Archive - Apr 2011

When data don't go your way, just change the rules, move the limits, or, best of all, introduce brand new data that will validate your assumptions. This has been demonstrated very well in Fukushima over the past month. Now it is coming out from Goldman's economic team, which is finding GDP to not be quite as amenable to "presenting" for client indoctrination purposes, due to its recent plunge from expectations (especially those of young master Hatzius, discussed here). As a result the Hatzius et al team have decided to launch an experiment in scrapping GDP as the key indicator of economic growth (or lack thereof) for those periods in which it is dropping, and instead will focus on the CAI, or the Current Activity Indicator: a synthetic Made In Goldman bogus indicator, which ignores the weak data, and emphasizes the good stuff. Brilliant. Goldman's recent addition to its economic team Zach Pandl explains. Elsewhere, Zero Hedge is launching a contest for the best abuse of the CAI acronym to explain what it really means...

Some days ago, the broader media made a big deal out of an option trade worth $1 million that bet on a 37% drop ($25) in silver by July. We discussed it here. Yet the same media has been oddly silent on what over the past two days has been a trade that is double in capital at risk and involves gold futures. As can be seen on the charts below, between April 12 and 13, someone has made a bet that gold would jump to $1,800 by October, having purchased about 3,000 October $1,800 calls in GC. We are eager to hear how this particular trade that goes against the MSM's perpetual bias against precious metals is spun (if at all).

For those curious what the half of life of not one, not two, but three consecutive Goldman crude downgrades is these days, the answer is - three days. It finally appears that the broader public is well-aware of just how business is done at 200 West. To all those who sold despite our warning that this is merely a shake out of the trembling hands, better luck next time. On the other hand, the squid, unlikely to accept defeat at buying crude at lower prices courtesy of panic sellers, will most certainly continue its onslaught against those who refuse to part with actually valuable assets and proceed with converting commodities into an infinitely dilutable and totally worthless combination of 75% cotton/25% linen.

Two days ago we indicated that something quite material could be happening in the Chinese real estate market. Quoting from Market News, we reported that "Prices of new homes in China's capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city's Housing and Urban-Rural Development Commission." And while many dismissed these news as merely a property specific ASP rotation, what followed was a downgrade of the Chinese property sector by Moody's citing an expectation of "credit conditions to worsen in next 12-18 months for developers" at which point we decided to dig in deeper. It appears not all is as good as the apologists would like to claim. Because while the average selling price in Beijing plunged by 34%, and that in Hangzhou by 26%, the drop was very substantial and rather pervasive pretty much everywhere else as well. From Citi's Oscar Choi: "ASP- down 7% MoM in March, biggest monthly drop in the past five years. In January and February, ASP in most key cities still maintained an upward trend. But entering March, ASP achieved in 18 key cities dropped by 7% MoM, and Beijing’s and Hangzhou’s ASP achieved were down 34% MoM, Hangzhou down 26% MoM." Well, it took about a year for the unbelievers (and infinite for Ben Bernanke) to realize that contrary to expectations, subprime was not contained. It will probably take the China apologists the same amount of time to agree that the biggest drop in real estate prices in 5 Years and a 7% countrywide plunge is the beginning of the end for the bubble. And while it is not so much the question of what properties make up the average ASP, or what the high-low priced composition is, the question is what happens next now that highly leveraged speculators are unable to flip properties on a monthly basis, and as a result have to create other bubbles elsewhere.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 15/04/11

Would you qualify for a QRM? I think few will.

I described The Con of the Decade last July (2010). The Con makes me a heretic in the cult religion of Hyperinflation. I consider myself an agnostic about the destruction of the U.S. dollar and hyperinflation (basically the same thing), but my idea that hyperinflation is fundamantally a political process makes me a heretic. I skimmed a few of the dozens of comments posted on Rick's Picks and Zero Hedge after they posted one of my expositions on this dynamic, and didn't see even one comment in favor of this perspective. The Con is being set up right now, and the outlines are clearly visible. The Con works like this...

Goldman's Themistoklis Fiotakis has released the firm's latest EURUSD outlook. And while the most amusing part of the note has nothing to do with FX but with the firm's ongoing attempt to bankrupt clients by holding Greek bonds ("Stay long 30-yr Greek GGBs, opened at 54c (ask) on 03 September 2010, for a target of 65c and a stop on a close below 50c, now at 53.6c (bid).") we will cut to the chase: Goldman is still calling for 1.50 on the EURUSD, driven by dollar weakness and increasing European interest rates (which will surely succeed in bringing the EUR to infinity, and then promptly lead to the destruction of the currency when half the European continent files for bankruptcy). But that is irrelevant: what is important is that due to some regression model thingy, the EUR has room to run, or in Goldmanese: "Given that this simple model has an R-squared of 74%, a significantly high reading for a regression in changes, it is safe to argue that our factor analysis captures the largest part of the EUR variation."

Just out from Reuters:

• FORMER NEW YORK STATE COMPTROLLER HEVESI SENTENCED TO 1 TO 4 YEARS IN PRISON FOR PENSION KICKBACK ROLE

In the meantime, Steve Rattner continues to be a distinguished CNBC contributor, and most certainly is not sentenced to 1-4 years in prison.

I’m fresh back from my trip to Amsterdam where I lectured hundreds of ING institutional clients/staff on the potential of a European banking collapse. Below are a few clips from the first of two lectures. The admonitions look to be quite timely as Greek spreads to Bunds break the millenium mark and head to the North Star. For those who haven't connected the dots, these bonds are held on many EU bank balance sheets as risk free in the hold to maturity category, and are levered up many, many times. Who's larger, the peripheral EU states or Lehman Brothers?

On one hand we have the BLS telling us core inflation declined to a ludicrous 0.1%, on the other hand Charles Plosser just had a soundbite, captured for posterity, that "high oil prices don't cause inflation", but luckily confirming there is someone not taking crazy pills, is the third hand, which takes gold to a new all time high of $1,481.46. We wonder, of the three hands, which one is right...

Once again confirming that sentiment indicators are completely irrelevant and thoroughly misleading at best, we have the UMichigan consumer sentiment coming out at 69.6 compared to expectations of 68.8 and up from the March 67.5 print. This number is a rather stark contrast to the recently highlighted Gallup consumer confidence which plunged to August 2010 levels. And looking at current economic conditions index confirms that since 2010 the economy has gone precisely nowhere. But most notably, 1 year inflation expectations are still at the highest since 2008 at 4.6 unchanged M/M. All that of course is irrelevant as the algos just scanned the headline and go batshit, lifting every offer with gusto.

From Goldman: "US industrial production increased by 0.8% mom in March, up from a revised 0.1% increase previously. In February, unseasonably warm temperature reduced heating demand and therefore output of utilities. This held back the gain in overall production despite growth elsewhere. This effect reversed in March, leading to strong growth in the index." So between snow, rain, heat, earthquakes, nuclear explosions, oil spills, all of which are of course completely unforeseeable, why do we need economists making "forecasts" again?

It seems that the ECB has now resigned to letting Greece fail. While previously any time we had a whopping 2 point drop in one day the ECB would promptly step in and be the buyer of only recourse in peripheral debt, it has been deathly silent today. And as the chart below demonstrates Greek debt is about to go bidless: a par 10 Year note is trading at 62, with the resulting yield now literally going parabolic. And the 2 Year is now at 16.5%. Luckily for a globalized economy, dominoes are completely isolated and what now appears to be a certain "chain reaction" in creditor defaults will have no impact on the Russell 2000: after all the Fed is surely prepared for this contingency.

While we will present a comprehensive update of the just released TIC data shortly, the one chart worth noting is the sequentual change in holdings by foreign countries, and particularly one of them. Importantly, of the 4 largest holders of US debt, China, Japan, the UK and Oil Exporters, the latter 3 all saw an increase in their Treasury holdings, China continues selling Treasurys, with a 4th consecutive decline in its total holdings. That said, since TIC data is notoriously flawed and always incorrect, with at least half UK purchases being attributed to China post annual revisions (nobody knows who is responsible for the other half) it could well turn out that China was the only country actually buying US paper. We won't know for sure for at least a year from now following the next full year revision. And by then it likely won't matter.