Archive - Aug 29, 2011

Italy's brief flirt with Austerity, disclosed on August 12, lasted all of 2 weeks. As Reuters reports, following a 7 hour meeting between FinMin Tremonti who has been portrayed by the media as the primary reason why Italy has recently become the target of bond vigilantes, and which in turn was forced to establish some token measures of austerity, and PM Berlusconi, the most provocative measure of the "austerity" packet have been dropped, namely the solidarity tax, which would see new taxes on high earners, as well as austerity imposed on local budgets, and instead will be replaced with new 'tax evasion' avoidance schemes. Surely this massive watering down of Italian austerity will work: just ask Greece how effective the whole crack down on tax avoidance was. At least the Piazza Navona strike cam can be dropped for now... or at least until bond vigilantes strike in Rome again, and the country does the whole austerity charade again.

Some observations from SocGen, which presents us with three charts explaining why those who believe in the Japanese scenario should "be afraid, be very afraid - If we accept the idea of a three-stage crisis (taking as our starting points 2000/01 + 2007/08 + 2011), we have probably reached a situation similar to Japan’s lost decade of the 1990s. A Japanese-style scenario for the US could gain traction, particularly if there is no real estate recovery in the US, high unemployment levels persist, and economic sentiment remains depressed. Such a configuration would suggest that, in June 2011, we exit a bear market rally, which was fuelled by restocking and QE2. Another 20% drop in the equity indices could then be observed in the coming months if this scenario were to materialise."

For anyone wondering why the biggest drivers of intraday moves in the stock market are furious short covering squeezes which have led the S&P to have daily fluctuations that make a mockery of the Fed's prerogative for "price stability", here is your answer. On August 15, short interest in the NYSE soared by over 1 billion shares compared to the end of July: this is the highest gross short interest since June 15, 2010, and the biggest increase biweekly increase in NYSE short interest since the S&P's plunge to 666 in March of 2009. If the central planners pull something out of their sleeve, and the short interest plunges to recent averages in the mid 13 billion share level, expect some even more furious short covering sprees to send the S&P much higher on an intraday basis.

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

Market Recaps to help improve your Trading and Global knowledge

The explosive rise and global impact of technological innovation has persuaded us that technology is the ultimate solution to all our problems. This assumption is rarely questioned; it has become like the air, unseen and unexamined. The notion that technological innovation is intrinsically incapable of "fixing" our problems is not just alien to our collective mindset, it is essentially sacreligious. In the current cargo-cult of technology worship, the basic assumption is better engineering can solve every problem. Thus we have two powerful cargo-cults influencing the American economy, society and government: the Keynesian "monetary easing," borrow-and-spend your way to permanent prosperity Cult of the Fed and its Keynesian priesthood, and the cult of technological innovation as the fount of all solutions. The idea that both these cults are the equivalent of the Mayan priesthoods which oversaw the decline and implosion of the Mayan Empire is not just an outlier--it is heresy of the first order. Ironically, perhaps, it is glaringly obvious that both cults will fail because they do not understand the problems and are automatically applying tools that cannot possibly fix what is broken: the three basic principles undergirding the American economy and society are crumbling, though that devolution is mostly hidden from view.

Even as the policy instrument that is the US stock market does its robotic levitation thing on days when it is not plunging (i.e. volume is bigger than average), other, more rational indicators continue to paint a less rosy picture in terms of risk inflection points. The latest of these is CMBS, which as we speculated two weeks ago, has continued to be sold off across all vintages and as of today, the super duper AAA tranche has just hit its widest spreads since June of 2010. The charts below show the spread comparison from two weeks ago for AAA and AJs and the subsequent widening to date.

Time for some more rotation of the titanic's deck chairs with the Princeton labor economist taking over Goolsbee. Unfortunately with Geithner still around, there is no risk America will change its current path heading straight into a Double Dip iceberg.

The second economic disappointment of the day comes from the Dallas Fed, which dropped from -2.0 to -11.4 on expectations of -9.0- this was the 4th consecutive negative print month. The report was, in a word, horrible, with just 2 of the 15 constituent indices posting an increase, and the bulk solidly in the red, led by Unfilled and New Orders which dropped 16.8 and 11.2, respectively: not good for economic growth. On the employment side there was nothing good either, with both employment and hours worked declining by -6.7 and -10.1, respectively. The only components rising were materials Inventories (must.restock.always), and CapEx, up 10.7. The most critical Production index declined by 9.7, just barely positive at 1.1, and the second lowest in 2011, with a worse number before that printing all the way back in 2009. Yet the most descriptive are the responses from the survey respondents themselves: two words "peak gloom." And why not: the ISM will print in the mid 40s and the NFP could well be negative. Which of course will send stocks soaring even higher on QE3 being priced in for the 666th time.

The nonevent of the year. The Fed has put off any serious action to repair the sagging economy until the next (FOMC) meeting on September 20-1. The economy is already humming along well enough to postpone any further stimulative action. In fact, he stated that he expects GDP to be stronger in the second half than in the first. This is in sharp contrast to the market’s opinion that things are going to hell in a hand basket, and that Armageddon is near. Could “surprise” become the most commonly used word in future Fed releases?

Perhaps it is time to redefine the term "distribution." And somehow everyone has forgotten to bash High Frequency Trading on days when it is the primary bidder of a levitating stock market.

The NAR just reported that pending home sales, yet another metric of that long-forgotten housing market, dropped 1.3% in July, on expectations of -1.0%, and down from 2.4% in June. Market reaction is none, because this metric does not matter: all that matters is who and what else petrodollars can bail out next. From the report: "The Pending Home Sales Index,* a forward-looking indicator based on contract signings, slipped 1.3 percent to 89.7 in July from 90.9 in June but is 14.4 percent above the 78.4 index in July 2010. The data reflects contracts but not closings." And the soundbite from the always hilarious and massively discredited and conflicted Larry Yun: "The market can easily move into a healthy expansion if mortgage underwriting standards return to normalcy,” he said. “We also need to be mindful that not all sales contracts are leading to closed existing-home sales. Other market frictions need to be addressed, such as assuring that proper comparables are used in appraisal valuations, and streamlining the short sales process." Ah yes, mortgage underwriting standards, in other words if banks were to actually do something about mortgage that are delinquent by nearly 2 years. Those standards?

Follow that bouncing ball across Europe as it eventually hits home right here on Wall Street. Why haven't we heard about this in the media or the sell side reports?

Nobody could have seen this coming. From Reuters: "Zynga, the social games maker may delay its plans for an initial public offering until November because of poor market conditions, the New York Post newspaper reported late on Sunday. The New York Post, citing two sources with knowledge of Zynga's plans, said the company hoped its shares would be listed as soon as possible but is "no longer in a rush because of the rocky stock markets." Another source close to the company said its public debut could be delayed until November but the company will know more after Labor Day, the newspaper said." Maybe Zynga can just find some of those sophisticated buyers of Sino Forest stock who were betting on a dead cat bounce, or all of those distressed funds who were bidding up the bonds at 50. If that fail, it can just approach the Sovereign Wealth Funds which bailed out the biggest (pro forma) Greek and American bank for a few days.

Although we waxed skeptical here the other day about Warren Buffett’s just-announced $5 billion stake in Bank of America, we allowed for the possibility that the deal will provide a handsome payoff to him no matter what happens to the bank.  B of A could implode, after all, a victim of sinking collateral values for its mortgage loans, and of litigation over its securitized-lending business. 

Bank Of America continues to desperately raise firesale capital (which it most certainly does not need).

• BANK OF AMERICA AGREES TO SELL 13.1B SHRS OF CHINA CONSTRUCTION
• BANK OF AMERICA SEES SALE GENERATING $8.3B PROCEEDS
• BANK OF AMERICA KEEPS 5% STAKE IN CCB
• BOFA SEES CUTTING RISK-WEIGHTED ASSETS BY ABOUT $16.1B BASEL
• BOFA SEES SALE GENERATING ABOUT $3.5B ADDED TIER 1 CAPITAL
• BOFA SEES GAIN $3.3B ON SALE

In summary: That's $13.3 billion in new capital in the past week that BofA promises it does not need. At all. As for the buyers: the same sovereign wealth funds that just bailed out the Greek banking sector for a few more days.