Archive - Mar 2011

Microsoft effectively purchases Nokia's entire hardware platform from an economic perspective for just over a billion dollars, while Nokia solves the sinkhole that was OS R&D and the quandary over how to compete with the free OS that has taken over the world - Android. Now, the big question is, "Will it work?"

BLOOMBERG: BOFA'S KRAWCHECK SAYS MERRILL'S BULL TRAVELS WELL GLOBALLY

When the deposed president of the world's biggest cocoa exporter says he is nationalizing the cocoa and coffee industry, the natural response is for cocoa to continue its nosebleed climb higher. However, when one considers that cocoa exports have already been banned from the now civil-war torn Ivory Coast, one wonders just what incremental impact this latest move of pure desperation will have going forward. From BusinessWeek: "Laurent Gbagbo has announced on state TV that the government will now be the only entity authorized to buy or sell coffee and cocoa, the country's two main exports. The move to nationalize the country's lucrative cocoa and coffee sectors comes as financial sanctions begin to take effect against the rogue leader who has refused to leave office. International pressure has resulted in a ban on cocoa exports and Gbagbo has also been frozen out of the state's accounts at the regional central bank. The decree made public late Monday states: "The purchase and sale of coffee and cocoa will be undertaken exclusively by the state." That said the punchline is quite hilarious and has led to speculation that Al Qaeda may now be providing halluciongenic drugs to the deposed tyrant: "It's unclear how nationalizing the sector will help the Gbagbo government, with the ban on cocoa exports already in effect." Luckily, in this market where nothing makes sense any more, the move was sufficient to get cocoa and coffee futures to be one of the only commodity products that are up on the day for now (yet with everything going bidless to offerless and vice versa in a manner of minutes this will likely not be the case by lunchtime).

There's a scenario that could play out between May and September in which commodities (including my beloved silver) and the stock and bond markets could all sell off between 20% and 40%. The trigger will be the cessation of QE II and a multi-month pause before QE III. This is a reversal in my thinking from the outright inflationary 'buy with both hands' bent that I have held for the past two years. Even though it's quite a speculative analysis at this early stage, it is a possibility that we must consider. Important note: This is a short-term scenario that stems from my trading days, so if you are a long-term holder of a core position in gold and silver, as am I, nothing has changed in my extended outlook for these metals. The fiscal and monetary path we are on has a very high likelihood of failure over the coming decade, and I see nothing that shakes that view. But over the next 3-6 months, I have a few specific concerns.

Hot money is good for the big US banks. But not so good for the folks in Libya. Congress wants to keep it that way.

After Gallup confirmed that the February NFP data was doctored just enough to allow the Fed to decide what to do with March employment data (should QE3 be determined necessary, look for a huge miss to expectations), today the polling company confirms that recent 3 year highs in consumer confidence were an inflection point. "Gallup's Economic Confidence Index worsened to -24 in February from -21 the prior month as Americans' optimism about the U.S. economy receded from a three-year high reached in January. Gallup's weekly economic confidence data show that consumer optimism hit a new weekly high in mid-February but fell sharply during the second two weeks of the month. As a result, the decline in optimism reported for the month is an average bolstered by relatively high confidence early in February. Recent events are not encouraging as far as the economy is concerned. Soaring gas prices, budget battles in Washington, D.C., as well as in many states, and recent declines on Wall Street suggest that Gallup's most recent weekly measure of -29 for the week ending March 6 may more accurately reflect current consumer confidence than February's monthly average." This is very surprising: don't consumer still not realize that the only thing that matters is core CPI, and that is indicating deflation is still a huge threat to Wall Street's record bonuses? What is just as surprising is that the deterioration in outlook was spread evenly across social classes, age groups and political affiliations.

The reasons the US hasn’t been gripped by riots are the following: 1) The security nets (food stamps, welfare, etc) continue to keep lower income Americans afloat… for now.
2) Food in the US is so processed that increases in agricultural prices don’t pass through as rapidly into higher food prices.

Neither of these will last much longer.

Some big picture observations on the market and inflation from deflationist David Rosenberg: "There is a great debate both in the markets and among Fed officials about whether QE3 will be necessary. Atlanta’s Lockhart was the latest to voice his view that such will be unwarranted, and he seems to find support from the likes of Richard Fisher from Dallas and Charles Plosser from Philadelphia. But there are others like Janet Yellen and Bill Dudley who appear to desire even more doses of stimulus. Bernanke is keeping his cards close to his vest. All we can say is that by the time the decision will be made, the headline U.S. inflation rate is very likely going to be at or above 3%, so the Fed is going to have a real job on its hands to convince everyone that “core” is the measure to watch (though even here we can expect to see fuel kick into airlines and cotton seep into apparel)."

Investors will win the ETF price war, while the real victim will be an arthritic mutual fund industry. You can’t miss those glitzy, overproduced, big budget ads on TV for a multitude of mutual fund families. But they are about to be consigned to the dustbin of history.

UBS' Andy Lees reminds all those who forgot the carnage in restaurant stocks in the spring/summer of 2008 when oil hit $150, crushing food margins and causing patron visits to plunge due to the $5 gas prices, that the next carnage (once the market starts trading back with some fundamentals) will be in... restaurant stocks. "FTI consulting suggests that it is not just the emerging market countries being squeezed by food inflation, but also a lot of the smaller US food chains. Last year restaurant chains such as Uno Chicago Grill pizza, Fuddruckers and Charlie Brown’s Steakhouse filed for bankruptcy. A lot of the smaller food chains apparently have large debt servicing costs and with cash flow being squeezed by higher input prices they are struggling to keep up payments. Larger companies with strong finances are not falling under these pressures."

Has anyone seen the latest Whitney Tilson NFLX reshort memo? Because if the news that Facebook and its 600 million registered users is entering the video streaming market is true, and it appears to be, the "value inventor" should promptly forget that he topticked the market with his short cover a few weeks back, swallow his pride and actually make money. As for Netflix, the world's most ridiculous zero barriers to entry business model is about to realize why most SWOT analyses typically at least cast a casual glance at said barriers to entry. Because when there are none, you can go from hero to zero in a like amount of time. All Things Digital reports: "The social media giant is taking its first step to connect you with
movies and TV shows, while collecting a fee in the process. It’s going
to let users rent movies directly from the site, using Facebook Credits
to pay for the transaction. First up is “The Dark Knight”, from Time Warner’s Warner Bros.. It will
cost 30 credits, or $3, for a 48-hour rental, via an app the studio has
built for the site. More movies, along with the ability to purchase the
titles outright, are coming." And so, the race to the bottom in Netflix margins begins. Next up: we repeat our prediction that NFLX will be forced to come to market with an equity offering, which will promptly cut the value of the world's most overpriced stock by at least 33%.

• Global Bond Rout Resembling 1994 Seen as Inflation Exceeds Benchmark Rates (Bloomberg)
• Libya Rebels Push to Regain Town as NATO Weighs No-Fly Zone (Bloomberg)
• OPEC Members Rush to Raise Oil Output (FT) Since Refuted by both OPEC Member and Goldman Sachs
• Divisions Emerge on US Foreclosure Settlement (FT)
• Policy Disputes Spill Over Into Spending Fight (WSJ)
• Keynes would denounce policies associated with his name (Washington Times)
• Monsters that lurk in the shadows of Wall St (FT)
• China Faces 60% Risk of Bank Crisis by 2013, Fitch Gauge Shows (Bloomberg)
• China Looks to Lift Imports (WSJ)... and to double exports
• EU Watchdog sets tough 2011 bank stress test (Reuters) criteria include whether traders can count to 10 without an abacus
• Rain and Snowfall Ease Drought in China (NYT)...  Cause China said so

While most of the focus continues to be on North Africa and the Middle East, the not inconsequential matters of the European sovereign debt crisis and the US’ dire fiscal situation continue to bubble away beneath the radar. Greek and Portuguese bonds have taken another hammering this morning. The Greek 10-Year yield has surged to 12.44% (TD: make that 12.764%), up another 35 basis points today alone, and Portuguese 10-Year has surged to 7.58% (TD: make that 7.66%), another 22 basis points. The recent “bailouts” and failure to properly restructure the debt shows that the sovereign debt crisis is far from contained. The US recorded its biggest monthly deficit in history yesterday with a $223 billion deficit for February alone, the 29th straight month of deficits – a modern record. This does not bode well for the beleaguered dollar and could result in further sharp falls in the value of the dollar. Lloyds TSB's Assetwatch survey finds gold and silver beat all other assets in 2010 due to investors looking to “protect the value of their investments amid the renewed uncertainty over the global economic outlook including the debt concerns in the eurozone and rising inflation.”

Markets are mixed this morning as they await Thursday’s EU meeting on the future of the EFSF. Yesterday showed that rising oil prices will likely cause a debate within the Fed as the rise could either accelerate inflation or even halt economic growth. Dallas Fed President Richard Fisher told conference attendees that QE2 may need to be scaled back to prevent inflation while Atlanta Fed President Dennis Lockhart supported a possible QE3 to avoid another recession. The debate will likely escalate along with ongoing violence in the world’s oil centers. Consumer credit rose for the fourth consecutive month, increasing $5.0B in January v $3.5BE, led by federal government lending. Meanwhile, revolving credit fell $4.2B, showing a still cautious consumer despite higher borrowing. Today’s NFIB survey release at 95.0E v 94.1 prior came in at 94.5. The rise is indicative of easier lending and improved employment figures, but we note that small business still lag large ones in economic progress.

Crude dropped overnight, after the FT joined the BBC in the "False Rumor Spreading Korner", after the Libyan Investment Authority held newspaper said some OPEC members are looking to raise oil output to avoid any supply shortfalls. Too bad that just like every other previous rumor-based attempt to drive oil lower, this one was refuted within minutes by the same OPEC members that were allegedly boosting their capacity (which does not exist in the first place). Perhaps if the FT had read the note sent out at midnight by Goldman's David Greely, which noted that there is virtually no spare OPEC capacity left, they would have known why they should have come up with a more credible rumor: like Gaddafi committing suicide after watching the latest episode of Sheen's Korner. So much for the rumor mill. Now on to facts, where instead we see a development which threatens to send oil surging far higher. Reuters reports that formerly peaceful Kuwait has just joined the ranks of demonstrators, demanding the resignation of the prime minister in a peaceful protest early in the day, with a larger one expected later in the day: "Kuwaitis demonstrating outside parliament for the prime minister's ouster came up with a new symbol of Arab discontent on Tuesday by handing out watermelons. "This is for the parliament's poor performance," one of the small band of protesters shouted as he gave a watermelon to a lawmaker making his way into the parliament. The significance was not spelled out, but in local parlance, a person who has a lack of understanding or holds an unrealistic point of view sometimes is called a watermelon. A potentially larger rally was expected later, inspired by spreading Arab protests that toppled leaders in Tunisia and Egypt before sparking the insurrection in Libya and spreading to other Gulf countries including Bahrain, Oman and Saudi Arabia." Kuwait, for those keeping track, is the 4th largest oil exporter in the world.