Archive - May 4, 2011

All we need to do is hire the people who appraised Bin Laden's hideout at a million dollars. Seriously, its an odd shaped lot, with uneven fences, no phone lines or internet connection, crumbling walls, cheap plastic garden furniture, in a country with a per capita GDP of $2,700. Unless the place comes with a cone of silence or room of invisibility, I don't see how that could be worth a million. And if it is, either the dollar is more worthless than I thought or my home might actually be worth more than I paid for it. I'm sure the mock-up the government built for training cost more than a million, but that's more a function of our governments great ability to overpay for anything they do. I find it hard to believe that hideout was worth a million, and don't really understand why every news report likes to focus on that largely meaningless number.

While this is certainly a good development, "Make Shiff Happen"... is the best name you could come up with Peter? Really?

In “Fight of the Century”, Keynes and Hayek weigh in on these central questions. Do we need more government spending or less?

And scene: as predicted, the US economy is now in free fall (even with QE2 still having two more months to go), validated by today's Services ISM (recall that the US economy is based on "services", not a manufacturing) which plunged from 57.5 to 52.8, taking out consensus of 57.5, and "growing" at the lowest rate since August 2010. As a reminder a number south of 50 means "contraction." From the report: "The NMI registered 52.8 percent in April, 4.5 percentage points lower than the 57.3 percent registered in March, and indicating continued growth at a slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased 6 percentage points to 53.7 percent, reflecting growth for the 21st consecutive month, but at a slower rate than in March. The New Orders Index decreased substantially by 11.4 percentage points to 52.7 percent. The Employment Index decreased 1.8 percentage points to 51.9 percent, indicating growth in employment for the eighth consecutive month, but at a slower rate. The Prices Index decreased 2 percentage points to 70.1 percent, indicating that prices increased at a slightly slower rate in April when compared to March. According to the NMI, 17 non-manufacturing industries reported growth in April. Respondents' comments are mixed about overall business conditions; however, they are mostly positive. Respondents' comments also indicate concern over rising fuel costs, commodity costs and the lingering uncertainty about the economy." Virtually every index declined with New Orders plummeting from 64.1 to 52.7 - the biggest drop in history, excepts for Supplier Deliveries (this will certainly drop next month), and Imports.

So here’s a CEO, someone with actual business experience (not some moron academic who’s never run a business a day in his life) telling us the following: food prices are up a lot and going higher in the future, despite high food prices, farmers are quitting farming (lower supplies are coming), food companies will be going bankrupt (even lower supplies are coming).

Just out from a big trading desk...

Just because snow is so February, here comes UK chocolate maker Thorntons with a new spin on an old scapegoating technique. See: they took the whole "blame it on the snow" so popular in America in Q1, and flipped it on its head. Brilliant. Guardian reports: "Chocolate maker Thorntons has hit the market with its second profit warning of 2011, blaming the recent sunny weather for a slump in sales over Easter. While most of the retail sector has welcomed the mini-heatwave that bathed Britain for much of April, it proved bad news for Thorntons. Sales of eggs and other products fell by over a fifth during Easter week, compared with a year ago." Not to be outdone, expect many comparable warnings from US companies which will now find any environmental and climatic "stunners" for earnings plunges: full moon, low tide, concerns about locust invasions, "that time of the month", etc.

Today's weak ADP was the first indication of why Wall Street may need to promptly revise its NFP consensus for Friday following last month's blowout 283,000 number. And while that number is legendary in its total irrelevance and complete lack of correlation to what the BLS reports, a more credible analysis of why NFP will likely come in lower than consensus comes from TrimTabs, which says that "Fed-fueled inflation in April has put breaks on consumption." The key culprit, and the main reason why the dollar just plunged again, is the realization that the economy has once again failed to restart the virtuous loop of trillions in monetary stimulus becoming a virtuous loop. And, as before, the only outcome will be more QEasing, and another massive spike up in commodities once Wall Street once again well delayed, realizes this is inevitable (as we have been claiming since January).

As one of my readers noted, single family foreclosures have boosted the multifamily rental market, and of course, speculators are doing the bubble thing again. Damn, that was quick. But what happens when interest rates go up, stagflation becomes more prominent, or housing brings us back to recession (that is assuming you believe we ever left it). Alas, I'm getting ahead of myself...

Next week will be interesting. Even as the Treasury is scrambling to find debt ceiling expansion options (for a complete analysis see this post from January) it has just released its most recent refunding statement, according to which it hopes to issue $72 billion in 3 Year, 10 Year and 30 Year bonds. What is interesting is that completely contrary to expectations, and to recent Treasury announcements, while the UST was expected to issue $69 billion this time around, it actually increased each issue by $1 billion. So much for that promise that the Treasury will need to borrow less. But what is worse is that there are no maturities or refunds next week, meaning the net debt increase next week will be $72 billion. This simply means that Geithner will now have to really start cutting back on all other interagency issues, and to actually start taking away from the funding of the SSTF. And the kicker: Congress is nowhere even close to start thinking about hiking the debt ceiling. While we had been expecting this to be a non-issue, it may suddenly become quite an issue, as unexpected downstream effects from the debt ceiling mitigation exercise start affecting local governments.  Bottom line: the US economy now has just $30 billion in incremental debt capacity. And money, being fungible, means that this is it for GDP growth at least until Congress gives the green light on the debt target increase.

• PBOC Reiterates Inflation Control Is Its Top Priority (Shanghai Daily)
• Portugal Reaches Deal on €78bn Bail-Out (FT)
• China Allows Firms to Sell Bonds via Private Placement (WSJ)
• Demand for Bank Loans Mounts in Emerging World, Survey Says (WSJ)
• China 2011 Growth Seen Solid, Inflation to Quicken: Reuters Poll (Reuters)
• Yemen-based Jihadist Has Potential to Fill Role (FT)
• Netflix Said to Seek TV, Film Rights for Latin America Service (Bloomberg)
• Palestinian Factions Prepare to Sign Deal (FT)
• Outcry Over Syria Rises Amid Wider Crackdown (FT)
• Waiting for Dollars in Belarus Puts Lukashenko on Unrest Alert (Bloomberg)
• U.K. Regulator Expands Its Reach (WSJ)

And so the first warning shot for this Friday's NFP comes, which we believe will be substantially below consensus, in the form of the ADP report, which comes at 179K, down from a revised 207K, and well below expectations of 198K. And while the number is very disappointing, both construction and financial activities posted a solid up month, with financial jobs posting a second consecutive monthly increase after over 3 years of drops.

ADP today (8:15AM) , followed by services ISM (10AM) carry unusual risk for markets today. In particular a downside surprise may be more broadly risk-off than has been the case recently on negative economic surprises. Positioning remains long risky assets and risk correlated currencies but there are growing concerns about pressures on oil and other commodities. ADP has been resuscitated as a payrolls indicators so there will be some reaction to a big surprise. Market expectations are very concentrated at 200k -- with modest downside extension to 180k and upside to 220k. Our economic surprise index for G10 is diving sharply and our economists are on the soft side as far as payrolls go. Net, net we think the downside risk outweighs the upside and that a downside surprise today is more risk off than normal.

Another sign of the increased appreciation of gold as an important asset came from Germany today where Angela Merkel’s budget speaker and his opposition counterpart have urged Portugal to consider selling their gold. Norbert Barthle, Germany’s governing coalition budget speaker and his counterpart Carsten Schneider from the Social Democrats, the biggest opposition party urged Portugal to consider selling some of its gold reserves to ease its debt problems. They called for a review of Portugal’s request for financial aid to include gold and other potential asset sales. The German lawmakers did not specify who should buy the gold from the Portuguese central bank but given the challenges facing Germany and the Eurozone it is likely that the Bundebank and the ECB would be willing buyers – if the gold is not already encumbered due to Portugal’s membership of the Eurozone. Meanwhile creditor nation central banks continue to accumulate gold reserves as seen with the breaking news from the Financial Times that the central bank of Mexico has been diversifying their currency reserves (largely in dollars) into gold with the purchase of 100 tonnes of gold bullion in February and March.

ADP, the non-manufacturing ISM, and the first policy speech from the new president of the San Francisco Fed. Also a bunch of other non-dissenting yet hawkish, and extremely hypocritical Fed presidents are speaking elsewhere warning how dangerous the printer's policy is even as they vote for its with every FOMC meeting.