Archive - Feb 2011

One of the benefits of America finally seeing what Zimbabwe went through as it entered hyperinflation, ignoring for a second that the Zimbabwe stock market was the best performing market, putting Bernanke's liquidity pump to shame, is that very soon everyone will be naked, once companies finally realize they have no choice but to pass through surging input costs. And while some may be ecstatic by the S&P's modest rise YTD, it is nothing compared to what virtually every single agricultural product has done in the first month of 2011. To wit: Corn spot up 7.76%, wheat up 5.63%, Rice up 10.08%, Hogs up 10.16%, Sugar up 5.64%, Orange Juice up 3.33%, and cotton.... up 17.08%. That's in one month!

Google's Android is now the undisputed top selling mobile OS in the world, unseating Research in Motion's Blackberry, Apple's iOS and Nokia's Symbian/MeeGo in record time. Being that Android is essentially a front end to Google's cloud services and apps, does this mean that Google now has (or soon will have) more application reach than Microsoft - the world's largest software company? Pretty good performance for a search engine, eh?

Our friends at The Forensic Factor have been busy. After exposing one after another alleged Chinese fraud reverse merger, and forcing management teams to address investors about numerous allegations of impropriety, the small research boutique has come out with a report exposing what it dubs "the most preposterous Chinese reverse merger yet." As usual, in a world of shady transatlantic backdoor dealings, and cash strapped US exchanges willing to list anyone and everyone, regardless of whether their financials are even remotely valid, we believe it is our duty (without intent to profit) to expose companies that may or may not be fraudulent, particularly now that it is obvious that the SEC is fully endorsing the ponzi scheme of US capital markets. Quote TFF: "after a deep dive into AutoChina (Nasdaq: AUTC), The Forensic Factor ("TFF") has concluded that AutoChina is potentially the most dangerous Chinese reverse merger that we have examined. As the AutoChina story gets exposed, we would expect a significant share decline of at least 50% and a material increase in the short interest (incredibly, less than 1% of the shares are short - a true rarity among the Chinese reverse mergers). TFF believes investors would be prudent to avoid AutoChina at all costs. At the same time, we implore regulators to protect the investing public and launch an investigation into AutoChina."

One more month, one more chance for GM to stuff its dealers with cars. Sure enough, in the just release January sales PR, the company announced that "General Motors dealers in the United States reported 178,896 total sales in January, a 23-percent increase from a year ago for the company’s four brands. The gain was driven by solid retail sales which were 36 percent higher than a strong January a year ago." And behind the scenes, GM has continued to shove a whopping 510,000 cars with dealers: In January 2011, the firm had 510k cars at its dealers, compared to just 390,000 in January 2010, a 30% increase. Furthermore, as the only component of consumer credit that is surging, non-revolving loans, indicates that virtually all car purchases are made based on the old formula of "no money down." And with the government backstopping both the car maker and the lender banks, we would be very interested in discovering just how bad the delinquency rate in non-revolving car debt is over the past year, especially as it relates to GM.

If you don’t want the Florida Supreme Court to pass the Florida Bar’s new rule violating the rights of citizen journalists, by the end of the day on Feb. 1, 2011, send an email to katherine.giddings@akerman.com and jjenning@flabar.org

The Kool Aid gushing from Goldman economic desk has become torrential. While the "super strong" ISM number was perfectly organic (in advance of Hatzius starting to demand QE3 in about 3 months, when everything will be spun as having been really stimulus-driven), the firm noted that the plunge in construction outlays were due to the weather. Luckily, Goldman did mention that surge in price paid with the following brilliant conclusion: "the prices paid index rose by 9 points to 81.5-most likely due to higher prices for energy and other commodities." Well, that's why they pay the German economist the big bux.

The basic problem is that nobody cares. Cotton, the grains, and oil all go up for the short term. But the long term impact of the Egyptian blow up on the global economy is minimal. But expect volatility to start trending upward from here. There are black swans out there gathering.

The January ISM Manufacturing M/M 60.8 vs. Exp. 58.0 compared to the previous print of 58.5. Yet the key metric that everyone is focusing on is the surging Price Paid number, which hit a 2 year high 81.5 (73.5 expectations): the highest since July 31, 2008! The corporate margin collapse is about to cripple Q1 numbers, and at this point it is only a matter of time before even sell-side analysts are forced to aggressively lower their S&P EPS estimates.

Last week's GDP miss is now long-forgotten, as not only that but the Egyptian revolution has been priced into daily POMO and $195 billion worth of incremental liquidity from the SFP program unwind.Today, David Rosenberg ignores all the noise comprising the number which lately is almost as credible as the goal-seeked data coming out of China (not to mention seasonally and weather adjusted) and instead looks at the big picture, namely how much debt is required to purchase not only the actual incremental growth, but a trendline 7.3% quarterly annualized GDP growth in a normal recovery. The math works out as follows: the US Economy should be adding $42 billion a month. It is at roughly half of this. But in the meantime, it is also adding $125 billion of debt per month (and soon much more). In other words, the US economy now takes $6 of debt to generate $1 of GDP growth (and would require $3 if it was growin in a normal fashion).

One of the long-term themes on Zero Hedge over the past two years has been that beginning in 2009, following the Fed's total incursion in all capital markets, mostly in equities due to the highest delta on consumer net wealth as a function of stock price upside, any type of traditional stock picking (long-short but also virtually everything) has ceased to matter. Various hedge fund manager retirements in 2010 merely confirmed the acceleration of this trend. The complete elimination of volatility in what has become a policy weapon merely means that day traders are also leaving stocks in droves and heading for places where the Fed's complete domination has yet to manifest itself, such as commodities, bonds and FX, where vol has surged over the past two years. Today, we present Iridian Asset Management's most recent market thoughts, which confirms the observations in the Morgan Stanley report posted a few days ago on Zero Hedge discussing the firm's fears that a 2007-like quant collapse is coming as there is no longer any normalcy in the market, on why stock picking as a business is now dead. Obviously, we couldn't agree more.

The two oil shocks of the 1970s saw gold prices rise by more than 24 fold (2,300%) in just 9 years - from $35/oz to $850/oz see chart above). To put that in perspective, today gold's rise has been far more gradual and it has risen some 5 fold (430%) in 11 years - from $250/oz to $1,330/oz. In this regard it resembles gold’s rise from $35/oz in 1971 to nearly $200/oz in late 1974 – a six fold increase. Given the significant macroeconomic, systemic, monetary and geopolitical risks of today gold is likely to perform again as it did in the 1970s. A 20 fold increase from trough in 1999 to peak sometime in the coming years would see gold rising to over $5000/oz. This may seem outlandish to those unaware of gold's fundamentals but the very small supply of gold internationally, increasing demand (particularly from investors and central banks), the sovereign debt crisis in the EU (soon to spread to the U.S.) and the debasement of the dollar, the euro and other currencies internationally makes this increasingly possible.

• Bernanke Misses Baseball in Battle for Euro Debt With Fed LISCC (Bloomberg)
• Egyptian army rules out force against protesters (FT)
• Federal Judge Rules That Health Law Violates Constitution (NYT)
• EU Said to Near Agreement on Bailout Fund Buying New Bonds (Bloomberg)
• Even a caveman could have fixed the system (NY Post)
• Whitney Municipal-Bond Apocalypse Is Short on Default Specifics (Bloomberg)
• U.S. Ambassador to China Plans Exit (WSJ)
• One in Five Mortgages Default Again After Modification (Bloomberg)
• Australia evacuates coastal cities in path of cyclone (Reuters)
• Bank of America Can Proceed With Nevada Foreclosures, Judge Says (Bloomberg)

Markets mostly positive again this AM following yesterday’s bullish performance. Economic data were supportive of expansion yesterday, though we note that the trend belief seems to be a strong December and a weaker January. Today’s ISM numbers will reinforce or negate that belief. Geopolitical risk has overtaken the Euro periphery story as the belief that the EFSF will be expanded has bolstered the Euro versus the USD – not good for global inflation worries. We believe it is important for investors to remember that USD is not the world’s reserve currency because of the power of the dollar or strength of the US economy. It is the world’s reserve currency because most every commodity in the world is priced in dollars.

The story: "the commencement of real political reforms." The truth: "we don't have enough private jets for every member of the upper class." Prime Minister Samir Rifai has been replaced with Marouf Al-Bakhit, "(born 1947) was the Prime Minister of Jordan from November 27, 2005 until 25 November 2007. and was previously the Jordanian ambassador to Israel and the national security chief." We fail to see the real political reform.

After Van Eck Global briefly suspended the EGPT ETF for trading, the broad synthetic market index resumed trading and closed about 8% higher on the day. That Kool Aided investors saw absolutely no problem with the fact that the ETF would not have access to creation units until the Egyptian market reopened. Which begs the question: after it was earlier announced by Arabiya that the Egypt bourses are likely to continue their closure until the end of the week, just how many more investors will risk with ramping up the ETF ever higher, even as it was trading at a 15% premium to FV yesterday. Lastly, if as some expect the Egyptian stock market does plunge once it finally reopens, those who loaded up on this latest mini bandwagon are about to be reaquainted with gravity. Alas, the Egypt stock market is not part of Bernanke's purview for wealth creation.