stunning examples of monetary prudence as Zimbabwe and Weimar Germany.

At the Sanford Bernstein conference several years ago Joseph Stiglitz spoke and said a good and healthy financial system is a small financial system. I couldn’t agree more. This is especially the case in a purely fiat money system. Money is too important to allow greedy children in expensive suits on Wall Street and dangerous academics at the Fed to play around with. I do not claim to know what the ideal money system is but I want to be very clear on this point. If we have a fiat system like today the banks should be the most regulated industry on the planet and operate like utilities. They are supposed to help the productive economy innovate and create wealth. They are not supposed to be parasites that suck the lifeblood out of the real economy and compose 16% of the weight in the S&P500 (only technology is bigger at 17%). Something is VERY, VERY wrong here.

"just borrow money at this ridiculous low interest rate and just buy the f'ing dip."

The biggest American distraction of the past decade may be losing its grip over the minds of your average Joe Sixpack. Bloomberg reports that American Idol averaged 26.1 million viewers to the two-hour opening of the 10th season on News Corp.’s Fox TV, a drop from past years that may jeopardize the network’s ratings dominance. The audience shrank 13 percent from the 29.9 million who watched last year’s debut, according to initial Nielsen Co. data released by the networks. And while the show is likely not threatened by this not all that surprising drop, as Americans seem to have gotten bored with electing their pop stars (after all Cramer is still on air... and has anyone seen his Nielsen ratings), it probably is quite concerning to other power and money interests, who like nothing more than seeing the middle class in front of its TV during peak hours, instead of actually looking behind the DJIA's glossy facade, and learning just how insolvent their country has become.

Something dramatic happened in the past 2 days: fundamentals came back with a thud, quite literally, for those momo traders who believe that they can always top tick a stock and sell just before it. Instead now they are caught in a toxic spiral of doubt when to take profits, hoping for a return to previous highs, even as stocks continue to descend ever lower. Of course, it is preposterous to assume that the Fed will allow a return to full normalcy: as we have written since oil passed $90, this is merely the Fed's ploy to kill the surge in commodity prices. Soon enough, WTI will get back to levels that are acceptable to the Fed, at which point the whole reflation trade will start grinding higher again one more time. In the meantime, the "normalcy return" could last one day, one month, or more. Additionally, keep in mind that the Fed will have to create an "unexpected event" ahead of June, which will be the trigger for QE2+, which leads us to believe that there will be at least two pronounced major distribution events: the current correction, and the next, and far more potent one, before the end of Q2. As such, we will once again commence looking at securities in a way that makes sense from a fundamental basis (as opposed to buy because it is green). Below, in our first foray back into normalcy after a long absence, we present the most hated stock in the world: these are the 28 names on the Fed favorite Russell 2000 which have a short interest as a percentage of float of more than 30%. They are hated with a passion, and for good reason. That said, in times when the Fed steps back from the limelight, these are the companies that should likely trade alongside a dropping market. Alternatively, due to their high beta nature, they will likely surge as soon as the Fed decides the break from executing its third mandate (and the populations of developing nations) is over.