Archive - Oct 17, 2012

Ten days ago, when we last tracked the progress of the third US aircraft carrier, CVN-74 Stennis, with destination Arabian Gulf, aka Iran, we reported that it was "within a week of reaching" its destination. Sure enough, as the latest Stratfor naval update confirms, CVN-74 has now reached its destination for which it was commissioned several months prematurely. But before you get your war hats out, note that that other aircraft carrier which is conducting its final voyage, the CVN-65 Enterprise, has decided to take a bit of a break and left the Arabian Gulf area for a scehduled R&R port visit in Naples, Italy. In a week or so, shore leave will be over and CVN will be back to join everyone else, at which point the US will finally have three aircraft carriers just off the Iranian coastline ready to rumble.

There is little doubt that asset prices have responded to Central Bank promises and actions. Even as bottom-up fundamentals are fading, top-down index 'nominal prices' rise on the back of magical multiple expansion - which is defended from on high by sell-side strategists the world over on the back of 'recovery' is just around the corner. The trouble is there's a limit and it seems - from QE2 and LTRO - that we are rapidly approaching that limit; and with earnings outlooks being revised lower, perhaps we are at peak P/E for this cycle of QE?

Playing in the market, with Phil. 

As incredible as it may seem, there is more than just November 6th to worry about for the next three months. We present UBS's summary and relative importance of the main economic events and political dates through the end of the year. Of course, it is dominated by the politics in Europe, US, and China, but key economic data points that are required to maintain multiple expansion hopes are also included.

Even though we have presented comparable scenarios looking at the coverage of the US money base in gold terms previously, aka "gold coverage" ratio, including once from Dylan Grice, and once from David Rosenberg, now that we have drifted into a new, previously unchartered and very much open-ended liquidity tsunami, it is time to revisit the topic. Luckily, Guggenheim's Scott Minerd has done just that. Not only that, but he presents three distinct gold pricing scenario, attempting to forecast a low, medium and high price range for the yellow metal. To wit: "The U.S. gold coverage ratio, which measures the amount of gold on deposit at the Federal Reserve against the total money supply, is currently at an all-time low of 17%. This ratio tends to move dramatically and falls during periods of disinflation or relative price stability. The historical average for the gold coverage ratio is roughly 40%, meaning that the current price of gold would have to more than double to reach the average. The gold coverage ratio has risen above 100% twice during the twentieth century. Were this to happen today, the value of an ounce of gold would exceed $12,000.” 

While we have largely resumed ignoring the non-newsflow out of Europe, as it has reverted back to one made up on the fly lie after another, or just simple rumor and political talking point innuendo in the most recent attempt to get hedge funds starved for yield (and chasing year end performance) to pursue every and any piece of Italian and Spanish debt (at least the until euphoria ends and the selling on fundamentals resumes) the latest development from the FT bears noting as it has major implications for Europe's make it up as you go along "recovery." According to the FT: "A plan to create a single eurozone banking supervisor is illegal, according to a secret legal opinion for EU finance ministers that deals a further blow to a reform deemed vital to solving the bloc’s debt crisis. A paper from the EU Council’s top legal adviser, obtained by the Financial Times, argues the plan goes “beyond the powers” permitted under law to change governance rules at the European Central Bank." The punchline: "The legal service concludes that without altering EU treaties it would be impossible to give a bank supervision board within the ECB any formal decision-making powers as suggested in the blueprint drawn up by the European Commission."

It will come as no surprise to some but the bankruptcy court hearing for Solyndra just threw up all over any hopes that our taxpayer-funded loans to this solar sinkhole will be recovered:

• *SOLYNDRA HAS ABOUT $71 MILLION IN NET DISTRIBUTABLE ASSETS
• *SOLYNDRA LENDERS AHEAD OF GOVERNMENT OWED ABOUT $77 MILLION

So it looks like a $0 recovery for us - US Government: Picking Losers One Sector At A Time.

With bellwhether, large- and small-cap firms missing earnings, missing revenues, and lowering outlooks, it is no surprise that the market is near record highs once again - oh wait... IBM anchor-like on an otherwise glorious day in the stock markets...

European Risk remains buoyant (unlike in the US), but the question is whether Moody’s upholding Spain a tick above Junk is really worth a 30bp plus relief rally?

With 20 days left to the big day and the candidates seemingly in a tighter race than many expected it seems appropriate to look at how the equity market is and will be positioned for a potential changing of the guard if Mitt Romney wins or if incumbent Barack Obama remains in charge. Credit Suisse has created a comprehensive 'cheat-sheet' outlining key issues for the election for each candidate, the sector impact of an Obama or Romney victory, and the extent to which that impact is already factored into current market prices. Everything you wanted to know about gaming the outcome of the election but were afraid to ask.

We can summarize the breeding ground of new-type depression: very demanding work that is beyond the capacity of people with poor social and communication skills and those who fear being left behind or failing. Fearing failure, they wilt under criticism that seems unfair and irresponsible given that they're doing their best. Facing an apparently no-win situation at work, they quit or take an extended leave of absence. This doesn't solve the depression or its causes, unfortunately. What seems to help is counseling that raises the emotional maturity of the person with NTD so they can better handle criticism, and counseling the senior supervisors to become better communicators with younger workers. Placing workers with low communication skills in jobs where they can work independently and productively also helps. The demands on enterprises and employees alike are rising as the "New Economy" of pervasive insecurity and constant adaptation become the norm. The take-away from Japan's new-style depression is that we need to understand not all workers are cut out for the high-social-skill "New Economy," though in the right positions they are admirably productive. That will take a new level of management skills in Corporate Japan, America and Europe as definancialization and deleveraging unravel the global economy.

While the media world is abuzz with last night’s Presidential debate, I’d like to cut through the noise and present you with two truly staggering facts that need to be kept in mind as the backdrop for the US Presidential Election

Sick of the seemingly endless presidential theater? So are we. Alas, there are 20 more days to go, so to kill a few minutes here are some cartoon anecdotes of previous presidential 'precedents' courtesy of XKCD.

We are currently experiencing a pre-election surge in all economic metrics; and then comes the hangover as can be confirmed by looking at hiring plans. Morgan Stanley's Business Conditions Index (a multi-factor real-time bottom-up economy tracker) has tumbled this month, giving back most of the very recent gains but it is the 'outlook for hiring' that is the most worrisome. Despite the stronger than expected employment report for October, both hiring indices fell to multi-year lows. The hiring index dropped 10 points to 44%, its lowest since December 2009, and the hiring plans index sunk 13 points to 44%, lowest since August 2009.  Due to its leading indicator nature, this means that imminent payrolls may not stop rising; but in a few short months will post the first sequential decline since 2010. What this means for the unemployment rate is self-explanatory - but by then the election will be decided.

Back in January, Zero Hedge proposed a pair trade, which to date has returned well over 100% on a blended basis, namely the shorting of local law peripheral European bonds, while going long English law (or strong covenant) bonds (a relationship best arbed in Greece, when various foreign-law issues were tendered for at par to avoid a bankruptcy, even as the local law bond population saw a massive cram down a few months later as part of the second Greek "bailout"). In big part, this proposal stemmed from the work of Cleary Gottlieb's Lee Buccheit, who has been the quiet brain behind the real time restructuring of Europe's insolvent states. In fact, one can say that what is happening in Europe was predicted to a large extent in his "How to Restructure Greek Debt" and "Greek Debt; The Endgame Scenarios." Which is why we read his latest white paper: "The Eurozone Debt Crisis - The Options Now", because it presents, in clear, practical terms, just what the flowchart for Europe looks like, unimpeded by the ceaseless chatter and noise of clueless politicians and career bureaucrats who have never heard the term pro forma or fresh start. In brief, Buccheit, unlike all European politicians, is hardly optimistic.