Archive - May 24, 2011

It may be time for the CME to hike some coffee margins as prices for the legal drug are starting to get out of control. According to Dow Jones, Smucker has just increased its average coffee product price by 11% in its 4th price hike in just the past year. This, along with all other comparable deflationary developments (according to some) could not have been foreseen by anyone, and will lead to the Fed's Elizabeth Duke discussing next year how, very inexplicably, America's low and middle classes are forced to choose between espresso shots and toilet paper.

The stock market peaked last February, not on April 29, as the indexes are suggesting. The stock prices of the best run companies in the most profitable industries are rolling over like the Bismarck. The best case is that we are nearly three weeks into a 10% correction that will take us to the 200 day moving average for the (SPX) at 1,234. (AAPL), (GOOG), (GS), (FCX).

When it comes to austerity in Europe, it appears that no costs are too big or too small. That goes for sharing teleprompters as well. Compare and contrast the latest remarks by Barack O'Bama (or Obama, following the president's prompt departure out of Moneygall on seasonally unadjusted volcanic ash concens) and Enda Kenny...

And another pearl of wisdom from the Fed's uberthinkers, in this case Elizabeth Duke: "the recent increase in gasoline prices has affected consumer choices in housing and other purchases, big and small. Family incomes have not kept pace with rising costs and many families, particularly those with low-to-moderate incomes, are actually facing the decision between buying gas to drive long distances to work and paying their mortgage. During the housing boom, when gas prices were much lower, potential homebuyers moved steadily farther away from employment centers in search of more affordable homes. This was referred to as the "drive till you qualify" method of home buying. Foreclosures remain high in these areas where the cost of driving to work has become so great." At least America's poor can still afford to buying deflating iPads... And after all didn't they said QE2 was a success for everyone? Or maybe the recent Philly Fed finding that lower and middle class families are actually suffering under the QE2 mandate, much in line with expectations of everyone who is not a Princeton economics professor or alumnus, are finally being validated. Oh well, this is nothing that a little QE3 can't fix. And some more thoughts from a Ph.D. in Captain Obviousness: "the collapse of housing prices and resulting worker immobility has changed consumers' appetite for homeownership. In Fannie Mae's 2010 Own-Rent Analysis, the percentage of respondents who said they were more likely to rent their next home than buy climbed from 30 percent in January to 33 percent in December of the same year." It's insight like that that explains why those Fed governors get paid the big Bernankebux.

Following the recent negative Chinese PMI print, the latest confirmation of the global economic slowdown/stagflation comes from Europe where Eurostat reported that EMI Industry Orders declined 1.8% in March, in line with expectations. This was the first M/M decline since September, although the Y/Y number was still a substantial +14.1%. Not surprisingly, previous months were revised lower: February revision: +0.5% m/m (+0.9%) January revision: +1.1% m/m (+1.2%). The momentum of previous months assured a 3.4%
average gain in 1Q. As Market News reports: "The drop in March was accentuated by falling demand for heavy transport equipment, which tends to be very volatile with a limited immediate impact on production. Excluding this category, orders fell 1.1% on the month and were 15.2% higher on the year. Intermediate goods orders increased 0.6% on the month and were 19.2% higher on the year, suggesting that the industry recovery will continue for some time. The drop in heavy transport demand helped drag down capital goods orders 4.6% on the month, giving a 14.5% rise on the year. Consumer durable goods orders plunged 6.8% in March and were 2.6% lower on the year. Still-sluggish consumer demand and competition from low-cost producers abroad have undermined capacity in this branch. Non-durables orders fell 3.5% on the month and were 0.5% lower on the year." And for those still wondering why there is a concerted effort at pushing the EUR lower, here it is: "Leading indicators suggest that demand will wane in the months
ahead. Manufacturers polled by the European Commission in April expected
new orders to lose steam in 2Q. The outlook index fell 5.1 points from
the record high in January to return to the level in July. Still, their
assessment of order book levels continued to improve, thanks mainly to
higher export back orders. They estimated that orders on hand would
assure 3.7 months of production, up from 2.6 months in January." In other words: must keep that export dynamo turning or else.

New home sales and speeches from several Fed officials. Even with the debt ceiling breached, and retirement funds tapped, it does not prevent the Treasury from issuing new bonds: $35 billion in 2 Years to be auctioned off at 1 pm. But never fear: Brian Sack will pump another $5-7 billion in our daily POMO.

• French government says China backs Lagarde for IMF (Reuters)
• ...but, China has actually not backed Lagarde (WSJ)
• “You Americans Are Funny” — You Start an IMF (Forbes)
• Norquist Emerges as Barrier to U.S. Debt Deal (Bloomberg)
• Scarcity, Usefulness, and Getting an Edge (Hussman)
• Bullard Says Fed May Keep Rates, Balance-Sheet Steady to Assess Economy (Bloomberg)
• For Global Steel Industry, China Poses Guessing Game (WSJ)
• Goldman Finding Third Time a Charm in Russia (Bloomberg)
• Greece Will Accelerate State Asset Sales to Stem Debt Crisis as Bonds Drop (Bloomberg)
• It can go wrong? It will go wrong (WaPo)

The Greek bankruptcy, pardon, sovereign liability management exercise, pardon reprofiling, is once again front and center in the news this morning, after Moody's had some words of caution about a broad spillover effect in Europe should Greece file. From Reuters: "A Greek debt default would hurt other peripheral euro zone states and could push Portugal and Ireland into junk territory, Moody's said on Tuesday, warning it would classify most forms of restructuring as a default.  "A Greek default would be highly destabilising and would have implications for the creditworthiness of issuers across Europe," Moody's Investors Service's chief credit officer in the region, Alastair Wilson, told Reuters in a telephone interview. "This would result in more highly polarised credit worthiness and ratings among euro zone sovereigns, with the stronger countries retaining very high ratings and the weaker countries struggling to remain in investment grade." And yet a Greek bankruptcy seems increasingly more inevitable after a brand new fissure has now appeared in the government, after the chief opposition, New Democracy, party leader Antonis Samaras said he would oppose the latest round of austerity which, nonetheless, must pass in order for Greece to not run out of funds in 2 months, as we previously reported, and finally set off the dominoes. While the political bickering will likely hit fever pitch, and result in new and increasingly more violent protests in Athens, it is likely that austerity will pass as western banks are licking their chops at acquiring Greek "privatized" assets, at least when it comes to infrastructure and real estate, banks not so much, at below cost prices.

Gold has reached a new record nominal high in British pounds due to the growing risk of stagflation in the U.K. and due to Moody’s somewhat belated threat to cut its ratings on most UK banks. This was not helped by Chinese ratings provider Dagong Global Credit downgrading the U.K.’s local and foreign currency sovereign credit rating from AA- to A+ with a negative outlook. The increasingly powerful Chinese credit rating agency warned that the U.K. government's fiscal deficit is likely to be a very high 9% of GDP this year and the U.K.'s banking system has a large amount of risk exposure, which could create risks for the government. It estimates that about 40% of the banking system's GBP 2 trillion worth of assets is exposed to risk.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

A special presentation from the Banzai7 Institute of Behavioral Finance and Montary Schlemielery...

In the investment industry, information asymmetry explains why elite funds are able to consistently outperform over the long-term. If you're curious about what elite funds are actually buying and selling, not what they're saying, this is a must read comment...

With everyone trading the GBP in the overnight session eagerly awaiting the leaked Moody's report that the rating agency, which has yet to be at least 2 years behind the curve, is set to downgrade "more than a dozen British financial institutions to reflect the eventual withdrawal of Government support for the banking industry", China has gone and upstaged the beating around the bush poser by downgrading the UK outright from AA- to A+, with an outlook negative. The premise: stagflation and deteriorating "debt repayment capability." Poor fools: they have yet to meet the full debt repayment capability of 20 Primary Dealers.