Archive - Sep 2011

Yesterday we made an amusing contrast between the lies of European insolvent state annexator general Olli Rehn who said that "Greece’s debt is on a “durable declining path” and new projections will show that the second rescue program reduces net  liabilities, European Union Economic and Monetary Commissioner Olli Rehn said" and the truth uttered by Greek budget committee head Stella-Savva Balfousia, who said  "Greece's debt has run out of control and government policies are failing to restore finances." Guess which one just got the axe. No this is not a trick question. And if you said prematurely terminated Devan Sherma you get half a point, because as the more observant out there may have noticed, the only benefit for blowing the whistle these days is immediate and irrevocable termination from both one's high profile job, and the status quo.

"And we have to improve our image," said Masatoshi Kumagai, one of the bosses of the Japanese mafia, in an interview with French reporters. Yakuza are on decline, he said, and if they don't change their business model, they might cease to exist.

Let's take a quick look at some numbers: 8, 160, 400, 350, 12 and 5. There have only been 8 weeks out of last 160 weeks that unemployment claims have been below 400 thousand claims. In normal circumstances we are worried about recessions when claims are rising above 350 thousand claims. Furthermore, jobless claims tend to plunge below 350 thousand a week within 12 months after the end of a recession. Currently we are still holding above 400 thousand claims after more than two full years since the recession statistically ended. Those are some pretty ugly numbers, but the most important number is 5. The reason that we think unemployment might move sharply higher is that every time the STA Composite Employment Index drops to a level of 5 or less the economy has been in a recession. Of course, it is during recessions that unemployment claims rise sharply as businesses cut back on their labor force to reduce costs. This is clearly seen in the chart.

Ugly afternoon for all those mo-mo monkeys who thought it was safe to chase again as Starz ends contract renewal talks with dearly beloved Netflix. NFLX -10.5% after-hours.

Recently, we’ve received a number of emails from readers asking why the primary gold ETF, SPDR Gold Trust (NYSE:GLD), doesn’t more closely track the price of gold, and other related questions. For those readers who aren’t already familiar with the workings of this innovative way to “own gold,” it’s worth going over a few of the details, because there are some common misunderstandings regarding the ETF. The creators of GLD were as savvy as it gets. They saw a market crying for something like this and turned that need into one of the most successful new financial products ever introduced. The ETF burst upon the scene in November of 2004 and was immediately latched onto as a means of riding the gold bull market without the inconvenience of having to transport and securely store actual bullion. In the past seven years, its rise has been meteoric. It has steadily ascended the list of the world’s leading gold repositories, until today it has the sixth-largest global stash of the metal, at more than 1,230 tons, or 39.57 million ounces, worth over $70.7 billion.

If anyone works in finance, chances are they have at some point, or more likely, constantly, received emails (we want to keep it civil) to participate in the Value Investing Congress, which purportedly, promotes ideas based on, well, value. Alas, if that is indeed the case, then primary sponsor Whitney Tilson's T2, has to urgently look up the definition of velue. To wit: "Our fund declined 13.3% in August vs. -5.4% for the S&P 500, -4.0% for the Dow and -6.4% for the Nasdaq. Year to date, it’s down 21.9% vs. -1.8% for the S&P 500, +2.1% for the Dow and - 2.2% for the Nasdaq." Even more to wit: "On the long side, our portfolio got clobbered across the board despite generally good company- specific news regarding our major holdings (discussed below). Amidst a tumultuous month in the markets, investors dumped stocks that were even slightly illiquid, or that are valued primarily on future, rather than current, profits – both traits that characterize many positions in our fund. One of our biggest advantages is being willing and able to look out 2-3 years when most investors are looking out 2-3 months (or, in many cases, 2-3 microseconds), but this hurt us last month." But wait, despite what is basically the start of yet another hedge death watch, Tilson sees smooth sailing ahead. "In our view, the turmoil of the past month has created the best bargains we’ve seen in the market since the chaos and panic of late 2008 and early 2009. Of course stocks aren’t anywhere as cheap now as they were then, but the risks aren’t nearly as great either (we think many people didn’t realize or have forgotten how close we were then to a worldwide Great Depression), so on a risk-adjusted basis we think our portfolio is as attractive now as it was then." We can only hope Whitney has some, any, money left to spend on chasing these amazing value bargains. In the worst case, the fees from the VIC conference should find the purchase of at least one block of ES.

Equity markets are starting to catch on to the fixed income market's signals as hopes of QE3 are slowly extinguished.

Another day of statistics, where the headlines are widely published, some details are somewhat explored, and in-depth analysis is next to nil...

The Fed has already gone too far with QE. QE 2 spent $600 billion and didn’t accomplish anything (as I and several commentators have recently noted). The Fed’s balance sheet (roughly $3 trillion) is already larger than the economies of the UK and Brazil. Has anyone bothered to ask how exactly the Fed going to unwind this? Everytime the Fed halts QE the markets implode. Do you really think the Fed could withdraw even $1 trillion in liquidity without forcing systemic collapse?

Rather interestingly to many of us, the 'pattern of misconduct and negligence' by Goldman Sachs' residential mortgage loan servicing sub Litton, has actually been pressed by The Fed. It seems in the short-term, this was the straw to break the ebullient camel's back of the equity market as XLF drops 2% on the day and GS was down around 3% before bouncing back a little. It certainly seems that the TBTF premium is wearing away rapidly from these once impregnable fortresses of misinformation as both equity and credit markets downgrade them.

Finally serious economists are considering a position I have been maintaining and writing about since the 2008 financial meltdown. Whatever its name— erasure, repudiation, abolishment, cancellation, jubilee—debt forgiveness, will have to eventually emerge forefront in global efforts to solve an ongoing systemic financial crisis. Debt forgiveness, therefore, accomplishes two important things. It eliminates the increasing and outsized portion of productive enterprise to pay off unproductive obligations, and it clears the ground for new opportunities, new thinking, invention, and entrepreneurialism. This is why the ability to declare bankruptcy is so essential in the pursuit of both happiness and innovation.

Even a broken clock could be right at least twice a day....    

These numbers are horrible.

While we often pick on Morgan Stanley's Jim Caron (the same guy who year after year after year keeps predicting the yield on the 10 year will soar, and not just soar, but soar for all the wrong reasons, such as bull steepening and what not), has just diametrically changed his tune, by bringing us, drumroll please, Operation Torque. To wit: "Policy makers in both the US and Europe get back to work in September, and this month will be rife with deliberations on stimulus and market support policies. In our view, a duration extension to the Fed's SOMA portfolio is an optimal policy tool to engender easing. This can initially be done through extending the duration of reinvestments from MBS and agency holdings but may ultimately culminate in selling shorter-duration USTs in its SOMA portfolio in exchange for buying longer duration assets (‘Operation Torque’, as we at Morgan Stanley have dubbed it)." Why 2 Years? Because as per the August 9 FOMC statement, we know that there will no rate hike for the next 2 Years, and hence no duration risk. Which means that the Fed can sell an infinite amount of paper into a mid-2013 horizon without worrying about demand destruction. And by doing so it will, as we have been predicting since May, expand the duration of its portfolio, in the process pushing investors into risky assets for the third time in as many years. But there is a twist...

Straight from the horse's mouth, in this case Goldman, which agrees with Zero Hedge that the ISM was weaker than perceived below the surface, and also provides an NFP goose egg for tomorrow: "ISM stronger than expected in August, although details of the report are softer than the headline suggests...We are lowering our forecast for tomorrow's nonfarm payroll report to +25k, from +50k previously. The main reason is the accumulation of evidence of weak hiring in late July and August: a sharp deterioration in perceptions of job availability in the latest Conference Board survey, a drop in today's ISM manufacturing employment index, another drop in job advertising, and a soft ADP report. Layoffs seem to have remained low, given steady jobless claims in the 410,000 range, although even here the recent pickup in layoff announcements is a concern." As everyone knows all too well, the difference of 25K people when you are dealing with a sample  of over 100 million has just one name: policy.