Archive - Jun 1, 2011

"Please sell anything that is not nailed down. Thank you. Oh yes, your invite to this year's Christmas elves party is in the mail"

15 Day realized vol double in last 6 week. 30 Day at 5 week high. 90 Day near highs of year. And just because the CME Group is so concerned about investors and their money, this is precisely the time for an ES margin hike. (Yes, we know, the irony would be priceless.)But we jest: just hike those SI and CL margins already. Nobody can see that coming.

Next up: Greece begins criminal proceedings against the rating agency for character defamantion and libel (or is that slander?). Also, Belgium is next. Yet most importantly, there is no mention in the downgrade if the "Vienna plan" currently contemplated, or the latest zany "debt rolling" proposal constitutes an Event Of Default, meaning the market will have even more uncertaintly to grapple with. From Moody's "The main triggers for today's downgrade are as follows: 1. The increased risk that Greece will fail to stabilise its debt position, without a debt restructuring, in light of (1) the ever-increasing scale of the implementation challenges facing the government, (2) the country's highly uncertain growth prospects and (3) a track record of underperformance against budget consolidation targets. 2. The increased likelihood that Greece's supporters (the IMF, ECB and the EU Commission, together known as the "Troika") will, at some point in the future, require the participation of private creditors in a debt restructuring as a precondition for funding support. Taken together, these risks imply at least an even chance of default over the rating horizon. Moody's points out that, over five-year investment horizons, around 50% of Caa1-rated sovereigns, non-financial corporate and financial institutions have consistently met their debt service requirements on a timely basis, while around 50% have defaulted."

Other than that, everything is great!

The S&P 500 will go no higher that 1430 by 2020, a mere 90 points higher than it is today. The current multiple normalized over the past ten years is 23, making the market outrageously expensive. The historic average is only 14. We are only 17 months into a second lost decade for the stock market.

So much for the interesting theory presented a few days back from Bernstein that one contrarian response from China to its electricity shortage problem is not to hike prices but instead to slow down its economy by pushing the margin producers out and allow the economy to slow down on its own. As a reminder, last Friday Bernstein analysts Parket and Leung, in discussing the 30 gigawatt power shortage currently gripping China, was the following: "a nationwide power price increase to alleviate the problem is not likely. Letting the current stand-off run its course – in the worst case scenario, allowing electricity shortages and the high price of fuel substitutes to force factories to shut down - would slow the economy. And that's the key point in our view: increasing electricity prices is inflationary while holding prices steady would achieve the NDRC's current economic goals." Alas, China has opted for the convention path, and as Business China reports, "China will raise prices for electricity used for industrial, commercial and agricultural purposes to curb demand from energy-intensive industries and encourage power generators to increase electricity supplies." Sigh - add more inflation, more resultant PBoC tightening, and more of the same dog chasing its tail failed policies that will lead the world's fastest growing economy nowhere fast.

Update: Hearing has been delayed until 3 pm.

While we await to find and bring to our readers the channel that will carry today's hearing between the House Financial Services Committee on the topic of "Federal Reserve Lending Disclosure: FOIA, Dodd-Frank, and the Data Dump" chaired by Ron Paul and Fed and NY Fed General Counsels, Thomas C. Baxter, Jr., and Scott G. Alvarez, below we present their prepared testimony that was just released by the New York Fed. The key section from the testimony: "We remain concerned that a more rapid release of information about borrowers accessing the discount window and emergency lending facilities could impair the ability of the Federal Reserve to provide the liquidity needed to ensure the smooth working of the financial system. If institutions believe that publication of their use of Federal Reserve lending facilities will impair public confidence in the institution, then institutions may choose not to participate in these facilities. Experience has shown that banks’ unwillingness to use the discount window can result in more volatile short-term interest rates and reduced financial market liquidity that, in turn, can contribute to declining asset prices and reduced lending to consumers and small businesses." Luckily, courtesy of $1.6 trillion in excess reserves, and the stigma now associated with Discount Window borrowings, for everyone except for Dexia, we doubt the Fed will ever have to worry about the discount window before the banking kleptoracy blows itself up once again.

Richard Koo is back with his latest piece titled, not surprisingly, that "Fiscal Consolidation is Not the Answer" - alas, a decimated by (previously secret) debt European continent, and even America, is rapidly starting to disagree with this assessment, which stems from the faulty assumption that the economic "balance" achieved after 30 years of endless balance sheet expansion courtesy of ever declining interest rates is sustainable. Hint: it isn't. And until the world realizes that it is precisely this Fiscal Consolidation that is the answer, we will continue seeing bankers sell bits and pieces of Greece to each other, transfer payments in the US from the government ending up straight in Wall Street pockets, and broadly the Big getting Ever Bigger to Fail. Yet for those who still believe (Krugman) that one last hit is all it takes and after that it will be better, here is Koo's summary, on why Japan, which we continue to believe is the key macroeconomic variable over the near term, may be in very deep trouble unless it commences yet another (what number is that, #20, #50, is anyone even keeping score?) round of fiscal or monetary stimulus: "Fortunately for the Kan administration, Japanese institutional investors have been dealing with this surplus of private savings on a daily basis for more than 15 years and understand its macroeconomic implications. It is only because of their calm and calculated response to these conditions that the yield on 10-year JGBs remains at 1.2%. To prevent this natural disaster from becoming a man-made calamity (ie a recession), the government needs to push ahead with reconstruction efforts. With private savings surging, the necessary funds can be borrowed for now. Later, once businesses and households start looking to the future, funding can and should be shifted to tax hikes and budget reshuffles." That is the conventional wisdom. For all those who wish to read what will happen if and when Japan continues on this unsustainable path of converting private savings into public funding without regard for demographics, please read Dylan Grice (here, here and here).

I find it odd (to say the least) that anyone on the planet even considers paying attention to the Fed’s CPI measure. According to CPI inflation has only risen 3.2% in the last 12 months. This is during a period in which gas rose 33% while ground beef, cheese, and vegetables are all up in the double digits as well. Heck, even RENT rates have jumped in the last year. But somehow because housing prices and iPads have fallen in price… inflation is under control.

About a year after Tim Geithner literally top-ticked the economy with his first Op-Ed, "Welcome to the Recovery", which came days ahead of the QE 2 announcement, he has just released his Op-Ed #2 "A Rescue Worth Fueling" in the WaPo, in which he praises the administration for using billions in taxpayer capital to save a few hundred thousand union jobs. His bottom line: "The domestic automakers are getting stronger. For the first time since 2004, each has achieved positive quarterly net income." Perfect release timing: just as both GM and Ford announce a drop in monthly sales, and GM discloses record channel stuffing. If there is one call to fade and short all the US automakers, this is it.

We really hope that the guy who bought LNKD at $122 on its first tday of trading has sold, because while one may debate the merits of gold and silver as an alternative currency to the infinitely dilutable linen/cotton contraption that has become enemy #1 of every central planner alive, there is absolutely no debating that LNKD is and will be nothing short of a dot com bubble until it drops to its fair value, somewhere 60% lower than current prices...where its fwd PE will be at most triple digits. Yet that will hardly be a consolation to LNKD longs: since everyone who got an allocation at the IPO has since sold, the entire LNKD long base (that has not booked a profit) is now at a loss.

The shiny metal still looks good ... in the long-run

This is, by far, the best time I've ever witnessed to be a consumer of mobile computing technology. Alas, this is going to be the worst of times for those companies that come in any where under 2nd place in the Mobile Computing Wars - including some pretty big names... RIM, NOK, MSFT? INTC?

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