Archive - Feb 1, 2012

Obama's latest attempt to stimulate the housing sector and inflate home prices "before waiting for them to hit bottom" (which they never will as long as central planning tries to define what clearing prices are) is a noble reincarnation of now an annual, and completely ineffectual, theatrical gambit. There is, unfortunately, one major snag. It is Dead on Arrival (just like every single iteration of the Greek bailout), for the simple reason that it has to get congressional approval. Which it won't. And that's not just the view of biased political pundits. Wall Street agrees.

Just as we thought GM's channel stuffing days may be coming to an end, and the company may finally be normalizing its inventory management, here come January numbers, where we learn that in addition to car sales declining by 6% compared to a year ago, at 167,962 vehicles sold (of note: "Retail deliveries declined 15 percent compared with the same month a year ago and accounted for 70 percent of GM sales"), it was the all critical month end dealer inventory that caught our attention. And unfortunately as the skeptics expected, GM is back to its old tricks, as dealer inventories rose once again, this time by over 36k units, or the second highest in its post-reorg history, to a near record 619,455 vehicles stored with dealers. This is just the second highest ever in fresh start GM history, second only to November's 623,666. The January-end number represents 89 days supply, but more importantly the recent spike in restocking, which was seen with all other major car dealers, explains the ongoing "expansion" in the US economy as measured by indices such as the ISM. Eventually, when the end demand for these dealer parked vehicles does not materialize, the New Orders so diligently tracked by economists everywhere will slip back under 50, but before that we are confident that the administration will come up with some new Cash for Clunkers plan to take demand from the future and to push it into the days leading into the election, probably funded once again by other taxpayers who don't quite see the fascination with owning a GM car.

Corruption is only possible if the benefits to the parties engaged in it far outweigh the potential consequences. However, as soon as the potential consequences become real, that’s when everything changes: people start talking/ confessing, and the corruption begins to come unraveled.

The Case Shillers are shilling that the market is still weakening. But that's just not the Case.

Borrowing money based on imaginary future surpluses is a higher form of counterfeiting. And that is precisely what the U.S. is doing, borrowing immense sums at every level, private, corporate and State/Federal, all leveraged against phantom future surpluses, even as the economy requires some 10% of its supposed output (GDP) to be borrowed and spent on consumption each and every year just to run in place, i.e. the Red Queen's Race (Bernanke, Goldilocks and The Red Queen January 10, 2011). In other words, the U.S. economy is running a massive deficit, and squandering the vast sums being borrowed on consumption and mal-investments. Once you rely on more borrowing against imaginary future surpluses to fund your current expenses, then eventually the costs of servicing that debt exceeds any possible future surplus. The last-ditch "fix" is to simply print units of money (or borrow it into existence like the Federal Reserve)--counterfeiting, pure and simple-- and deceive the market for a time via the illusion that the freshly printed units of money are actually backed by productive value or surplus. As history has shown, eventually the market discovers the actual value of this counterfeit money, i.e. near-zero, and the system implodes. Once there is no more "free money" to fund consumption and mal-investment, then the reality of systemic insolvency is revealed to all. You cannot counterfeit actual surplus value generated by productive assets, you can only counterfeit proxy claims on future surplus.

You're about to hear a big boom come from across the Atlantic, but I've yet to hear a peep from the rating agencies. And many of you guys think they were delinquent during the other credit bubble!!!????

It appears from the Treasury's announcements and the Treasury's Borrowing Advisory Committee (TBAC) recommendations that we will shortly see Treasury FRNs. While details remain murky (what maturities, the underlying index, reset frequency, and so on) we would be surprised if they did not after all this analysis and the potential problems they may face. Given the weight of short-dated maturing Treasury debt, if the Treasury were roll/term this debt out at the same pro-rata distribution of maturities as it has currently, then the weighted average maturity of their debt would rise significantly. While avoiding the short-term limit of zero-date issuance that many European sovereigns face is a positive clearly, the problem for the Treasury lies in the non-domestic (read Fed) demand is waning significantly for any longer-dated Treasuries (while bid-to-covers on Bills remain very high and active for foreign buyers). FRNs would implicitly provide the lender with upside coupon on a rise in rates (a potential plus for foreign demand given their angst and the low level of rates priced into the market) and would benefit the Treasury by reducing potential demand issues at the long-end (and potentially offering the Treasury upside if rates stayed low for longer). The bottom line is that the structural decline in the stock of global high-quality government bonds, coupled with an increase in demand for non-volatile liquid assets, should make U.S. government issued FRNs extremely attractive. Of course, the benefits to the Treasury from issuing FRNs also relies significantly on the Fed's monetary policy stance - savings are likely to be greater when the change in the funds rate is negative, and especially when such change is more negative than the expectations priced into forwards (and it seems reasonable to assume that the risk to short-rates is somewhat one-sided against the Treasury FRN).

Listen to the Landlord in Chief lay out his REO to LBO plan live and in stereo. Since everyone will end up paying for it, directly or indirectly, sooner or later it probably is relevant.

Two days ago, the US Treasury announced that for the Q2 fiscal quarter (January - March), the net borrowing need of the US would be $97 billion lower than its previous estimate, coming in at $444 billion for the three months (still a $115 billion monthly run rate, not nearly enough to last until the end of the year with the current debt ceiling capacity, and likely not even through the election). What the Treasury did not specify is where this incremental cash would come from, merely noting that the higher cash balance which it ended December 2011 with compared to estimates "was driven primarily by higher-than-projected receipts and lower outlays" implying that the Treasury was confident higher than expected tax receipts would continue.  There is however one problem with this: as the attached chart from the just released Q1 fiscal report from the Office of Debt Management shows, withheld taxes, the primary source of US government revenues, has just rolled over and is now posting negative Year over Year numbers (chart 1). Which is bad news for Tim Geithner if he hopes that the spike in tax receipts will continue, and for the TBAC which projects a lower than expected funding needs: in fact we are confident that the net issuance in Q2 will be substantially greater than the net forecast, and will likely be funded with short-term Bills, either ad hoc, or in the form of increased program Cash Management Bills issuance. Yet the fact that America can not live within its means is not news. What however, needs addressing is why, as Chart 2 shows, have US corporate taxes never regained their historical levels from 2007, when as is well-known, corporate profits have never been higher (if now rolling over finally), and corporate cash, especially that held off shore, at record levels? Because as the green line shows, the 12 month moving average of corporate income taxes, has barely budged from the recession lows. We wonder why nobody has asked the question: why is this the case and why have neither politicians nor individual taxpayers made an issue out of this yet?

Early Tuesday morning, the Portuguese 10Y bond was trading over 300bps wider than its close last Friday. Contagion from concerns in Greece and what that meant for a nation that while not in as dire a position as Greece economically was well on its way to totally unsustainable debt levels relative to what little and shrinking GDP they can garner. Market access is of course off the cards and there are reasonable chunks of debt maturing that will need to be funded. Since then the PGB has rallied an incredible 300bps, now trading a mere 5bps wider on the week as if nothing had ever happened. We know the ECB was active yesterday and it appears also today but what is also very notable and perhaps explains more of the compression is the huge drop in the basis between CDS and bonds for Portugal. The basis, as we have discussed before, was extremely wide for Portugal (a quite illiquid sovereign bond and CDS market) and we suspect at a spread between bonds and CDS of almost 850bps, it was just too tempting for hedgies not to buy the package en masse. This means they would have bought PGBs (bonds) and bought CDS protection to try and 'lock-in' the spread between the two. That demand for the basis has pushed it 200bps narrower and given the thinness of the PGB market, the marginal demand from basis traders has exaggerated that rally by the 300bps we noted above. So Portuguese bond risk remains elevated (CDS around 1400bps and and 5Y PGB around 20% yield) but the drop in the last few days is not a risk appetite signal but reflective of an ECB-spurred risk transfer to basis traders who we assume are more confident in Portuguese bond contracts and CDS triggers than Greek bonds for now. It seems they have found another pivotal security to manipulate down to show 'improvement' as Portugal leaves the global bond indices but is mysteriously bid this week - watch the basis for more compression and the signal for unwinds which will stress PGBs once again.

As we hinted earlier, and contrary to 100% wrong whisper numbers, the January ISM not only did not land in the 55+ ball park, but missed consensus estimates of 54.5, printing at 54.1, yet up from December's 53.1. However, just like in China, the goalseeked number was neither good nor bad, although leaning toward the weaker side to keep with the Chicago PM's miss. After all the Chairman needs an exit door for more QE.The internals were not very notable with the exception of Prices Paid, which came at 55.5 compared to expectations of 50.0 and up from 47.5 in December, the highest since September 2011. Oops margins and oops Inflation? And what is just as bad, the traditionally leading "New Orders less Inventories" index turned down once again, with Invs rising by +4.0, and New Orders up just 2.8%.

One of the laments of the uberdoves in the world over the past several years has naturally been the fact that interest rates are bound by Zero on the lower side, and that the lowest possible rate on new paper is, by definition, 0.000%. Which is what led to the advent of QE in the first place: in lieu of negative rates, the Fed was forced to actively purchase securities to catch up to a negative Taylor implied rate. This may be about to change, because as the just released letter from the Treasury Borrowing Advisory Committee, or as we affectionately called the JPMorgan/ Goldman Sachs Chaired committee, the "Supercommittee That Runs America", simply because it alone makes up Tim Geithner's mind on what America needs to do funding wise, demand, "It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical." And what JP Morgan and Goldman Sachs want, JP Morgan and Goldman Sachs get. And once we get the green light on negative yields at auction, next up will be the push for the Fed to impose negative rates on all standing securities, which means that coming soon savers will be literally paying to hold cash. And that will be the final straw.

Following today's sizable miss and significant revision to the ADP data it is perhaps worth taking a step back and looking at some independent research on the adjustments and seasonality issues in forecasting jobs around this time of year and furthermore, why one of the pillars of this extended rally and US decoupling story (a substantially improving jobs market) could be made of salt. Bloomberg's consensus for Friday's NFP at +145k (from +200k prior) and a 30k standard deviation, there is plenty of uncertainty among the economic elite (with 125k to 150k the sweet spot for their guesses) and our favorite outlier Joe LaVorgna near the top at +210k. So while the trend is supposedly improving (though expectations are slightly off December's exuberance), Stone & McCarthy (SMRA) point out a disturbing trend of sizable forecasting errors for the January payroll print with 7 straight years of estimates overshooting by an average of 64k - strangely consistent post the BLS switch to a probability-based sample. But its not just forecasting error, TrimTabs takes a deep dive into the actual daily income tax deposits from all salaried employees (which are historically more accurate than BLS initial estimates) sees the US economy added only 45,000 jobs in January, nearly unchanged from the 38,000 in December. Noting similar forecasting errors as SMRA, TrimTabs points out that the decline in seasonal adjustment factors and the reality of the underlying tax data suggest "It appears that the economy has hit stall speed due to lackluster demand and a deleveraging consumer who would rather save than spend." as wage and salary growth (net of inflation) weakened further to -2.1% YoY in January from -0.5% YoY in December. "The weak job market has us concerned" seems like a truer reality than the establishment trying to keep the dream alive.

While sounding just a tad preachy in his February newsletter, Bill Gross' latest summary piece on the economy, on the Fed's forray into infinite ZIRP, into maturity transformation, and the lack thereof, on the Fed's massive blunder in treating the liquidity trap, but most importantly on what the transition from a levering to delevering global economy means, is a must read. First: on the fatal flaw in the Fed's plan: "when rational or irrational fear persuades an investor to be more concerned about the return of her money than on her money then liquidity can be trapped in a mattress, a bank account or a five basis point Treasury bill. But that commonsensical observation is well known to Fed policymakers, economic historians and certainly citizens on Main Street." And secondly, here is why the party is over: "Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk” and the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time." Yet most troubling is that even Gross, a long-time member of the status quo, now sees what has been obvious only to fringe blogs for years: "Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper." Let that sink in for a second, and let it further sink in what happens when $1.3 trillion Pimco decides to open a gold fund. Physical preferably...