Archive - May 23, 2011

Following its just announced flip flop on oil, Goldman's "sellsiders" go ahead and not only cut Chinese growth prospects, but raise the Nikkei. So let's get this straight: Goldman raises its prices forecast for oil, even as it downgrades the primary driver of demand - China, and somehow the Japanese market, which suddenly is overreliant on natural resources for energy creation in the aftermath of Fukushima, is supposed to surge... Was this script written in Bollywood? Anyway, for those with a sense of humor, here is the gist on China: "Recent data have been worse than we expected. The growth slowdown has been even sharper than we forecast, especially evident in April industrial production (which mainly reflected tighter monetary and fiscal policy, although some specific industries have seen supply-side constraints). In addition, inflation is not coming down as rapidly as we hoped. We now cut our 2011 GDP growth forecast to 9.4% from 10.0%. This partly reflects the lower-than-expected 1Q2011 GDP print (9.2% qoq ann.), but we have also cut 2Q2011,3Q2011, and 4Q2011 growth to 8.0%, 9.0%, and 9.3% qoq ann. from 8.8%, 9.5%, and 9.7% respectively. This is only very slightly above the last official consensus, which came before the disappointing April data, and so we are likely to be above the true consensus now. We expect annual average inflation of 4.7% (up from 4.3%), with a peak in yoy terms of 5.6% in June. We also nudge down our 2012 GDP growth forecast to 9.2% from 9.5%, reflecting in part the impact of higher oil prices. Although we maintain our annual average inflation forecast of 3.0% in 2012, we have a slight acceleration within 2012 as higher oil prices eventually get passed on more fully." Yet while this conclusion in and of itself makes some sense, the following from Goldman's Kathy Matsui in the Nikkei, regarding the firm's outlook on the Japanese stock market, confirms that whoever is coordinating the Goldman sellside push may have crossed the Tropic of Thunder: "Contrary to popular opinion, we believe the disaster will accelerate - rather than delay - Japan's exit from deflation. We see reconstruction demand and exports driving gross domestic product growth to an above-trend pace of 2.5 per cent in 2012...Market participants have argued for some time that it will take a cataclysmic event to drive structural change in Japan; now the world is watching." Bottom line: China down, Japan up, and oil far, far away. Sigh.

And Moody's will issue a big credit warning on 14 of the UK's 18 biggest banks tomorrow ...

The Fed has done NOTHING but loosen monetary policy since the Financial Crisis began… the problems that the Fed has been battling have not gone away… and the Fed is somehow going to magically starting tightening?!?! Discussions of the Fed tightening should be up there with Elvis sightings: entertaining but worthless. The only thing the Fed knows how to do is throw money away.

Anyone remember that rapid succession of brent downgrades by Goldman last month which did nothing until the CME and the administration launched an all out war on speculators a relentless barage of crude margin hikes? Well, uber momo Goldman sure doesn't. Just out from David Greely: "While near-term downside risk remains as the oil market negotiates the slowdown in the pace of world economic growth, we believe that the market will continue to tighten to critical levels by 2012, pushing oil prices substantially higher to restrain demand. Events in the Middle East and North Africa are having a persistent impact, which leads us to increase our oil price targets We expect that the ongoing loss of Libyan production and disappointing non-OPEC production will continue to tighten the oil market to critically tight levels in early 2012, with rising industry cost pressures likely to be felt this year. We are now embedding in our forecasts that Libyan production losses will lead to the effective exhaustion of OPEC spare capacity by early 2012. Consequently, we are raising our Brent crude oil price forecast to $115/bbl, $120/bbl, and $130/bbl on a 3, 6, and 12 month horizon." Welcome back volatility. CME petroleum product margin reduction in 5...4...3...

Paul Craig Roberts: "The west prides itself that it is the standard for the world, that it is a democracy. But nowehere do you see democratic outcomes: not in Greece, not in Ireland, not in the UK, not here, the outcomes are always to punish the innocent and reward the guilty. And that's what the Greeks are in the streets, protesting. We see this all over the west. There is no democracy, there are oligarchies, some of these smaller European countries are not even run by their own governments, they are run by Wall Street... There is probably more democracy in China than there is in the west. Revolution is the only answer... We are confronted with a curious situation. Throughout the west we think we have democracy, we hold ourselves up high, we demonize China, we talk about the mafia state of Russia, we talk about the Arabs and so on, but where is the democracy here?"

We have all heard the saying that the market is like a bug in search of a windshield. Today, courtesy of Peter Tchir we proposed another one: the market is like a child in search of a Santa Claus (and Bernanke will likely be the jolly fat man).To clarify: "Tthe markets are waiting for the ECB or FED or both, or Santa Claus, to announce some new program to stop this horrific decline of a couple percent in the market. Smart money is betting that the ECB, FED, or some other government agency will step up and give us a reason to rally. The data shows that the economy is taking a leg lower. Very few of the 'macro' problems have been fixed. Japan is still spewing radiation. MENA, with the possible exception of Egypt is worse than ever. Killing Osama eliminated one man, only to expose the potential danger from a nation, that we half considered allies while never trusting them or treating them well. The PIGS are back at the trough with their unending appetite for cheaper debt. We are using accounting tricks to keep exactly 25 million under our debt ceiling until at least August 2nd (or whatever date that Tim deems appropriate). Against the logic that things are getting worse and nothing has worked, is the Pavlovian response that governments bailout the markets and it is stupid to bet against a fresh round of stupid intervention. On data alone, the market would be lower, but we are so conditioned to expecting support at every crisis that no one is willing to miss the next rally. We all know St. Nicholas comes on December 25th, and we all know Trichet, Ben, and crew come every time the Dow drops 3%."

Last week David Stockman was on Tom Keene, making the usual media rounds (sometimes we marvel at his patience and endurance), as one of the few voices of fiscal prudence available to TV producers who seek to hold a balanced debate on the topic of US insolvency. Today, Reagan's budget director was again on Bloomberg TV explaining the reality of the situation to Matt Miller for the nth time (by now even a 2 year old will understand the cul-de-sac facing the US), although presenting a new spin on the situation, namely that we have gotten to a point where both parties are implicitly pushing for a US default, while though their inability to reach a political compromise, blaming each other for this inevitable outcome. "The real problem is the de facto policy of both parties is default. When the Republicans say no tax increases, they're saying we want the U.S. government to default. Because there isn't enough political will in this country to solve the problem even halfway on spending cuts. When the Democrats say you can't touch Social Security, when you have Obama sponsoring a war budget for defense that is even bigger than Bush, then I say the policy of the White House is default as well...That is the question that really needs to be understood better and appraised by the bond market. Both parties are advocating default even as they point the finger at each other."

The DSK soap opera continues. The latest revelations about the alleged rape that occurred last Saturday at the Sofitel now detail the specific language attemptedly used by the former IMF head, in what is becoming apparent was nothing more than a case of entitlement gone horribly wrong, and unchecked, thus encouraged, for many years. Per Fox news: "Dominique Strauss-Kahn told a New York hotel maid, “Don’t you know who I am! Don’t you know who I am?” while pinning her down during the alleged sexual assault, law enforcement sources close to the investigation told FoxNews.com. The 32-year-old African immigrant repeatedly told her alleged attacker, “Please, please stop. No!” Strauss-Kahn allegedly responded: “No, baby. Don’t worry, you’re not going to lose your job. Please, baby, don’t worry,” Strauss-Kahn responded, according to investigators. “Don’t you know who I am? Don’t you know who I am?." As usual, with most opinions on the matter appear to have been already determined well in advance of the actual jury trial, the one reasonable assumption is to take everything with a grain of salt.

HY credit reached its widest level of the year today as IG and HY intrinsics are now unch YTD! Significant decompression since mid Feb in HY spreads, increasing amounts of net selling in secondary bonds, and a clear preference for up-in-quality and up-in-capital-structure leaves equity valuations looking precarious.

Little can be added to the ongoing discussion of insider selling (and occasionally, buying): while last week the ratio of selling to buying was over 350x, Bloomberg reports that the just ended week saw the ratio drop to the still massive 60x, primarily courtesy of the Titanium Metals Buyer appearing on the scene again, whose $7.6 million purchase accounted for 61% of total purchases of $12.4 million, spread among 14 transactions. The selling, meanwhile, barely abated, and while it was not last week's nearly record $1 billion, insiders did sell just about $750 million worth of stock in 130 transactions. The top 5 sales were in Microsoft, where $377 million was sold, either before or after the company's earnings. MSFT was followed by 3M, Pepsi, Estee Lauder and Praxair. All in all, total selling-to-buying was roughly 2 times the threshold of the bearish barrier, which however has been the case for the bulk of the past two years.

Cash is not our enemy right now - cash is your friend.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 23/05/11

For the most part Chinese micro fraudcaps, as most Chinese companies trading in the US are now affectionately known to most, have so far been small companies, with market caps topping at around $250 million. They have also been a veritable gold mine of P&L as short after short has generated massive returns, to the point where our proprietary ZH short basket has just hit a record low and has returned over 38%. Most have been happy as the SEC has continued to largely ignore the topic of Chinese reverse-merger (and other) IPOs on US exchanges, meaning free money would likely continue as many, many more such frauds would continue to be exposed by share sleuths armed with lots of time. All this is about to change, courtesy of the biggest Chinese (alleged) fraud to date: $1 billion market cap (said market cap will be a fraction of this number once LFC is unfrozen for trading), whose largest investors are not some mom and pop retail investors, but Fidelity, as well as investment "legends" Maverick and Tiger Global (and JPMorgan in 4th). And with Maverick standing to lose as much as up to $200 million, one can be sure the SEC is suddenly going to promptly move to pop the Chinese fraud bubble, after over 6 months of warnings by the likes of Zero Hedge, thereby finally removing the "market efficiency" function that speculative shorters (who are apparently the only ones who actually do their homework) truly provide in this case, as well as in all others.

Certainly no one should expect Europe’s banks to suffer their own losses after making idiotic loans to corrupt governments. It’s much easier to stick the people with the bill by establishing a trillion dollar bailout fund with taxpayer money. Problem is, people in Europe are starting to wake up and get it. The anti-euro “True Finn” party in Finland recently surged in the polls to become the country’s third-largest political party and a major obstacle for any European bailout. This weekend, Spain’s ruling Socialist party was hammered with losses as voters voiced their utter disgust with the current government’s handling of the economy. In Germany, this year’s state election results are showing that voters are sick and tired of shouldering the financial burden for the rest of Europe. Chancellor Angela Merkel’s ruling party is losing miserably, though in a pathetically desperate move, some local governments are changing suffrage limits and allowing 16-year olds to vote. This is the strongest indicator yet of how bad the situation in Europe has become: German banks are so over-exposed to the PIIGS sovereign debt that, in the face of political revolt all across Europe, German politicians have resorted to recruiting the Justin Bieber crowd to maintain the status quo.

What a difference a year makes. It was just over a year ago that Greece received its first (and certainly not last) $1 trillion + bailout package from the EU, the ECB and the IMF. Just over 12 months later, all those who peddled Greek bonds to the rest of the world (ahem Germany) are now furiously backtracking, having finally realized what we, and everyone else with half a brain realized from the beginning: it's over for the euro. But fine, let's kick the can down the road for a few more months, which will allow banks, with access to interest-free central bank capital, to literally steal Greece's soon to be privatized assets for pennies on the dollar, and then send the carcass, now picked dry, to the international bankruptcy court. In the meantime, we would like expose all the idiots who like various anchors on Comcast's bubblevision channel, pitched Greek paper to hapless investors, only to see losses (this is not some speculative asset - this is fixed income) of over 40% in one year, and for some reason continue to have a podium from which to spread their lunacy, greed and outright stupidity.