Archive - Jun 2011

An inescapable double-bind has emerged for Germany: If Germany lets its weaker neighbors default on their sovereign debt, the euro will be harmed, and German exports within Europe will slide. But if Germany becomes the "lender of last resort," then its taxpayers end up footing the bill. If public and private debt in the troubled nations keeps rising at current rates, it's possible that even mighty Germany may be unable (or unwilling) to fund an essentially endless bailout. That would create pressure within both Germany and the debtor nations to jettison the single currency as a good idea in theory, but ultimately unworkable in a 16-nation bloc as diverse as the eurozone. Be wary of the endless "fixes" to a structurally doomed system.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

With the Obama economy limping along thanks in part to the Administration’s policies in favor of extreme dollar weakness, there’s growing speculation as to his re-election chances in 2012.

The world's premier euroskeptic, Nigel Farage, just held a funeral procession for the Euro after Europe now has just 10 days left in which to save its battered currency. ND at the rate Europe is imploding, Nigel won't have long to wait to get confirmation that all his concerns about the flawed European experiment were not only grounded but outright optimistic. And yet Europe, caught up in its own historic ponzi, refuses to do the right thing which is to impair banks with a 50%+ haircut, and instead will kick the can down the road, in the process destroying any residual liquidation value of hundreds of trillions of impaired assets, which as has been pointed out on numerous times before, are concurrently the liabilities of other banking institutions, therby making the entire central banking plan of debt inflation pointless. Farrage summarizes this best: "European banks are going to take a hit at some point anyway, if you are a bank owed a great deal of money it's better to get 50% of it than none of it. Down the path we are going now is heading for a total bust." Probably a good analogy is that if Bernie Madoff was stopped in the 80s or ever 90s, much of his capital would have been recovered. Alas, waiting until he himself cried uncle, guaranteed no recoveries for anyone. It is sad that Europe, and the entire "developed world" has decided to pursue this path.

Its one thing when Investment Banks use optimistic assumptions for revenue growth and margin expansion to "rationalize" a high price for its client's stock. Its another thing entirely to assume a Chinese company has the same level of risk as a U.S. one...

This is the first real technical warning sign that the market is on the verge of breaking down and the economy is on the verge of a recession.

The Great Recession has now earned the dubious right of being compared to the Great Depression. In the face of the most stimulative fiscal and monetary policies in our history, we have experienced the loss of over 7 million jobs, wiping out every job gained since the year 2000. From the moment the Obama administration came into office, there have been no net increases in full-time jobs, only in part-time jobs. This is contrary to all previous recessions. Employers are not recalling the workers they laid off from full-time employment. The real job losses are greater than the estimate of 7.5 million. They are closer to 10.5 million, as 3 million people have stopped looking for work. Equally troublesome is the lower labor participation rate; some 5 million jobs have vanished from manufacturing, long America's greatest strength. Just think: Total payrolls today amount to 131 million, but this figure is lower than it was at the beginning of the year 2000, even though our population has grown by nearly 30 million...The inescapable bottom line is an unprecedented slack in the U.S. labor market. Labor's share of national income has fallen to the lowest level in modern history, down to 57.5 percent in the first quarter as compared to 59.8 percent when the so-called recovery began. This reflects not only the 7 million fewer workers but the fact that wages for part-time workers now average $19,000—less than half the median income.

When unsure, blame the speculators:

• MARKET WATCHDOG SAYS REVIEWING TODAY'S BANK DECLINES
• CONSOB OFFICIAL: STOCKS PLUNGE IN PART DUE TO STOP-LOSS TRADES
• CONSOB OFFICIAL CAN'T RULE OUT MANIPULATION TRIGGERED DECLINES
• CONSOB OFFICIAL SPEAKS BY PHONE        

Alternatively they are spot on, and someone is doing their darnedest to spread the contagion finally to the last PIIGSy.

As vacuum tubes slowly realize they were all cheated by the great European fraud headline and soundbite machine, the scramble into the relative safety of Uncle Sam's paper is once again reaching a crescendo. At last check, the 1 month Bill was trading 0.000/-0.005, whereby people pay Tim Geithner to prevent them from investing in the worthless asset class known as stocks.

That yesterday's entire move on the idiotic ramp into the close is now unwound is not at all surprising. We predicted this is what happens when you have busted vacuum tubes lifting every offer in a market that has 3 lots in Level 2. What is surprising is that even as the ES has plunged, the RISK basket has tumbled far faster. As usual, at times of great arbitrage, we point out the glaringly obvious, which at this point is to compress the ES-RISK trade for a 14 ES point equivalent compression.

Following its admission yesterday that it is now buying oil by telling clients to sell Brent to $105-107 a monther after advising anyone who cares Brent was on its way to $130, today we learn that Goldman is actively dumping its prop, pardon, there we go again, flow, FLOW, inventory of oil equities to idiots, pardon, clients. As to how dropping crude prices and thus collapsing profit margins is beneficial for energy producers, that is one we will long be scratching our heads over.

Some time ago we created a short basket of Chinese fraudcaps based on every single Buy recommendation from disgraced brokerage firm Global Hunter Securities. So far the basket has returned about 50%. However, as Sino Forest indicates, there is much more room to go as fraud after fraud get exposed. Therefore, to make readers' lives easy in creating a new and improved Chinese short basket, below is every single Chinese company which began trading through a reverse merger on the NYSE and Nasdaq. Sooner or later, 99% of these companies will be trading at $0.00, although neither the cash strapped Nasdaq, nor the irrelevant NYSE will ever refund listing fees to the soon to be defunct companies. In the meantime, creating a short basked from all of these names is easily a good repeat of a slow bleed trade.

Yesterday's very disappointing initial claims number was quickly forgotten as algorithms latched on to any positively sounding headline out of Europe in order to push the Dow over the mythical 12,000. Alas, this is very shortsighted, because as Bloomberg economist Joseph Brusuelas is quick to point out, based on historically close Claims-NFP correlations, the June NFP number will be a big miss to expectations, and print in the 75-125K range. This ugly number which will merely further cement the case for further monetary or fiscal stimulus (and forget the latter), will come just in time for the Manufacturing ISM to print sub 50, and send the confirmation that we have all been waiting for that the US economy is now officially contracting.

Christine Lagarde, who is quick to play the gender card, has released her formal statement to the IMF Executive Board pitching her candidacy. As she herself prioritizes her qualifications: "Having clarified this situation let me state the following: I stand here as a woman, hoping to add to the diversity and balance of this institution." etc. Translation: no need to worry I will (allegedly) rape maids, so pick me. Then there's everything else, which for a bailout agency which is now wholly in China's shadow, is very much irrelevant.

Good and bad news from the May durable goods data, where as expected transportation contributed the major portion, with the total number coming at 1.9% on expectations of 1.5%, up from an upward revised -2.7% (previously -3.6%). However, take out transportation and the change was only 0.6%, below consensus of 0.9%. From the release: "Transportation equipment, also up two of the last three months, had the largest increase, $2.7 billion or 5.8 percent to $49.6 billion. This was due to nondefense aircraft and parts which increased $2.7 billion. Shipments of manufactured durable goods in May, up five of the last six months, increased $0.6 billion or 0.3 percent to $194.6 billion. This followed a 1.4 percent April decrease. Machinery, up three of the last four months, had the largest increase, $0.5 billion or 2.0 percent to $28.3 billion." The surprise was a jump in machinery orders which had a 3.4% rise in May, to $108.7 billion: "This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 3.7 percent April increase." Another all time record comes from a good old standby: inventories: "Inventories of manufactured durable goods in May, up seventeen consecutive months, increased $4.1 billion or 1.2 percent to $355.4 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 1.2 percent April increase."