Archive - May 2011

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.

In what could be the watershed news event of 2011, Dow Jones reports that Asean+3 governments (virtually every Asian country including China, Japan and South Korea), "have been concretely studying the idea of a common currency, though an internal paper shows anything like a euro for the region is still far off." In what appears to be Asia's attempt to recreate the Euro, "an Asian "regional monetary unit" could provide a helpful macroeconomic monitoring tool and its use could in time be expanded to include official and private transactions, according to a study by a high-level research group reporting to Asian officials." So for all those complaining that the Yuan would not be able to compete with the dollar as a reserve currency, how about a basket of currencies which includes the Yuan, the Yen, and virtually every other growth currency. It is only fitting that as a last ditch effort to save the current globalized system, as we see the last days of one failed "aggregator" currency, we get the inception of another.

Even though Portugal announced somewhat sparse details of a €78 billion IMF/EU bailout late yesterday, the market was only modestly impressed, and even though Portuguese CDS dropped 29 bps to 620, according to CMA at 10:10 a.m. in London, the country still saw the yield on its just issued 3 Month T-Bills surge to a fresh all time record. From Reuters: "Portugal sold around 1.12 billion euros ($1.66 billion) in three-month T-bills on Wednesday, above the indicative offer, with yields rising from an auction late last month even after the country said it agreed a 78 billion euro EU/IMF bailout. The average yield rose to 4.652 percent from 4.046 percent in an auction on April 20. Portuguese debt premiums in the secondary market had risen sharply in the past two weeks on jitters about a possible Greek debt restructuring and concerns about Portugal's own fate, but retreated after the bailout deal." And to confirm that the market no longer really beleives in the bailout fairy, the Bid to Cover dropped from 2 to 1.9.

Like last year, I took on the unenviable task of trying to capture everything that was said at this year's Berkshire Hathaway annual meeting. Over 18,000 words and 24 pages later, I hope my notes provide a fair representation of what Munger and Buffett had to say.