Archive - Aug 2011

Alternative economic analysis brings with it a certain number of advantages and insights, but also many uncomfortable burdens. Honest financial research is a discipline. It requires us to not only understand the fundamentals, but to question the fundamentals. It requires us to look beyond what we would LIKE to see in the economy, and accept the reality of what is actually there. With this methodology comes the difficulty of knowing the dangers ahead while the mainstream stumbles about well behind the curve. It means constantly having to qualify one’s conclusions, no matter how factual, because the skeptics and opposition base their views on an entirely different set of rules; farcical rules that no longer (or never did) apply to the true state of our country’s fiscal health.

Less than an hour ago, Larry Kudlow tweeted the following: "Sources tell me Italy has to restructure bonds.Deposit run on Italian banks.EU will have to mount Tarp rescue.Big stress on interbank loans." Basically, this is the worst possible combination for Europe which means that another bailout is not only imminent but has to happen tomorrow. Incidentally Reuters is reporting of an emergency meeting between Sarkozy and Merkel and Zapatero on "the markets" which can only mean damage control following today's disastrous Trichet performance. Too bad the markets won't buy it any longer absent some actual actions to back up the deeds. Yet what we are more concerned about is whether or not there really is a bank run in Italy which would be the end of the euro. For that we went to the most trustworthy indicator for European "bankrunness" the EURCHF. To our surprise, the pair just plunged nearly 100 pips after hours, after dropping over 200 pips from intraday highs following yesterday's SNB intervention. Will this force the SNB to intervene again? Find out shortly. AS to what Sarkozy has up his sleeve, we will just have to wait and see when the European markets open in about 10 hours.

The Fearful Flight To Quality Trade stuffs global capital into US treasuries once again, negative yields forthcoming! As Bernanke, et. al. gambled, Europe collapses first - suppressing our gambling costs to record levels. Hey, it was either Europe or China, and our bet was Europe too! Kudos Mr. Bernanke for kicking the can down the road once again.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 04/08/11

For all those wondering if Bernanke has given himself the permission to go ahead with QE3 (which is the only permission that matters, coming courtesy of his bosses at Goldman of course), here is the chart that confirms it. Priced in the anihilated "value" of dollar, the S&P is now almost back to Jackson Hole levels. It is also down 8.6% for the year. As for that far more prosaic chart of the market priced in gold, we won't even go there: basically the entire rally since the March 2009 low has now been wiped out.

Nothing from 2008 has actually been fixed. Faith and trust do not exist in the financial system anymore. Everyone knows the deal… they just don’t want to admit it as it means GAME OVER for the system as we know it.

The Dow is down more than 500. The S&P is down 60. The VIX surges 35% to 32 the highest since June 2010. Implied correlation surges to the highest since last summer. ES volume surges to the highest since the flash crash. Europe is opening in 12 hours. Margin debt is near record high levels, and mutual funds have record low cash. Liquidations galore. Did we miss anything?

For the sake of John Paulson, we sure hope he sold his BAC holdings which are now well below his cost basis. For the sake of everyone else, we also hope they sold their BAC stakes, if any. That said, we can't wait for the Fairholme Capital's conference call with Bank of America's Brian Moynihan on August 10 from 1 to 2:30 pm in which they explain to the market why it is oh so wrong on the most insolvent bank in America.

Here is a chart of what could well be the biggest concern for the market, and one we have been highlights for a long time: mutual fund cash levels, which as ICI indicates were 3.4% in June, is the lowest ever. A 4% drop in the absolute value of mutual fund investments, effectively wipes out the capital buffer of most. Enter liquidations.

Sometimes it is worth reminding our vacuum tube-based readers that after 2pm only a 3,600 point in the DJIA will force a market close for the day, unlike the FTSE MIB and the Liffe where a 4% drop is sufficient.

When looking for super bullish expectations on the economy, everyone knows where to turn to: Deutsche Bank's Joe LaVorgna of course. However, many readers probably did not know that when looking for worse than consensus expectations about the future, including those cautioning about heightened recession worries, one should turn to... Joe LaVorgna?! That's right, in a just released note to clients, the CNBC staple "pundit" has just said that tomorrow's NFP may not only be 9.2% but may in fact exceed it. He also adds that "Weak income growth, falling stocks will have "damaging effect on business confidence" and make "managers even more hesitant to spend on either labor or capital" His conclusion: "‘If the unemployment rate were to spike, investors would become even more worried about a recession, because unemployment tends to go up sharply just ahead of the onset of recession." Judging by Joey L's predictive track record it may really be time to mortgage that first born and buy everything that is not nailed down.

For those who didn't get their share of laughs listening to Barton Biggs yesterday on CNBC, and his prediction of a 7-9% rally in three weeks (make that 9-11% as of today), here is your repeat chance to do just that as he has a 3:00 pm appearance on Bloomberg TV today. Incidentally, Barton will be absolutely correct if next Tuesday the Fed announces that QE3 is starting. Of course gold will be at $2000 to celebrate the Fed pushing its balance sheet over $4 trillion. Otherwise, the outlook is not so rosy...

QE2 is dead. Long live QE3! Markets rebounded yesterday when Ben Bernanke’s BFF at the WSJ Jon Hilsenrath published an article that quoted senior officials at the Fed as saying that they would give “very serious consideration” to a new round of bond purchases, aka QE3. Not to toot my own horn or anything, but I published a note back on February 2nd called Go All In On Bernanke’s Weak QE3 Hand where I said, “The problem the Fed and Chairman Bernanke now face is that the so-called wealth effect of the rising stock market has been dependent on the existence of QE2 and removing that punch bowl could cause the party to end and reverse the gains, both economic and market, that we have seen in the last 5 months.” At the time, you’ll recall, the market was solidly convinced that QE2 would be the last and final round of QE from the Fed. I disagreed. Unfortunately, it’s starting to look like I was right. However, as a long-time buyer of gold and silver, I have to admit that these never ending rounds QE are a gift from the (finance) Gods. But why should the market get excited about a policy that’s essentially failed, twice, to do anything except temporarily juice stocks higher? I think it’s very simple, the Fed cannot afford to be seen as helpless, they must do something, anything. Otherwise, why have them as Ron Paul might ask? And besides, at this point in the game, what else can they do? Lower rates? Nope, zero-bound already. Lower reserve requirements? Not likely, our TBTF banks are already scraping by with mark-to-model accounting on real estate assets that are currently worth less than they were in 2008 yet still somehow are marked at or close to par. Lowering reserve requirements would likely cause the banking panic currently growing in Europe to quickly jump the pond and land on our shores. Which leaves us with QE3/asset purchases.

The epic blow out accelerates with the widely followed (by the administration) DJIA dropping by over 400 points at last check. And as we warned earlier, the liquidation sell offs in PM, to no small part driven by rumors of yet another CME margin hike, are picking up pace, with silver tumbling from over $42 to just $38.50. We are very concerned we may see another Flash Crash, or Crash Crash as it would be better known assuming there is no imminent bounce back. As such we urge readers to immediately put limit buy prices across the entire S&P that are 19.99% down, as down 20% is the magical border below which the exchanges cancel all trades. Just in case, with circuit breakers at 10% for the top 1000 stocks, a 9.99% limit buy may be a better deal.

The U.S. remains hopeful that QE3 is coming.  The tone of messages I get seems to be of people caught long (possibly recently) trying to show that market isn't really that weak.  We tried the "Europe has gone home rally" and it pushed SPX cash all the way up to 1229, but since then we have faded.  I think people will get more and more nervous about NFP as we head into the close.  It is not just the number tomorrow that people are worrying about, but possibly massive downward revisions.  Is it possible we get a 10% unemployment rate print tomorrow?  Probably not, but given the price action, the fact that too many people still seem to be hoping for QE3 (I was one of those overnight and early today), and the NFP revisions fear, I think we will see a new low today before we close.