Archive - Jul 1, 2011

The take home point with all of this is that the Fed is in fact powerless to address, let alone fix, the Financial Crisis that began in 2007. Indeed, the Fed’s key role in creating it was to let Wall Street dictate the Fed’s moves. And now that the Fed is supposed to solve the Financial Crisis, we’re finding out not only do they have no clue how to do it, but they’re even aware of this fact

I tend to be years early on identifying trends, but three that will make a difference going forward are what I call "The Three Ds": Delegitimization, Definancialization and Deglobalization. Broadly speaking, the global economy and thus globalization and its sibling, financialization, depend on the legitimacy of centralized institutions. These include nation-state governments, international organizations such as the IMF, central banks, the mainstream global media, and various Central State agencies tasked with reporting data accurately, for example the Securities and Exchange Commission (SEC) in the U.S. and equivalent agencies in other trading blocs. By far the grandest experiments in legitimization of the past 20 years are the European Union (EU) and its common currency, the euro, and China's one-party rule combining a command economy with a quasi-free enterprise model, i.e. "Capitalism with Chinese characteristics." The vortex of insolvency gripping Europe is rapidly chewing through what remains of the legitimacy of the euro and the EU institutions tasked with overseeing the financial sector...As for the euro and the EU's grand integration experiment, we can turn to George W. Bush's inimitable phrase for a summary: this sucker's going down. The subprime mortgage meltdown offers a cogent preview of Europe's future.

This is how we handle things down in Toon Town.--Judge Doom

As the table below demonstrates, the bond vigilantes are now eviscerating the belly of the US Treasury curve: the weekly percentage move higher in the 5 Year yield is now the largest...Ever. For those wondering if PIIGS should be renamed to PIIS following the brief rescue of G, perhaps it is time to officially rename it PIISA.

Just out from Reuters:

• STRAUSS-KAHN ACCUSER ADMITTED SHE LIED TO GRAND JURY ABOUT WHAT HAPPENED FOLLOWING PURPORTED ATTACK - D.A.
• STRAUSS-KAHN ACCUSER CLEANED ANOTHER ROOM AFTER INCIDENT, CONTRARY TO WHAT SHE TOLD GRAND JURY - NY PROSECUTOR
  

More as we get the full letter sent out by D.A. Cyrus Vance.

The much-awaited filing of the Farmville creator's $1 billion IPO can be found here.

Some highlights:

• Q1 2011 revenue: $235.4MM, up from $100.9MM YoY, LTM revenue $731.9 MM
• Q1 Net Income: $11.8MM up from $6.4MM YoY, LTM Net Income: $96.2MM
• Q1 Adjusted EBITDA: $112.2MM, up from $93.5MM, LTM EBITDA: $411.4MM
• Adjusted EBITDA definition also excludes stock based comp and change in deferred revenue
• Cash: $995.6MM, almost the same size as the entire proposed IPO
• Working Capital: $603.4MM

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

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

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

DSK who has just left New York court, has been advised he will be released on his own recognizance, however the prosecution is not dropping its case, as expected, he will not regain his passport, he will regain his cash bond back, and will appear in court again on July 18. Perhaps the best approach at this point is to get the maid's story on all the latest developments that have emerged instead of having an infinity+1 conspiracy versions of what may have happened.

"The Institute for Supply Management (ISM) rises unexpectedly in June, up 1.8 points to 55.3. As the median forecast and ourselves had looked for a decline, this is clearly an encouraging upside surprise. The composition of the report, however, was on the weaker side. Specifically, a sharp increase in the inventories index (from 48.7 to 54.1) explained 1.1 points of the 1.8 increase in the headline index. If anything, an increase in inventories is a negative for future activity. The remaining 0.7 point of the headline increase was due to small increases in new orders (by 0.6 point to 51.6), production (by 0.5 point to 54.5), supplier deliveries (0.6 point to 56.3) as well as a more sizable increase in employment (1.7 points to 59.9)."

After the "Japanese renaissance" component of the global economic rebound thesis was effectively negated yesterday following the release of the worse than expected Tankan manufacturer index, today we get point blank evidence that the second leg of the economic recovery is now completely debunked, after GM, whose June car sales were up 10.2%, broadly missing expectations of an 18% pick up, but far more importantly, and as we have been pointing out for a year now, the bulk of GM production does not ultimately lead to any sales, but merely more and more channel stuffing in the form of month end dealer inventory which in June just hit 605,000. Point being: the Japanese supply shortage is a strawman that has nothing to do with actual demand which to the chagrin of the Koolaid drinkers is a critical component in determining clearing prices, and which is simply non-existent despite the government's eagerness to provide subprime loans to everyone (or no one as the case may be) who wishes to buy a GM vehicle.

While all the algos are scanning the ISM general business conditions headline, the New Orders Less Inventories spread, which leads the broader index by 3 months, has tumbled and the divergence between it and the ISM Composite is now at near record wide levels. The last time this spread closed in a favorable fashion was back in 2010, when QE1 and 2 goosed the market and the general manufacturing space. This time around, in the absence of another stimulus, the spread will close again all right, but not the way it did last time around, and explains why an ISM analyst just said new orders "not where we'd like it to be." The sub 50 ISM print is coming. Just not this month.

Just like earlier in the year, the global recovery is once again on the shoulders of the US. Manufacturing ISM just printed at 55.3, a major beat to expectations of 51.3, and up from 53.5 before. How this meshes with PMI data that is contracting across the globe is irrelevant: just BTFD as America is once again expected to push the world out of the "soft spot" although this time with no QE or fiscal stimulus. Among the various indices, employment mysteriously increased from 58.2 to 59.9 despite consistently weak initial claims and NFP numbers missing expectations, New Orders increased from 51.0 to 51.6 despite a collapse in comparable metrics in recent regional Fed surveys, and prices paid dropped from 76.5 to 68.0, despite ongoing inflationary pressures.

In true bizarro fashion, the latest catalyst for the stock jump is the latest miss in UMichigan consumer confidence, which missed expectations of a rebound from May's 71.8 to 72.0, instead printing at 71.5, dashing our hopes that there would be more BS-base baffling. In doing so, UMich has confirmed the Conference Board's indication that consumers are now less confident, despite a substantial drop in gas prices in the last month (a decline which has now been largely reversed). More importantly, 5 year inflation expectations continue to be firmly lodged in and came unchanged from last month at 3.0%. 1 year inflation expectations however did drop from 4.0% to 3.8%, a number which will likely reverse if gas prices continue trending straight up. And now, all eyes on the ISM.