Archive - May 2011

Just another mess on the horizon.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 17/05/11

Apparently even Libya has had enough of the toothless and impotent NATO offense and is hoping for some sort of escalation. Reuters reports: "Libya said on Tuesday its forces had hit a NATO warship while it was shelling areas in the western parts of the rebel-held Libyan city of Misrata. Libyan state television said "our forces fired (at warships) and hit one directly and severely". It gave no further details. It was not immediately possible to verify the report." It remains to be seen if Nicholas "the people's liberator" Sarkozy, busy celebrating the recent developments in New York, will take time from his presidential campaign to urge the "marines in the water" to become "boots on the ground."

While it won't be a surprise to anyone at this point, seeing it in black on white is about as startling as hearing that one's credit card has been denied. Yesterday, following the settlement of all of last week's auctions, total debt held by the public increased by$51.4 billion, just as we had predicted, bringing the total to $9.717694 trillion. And with the total debt subject to the ceiling maxed out legally by $14.294, Tim Geithner reported a total of $14,293,975 MM, $25 million away from the ceiling. What was the plug? Why "Intragovernment Holdings" of course, which declined by $14.3 billion. As Tim Geithner warned yesterday this is now money held in retirement trust funds, which is now being directly sacrificed in order to keep the ceiling from breach: "I will
be unable to invest fully the portion of the Civil Service Retirement
and Disability Fund (“CSRDF”) not immediately required to pay
beneficiaries. In addition, I am notifying you, as required under 5 U.S.C. §
8438(h)(2), of my determination that, by reason of the statutory debt
limit, I will be unable to invest fully the Government Securities
Investment Fund (“G Fund”) of the Federal Employees’ Retirement System
in interest-bearing securities of the United States." And as expected, once the debt ceiling is raised, the accrued shortfall will be filled, meaning upon a debt ceiling hike, which will come some time in July, total debt will explode higher, surging by about $300 billion in a few days.

Last week I used the analogy of a shotgun wedding to describe how the bailout was being forced upon the Greek people. Maybe, after the events of this weekend, I wasn’t being harsh enough in my choice of analogy. As I continue to digest the news and various opinions, I still reach the same conclusion. Default or restructuring is the most logical outcome and should occur sooner than later. I believe that the image of the IMF has been tainted and it will make it more difficult for the Greek people to accept a deal from them, unless the terms are incredibly favorable. I’ve also listed several of the arguments most commonly used to encourage Greece to delay restructuring, and point out the flaws in each of them.

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...