Archive - Mar 26, 2012

As we noted this morning, the hope trade seems to be morphing from 'we don't need no stinking QE' to 'good is good but bad is better' as 14 of the last 16 data points have missed expectations. With a relatively heavy calendar of data this week, we are sure there will be ups and downs and micro-trends to call for the all-in but as Jim Reid if Deutsche Bank notes, this is the start of the point in the year when seasonals have often led to data disappointments over the past decade. The data typically beats expectations between November and January but then disappoints for 8 of the next 9 months with the notable exception of May. Overall its certainly a relationship to have in mind, especially as we travel through a period, theoretically, post maximum liquidity for now. Adding to this concern is the fact that real economic activity has 'improved' less and less with each extreme easing action by the Fed - with 'Operation Twist' barely budging the needle on ECRI's growth index relative to QE1 or 2 - and with economic data missing expectations rather consistently already, history suggests negative returns for the S&P will be evident.

The size and scale of 'current law' expectations for spending in 2012 and 2013 are dramatic to say the least. As Morgan Stanley notes, these are huge economic and political challenges to any deficit reduction - which we discussed last week (courtesy of James Montier) is critical if we are to maintain corporate profit margins. Presenting, with little pomp and circumstance, the US economic fiscal cliff...

Deny that, bottom deniers.

In Don Coxe's latest and typically excellent letter, "All Clear?", he highlights the opportunity in precious metals mining companies: "If there were one over-arching theme at the BMO Global Metals & Mining Conference, it was that the gold miners are upset and even embarrassed that their shares have so dramatically underperformed bullion...  "On the one hand, they were delighted in 2011 when it was reported that since Nixon closed the gold window, a bar of bullion had delivered higher investment returns than the S&P 500 for forty years-- with dividends reinvested. But some gold mining CEOs find it an insult that what they mine is more respected than their companies' shares...  "In our view, we have entered the most favourable era for gold prices in our lifetime, and the share prices of the great mining companies will eventually outperform bullion prices." As Don Coxe makes clear, governments are running deficits "beyond the forecasts of all but the hardiest goldbugs five years ago; central banks are printing money and creating liquidity beyond the forecasts of all but the most paranoid goldbugs a year ago." The choice for the saver is essentially binary: hold money in ever-depreciating paper, or in a tangible vehicle that has the potential to rise dramatically as expressed in paper money terms.

For the first time since June 2011, the average price for Gas across the 27 European nations just broke above USD10/gallon. With the US on average above USD4/gallon (at its highest since May), it is perhaps worth looking under the covers at just what nations have been hurt the most in the last year by the money-printing-insanity-experiment rising price of crude. Italy has been hit the hardest with Fiat Uno drivers paying 18% more this year than last for a litre of petrol. As The Economist points out, only the Dutch and Norwegians pay more than the Vespa riders but perhaps it is worthwhile noting just how low (on average) the US price is compared to its global peers (for now) and the fact that only the French are paying less this year than last.

Short term, the bulls will probably remain in control. 

Earlier we presented the view by one of the TBAC's co-chairmen, Goldman Sachs, former employer of such NY Fed presidents as Bull Dudley. Now we present the only other view that matters - that of Fed boss (recall the JPM dividend announcement and how Jamie Dimon pushed Ben B around like a windsock) JP Morgan, and specifically chief economist Michael Feroli who is a little less sanguine than the market about interpreting Bernanke's promise to always support stocks, using the traditional stock vs flow obfuscations which is about as irrelevant as they come. To wit " How one views the word "continued" in this context depends in part on whether it is the stock (or total announced amount) of asset purchases that matter for financial conditions, or whether it is the monthly or weekly flow of those purchases.... according to the stock effect view the end of Twist purchases in June does not amount to a tightening, but rather is a continuation of the current accommodative stance of monetary policy. Thus, "continued accommodative policies" for a stock effect adherent would not necessarily imply an extension of asset purchases beyond June." That said, all of this is semantics. Recall that the US has $1.4 trillion in debt issuance each and every year. Unless the Fed steps in to buy at least a material portion, this debt will never be parked, rendering all other plot lines, narratives and justifications for QE moot.

We have one last chance to restore at least a part of the Bill of Rights. Some members of Congress awakened from their fund-raising somnambulance and proposed the Due Process Guarantee Act which would restore the Bill of Rights to its proper place in US law. So do one thing today for the nation and its liberties: contact your representative and senators to press them to support this bill. Ask them which military or law enforcement agencies requested that Congress nullify the Bill of Rights with the NDAA. Advise them to do the correct thing for once in their sordid little careers and vote for the Due Process Guarantee Act. This page lists other articles about the NDAA and also provides links to find your representative and Senators: It's treason. Call it what it is.

The initial reaction to the release of Bernanke's speech this morning was 'QE3 is on' and this was borne out perfectly in the data. TSYs rallied (with the short-end performing best), the USD dropped and with it commodities soared (though Oil stayed much more in sync with it than we have seen historically) and the nominal price of stocks jumped handsomely. What was most notable though was Gold's outperformance (and Silver given its high-beta juice) compared to other asset classes. Then as the US day session opened, Treasuries turned around with the whole curve rising in yield and the long-end steepening as the correlation-algos stepped in to pull the TSY complex back into a twist around the 10Y (10Y unch from 8amET, 30Y +2bps, 5Y -2bps and Mortgage spreads - which widened initially - are now back to unch from 8amET and well down on the day). Oil and the USD have tracked sideways from the open and aside from a gap up around 10amET (on dismal data we assume locking in more QE hope), stocks have leaked back a little as volume faded. Gold (and Silver), however, have continued to surge - now over $1685 and at near two-week highs as once again the cleanest and largest impact of Bernanke's hint at further debasement is exemplified in the price of precious metals.

For months we have been saying that there is no housing recovery, and what little buying interest there was was driven purely by abnormally warm weather and still record low interest rates. Well, the seasonal aberrations are now over, and normalcy can return, but not before much demand was pulled forward (Cash for Caravans? Money for McMansions? Shekels for Shacks? Dough for Dumps?) to December-February courtesy of "April in January" and mortgage rates soaring to well over 4%, leading to a major tumble in MBA new home and refi mortgage applications (as noted here "So Long Housing - Mortgage Applications Collapse, And Sentiment Update"). So we won't repeat ourselves, intead we will give the podium to CNBC's Diana Olick who now finds empirical evidence of what we have been saying all along. From Olick:  "Housing was charging back. Spring sprung early. Sentiment among home builders doubled in six months. Any talk that the fundamentals might not be supporting the sentiment was met with harsh criticism. And then suddenly it wasn’t. A slew of new housing data last week disappointed the analysts and the stock market, and all of a sudden you started to hear concern that maybe housing wasn’t exactly in a robust recovery. From home builder sentiment to housing starts, to home builder earnings right through to sales of newly built homes, there was not one hopeful headline in any of it (except perhaps if you invest in rentals, as multi-family housing starts made more gains, but that is a contrary indicator to housing recovery)." And from the ground:"And then an email from a Realtor in New Jersey: “Just reviewed March buyer clicks, Google’s analytics on all the sites we monitor – March is turning out to be the weakest month since last October re: Buyer interest."

Big picture: the markets are being held together via a very tenuous balancing act on the part of EU leaders and the world Central Banks. The short-term bias will be bullish due to the factors listed above. But big trouble is lurking just beneath the surface. And should anything upset the current balance being maintained, we could see some real fireworks in the markets in short order.

The Dallas Fed Manufacturing Outlook just came with its largest miss of expectations in 9 months - and biggest drop in 7 months.. A 10.8 print vs expectations of 17.0 dropped the index back to its lowest since December and keeps the 'good is good but bad is better' dream alive we assume and markets are entirely unfazed. The 'hope' sub-index printed higher which accounts for some of the reaction but we note that New Orders went negative, Average Workweek plummeted to its lowest in at least six months (and the number of employees also fell), and Prices Paid jumped but Prices Received dropped for the first time in three months (more margin pressure). This makes 14 of the last 16 macro data prints in the US a miss - but Ben is here to save us from considering the harsh reality of our quagmire.

While much heart palpitations are generated every month based on how much of a seasonal adjustment factor is used to fudge US employment, many forget that a much more serious long term issue for the US (assuming anyone cares what happens in the long run) is a far more ominous secular shift in US population - namely the fact that everyone is getting fatter fast, aka America's "obesity epidemic." And according to a just released analysis by BNY ConvergEx' Nicholas Colas, things are about to get much worse, because as the OECD predicts, by 2020 75% of US the population will be obese. What this implies for the tens of trillions in underfunded healthcare "benefits" in the future is all too clear. In the meantime, thanks to today's economic "news", fat people everywhere can get even fatter courtesy of ever freer money from the Chairman, about to be paradropped once more to keep nominal prices high and devalue the dollar even more in the great "race to debase". Our advice - just pretend you are going to college and take out a $100,000 loan, spending it all on Taco Bells. But don't forget to save enough for the latest iPad, and the next latest to be released in a few weeks, ad inf.

Pending Home Sales missed expectations by the largest amount since September of last year and printed negative (-0.5%) versus hope of +1.0%. It seems our self-fulfilling housing recovery is not so self-fulfilling or recovering...this makes 13 of the last 15 macro data prints in the US a miss. What is perhaps most surprising is the fact that this is from our old friends - the NAR - who seem comfortable 'fabricating' whatever number they need and in a wonderful ignorance of the reality of the situation (or uncomon confidence in extrapolating exceptional trends), Larry Yun (NAR Chief Economist) notes "The spring home buying season looks bright because of an elevated level of contract offers so far this year" which seems odd given the fall MoM and the clear warm-weather demand-pull that has occurred (but we assume he is spinning the better-than-expected YoY data that marked a pick up from the last abyss we saw in home sales). We also note that while YoY comps are the positive spin, the Jan print was almost the highest 'rise' seasonally for January of the last 10 years and this print (for Feb) is well below seasonal average (and near the worst of the last 5 years).