Archive - Aug 16, 2011

Trading the CAC40 vs witnessing The Inevitable Pan-European Real Estate Collapse

Earlier today, at least one economist was ridiculing the gold standard because supposedly while under one, there was "price instability", despite empirical proof by George Selgin that the Fed's mandate of 'price stability' has been a disastrous exercise in complete futility. For those who have a shorter attention span and can not be bothered with multi-page, non-bulletized presentations, here is an example of your precious centrally planned price stability: as Sean Corrigan demonstrates, the swing back and forth in the CHF trade weighted index on SNB (non)intervention in one short week is a 11.5 sigma event, or a 1 in 1,516,122,879,893,320,000,000,000,000,000 event, which without central planning price stability intervention would occur roughly once every several trillion qunitillion years. And the kicker: a quick look around today's markets is chock full of such examples. But yes, aside from the facts, the gold standard is a "joke." In the meantime, anyone who took said economist's advice and went long spam and short gold, is broke about 10 times over in the past two years...

SSDPlunge

Roll up, roll up for the Ministry of Debt Tour...

Remember what happened to the market following Trichet's disastrous press conference two weeks ago? Well, cue it up, because it is deja vu all over again. The second Sarkozy said that neither the Eurobonds are coming as expected, nor the EFSF will be expanded, the sell off began. The only question the market has is when is the next emergency meeting?

Plan seems long on big picture idea, short on details and short on other member states being consulted. Feels like more concrete, immediate action, was already priced in. If anything, seems like they are going to start taking money from banks to pay for bailouts of banks. Makes sense in a weird way, if you believe banks should be bailed out, but don't think that was the "support" the market was looking for. With all the short covering, and high expectations, I think market will end up the day disappointed.

Here are the key highlights for now:

• And fade: Sarkozy says "Maybe" Eurobonds imaginable one day
• Sarkozy says not enough integration for eurobonds now
• Eurobonds have no democratic legitimacy now, Sarkozy says
• French president Sarkozy says proposal would elect a Eurozone president for two and a half years
  
• Van Rompuy Proposed as Head of Euro Council
• Merkel says debt brake to be anchored in German, French law. And so the take over of europe by the new axis countries: France and Germany, is complete.

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

Market Recaps to help improve your Trading and Global knowledge

Things will be happening in the next 24 hours.

Over the weekend, following the Iowa straw poll result, we posed a simple question: why does the media continue to ignore Ron Paul (on both the left and right)? We followed up with none other than Paul's own response to this curious status quo. A few days later, it appears that the media itself has finally caught on to this ironic 'house of mirrors' effect, and while Paul is still not a household name, the self-effacing sarcasm this topic has garnered, has been captured best by none other than Jon Stewart in this entertaining clip that mocks the established mindset of the legacy media to not dare disturb the status quo, confirming that everyone, left and right, are really all just the same. For those who have not seen it yet, this is a hilarious must watch.

For those wondering why gold just surged by about $20 dollars, and why Gartman's cab driver once again proves to be far more astute than his passenger, we bring to your attention  a report just released by Goldman's Francesco Garzarelli which is appropriately titled "The Price of Slower Growth" - appropriately, because in it Goldman slashes the firm's outlook on global policy rates across the board, slashes to cut its 10 Year bond yield outlook from 3.75% to 2.75% in 2011 and from 4.25% to 3.50%, slashes 2012 US GDP from 3.0% to 2.10%, and once again makes it all too clear that QE3 is coming, and not only coming but is already priced in (to the tune of about $300-400 billion): "In previous work, we have estimated that every US$1trn in purchases, if maintained, decreases 10-yr Treasury yields by 25bp-50bp. If our subjective assessment that market participants now assign a greater-than-even chance of ‘QE3’ is correct, and considering that the expected ‘unsterilized’ size of these purchases is in the region of US$600-800bn, this would equate to as much as 20bp being already ‘in the price’. Clearly, these magnitudes are unobservable, and thus subject to great uncertainty. Nevertheless, our calculations would suggest that the bond market is already discounting a mild recession and the chance of a Fed reaction to it." Translation (and this is nothing new to ZH readers): Bill Dudley has his marching orders from Jan Hatzius: GS now sees deflation as the broader risk, and anything and everything must be done to make sure Wall Street has another record bonus season round, pardon, deflation must be halted.

Over the weekend, we presented the suddenly very pessimistic outlook by Morgan Stanley's equity strategist team which stated in no uncertain terms that it "assigns a higher probability to our bear case than bull case, preventing us from becoming increasingly optimistic" adding that it "continues to assign a higher probability to the bear case than the bull case, and believe the recent price action increases the probability of the bear case." Yesterday, the firm's Credit Strategy team joined the call for a bearish outcome, when in a conference call it stated its case for why its "bearish strategic view is based on long-term structural and valuation issues." Two key metrics watched by MS: i) The unsustainable DM credit super-cycle may be approaching a difficult dénouement, and ii) based on long-term P/E valuation measures, US and UK equities are still expensive. MS warns that "a larger correction in risk assets is likely if a recession occurs, more so for equities" a topic discussed by the equity strategy team over the weekend which believes that the probability of a recession has surged (and continues to be confirmed by leading indicators such as yesterday's Empire State Fed survey). Morgan Stanley's concluding advice to clients: "look to reduce risk in Developed Markets  in Counter-Trend rallies." Luckily, any time volume trickles to a halt, the counter-trend rally should present itself providing ample opportunities for selling into it.

A French-owned rating agency (the same country that currently has a short-selling ban) just did all it can not to tip the boat. What can one say but "truly a gutsy call." Unlike S&P which looks at such obsolete things as fundamentals and realistic projections, Fitch instead relies on something far more intangible: "its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base." In other words, it's rated AAA... because it is rated AAA. Somehow we doubt Fitch will take the initiative to be the first to downgrade France... That said even Fitch had some pseudo-harsh words: "Despite its exceptional creditworthiness, the fiscal profile of the US government has deteriorated sharply and is set to become an outlier relative to 'AAA' peers. The overall level of general government debt, which includes debt incurred by states and local governments, is estimated by Fitch to reach 94% of GDP this year, the highest amongst 'AAA' sovereigns. However, federal government indebtedness is lower than in other major 'AAA'-rated central governments. Fitch estimates that federal debt held by the public will be equivalent to approximately 70% of GDP this year compared to around 75% for the UK ('AAA') and France ('AAA')." So, record debt for a AAA-rated country, check, but... AAA-rated. So all is good.

July industrial production came in slightly better than consensus expectatins of 0.5%, printing at 0.9% for the biggest rise of 2011 to date. This followed an upward revised June of 0.4%, up from 0.2%. Manufacturing output rose 0.6 percent in July, as the index for motor vehicles and parts jumped 5.2 percent, the biggest driver for the spike, and production elsewhere moved up 0.3 percent. Some other details from the report: "The output of mines advanced 1.1 percent, and the output of utilities increased 2.8 percent, as the extreme heat during the month boosted air conditioning usage. At 94.2 percent of its 2007 average, total industrial production for July was 3.7 percentage points above its year-earlier level." As for capacity utilization, the total industry rate climbed to 77.5 percent, a rate 2.2 percentage points above the rate from a year earlier but 2.9 percentage points below its long-run (1972--2010) average."

Throughout the PIIGS crisis, it has been a given that the German juggernaut economy would provide the strength for the rest of Europe to rely on. Last week's weak French GDP number highlighted concerns about the ability of France to retain its AAA rating. Today's weak German GDP numbers will make it even harder for Merkel to convince German's that they need to spend even more money fixing problems abroad. Certainly some opposition members are likely to use the weakness as a sign that she has had her eye of the ball and the domestic economy is suffering at the expense of all her bailout jaunts. I think this potential weakness in the core of Europe is a new addition to the growing list of problems facing the global economy. Empire manufacturing, a relatively minor data point, was awful yesterday. Stocks were able to ignore that yesterday, just as they ignored the extremely weak consumer confidence number on Friday. It feels like a lot of hedges were cut yesterday and the bullishness that was inspired by the strength of stocks has been replaced with doubt again. So far people aren't rushing to put on hedges, but the tone has become decidedly negative.