Archive - Sep 29, 2011

As the rapacious rally of this afternoon glides into a sulky sell-off, Goldman's global economics team provide a little more kindling on top of further Kiwi downgrades to help us on our way. The Goldman Sachs Analyst Index (GSAI) fell below the 50 mark (signifying more analysts see contraction in their sectors than expansion) for the first time since AUG09. Combine that with the new orders index registering the largest decline in the index's history (plummeting 22.5pts to 28.6) and the subdued growth outlook remains firmly in place.

We round off the early evening with this must watch interview by Tommy Humphrey of Cambridge House International with Casey Report's Doug Casey, familiar to all regulars of Zero Hedge, in which all the usual suspects are discussed: systemic downfall, alternative investments and flight to real, not mainstream media inspired, safety. 

REEs are found in everyday products, from laptops to iPods to flat screen televisions and hybrid cars, which use more than 20 pounds of REEs per car.  Other RRE uses include phosphors in television displays, PDAs, lasers, green engine technology, fiber optics, magnets, catalytic converters, fluorescent lamps, rechargeable batteries, magnetic refrigeration, wind turbines, and, of most interest to the Pentagon, strategic military weaponry, including cruise missiles. Technology transfer is the essential overlooked component in China’s economic rise, and Beijing played Western greed on the subject like a Stradivarius, promising future access to China’s massive market in return, an opium dream that rarely occurred for most companies. You want unimpeded access to Chinese RREs? Fine – relocate a portion on your production lines here, or…Which brings us back to today’s topic.Rare earths and investment – where to go?

This should get real interesting if the rest of the clerks in NY follow suit. Good luck on “fixing” this one Nationwide…

The big news this morning, aside from the relatively strong economic data out of the US (of course, we’ll have to wait for the downward revision on jobs to see the real number, which is an ongoing statistical aberration for the record books but anyway) is the news that the German parliament overwhelmingly passed the measure to support the EFSF.  In reality, this wasn’t really that newsworthy as passing this particular legislation had been expected since Germany originally agreed to the deal in principal earlier this summer.  This was not the leveraged, CDO^2 like structure that failed NY Federal Reserve President cum Treasury Secretary Tim Geithner had been pitching recently in Europe.  No, that idea has been dismissed out of hand and Mr. Geithner properly ridiculed for recommending that the already over-taxed European people be further Major Kong-style strapped to the ticking atom bomb that is the European banks’ leveraged balance sheets.

In case you haven’t noticed lately, the market doesn’t move on good or bad earnings or economic data, it moves on political rumors and innuendo about government’s willingness to continue the TARP/cheap money/QE lifeline to the terribly over-leveraged banking sector.  It’s especially troubling when you consider the faith most members of Congress place in Ben Bernanke and the other Oracles of Delphi at the Fed.  One area that’s going to come home to roost very soon is the zero interest rate policy (ZIRP) that has been in place since late ‘08/early ’09.

We have seen several days in recent weeks that beggar belief in terms of intraday range and velocity but today was very impressive indeed. After rallying over 2.6% from overnight lows, ES then dropped almost 3.2% before managing a 2.2% rally off intraday lows in the last hour to regain VWAP. A massive volume at the close (especially compared to the rest of the day) was also notable but once again we note the significant pickup in relative volume as we sold off versus the rally. We fear that the longer it takes to bite the bullet in Europe, the more volatile we get as Greece's deadlines loom and scenarios become fewer and more disparate.

Denial. Denial is safe. Comforting. Religiously and relentlessly abused by politicians who don't want nor can face reality. A word synonymous with "muddle through." Ah yes, that "muddle through" which so many C-grade economists and pundits believe is the long-term status quo for the US and the world just because it worked for Japan for the past three decades, or, said otherwise, "just because." Well, too bad. As the following absolutely must read report, which comes not from some trader of dubious credibility interviewed by BBC, nor even from an impassioned executive from a doomed Italian bank, but from consultancy powerhouse Boston Consulting Group confirms, the "muddle through" is dead. And now it is time to face the facts. What facts? The facts which state that between household, corporate and government debt, the developed world has $20 trillion in debt over and above the  sustainable threshold by the definition of "stable" debt to GDP of 180%. The facts according to which all attempts to eliminate the excess debt have failed, and for now even the Fed's relentless pursuit of inflating our way out this insurmountable debt load have been for nothing. The facts which state that the only way to resolve the massive debt load is through a global coordinated debt restructuring (which would, among other things, push all global banks into bankruptcy) which, when all is said and done, will have to be funded by the world's financial asset holders: the middle- and upper-class, which, if BCS is right, have a ~30% one-time tax on all their assets to look forward to as the great mean reversion finally arrives and the world is set back on a viable path. But not before the biggest episode of "transitory" pain, misery and suffering in the history of mankind. Good luck, politicians and holders of financial assets, you will need it because after Denial comes Anger, and only long after does Acceptance finally arrive.

The seductive embrace of our collective insanity promises us all a softer easier way, an alternative path where we are told we can have our cake and eat it too. This is a bald faced lie, even if the machine consistently produces more cake as if by magic.

The VIX is an ephemeral beast beloved by talking-heads and options-market-makers alike (and now FX strategists). In a rather alarming note from CitiFX today, they are concerned over the chance of an explosive breakout as one of their favorite technical setups comes to pass - a double bottom within a triangle. If these levels break then the team expects a test of S&P 1000-1015.

Monday afternoon the markets shot straight up after taking a dose of CNBCialis. CNBC was the first to break the story about letting EFSF use leverage or turning the EIB into a vehicle to increase the potency of the EFSF funds.  That was followed up by more leaks to other news sources. Stocks went higher quite happily but failed to drag the credit markets with it to a large degree.  Any analysis of the various plans all lead to the same conclusion - no matter how complex or convoluted the plan, the only way it works is for Germany and France to risk their credit ratings to support everyone else, or to print money.  No miracle solution was at work.  Plans may yet be put in place, but it is clear all they do if shuffle the deck chairs and obfuscate who is picking up the tab, but solve nothing.  It is clear that if it gets implemented, any further problems would become far worse as there would be no Eurozone country strong enough to support the rest.  What wasn't clear, is whether the downgrades would occur even before the plans were launched. As I wrote earlier, I will change my view of the market when something real comes out to make me change it.  I also really believe that in the near term, after a Greek default, SPX is likely to move in a range of 1000-1150, and the next big move will be if the global economies can resurrect growth.

The Fed’s decision to buy $400 billion of longer-term US Treasuries in this environment is essentially the Fed announcing that it will be covering a significant portion of new debt issuance going forward as a means of putting off the inevitable US debt default. At most the Fed has bought 2-3 months of time for the US. I fully believe that before the end of this year, the bond market will shift its sights away from Europe to the US. At that time, the US debt bubble will burst resulting in systemic failure.

Most of you reading this right now are thinking that this is interesting but he is exaggerating and this will blow over. I am here to assure you that it is not and this whole thing is about to grow exponentially as the economy continues to stagnate and people climb the learning curve. Are you aware that the founder of Salon.com, David Talbot, is publicly calling for an “American Spring?” This of course is a reference to the Arab Spring, in which revolution swept across North Africa earlier this year and led to the collapse of the Tunisian and Egyptian governments and then major government bribes to the people living in the oil rich kingdoms. Mr. Talbot writes “In these increasingly hard times, Salon is dedicating itself to an American revival. Our editorial mission will become more explicitly and aggressively populist. We will be publishing more investigative pieces, exposing the shadow dance of power. And both Democratic and Republican targets will be fair game, since both parties are increasingly under the control of the same corporate forces"... We the people now understand it is not “rich vs. poor,” businessperson vs. teacher.” It is serf vs. oligarch. They are 0.1% and we know what they are up to. GAME ON.

Well it was fun while it lasted. Utilities now the best performers on the day as Financials cross down towards the red. Consumer Discretionary -2.6% as we lose Dow 11000 and HY and IG credit is dropping rapidly. Of course the pschological impact of a quarter-/month-end close below 11,000 may be too much to bear for the PPT, so tread carefully - though we note broad risk assets are all selling off and catching up to stocks here.