Archive - Nov 2012

While some of the smartest chaps on the street suggest that being long of Gold in cowbell terms is the trade of the decade, it appears the winner off the March 2009 lows remains long of Gold in plain-old USD terms. Gold in USD terms has risen 84.5% from the 2009 equity lows and leads the race-to-debase while JPY (until very recently) was the big loser among the majors - debasing itself a mere 52%. It seems Mr. Abe had better get to work...

During a week in which Americans are supposed to give thanks, we thought this inside look at the reality on the streets of Greece was worthwhile comprehending. From the May 2011 Syntagma Square uprising to "the 'firesale' of their country, their labor rights, and their livelihoods to corrupt domestic elites and foreign financial interests" the brief documentary follows the dramatic portrait of a country veering to the brink of collapse - and the people who choose to struggle to build a new world from the ruins of the old. "For [the elites] Greece is a guinea pig, to find out up to what point they can 'milk' [us]" is how one narrator describes the situation, adding that "they are refusing to see the reality [saying] it's not happening, it's not happening, it's not happening, everything is gonna be alright; Nothing is gonna be alright" as "loans enslave people." Utopia remains on the horizon...

Plus, news from the Choomba Triangle...

Quite a shocker of a day in FX and European corporate bond and stock markets as shorts are squeezed back up to last Wednesday's levels. Sovereign bonds - which one would think the beneficiary of all the exuberance are flat as a Gaza-strip apartment building: +/-2bps in the last 4 days (aside from Portugal which rallied over 30bps today). The following four charts gives a sense of the anxiety both ways in this market with the low volume this week likely to help all those hoping for a final solution. Credit markets gapped tighter and kept going (one of the biggest moves of the year with XOver -35bps) with financials outperforming (more life-lines for the over-levered?); equity markets all retraced last week's losses in large part (aside from Greece); EURUSD broke back above 1.28 and its 200DMA; and Europe's VIX has collapsed from over 22% to 19.6% at the close today.

On the basis of a joint press conference following a one-hour chat, the S&P 500 is up over 2.5%; it seems there is little doubt that the fiscal cliff is front-and-center in people's minds. And yet, positioning is far from biased towards negativity and sentiment remains positive - the 'they will fix it; they have to, right?' meme is everywhere. As Morgan Stanley notes, however, a smooth resolution requires some of the same public officials who created the cliff to cooperate to avoid it. As far as hope of a short-term solution, Obama's Burma trip aside, Speaker Boehner has already indicated that it would be inappropriate to pass comprehensive legislation in the Lame Duck session, given that more than 100 current members of the House will not be returning next year; and as for any actual substantive change: the sequence most talked about is patch (stop-gap legislation) and promise (ten-year budget reduction), followed by a plan. In that regard, politicians’ solution to the 2012 fiscal cliff will be to create another one in 2013. Thus, only a portion of the uncertainty about policy will be resolved by the patch and promise, as much could go wrong with the plan.

If you want further evidence that the financial elites are already preparing for a default from Spain and a collateral crunch, you should consider that the large clearing houses (ICE, CEM and LCH which oversee the trading of the $700+ trillion derivatives market) have ALL begun accepting Gold as collateral.

On the block of Hazelwood Road in Memphis, Tennessee, where Rebecca Black used to live, 17 out of 30 parcels have either been completely reclaimed by nature or have houses that sit empty. Five of the 15 parcels on her side of the street were abandoned after the recession ended, public records show. Many of the deserted properties are still legally owned by the mortgage borrowers. Nine of the properties are behind on taxes owed to the city or county governments, or both, public records show.

Whether it is a pure low volume technical run for the 200DMA, or fundamental bias as 'officials' comment that the release of a EUR44bn aid tranche to Greece is expected by December 5th, is unclear. One thing is certain, the Eurogroup is placing the decision squarely back in Madame Lagarde's lap as it appears to be behaving as if the IMF's threat not to disburse funds (due to Greece's unsustainable debt load) does not exist. While Lagarde is unlikely to want to be the trigger for GRExit, the non-European members may have differing perspectives or will they all just continue kicking the can down the road - proving once and for all that all the power lies with the Greeks as their supposed overlords "can't handle the truth".

Back in April, we did an extensive analysis of what, in our opinion, is the primary reason for the slow burn experienced by the US, and global economy, and why virtually every liquidity pathway used by central banks is hopeless clogged: the complete lack of capital expenditures at the corporate level, and lack of (re)investment spending. Specifically we said that in both the context of Japan's plunging corporate profitability over the past 30 years despite year after year of record budget deficits, and its implications everywhere else, that "we get back to what we have dubbed the primary cause of all of modern capitalism's problems: a dilapidated, aging, increasingly less cash flow generating asset base! Because absent massive Capital Expenditure reinvestment, the existing asset base has been amortized to the point of no return, and beyond. The problem is that as David Rosenberg pointed out earlier, companies are now forced to spend the bulk of their cash on dividend payouts, courtesy of ZIRP which has collapsed interest income. Which means far less cash left for SG&A, i.e., hiring workers, as temp workers is the best that the current "recovering" economy apparently can do. It also means far, far less cash for CapEx spending. Which ultimately means a plunging profit margin due to decrepit assets no longer performing at their peak levels, and in many cases far worse." Today, with the usual six month or so delay, this fundamental topic has finally made the mainstream media with a WSJ piece titled "Investment Falls Off a Cliff: U.S. Companies Cut Spending Plans Amid Fiscal and Economic Uncertainty."

The always prescient NAHB index reached levels not seen since May 2006 this morning completing its sixth beat out of the last seven with its biggest jump since July (a five-sigma beat of expectation no less!). Driven by a huge 8 point jump in 'present' sales and a rise in the outlook driven by a huge jump in Midwest expectations. We can only look on with incredulity that this index is given any credibility at all. Perhaps a longer-term look at the index is useful to realize that while we have risen, we are merely at the 9/11/01 trough levels - as always context is king.

A shockingly low 30% of S&P 500 firms beat revenue expectations in the prior quarter and while Bloomberg's data suggests around 65% beat earnings expectations, the in-period adjustment of expectations (analysts ratcheting down earnings as the season progresses) naturally biases this to look rosier. The critical question is - how much more fat is there to cut? With Sales (and outlooks) so weak, how many more jobs need to be cut to meet margin expectations? 2013 top- and bottom-line (+13.6% EPS growth) expectations remain magnificent in their optimism - do you believe in miracles?

It all makes perfect sense. S&P 500 futures are 33 points off Friday's lows (Boehner's 'constructive chatter' and Fiscal Cliff is fixed), EURUSD is rallying decently (Greece is fixed), and commodities in general have gone vertical. Gold is back above $1730 but its Silver and Oil (tensions rising - despite cease-fire?) that is running the high-beta pump this morning. WTI is almost 4% higher than Friday's lows up near $89. The highly correlated nature of everything is perhaps merely sympomatic of a low volume week ahead and short-term oversold conditions - we suspect little is really resolved in any of these three 'event risks' and the same real-money anxious investors will use strength to reduce exposure further - since remember, if the S&P 500 is anywhere near its highs by year-end, there will be no fiscal cliff resolution.

One by one, everyone is quietly heading for the exits.

In a watershed moment for inverse inflation watchers everywhere, Russia, and specifically its alcohol watchdog entity aptly named "Rosalkogoluregulirovaniye" just delivered the judgment blow, with a decision to hike the minimum vodka price by 36% in 2013... as if a million cirrhotic livers cried out (or was it rejoiced) and were suddenly silenced. The reason for this shock and awe approach to defeating deflation: fighting counterfeiting, by hiking the tax on alcohol purchases, which in turn will push the baseline price of alcohol everywhere higher. In other news, a lightbulb is slowly lighting up above the president's head: "new taxes -> booze -> "fairness doctrine" -> bingo" as vice taxes are set to surge in a banana republic near you. Remember: "that's a tax for that" and if there isn't yet, there will be.