Archive - Aug 18, 2011

Welcome to the New ZH Servers. Due to recent traffic surges (courtesy of what we believe is a permanent transition to market efficiency) which resulted in numerous server crashes over the past 3 weeks, courtesy of 1.5 - 2 million page views per day, we have had to upgrade once again, a move that was funded thanks to your donation generosity, dear readers. We are now at a state where even a 500 point drop in the S&P will hopefully not bring us down. We will also gradually return all the recent UI improvements such as comment ranking, and contributor blogs that we had to eliminate due to processor capacity limitations. We hope you enjoy the experience.

As those who have studied some history know all too well, any mention of the Maginot Line usually does not have a Hollywood ending. Alas, the same can be said for the highly unique analysis by JPM's Michael Cembalest who looks at Europe's latest "Maginot Line", this time however for the insolvent, 21st century, generation. "Rather than focus on what EU politicians said at yet another summit this week, let’s look at the lines of defense they may eventually have to rely on to defend the European Monetary Union. For illustration’s sake, we have superimposed these defenses on a map of the Maginot Line constructed by France in the early 1930’s to defend against an attack from the East." The 8 steps outlined present, from start to finish, the flow chart of what will happen in the next few months as Europe scrambles to avert one crisis after another, which as we pointed out months ago, ends with the "last resort" federalization of Europe, via the Eurobond paradigm. Alas, the response to that is (or isn't) revolution, in which the people finally tell their treasonous (there, we also used that word) governments they have had enough of funding other people's greed, gluttony, and overall mistakes. Just as the idiotic Maginot line, praised back in its day as a work of genius, was circumvented in one simple move when the German army simply invaded France through the Ardennes forest and took over in hours, so this latest Maginot line will do absolutely nothing to prevent the final outcome which even Europe's deranged bureaucrats know is coming: the end of the most flawed generational experiment in globalization history.

Barton "AUM Smalls" Biggs, who is now very obviously floating in a geritol-free pink cloud of his own, and who back on August 4 predicted a 7-9% rally in the next 3 weeks, only to realize subsequently he forgot a minus sign (and potentially his incontinence protection), confirms he has now totally lost all grasp with reality. As in an absolute psychotic breakdown, per the following statement given to Bloomberg TV: "I don't see all the bad news that you keep citing." We urgently demand that the DSM IV do some creative adjustments to their definition of schizounipolarpermaclowndementia and apply the appropriate image of this now uber-ridiculed example of a the lost beta chasing generation (and one with some very serious flaws in thawing from the cryogenic sleep state). Forget late night comedy, the following 8 minutes are nothing short of the most grotesque-cum-slow-motion-train-crash-rubbernecking entertainment one can get for free tonight.

Following last week's near record surge in M2, which was merely the result of a complete panic in markets resulting in a scramble for deposit accounts out of money markets (these tumbled by $82.5 billion in the week to $1688.5 billion, the lowest since September 2007) and other "unsafe" venues, amounting to $159.1 billion, this week M2 has risen by a far more modest (though still abnormally high by historic standards) $42.2 billion. What is disturbing is that unlike in the past when record surges in commercial bank savings deposits have seen a prompt unwind in the following week, this time around last week's $58.4 billion spike in such money was followed by another massive $51.7 billion, as cash ran to the "safety" of FDIC insurance. And just as disturbing, the huge $99.3 billion in additions to plain vanilla demand deposits did not see any unwind, with just $8.3 billion leaving bank teller windows in the past week. End result: M2 has just hit another new all time high of just over $9.5 trillion (which helped today's LEI number beat expectations). And if QE3 proceeds as planned, and it US consumers actually start borrowing, this number is going much, much higher. Which will be bullish, for makers of wheelbarrows.

Now that even Joe LaSagna is no longer imbibing the Kool Aid, and is scrambling to regain some credibility by enunciating such occult (for his mouth) words like "recession" and "downturn", it has become all too obvious, that just like in August of 2010, right before Jackson Hole 1.0, the scramble for who can downgrade the US in the most unique, bizarre and sadomasochistic fashion is on - these people need to get paid after all, and without the Fed cutting checks, they may all have to face comp committees that demand to see performance. Alas with everyone on Wall Street missing today's Philly Fed by eight unbelievable standard deviations, base comp is all said economists can hope for. In other words, and as predicted over and over and over, the scramble to make the baseline case a recessionary one, is here. And since it is now cool to be pessimistic again, here is JPM's Michael "Fonzarelli" Feroli who just projectile vomited all over the US' growth prospects...two short weeks after he did precisely the same: "Growth in the current quarter looks only moderately softer than our previous projection, however the risks to our previous projection for 2.5% growth in Q4 are now very clearly to the downside and we are lowering forecasted growth in that quarter to 1.0%. We are also lowering 12Q1 growth to 0.5% from 1.5%. In sum, over the next four quarters we don't see growth that is much faster than the growth that took place in the first half of this year." Translation: "help us Obi Ben Bernanke, you are our only hope."

The WSJ article last night was the kiss of death for all markets today. Was that deliberate? I think so.

The "panic" trade had a few hours to eat dinner, and now it's back to business. As Asia opened, the kneejerk reaction to Europe closing is that, naturally, Europe will open in a few short hours, this time however with fresh fears of what the SNB might be cooking if it needs Fed assistance to sustain its local banks' dollar margin calls. The result: gold hits new all time record highs, bonds drop to intraday lows, crude is about to reenter the critical 70's, so very necessary for QE3, and ES, well, you get the picture.

Now I believe it is time to fast forward to the fall of 2008. Once again the 2008 market is a road map of how human emotion reacts when credit events happen. When economic data deteriorates at an exponential pace. When the unthinkable becomes reality. The volatility skew relative to the vix captures market sentiment very well. Overlay any such chart with the SPX and the similarities are without question. So for all those pundits who say this is not 2008 I present the following chart. Once again markets are pricing in the unthinkable. In 2008 history witnessed the failure of Lehman, AIG and the GSEs. Today history is bearing witness to sovereign nations on the brink of failure. In 2008 there was the threat of bank runs. Today there is the threat of currency runs. In 2008 there were government bailouts. Today there are central bank bailouts.

We said ¹ for a reason, because while indeed homes have never been more affordable... one must pay for them in constant gold. Yes, holding gold over the past century has as of this point effectively defeated any of the accumulated home price inflation over the years, and when expressing home prices in terms of gold, the average home is now more affordable than ever before. We said gold. Not dollars, not yen, not spam, not Nobel economics prizes. So for everyone who wants to exchange some of that shiny metal into the most valuable and capital intensive investment the average American will do in their lifetimes, this is your moment.

The sleepwalking during the last 24 months is all the more remarkable, given that the economy has been treated with the biggest dose of monetary and fiscal stimulants ever administered in U.S. history. Why the continued weak pulse? Each recession has its own story – how long it lasts, how deep it gets, industries worst hit, particular bubbles burst. But in every recession, the heart of the problem is the same, namely, an imbalance in the market for cash. Every recession begins when the aggregate amount of cash that people want to hold (given their wealth and the other things they want to own) is more than the amount of cash actually in existence. That imbalance – the demand for cash exceeding the supply – depresses the entire economy because the flip side of the market for cash is the market for everything else. All markets and all industries are hit, and most of them contract because most people are trying to sell more than they buy... which is the only way for anyone to increase his cash holdings and which is impossible for everyone to do at the same time.

If yesterday's news broken by ZH that one bank was in dire need of US dollars and ended up borrowing $500 million from the ECB was enough to send the market down almost 5% today, then the follow up news that the FRBNY just reactivated FX swap lines with Europe will likely send ES limit down at tomorrow's open. The FRBNY has just announced that in the week ended August 17, it lent out $200 million to not the ECB, not the BOE, but the "most stable" of all banks: the SNB. This is the first use of the Fed's Swap Lines since March, and the most transacted under this "last ditch global bailout swap line" (see more on how the Fed bailed out the world using swap lines here) since October 2010. This event also gives us a hint that the European bank in question in dire need of cash is Swiss, which in turn means that it is not some usual PIIGS suspect, but one of the two "big ones." If true, this means that the European insolvency, liquidity and what have you crisis is about to take an exponential step function higher.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 18/08/11

The ridiculous war between Obama and S&P, which escalated last night following disclosure by the NYT that S&P was being investigated for its muni ratings, has just taken another turn for ths surreal after S&P announced that it would most likely downgrade munis as soon as the final US budget is finalized. Granted that could very well mean never. To quote S&P: "In our opinion, the longer-term deficit reduction  framework adopted as part of the Budget Control Act of 2011 (BCA) could undermine the already fragile economic recovery and complicate aspects of state and local government fiscal management. Either of these outcomes could potentially weaken our view of certain individual credit profiles of obligors across the sector." The sector being the US munis. And from Bloomberg: "The company, which said earlier this month that states and local governments could remain AAA even after the U.S. cut, said in a report today downgrades could come after reductions in federal funding or changed policy. Ratings changes would come based on “differing levels of reliance on federal funding, and varying management capabilities,” and, after the Budget Control Act of 2011, will be felt “unevenly across the sector,” S&P said. "Experience tells me I would expect there to be some downgrades,” said S&P credit analyst Gabriel Petek in a telephone interview. “These cuts are coming in addition to the losses of revenue that already came during the recession."" Bottom line: the longer this downgrade over up to 7000 issues is deferred, and it is very much overdue right now, the bigger it will be when it finally arrives, and the greater the gloating by Meredith Whitney will be when it finally arrives.

While two short months ago, "nobody" had any idea that Italy's banks were on the verge of insolvency, despite that the information was staring them in the face (or was being explicitly cautioned at by Zero Hedge days before Italian CDS blew out and Intesa became the whipping boy of the evil shorts), by now this is common knowledge and is the direct reason for why the FTSE MIB has two choices on a daily basis: break... or halt constituent stocks indefinitely. That this weakness is now spreading to France and other European countries is also all too clear. After all, if one were to be told that a bank has a Tangible Common Equity ratio of under 2%, the logical response would be that said bank is a goner. Yet both Credit Agricole and Deutsche Bank are precisely there (1.41% and 1.92% respectively), and both happen to have total "assets" which amount to roughly the size of their host country GDPs, ergo why Europe can not allow its insolvent banks to face reality or the world would end (at least in the immortal stuttered words of one Hank Paulson). So yes, we know that both French and soon German CDS will be far, far wider as the idiotic market finally grasps what we have been saying for two years: that you can't have your cake and eat it, or said otherwise, that when you onboard corporate risk to the sovereign, someone has to pay the piper. Yet there is one place where that has not happened so far; there is one place that has been very much insulated from the whipping of the market, and one place where banks are potentially in just as bad a shape as anywhere else in Europe. That place is.... Canada.

Earlier today, we cynically predicted that by purposefully leaking the Autonomy news, HPQ was merely "doing its best to mask ugly news later." Sure enough, HPQ has just released earnings early, with the stock being halted, and for a good reason. In the PR we find the following stunner (totally expected to Zero Hedge readers): "HP estimates full-year FY11 revenue will be approximately $127.2 billion to $127.6 billion, down from its previous estimate of $129 billion to $130 billion. FY11 GAAP diluted EPS is expected to be in the range of $3.59 to $3.70, down from its previous estimate of at least $4.27, and FY11 non-GAAP diluted EPS is expected to be in the range of $4.82 to $4.86, down from its previous estimate of at least $5.00. FY11 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $1.16 to 1.23 per share, related primarily to restructuring and shutdown costs associated with webOS devices, the amortization and impairment of purchased intangibles, restructuring charges and acquisition-related charges." Whoever followed our advice to pound the robot driven spike earlier, congratulations.