Archive - May 17, 2011

And so another woman appears on the DSK scene, so far unnamed. As AP reports, "An employee who had a brief affair with IMF chief Dominique Strauss-Kahn warned the organization about his behavior toward women in a letter sent three years ago." And no, this is no the Hungarian Piroska Nagy who almost caused the downfall of DSK if only the bailout crew had had enough brains to do a little more to the "head" than censure him. But it appears that the two are close: "The person who confirmed the existence of
the letter is close to the former International Monetary Fund employee,
Hungarian-born economist Piroska Nagy. The person declined to be
identified, citing the sensitivity of the matter." As a reminder the so far only known major transgression of DSK, Nagy, had worked at the IMF for decades, and left the organization after the affair with Strauss-Kahn in 2008. An IMF-funded investigation into the affair cleared Strauss-Kahn of wrongdoing but criticized his judgment. If it now turns out that the IMF had been officially warned about DSK, yet completely ignored the charges, we may have another public humiliation ala the SEC and Bernie Madoff, which ultimately will strip the organization of even more "bailout" and dollar-alternative power. Which begs the question: just how far will the powers that be go to make sure the SDR concept is now and forever killed as a USD-replacement currency?

Let's invade Miami! I hear they have beautiful girls ... er ... spicy food ... ummm. TERRORISTS!

Just when you thought the humiliation couldn't get any worse...

As if today's disappointing announcement of slowing Industrial Production was not enough for all those still hoping for a hockeystick to the economy, we now get an update from Stone McCarthy which looks at the latest Wards Automotive data and sees what apparently nobody has factored into their models yet. In a nutshell, the annualized April motor vehicle assembly plunged at a 12% rate from 8.923 million in March to just 7.847, the lowest reading in all of 2011. From SMRA: "In the past, such a sizable drop in the assembly rate has usually translated into a sharp decline in motor vehicle output. We project motor vehicle output to decline by 9% in April, which would be entirely consistent with the drop-off in the assembly rate." The immediate impact: the drop in the industrial production already seen, but the bulk of it due to delayed aftereffects will likely impact the May number, as the follow through from the Japanese supply chain halt starts ringing a loud alarm bell across Wall Street. Of course, this is another thing that all those calling for a 4% H2 GDP could have absolutely not foreseen (and in fact it was originally supposed to be positive for the economy, eh Deutsche Bank?). Expect to see drastic downward cuts to May Industrial Production and next, to Q2 GDP.

The only thing we have to fear is them...

Mohamed El-Erian is back to doing what he has been doing best lately: writing opeds. Today, the man who some speculated could well be the replacement for DSK himself, has written a scathing posting blasting the IMF's sad state, focusing on the specifics of the "head" position as well as the qualifications required to attain it. His coup de grace: "This feudal selection approach must be changed; and now is the time to do it. Without a credible and quickly-recovering IMF, Europe will face even more uncertain prospects, progress on structural reforms in advanced economies will recede, and the world will find it more difficult to make room for rapidly growing emerging economies." As for speculation that MEE (in keeping with acronymis) could be the next DSK: "I will not be part of this process; I already have a great job, here in California." His words of wisdom: "Hopefully, governments of the world can finally come together and open the selection process to a pool of other candidates from around the world. By so doing, they would cast aside a tradition that no longer serves a purpose consistent with the spirit of multilateralism and its required effectiveness."

There are certain times in life when a man is faced with overwhelming adversity… times when he has no reason to adhere to society’s norms anymore. It is in these instances that the true quality of his character comes shining through. One of these situations is when he’s broke. Dead, flat broke. Some people, even when staring deep into their own financial abyss, still hold to their moral principles, honor their obligations, and keep their word. For others, the boundaries of morality are quickly blurred into shades of gray, and things like fraud, thievery, and deception become perfectly legitimate tactics in their minds. Speaking of broke, faced with what is tantamount to the official insolvency of the United States of America, policymakers have opted to seize funds from the retirement accounts of public sector workers in order to keep the government running. Wow. America’s leaders are willing to engage in cannibalistic thievery in order to continue funding government operations. I wonder what sorts of operations are so important that they are willing to steal from their own people in order to finance? Any ideas? Apparently, starting a shooting war in Pakistan was at the top of their list.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

It is no secret that CLSA's Russell Napier has not been a fan of QE2. As he pointed out in his recent prominent note, "whether equities will fall further depends on how flexible and successful the Fed’s next monetary package will be. Given the risk, investors are better off watching from the sidelines." He further explained: "A risk to reflation would send equities sharply lower. The failure of QEII will undermine investor faith in a monetary solution. With equities near bubble valuations, based on cyclically adjusted PE, a failure to reflate risks major downside. The Fed will try again with a new package, but investors would do best by waiting to see how it plays out." Since as of now we still don't know when and if there even will be a package, here is Napier once again, interviewed by the FT's Long View, presenting his updated views on the economy. His outlook, which we agree with entirely, is that first we will see another major deflationary shock, following which the Fed, already boxed in a corner, will have two choices: let major financial institutions fail, or proceed to monetize outright. Regardless of which outcome is picked, Napier's target for the S&P, which just happens to coincide with that of Albert Edwards, is not pleasant for the bulls: 400 (or somewhere in that vicinity). And that will be the true generational buying bottom.

Just as POMO ends, the floor gets taken out of the market. And this was just a $6.4 billion operation (monetizing the recently issued 5 year). To think there still are those who believe the Russell 2000, pardon, the economy and the wealth effect can be sustained absent quantitative easing. The market is finally, with about a 3 month delay, pricing in the end of QE2. We wonder how long before it starts (since 2011 is a replica of 2010) pricing in QE3...

For everyone anxious to read a comprehensive update (of sketchy credibility, but better than nothing) on the Fukushima situation, a progress report out of Tepco, and the current status of the firm's "roadmap to recovery" (seems to be a catchphrase these days), Tepco has just released a progress status of the "Roadmap towards Restoration from the Accident at Fukushima Daiichi Nuclear Power Station." From the release: "With regard to the accident at Fukushima Daiichi Nuclear Power Station due to the Tohoku-Chihou-Taiheiyo-Oki Earthquake occurred on Friday, March 11th, 2011, we are currently making our utmost effort to bring the situation under control, and on April 17th, we put together a road  map towards restoration from the accident. Today, as a month has passed since we presented the roadmap towards restoration, we would like to present the status of the progress." And the by now "too little too late" apologies: "We would like to deeply apologize again for the grave inconvenience and anxiety that the broad public has been suffering due to the accident at the Fukushima Daiichi Nuclear Power Station. We will continue to make every endeavor to bring the situation under control." How about providing the public with a true and honest update of what is really happening?

You asked for it, and Next Media Animation delivers.

Here’s my latest with Max Keiser discussing Goldman Sachs (remember, I was the first and original public Goldman Bear), the race to the bottom for the profligate three (or the Triumvirate of super states looking to crash the other two), the banks as the “new tobacco companies” and the accuracy of my call that banks are choking on Bernanke’s ZIRP flavored medicine…

You just don’t hear this stuff in the mainstream, do ‘ya?

The most profitable strategy of Q1 is shaping up to be, not surprisingly to Zero Hedge readers, identifying and shorting Chinese fraud stocks. As one of the premier hunters of reverse merger fraud, Kerrisdale Capital, notes, it generated an unbelievable 89.1% return gross of fees and 73.2% net, beating the performance of the S&P by about 68%. Since inception, the fund is up 299.5% net of fees and 405.6% gross of fees. Kerrisdale notes: "As one of the first funds to expose scams within the  U.S.-listed Chinese reverse merger universe, we benefited from our intimate knowledge of the sector. Most of the frauds exposed this quarter contributed to our returns in some shape or form, as did equity declines in many Chinese fraudcaps that were not exposed." Indeed, as we predicted back in November 2010, Chinese fraud hunting would soon be a pervasive and very profitable strategy. And since neither NYSE, nor Nasdaq, and certainly not the SEC cares one bit about investment integrity, we anticipate many more profitable days for those who focus purely on isolating market fraud. "The Chinese “fraudcap” space imploded this quarter. Chinese reverse merger stock scams were down anywhere from 10% to 80%, with many stocks down 50%+. On average, 1-2 frauds were exposed per week, with long, detailed reports put out by a wide variety of research firms, including Muddy Waters LLC, Glaucus Research, Citron Research, etc." Don't worry: there is plenty of it to go around.

Just out from Reuters: "Shokri Ghanem, chairman of Libya's National Oil Corporation (NOC), has defected from Muammar Gaddafi's government and is on his way to the Tunisian capital, a Tunisian security source told Reuters on Tuesday. Another source said earlier on Tuesday that Ghanem had arrived on the Tunisian island of Djerba after fleeing Libya." It is unclear if this will have much if any impact on the Libyan oil production which continues to be halted, and lately even the rebel have seen their output halted due to lack of supplies. One thing is sure: Saudi Arabia will scream loud that it will be more than happy and willing to replace any lost production even as it continues to cut its output as it now enjoys $120 brent a little too much. And yes, the Japan rebuilding effort will be run on chlorophyll.