Archive - Jun 2011

The latest soundbite that should certainly add a few extra points to the S&P now that trading has reverted back to the bizarro zone is the most recent warning from Robert "Case-Shiller" Shiller who said that another 10-25% drop in real home prices would not surprise him at all... or anyone else for that matter except for all those who saw the "official" housing bottom back in 2009.

And another signal of economic slowdown: Wholesale Inventories, that wonderful plug for generic "growth" was unable to keep up with expectations, rising only 0.8% in April, below consensus of 1.0% and down from an upward revised March number of 1.3% (1.1% previously) meaning that Q1 growth may be revised higher at the expense of Q2. Even bigger was the miss in wholesale sales which plunged from 2.9% in March to just up 0.3%, well below consensus of 1.2%. Yet since today is one of those bad news is good news days, expect the Dow to close up triple digits. From the release: The U.S. Census Bureau announced today that April 2011 sales of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations and trading-day differences but not for price changes, were $393.5 billion, up 0.3 percent (+/-0.5%) from the revised March level and were up 14.4 percent (+/-1.4%) from the April 2010 level....Total inventories of merchant wholesalers...were $447.2 billion at the end of April, up 0.8 percent (+/-0.4%) from the revised March level and were up 13.8 percent (+/-1.2%) from a year ago." Lastly, the inventory/sales ratio was unchanged from March, coming at 1.14.

I warned that the attempt to centrally plan 16 economies in concert, by force nonetheless, would result in the Eurocalypse (that's a Reggie Middleton copyrighted term)! As is customary with warnings of common sense against unbridled, optimistic BULL(ishness), I was dismissed as being sensationalist. Well, as Malcom X is known as saying, "The chickens are coming home to roost!"

Since "the China Story" is the foundation of global growth, demand for commodities and ultimately, stock market profits, when China's stock market breaks down it behooves us to pay attention. Technical analysis offers a number of tools to help us chart the past and present and calibrate probabilities of what might happen in the future. Much of the time there are no clear signals, and chartists can lose their way trying to discern patterns and trends which may or may not pan out in the future. One classic pattern is a flag or pennant (a.k.a. a wedge). The psychology behind the pennant is rather transparent. Lower highs reflect a decline in Bullish enthusiasm and buying pressure, as every "buy the dip" fails to match the previous dip-buying. he direction of China's market has been decisively signalled: breakdown. In technical analysis, it doesn't get any better than this.

Wondering what lit a fire under the EURUSD? Wonder no more, courtesy of Reuters:

• New bailout for Greece likely to total about EUR 120bln according to Eurozone sources
• New bailout may comprise EUR 30bln from private sector, EUR 30bln from privatisations, up to EUR 60bln from EU/IMF
• Remaining loans from initial Greek bailout would be disbursed alongside new bailout, according to Eurozone sources

And yes, as predicted the final amount will be far greater than previous expectations of under €100 billion.

We have already noted our amusement at Sorkin's inaccurate and dictated defense of Goldman's housing short position previously (apparently the DCF expert has absolutely no understanding of such concepts as DV01, delta, gamma, capital structure priority, gross vs net notional, and exposes so many other misconceptions that we will simply wait for the official Goldman 8K to come out, as opposed to this unofficial one, before issuing out full debunking of any Goldman defense). One thing we did not note, however, that needs disclosure, is the glaring conflict of interest in ARS' puff piece. As Taibbi pointed out, it is none other than Goldman who is a critical backer of Sorkin's Dealbook. To wit: "Barclays Capital, Goldman Sachs, Sotheby’s and Tata Consultancy Services
are charter advertisers for the relaunch of DealBook." Indeed, it is perhaps time to have a disclaimer at the end of every article that there is substantial squid pro quo involved in namesdropping-for-brownnosing modus operandi. But even that is nothing compared to the latest attempt to glorify those who perform god's work on earth. Below is a snapshot of FierceFinance's spirited defense of Goldman Sachs. The author mocks the concept of Sorkin as an apologist for those who enjoy seeing their name in a good light in the NYT and on HBO: "Sorkin might be accused of trying to bolster his base with his report--Wikipedia describe him as "an apologist for Wall Street/Goldman Sachs." I kid you not. But Sorkin makes a lot of sense when discussing how one unit in a very large company may be hell-bent on shorting the market even as another unit in the same company may be stuck with certain securities." It is not the ongoing misunderstanding of previously noted concepts, but the actual advertisement as part of the piece. Once again, we see that only those who directly get funding from Goldman Sachs would be willing to destroy their credibility by coming to its defense.

Regular Zero Hedge readers are aware of our consistent noting how in the past several years, the BLS has relentlessly imposed an guaranteed upward bias to prior initial claims revisions, to the point where it has become a statistical farce (today's upward revision of last week's number from 422K to 426K being just the latest indication). It is thus to our surprise and disappointment to find that even Bloomberg has ceased to keep track of prior revisions: one wonders if the BLS may have had some close conversations with the only media which back in 2009 dared to challenge the Bernanke Put.

Soundbites from the Trichet conference:

• TRICHET: ECB SEES "UPWARD PRESSURE" ON EURO AREA INFLATION
• TRICHET: "STRONG VIGILANCE" NEEDED ON INFLATION RISKS; ECB WILL ACT IN FIRM AND TIMELY MANNER; ECONOMIC UNCERTAINTY REMAINS "ELEVATED"
• SEES 2011 INFLATION AT 2.5% TO 2.7% VS PREV 2.0% TO 2.6% *TRICHET SAYS HIGHER INFLATION FORECASTS REFLECT ENERGY COSTS
  
• TRICHET: COMMODITY, ENERGY COSTS DRIVING PRICE PRESSURES; UNDERLYING PACE OF MONETARY EXPANSION RECOVERING
• TRICHET: UNDERLYING PACE OF MONETARY EXPANSION RECOVERING; MONETARY STANCE IS "ACCOMODATIVE"
• TRICEHT: GREECE NEEDING ABOUT EU45B OF NEW LOANS; GREECE WILL GET EU57B OF LOANS UNTAPPED FROM 2010; RAISE EU30B FROM ASSET SALES THRU '14
• TRICHET: ECB TO SECURE FIRM ANCHORING OF PRICE EXPECTATIONS; ECB "WILL DO ALL THAT IS NEEDED" ON INFLATION
• TRICHET: NON-STANDARD MEASURES ARE TEMPORARY
• TRICHET: ECB TO KEEP FIXED RATE ALLOTMENT TENDER FOR 3 MONTH LTRO OPERATIONS FOR Q3
• TRICHET: ECONOMIC ACTIVITY EXPECTED TO BE SOMEWHAT DAMPENED BY BALANCE SHEET ADJUSTMENT
  

The EURUSD chart looks like an EKG

There is nothing to excuse last week's once again disappointing jobless claims number which came at 427K, even as the lemming horde was expecting an improvement to 419K. The previous number of 422K was revised as is always the case higher to 426K, in an attempt to make the W/W deterioration seem less than expected. Continuing claims on the other hand surprised to the upside, coming in at 3,676K on expectations on 3,700K, with the previous revised higher to 3,747K from 3,711K. Ever more people continue to drop out of the 99 week category as 52K fell out of EUCs and Extended Benefits. Elsewhere, the US trade balance came in better than expected as the US imported less: the US Trade Balance in April came at -43.7bln M/M vs. Exp. -48.8bln, with the Previous -48.2bln, Revised to -46.8bln. The only number however that matters is the continued deterioration in claims.

The ECB's press conference, which lately has been seeing rather aggressive questions from the press corps (especially if the Finns are present like last time) and very rambling non-answers from Trichet can be followed live below. Expect to see some volatility in the EUR as a result of Trichet's carefully chosen words. Once again, the keyword of note is "vigilance."

Following the dramatic outperformance of Treasurys (compared to stocks) since the beginning of April many have been fast to proclaim Bill Gross wrong (when he is merely early) in his decision to abandon the asset class, while other prominent deflationists have been pounding their chest, claiming how right they have been. Well, as the chart below shows, the recent UST move has to be put in context, and the context is not pretty for "deflation." What is more troubling is that according to a technical resistance levels, the period of abnormal bond strength may be over. On the other hand, should the ratio of the UST/SPX breach above the 0.97 level, the down cycle will be broken and it may be time for a new regime of consistent Treasury outperformance.

While the bulk of the economic newsflow continues to come from outside of America, looking at our own mess today we see jobless claims, wholesale inventories, the trade balance... and Janet.

As expected the main financing rate is unchanged at 1.25% (and by implication the Marginal Lending Facility remains at 2.00% while the Deposit Facility remains at 0.50%). The EURUSD is drifting modestly higher but nothing remarkable. The key continues to be the upcoming conference.

European CDS is wider across the board. SOVX is 203 which is 4 wider on the day, and liquidity seems to have broken down completely as I'm seeing 3 bp bid/offer spreads rather than the more customary 2 bps. That is after it widened 10 bps yesterday. Fins at 163 (+4 on day) and Fin Subs 279 (+12 on the day) are also trading extremely poorly. Fin Subs, although fairly illiquid deserve special mention. They were 15 wider yesterday and although it is hard to tell with the rolls, it looks like they are almost at the widest levels of last March at the height of the first time the market noticed the sovereign debt crisis. The sovereign bond market looks to be in rough shape as well. Greek 10 year bonds are back below 54 on a price basis (16.35% yield). They have given up most of the late May gains. It rallied on the comments that the EU wanted a plan to bailout Greece again. It is fading on the fact that in spite of wanting a plan, it seems very difficult to come up with a workable plan.

• Obama Considering Another Stimulus Tax Cut (New Republic)
• Taxes on the menu in debt-reduction talks (Reuters)
• Americans torn over debt limit (WaPo)
• Dimon Challenges Bernanke on Wall Street Regulation (Bloomberg)
• The Great Property Bubble of China May Be Popping (WSJ)
• Beige Book confirms break in supply chain(FT)
• Trichet May Play ECB Rate Card as Germany Risks Split on New Greek Rescue (Bloomberg)
• Slow growth to anchor Bank rates despite price pressure (Reuters)
• President Obama Authors The Economic Recovery That Isn’t (Forbes)
• New Cracks in Oil Cartel (WSJ)