Archive - Sep 14, 2011

By now only the cream of the naive, Kool-Aid intoxicated crop believes that the US is not in either a deep recession, or, realistically, depression. For anyone who may still be on the fence, here is David Rosenberg's latest letter which will seal any doubts for good. It will also make it clear what the fair value of the stock market is assuming QE3 fails, which it will, and the market reverts to trading to fair value as predicated by bond spreads. To wit: "If the Treasury market is correct in its implicit assumption of a renewed contraction in the economy, then we could well be talking about corporate earnings being closer to $75 in 2011 as opposed to the current consensus view of over $110. In other words, we may wake up to find out a year from now that whoever was buying the market today under an illusion of a forward multiple of 10x was actually buying the market with a 15x multiple." And since we are in the throes of a deep depression and a 10x multiple is more than generous, applying that to $75 in S&P earnings, means that the fair value of the S&P is... we'll leave that to our readers.

The following chapter 2 is excerpted from The Little Book of Sideways Markets (Wiley, 2010).  Enjoy

Every "solution" to the European debt crisis, whether it is ECB purchase, EFSF, Eurobonds, or BRIC's, fails to account for the fact there are really two types of bonds out there.  There are those that are trading and marked, and those that remain on some bank balance sheet unmarked. That is a key distinction.  If all Greek bonds were marked at 45 (or even had 55 points of reserves held against them) then there would be a lot of potential solutions.

You know what they say about official denials:

• CARNEY SAYS WHITE HOUSE COOPERATING WITH SOLYNDRA PROBE - Bloomberg
  
• CARNEY SAYS WHITE HOUSE DIDN'T TRY TO INFLUENCE LOAN REVIEW - Bloomberg

Will a doomed solar company, and a failed economic voodoo religion be Obama's Watergate? We will know in a few weeks. In the meantime, someone should probably look into how much money Obama received courtesy of Solyndra 2, aka Mojave Solar LLC

• DOE ANNOUNCES $1.2B LOAN GUARANTEE FOR CALIFORNIA SOLAR PROJECT
• U.S. CITES LOAN GUARANTEE TO MOJAVE SOLAR LLC

Yeah, that's right: even as the PR scandal of Solyndra is threatening to sweep the administration, it continues to funnel more taxpayer capital in failed solar projects!

Well, that was a brief hiccup for the ponzi scheme. Luckily, the market has forgotten that it priced in China bailing out Europe two days ago so it is time the vacuum tubes are reminded. From Bloomberg: "China's NDRC says China using foreign reserves to support investment abroad; NDRC Vice Chairman says in transcript of remarks on website double-dip recession abroad is “avoidable,” willing to buy bonds of sovereign-debt crisis nations. National Development and Reform Commission Vice Chairman Zhang Xiaoqiang spoke in an interview with the media in Dalian today, according to transcript distributed on the planning agency’s website today." EURUSD predictably soars... for at least a few more minutes, when we start the whole bailout rotation all over again, first with Russian, then Brazil, etc, etc. In the meantime, what all this means, read the post by Dylan Grice on how to deal with a whole world gone pathlogically rogue, and willing to lie and cheat in order to preserve the status quo.

Update: never a dull day as apparently there is a silver lining: from Reuters "Austrian finance minster says parliament only rejected changing the agenda; EFSF vote will be delayed with a special meeting to be called"

Yup, Europe is open, and the suiciding has started early.

• AUSTRIAN PARLIAMENT COMMITTEE DOESN'T APPROVE EFSF UPGRADE
• AUSTRIAN PARLIAMENT COMMITTEE NEEDED 2/3 MAJORITY

As a reminder all countries need to ratify the EFSF, even the weakest links, or else no bailout. As Peter Tchir reminds: "And Austria is AAA, it is needed for EFSF to get AAA on its size, would have to be cut back by about 15 billion EUR to still have AAA.  Though I would guess this gives other countries the courage to say enough is enough."

Speaking at a briefing Rome, Germany's economy minister Philipp Roesler has been dropping truth-bombs this morning. These have perhaps been responsible for the decompression in European credit spreads (SENFIN 9bps off tights). The most unequivocal, and most ultimatum-like is his noting that "Merkel and Sarkozy will send a 'clear signal' to Greece tonight on the need to meet deficit cutting goals".

Everyone, especially various textbook "schools" of postmodernist Keynesianism which (in addition to apparently never having actually been in the real world) believe there is such a thing as a free lunch as long as a reserve currency can issue infinite debt, and stubbornly fail to see the creeping currency devaluation which ultimately represents itself in hyperinflation, should read the following note from SocGen's Dylan Grice who explains pretty much... everything, including why in world starved for honesty, gold is the benchmark, and is now worth $10,000. To wit: "Gold might be a mere lump of dense, useless shiny metal, but it’s one which crackpot central bankers can’t print. Indeed, benchmarked against the printing of The Ben Bernak, the price of gold at which the US dollar would be fully gold-backed is now $10,000. You might think such a ‘price target’ is far-fetched (and I might agree with you). But bear in mind that the last time honesty was perceived to be so scarce – in the 1970s gold mania – the dollar was over-backed by gold (see chart below). If it happened then, why not again?"

The market has become dominated by rumors. The primary rumor is of China supporting Europe. We saw similar rumors in 2008 for Wall Street banks. Those purchases all resulted in massive losses for the funds in question. And yet we are seeing similar rumors inciting large rallies in stocks today, this time the rumors pertaining to China and Japan buying Europe.

Policy Madness (inconsistency) in Muniland.  Some bullets.

Apparently the market finally woke up: seconds ago SocGen shares, completely out of nowhere, just took a massive spike lower, tumbling a good 8% on no news. There is a goal seeked version that attributes the move to remarks by Noyer discussing French bank stability may have caused this but this makes little to no sense, as they were supposed to be favorable for banks. It appears like a major block was dumped as someone realized they have had enough with the rollercoaster. Now the question is: "why?"

As if one admittedly market manipulating clown interviewing another admittedly tax challenged clown is not the biggest time waster in the world, here is an actual moment of honesty from at least one of the clowns (the other one should be completely ignored: after all it was him who said that there is no chance the US will be downgraded three months before it was... why anyone listens to this pathologically wrong liar is beyond us). So... without further ado here is Cramer's 2008 rant on Tim Geithner: "If Tim Geithner, the much praised and ballyhooed NY Fed Chairman gets to be Obama's Treasury secretary, and he looks like a shoo in for the job, let me just tell you something, we are done, we are kaput, we are finished, we are completely and royally hosed as a nation... Geithner should be facing a senate investigation, not a senate confirmation...I am predicting he will be a total disaster as he has been as a New York Fed Chairman. Please I am beginning you: don't hire Tim Geithner, he is an academic and all he has going for him is that he is a democrat" For once we agree with at least one of the two clowns.

Nothing good on the US economic front as usual. After all, this is fact and data driven, not based on headline and rumors (even though the BLS does enjoy fudging the data to an extent to make a Chinaman blush). PPI came at 0.0%, in line with expectations, but PPI ex food and energy increased just 0.1%, missing expectations of 0.2%, down from July's 0.4%; it was also tied for lowest since November 2010. The 12 month change in the PPI for finished goods was up 6.5%, the lowest since March 2011. And while finished goods still retained their inflation power, it was in the intermediate space that we saw a major drop of 0.5%, the biggest in over a year and the first decline since July 2010, mostly due to energy goods: "Most of the August decline can be attributed to lower prices for intermediate energy goods, which dropped 2.3 percent. The index for intermediate materials less foods and energy also contributed to this decrease, edging down 0.1 percent. By contrast, prices for intermediate foods and feeds advanced 1.7 percent. On a 12-month basis, the index for intermediate goods moved up 10.3 percent in August." Overall, this gives more leeway for Op Twist and an IOER cut to be announced in one week by Bernanke. Which according to the Fed will be needed: Advance retail sales printed at 0.0%, below consensus 0.2% and down from a downward revised 0.3% in July. Retail ex sales and autos was the lowest since December 2010. Some comments from Bloomberg on this latest miss: Clothing sales down 0.7%, department stores down 0.3%; consumers likely cut purchasing due to rising cotton, other materials costs, says Bloomberg economist Joseph Brusuelas. "Sales disappoint as households deleveraging, real incomes decline." And scene.

• World Must ’Get House in Order,’ Not Rely on China: Wen Jiabao (Bloomberg)
• Merkel bids to quash Greece default talk (FT)
• Moody’s cuts two French banks’ ratings (FT)
• Geithner Takes Tougher Tone on Europe (Bloomberg)
• Obama to propose Medicare and Medicaid cuts (FT)
• Biggest Brokers Consider Banning Market Orders (Traders Mag)
• Grifters of 'Al Saud, Inc.': How Saudi royals get their wealth (Wikileaks)
• Emerging Giants Look at Europe Aid (WSJ)