Archive - Jul 11, 2011

The low job growth in the U.S. isn't a "soft patch," it's a sea of quicksand. In a nutshell, here's the situation: 2/3 or more of all job growth comes from small businesses starting up and expanding; only a third or less of new jobs come from Corporate America or government expansion. As recent reports have shown, Corporate America has been on a hiring spree--overseas. From the point of view of globalized Corporate America, why hire anyone in a slow-growth market like the U.S.? It makes sense to hire new employees in fast-growing markets where the corporation is reaping its growth and most of its profits. As for government hiring: the game of expansion based on explosively rising debt or Federal stimulus spending is over. To live within their means, local goverment and related agencies will have to shed jobs, as labor accounts for 80% of government expenses. That leaves any future expansion of jobs up to small business. But small business isn't hiring, and won't be hiring, for these structural reasons...

It appears that the market refuses to be baffled with bullshit any longer. The EURUSD just took a big tumble following a report that Christine Lagarde, the IMF's new boss, announced that her new agency has not yet discussed Greek aid details, and made it clear that "nothing should be taken for granted on Greece." Since the only thing that is being taken for granted is that Greece will be bailed out, it is easy to see why the EURUSD just lopped off 60 pips in seconds. Not very surprisingly, this fits with what the Chairman of Commerzbank Martin Blessing told the Frankfurter Allgemeine Zeitung earlier. It appears that the dining room table is being set for what the EUR's chef believe will be a brief feast on the Greek carcass, following the country's plunge into SD, or temporary default status. What will happen next, however, is the same thing that happened when Lehman filed: sheer panic, as a global bank runs ensues, and the USD, not to mention gold, all go parabolic. The only possible brief saving grace is once again China, which just reported that its FX reserves rose from $3,197 billion to $3.233 billion. The bulk of that money is now going to purchase EURs and keep Europe afloat one more day.

A year after the outgoing secretary of the treasury top ticked the economy and ushered in QE 2 with his abysmal NYT op-ed "Welcome to the Recovery" it is only appropriate that we get news that Cisco is preparing to fire 10,000, or 14% of its entire workforce, over and above the number of people that the company said was going to be let go in May. "The cuts include as many as 7,000 jobs that would be eliminated by the end of August, said the people, who asked not to be identified because the plans aren’t final. Cisco, based in San Jose, California, is also providing early-retirement packages to about 3,000 workers who took buyouts, the people said. Cisco Chief Executive Officer John Chambers is slashing jobs and exiting less-profitable businesses as competitors such as Juniper Networks Inc. (JNPR) and Hewlett-Packard Co. (HPQ) take market share in Cisco’s main businesses with lower-priced, simpler products. Sales of Cisco’s switches and routers, which made up more than half of revenue last year, will continue to slip, said Brian Marshall, an analyst at Gleacher & Co." All in the name of the bottom line: "Eliminating jobs will help Cisco wring $1 billion in expenses in fiscal 2012, the company said in May. Cisco expects costs of $500 million to $1.1 billion in the fiscal fourth quarter as a result of the voluntary early retirement program, it said in a quarterly filing." We expect many other companies to follow suit in order to eliminate even more "overhead", or as it is better known, fat. And while S&P500 EPS may get a modest boost out of this latest upcoming firing wave, it means that the next leg down in payrolls is imminent.

Now that the market's bipolar yet brief attention span has once again shifted back to Europe, the vacuum tubes have completely forgotten that last week just confirmed that the labor part of the US economy (one part of the Fed's original dual mandate, before the whole market manipulation thing became dominant) has joined housing into sliding back into near outright contraction (and the just released news that Cisco will fire 10,000 people - more on that later - will only make things much, much worse). And so the US, which up until two weeks ago was supposed to be the source of "reverse decoupling" has been quietly swept under the carpet. Yet Goldman's economics team, which in addition to being wrong about NFP forecasts, is unable to conveniently avoid discussing the US economy, has just released its latest macro report, titled, appropriately enough: "Still Disappointing." Needless to say, Hatzius still refuses to acknowledge that his December 1 "economic renaissance" call was abysmal, and so continues to push for a 3% growth in H2, but is finally getting closer to admitting defeat: "The bottom line is that acceleration to a slightly above-trend growth pace in coming months, coupled with unchanged monetary policy through 2012, remains our modal forecast, but the risks to this view are very much tilted to the softer side. In order to hold on to the modal forecast, we will need to see a clear improvement in the indicators as well as a resolution to the debt ceiling debate that imposes fiscal restraint of not much more than the 1% of GDP that we are currently building in for next year. We should have more clarity on both of these issues by early/mid-August." Good luck Jan.

For all who trade across asset classes, not focusing on just equity or just fixed income, a recent paper out of Stanford titled "Capital Structure Arbitrage-Implied Index Trading" contains what is arguably the coolest time series chart looking at the relationship between credit, equity and volatility. While it will have virtually no impact on one's trading prowess, the following correlation between CDX IG, the S&P and the VIX provides countless hours of fun gazing into the distance, as well as numerous probabilistic extrapolations into the future. We can already smell the 19 year old math Ph.D. coding furiously, attempting to reverse engineer the below correlations and translate them into algo signals, which trade based on absolutely nothing but correlations to the other systemic variables, will desperately try to eek out arbitrage pennies before a collapsing ponzi steamroller.

For the week ended June 27, the Fed flooded the financial system with $76 BILLION in liquidity. Bill King of the King Report puts that number into perspective noting that it’s BIGGEST increase since September 22, 2008 right after Lehman Brothers collapsed. That’s right, the Fed just juiced the system as much as it did when Lehman Brothers went under. While a shockingly large single money pump, the Fed’s generally been flooding the system with liquidity at a pace equal to that of 2008 since the beginning of the year.

Our collective insanity will only provide us with answers that sustain and validate our insanity. To assume that we can apply the same thinking processes and so-called logical train of thought to unravel the insanity is to believe that the insanity itself has the capability to be sane, an obviously insane conclusion. So what do we do?

Unable to keep with the events in Europe which are now literally changing on an hourly basis? Fear not: SocGen's James Nixon has compiled the most succinct explanation for why we are where we are, and why things will get much worse, before they get even remotely better. In a nutshell, everything you know about the existing proposals is finished: what is currently on the table is "a wider strategy which includes lowering the interest rate on lending to Greece and returning to the idea of bond buybacks." Ah, yes, the Goldman proposal. However did we know we may end up precisely here. The problem with this proposal is that all bond buybacks at prices below par are, and always have been, considered by the rating agencies as immediate events of technical default. How this eliminates the ECB liquidity scramble bogeyman we have no idea. At this point we are absolutely certain that the only thing on the Eurozone and ECB's plate is to baffle everyone with steaming pile after pile of bullshit so unbelievable, that people are stunned for days, buying bankers valuable time to convert even more freshly printed paper into hard assets. In the meantime, there is no actual plan to deal with the problems of untenable debt, or at least not one that does not involve the outright monetization of debt and thus, the spurring of hyperinflation, which unfortunately is the last recourse to wipe out the tens of trillions in bad debts dispersed proratedly across Europe's insolvent banking system.

It is only fitting that a few days after South Sudan became the newest independent country to join the roster of IMF and World Bank "modernization and industrialization" targets, another Southern version of something should break apart, although some may be surprised that this latest secession is not somewhere in the middle of Africa, but in America's own insolvent back yard. Meet Southern California. "Accusing Sacramento of pillaging local governments to feed its runaway spending and left-wing policies, a Riverside County politician is proposing a solution: He wants 13 mostly inland, conservative counties to break away to form a separate state of "South California.'' Supervisor Jeff Stone, a Republican pharmacist from Temecula, called California an "ungovernable'' financial catastrophe from which businesses are fleeing and where taxpayers are being crushed by the burden of caring for welfare recipients and illegal immigrants." Ah yes, the heart of prosperity that is the Inland Empire, known for such great achievements as Hell's Angels, the most ridiculous excesses of the housing bubble, Del Taco, and... that's pretty much it. This sounds like yet another Swiss Watch plan.

As long as unemployment remains high and economic activity remains no better than flat there will be pressure on the Fed to meet its full employment mandate. QE is the only trick left in their bag. That will lead to further price inflation, a shot in the arm for the financial markets, but it will not lead to a boom in industrial activity or the estimated 250,000 new jobs a month that must be created over the next five years to create "full employment."

This is kinda like if one is a 2nd year corp fin analyst, and just as the 300 tab excel model showing the massive synergies from the pitched M&A deal is supposed to be presented to the client, the whole thing #Refs out... And hasn't been saved for days. According to Bloomberg, in the last week the ratio of insider selling to buying on the S&P was 3,700x.... 3,700x!!!!!

Yep. G-Pap, up until a week ago completely reliant on the good will of Europe to prevent a revolution in Athens, has now turned the tables on his saviors and has dispatched a scathing letter blasting his rescuers: ""Crunch time" has arrived and there is no room for indecisiveness and errors such as: (1) taking decisions that in the end prove 'too little, too late' to convince the markets we are serious; (2) making compromises that satisfy our internal political 'red lines' that in the end substitute tactical politics for sound management of the crisis (although I do recognize the problems some governments have and the democratic demand for a greater say of Parliaments in trying to deal with this crisis); (3) failing to use in-depth technical analysis and consultation before decisions are made; (4) allowing a cacophony of voices and views to substitute for a shared agenda, thereby creating more panic than security; (5) nd I would add more global issues such as doing nothing substantive about the destabilizing role of the rating agencies, credit default swaps, tax havens or about plausible new revenues such as a financial transaction tax....The above have in one way or another had profound effects on my country and others facing similar challenges." Yeah, it's all Europe's fault Greece is broke. And the vile, evil speculators of course.

How indeed...

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 11/07/11