Archive - Mar 2, 2012

One way to gauge the real economy is to look at charts of the GDP, wages, household debt and the price of oil; another way is to correlate all of these on one chart. The following chart (courtesy of frequent contributor B.C.) plots these four metrics thusly: GDP/(wages/household debt)/price of oil. What pops out of the chart is what happens when oil spikes higher or declines. In 1973, the first oil shock sent the economy off a cliff. Conversely, when oil fell to $12/barrel in the late 1990s while wages were rising strongly, the plotline peaked, reflecting a strong economy. In 2008, oil spiked to $140/barrel in 2008, household debt reached record heights and wages began stagnating, and the economy fell into a sharp recession. When oil plummeted back to $40/barrel in early 2009, the plotline spiked up. When oil prices and household debt are high while wages stagnate or decline, the economy sinks to recessionary levels....The current plotline is hovering just above the recessionary levels of late 2008. Does this reflect a strong economy, or one that is weak? If oil keeps climbing, what will that do to a visibly weak economy?

The key focus of Cashin's daily letter today has to do with the steadfast resilience of the ECRI's Lakshman Achuthan, who called for a recession back in September, and when asked yesterday if he reaffirms his call, he says "Consider it reaffirmed." He then proceeds to list out the "key, hard facts" summarizing the litany of truth as follows: "The economy is weaker today than it has been in 21 months." And scene.

While last winter every downtick in corporate earnings was promptly "explained away" by executives using the harsh weather excuse, one has heard not a peep from companies on the topic of an abnormally accommodative climate over the past 4 months. And why would they - after all it would mean that any gains, not that there have been many as most companies have reported below average results, have been artificially boosted by one-time events. Needless to say, the mainstream media would rather not touch this topic with a ten foot pole: there is an election to be won and the public can not be disturbed with facts (heaven forbid someone should mention seasonal adjustments - that's a death sentence). Which is why ironically we have to go to Goldman, which as noted recently, has once again turned bearish on the economy for one reason or another, to quantify the impact of the balmy winter. "Reported growth in the CAI is 2.8% for December and 2.9% for January. The estimates here imply that excluding the effect of warm weather, growth would have been 2.5% in December and 2.5-2.7% in January. Note that although January was very warm relative to seasonal norms, this followed a gradual warming in temperatures in October through December. We think our estimates of the weather impact may be on the low side, given that snowfall was also below seasonal norms this year. Lower precipitation can raise activity in some sectors. Our estimates imply that a normalization in temperatures could be a modest headwind to growth over the next few months. The extent of the drag depends on the specification, but a plausible range would be 10-40bp in March if temperatures return to seasonal norms by that month." Looks like Newton was right after all, despite all attempts by central planners to deny reality.

That Tilson's fund was down 0.9% in February is no surprise. After all the company's Qualified fund has underperformed the S&P since inception in 2004 (more on that in a second). After posting a gain in January, T2 is back to its losing ways (as a reminder the fund was down 20% in 2011, which means it has to post a well bigger than 20% return in 2012 to get above the high water mark). Tilson's performance is summarized as follows: "On the long side, winners included Citigroup (8.5%) and SanDisk (7.8%), offset by Netflix (-7.9%), Grupo Prisa (B shares) (-7.4%), and J.C. Penney (-4.7%). On the short side, we profited from First Solar (-23.6%), which just reported dismal earnings and guidance, Interoil (-10.4%), and Boyd Gaming (-8.7%). These gains were offset by Salesforce.com (22.6%), which is growing rapidly but trades at 8.7x revenues and has a $19.6 billion market cap despite being unprofitable. In addition, Green Mountain Coffee Roasters, which we think is likely to be the next Krispy Kreme (for those of you with long memories), rose 21.8%" And also "Since Berkshire reported earnings, the stock is actually down a bit so we took advantage and, though it was already our largest position, we added to it." All that is fine and well, but we have two questions. What is Tilson's, a self-professed "value investor" Sharpe Ratio? Judging by the monstrous volatility swings in its marginal positions, the fund is as much a value investor (read slow, stable rise), as a momo investor is the Queen of England. How long until the CME opens a triple levered (forward and inverse) ETF to take advantage of the already ridiculous monthly vol in the Tilson portfolio, whose Sharpe, just by eyeballing it, must be negative give or take.

Re: LTRO2, banks, CRE and the oppurtunity to see just how much free really costs...

Over the past 5 months, the only reason the US market, and this economy has outperformed the world (or "decoupled" in the case of so-called US fundamentals) is because the trillions in incremental liquidity from generous central planners have homed in on US equities like a heat seeker, in the process boosting confidence, and in a reflexive fashion, making consumers believe that things are getting better (for producers of printer cartridge maybe, everyone else just keeps getting worse off in real, not nominal, terms). Paradoxically, the trillion plus injected into the system from the ECB, ended up helping not Europe, but the US. However, as every action ultimately has an equal an opposite reaction, the recent US "renaissance" has also sown the seeds of its own destruction, because one of the side effects of a massive liquidity reflation is what has happened in the energy markets where the crude complex trades at all or near all time highs. However, as the following chart from UBS shows, it is the US which has the most exposure to that other side effect of soaring liquidity: surging prices. While the number is fluid (economist humor), every $10 increase in crude prices, cuts US GDP by 1%, and less than that in Europe and the ROW. As noted yesterday and today, "strategists" have already started trimming their GDP forecasts. How long before we end up seeing already weak growth turn negative as a result of the most recent central planning reliquification experiment? Because it will - central intervention always leads to adverse consequences in due course. Only this time, corporate profits will not allow the economy (read the markets) to pull itself up by the bootstrap, as they have topped and are now sliding lower.

Nearly two years after his catastrophic foray into Op-Ed writing, here is Tim Geithner's latest, this time making the hypocritical case to "not forget the lesson from the financial crisis"... which he himself ushered on America as head of the New York Fed. Frankly we are quite sure it is not even worth reading this drivel: the unemployed man walking has been a total disaster during his entire tenure (at both the New York Fed where he supervised all the banks that subsequently fell, and the Treasury), and we are fairly confident that reading anything written by this pathological failure will cost collective IQs to drop by 10 points at a minimum. Hey Tim: is there a risk the US can get downgraded? Any risk?

Yesterday, when we reported about Goldman not one, but two GDP Q1 forecast cuts in one day, we said to "watch for the Wall Street lemming brigade to quickly follow in Goldman's footsteps." Sure enough, here is Bank of America, rushing first into the bandwagon, trimming its Q1 forecast from 2.2% to 1.8%. This is perfectly expected: recall that from day 1 of 2012, most banks had been pushing for QE3, ignorant of the massive liquidity tsunami that was going on behind the scenes. Well, the impact of that has now come and gone, with no more easing from the ECB on the horizon for a long time. Which means that the focus can again shift to how "bad" the US economy is in preparation for the inevitable Bernanke gambit. Needless to say this will make the pre-election economy appear like a total farce in the months before the re-election: soaring employment and plunging everything else. Good luck explaining that away. Incidentally explains why the EURUSD has resumed its slide: the market is now pushing Bernanke to halt the appreciation of the USD against the EUR, and thus the implicit benefit of German's economy over that of the US, which can only happen with further promises of easing. That said, we can't wait for the statement as the vaudeville Trio of Bianco, Chadha and of course LaVorgna to follow suit and slash their now comically hyperbolic expectations.

Wednesday’s sell off is being attributed to one massive sell trade of 31 tonnes on the Chicago Mercantile Exchange during Bernanke’s speech. There are rumours of a large US fund selling and also that the selling may have been by JP Morgan – rumoured to be acting on behalf of an Asian fund. Who sold off and why is less important than the fundamentals of the gold market. Absolutely nothing has changed regarding the fundamentals of gold which remain as sound as ever with broad based demand from store of wealth buyers, institutions and central banks internationally and especially in Asia. Good volumes have been seen on the Shanghai Gold Exchange in recent days. In India, lowest gold prices in a month saw strong physical bullion demand and physical buyers hunting for gold bargains to meet the wedding season demand. India remains the world’s largest buyer of the yellow metal (900 tonnes/year) but China is expected to outpace them this year according the World Gold Council. ETF holdings gained 238,674 ounces to a record high of 70.76 million ounces, showing that institutions and investors remain keen on gold. Also, options data has not changed since Wednesday’s price falls.

There is one name one won't find on Third Point latest 13F. Curiously, it is the same name that is now Third Point's fifth largest position as of February 29, 2012. As we said: every hedge fund is now in it. More importantly, we wonder, when will Apple, which is effectively an Alphaclone of itself, start charging its shareholders 2 and 20 for the privilege of owning its stock?

Nothing good here for our Spanish readers: while speaking at a news conference, Deputy Prime Minister Soraya Saenz de Santamaria said that Spain's economy will contract by 1.7 percent this year as the government carries out drastic austerity measures. The forecast matched the International Monetary Fund's outlook for Spain's economy this year and was less optimistic than the outlooks from the country's central bank and from the European Commission. Earlier, Spain also defied the European Union, setting a 2012 deficit target at 5.8 percent of gross domestic product, a far softer goal than the 4.4 percent agreed with Brussels. More importantly, the country now anticipates that its unemployment rate will hit 24.3%. Frankly, while horrendous and worse even than in Greece (as it also implies a youth unemployment rate well into the 50%s), this is an overoptimistic number, because as noted before, Spain's unemployment soared from 21.5% to 23.3% in Q4 alone. When all is said and done, look for Spain's 2012 YE unemployment to be well over 25%. So as the economic deterioration across the PIIGS accelerates, at least the banks are "safe."

European indices are trading in minor positive territory ahead of the North American open with tentative risk appetite. This follows news that the EU leaders have signed off on the EU fiscal pact, with German Chancellor Merkel commenting that 25 out of 27 countries have signed the agreement. The effects of the ECB’s LTRO continue to trickle through as the ECB announce they received record overnight deposits of EUR 777bln from European Banks. Little in the way of data today, however UK construction PMI released earlier in the session recorded the highest rate of increase in new orders for 21 months. In the energy complex, Brent futures have come down below USD 125.00 from yesterday’s highs with WTI echoing the movements, following market reaction to the confirmation that there were no acts of sabotage on Saudi pipelines yesterday, according to Saudi officials. EUR-led currency pairs are trading down on the session, and USD/JPY continues to climb, hitting a 9 month high earlier today at 81.72.

Overnight sentiment is turning south, after 4 successive days of breakout attempts have failed to conquer Dow 13K, and with crude sticky at multi month highs. The EURUSD is down over 100 pips and is testing 1.32 support. BBG summarizes the key overnight events that are shaping the mood: EU leaders, bowing to German demands, signed a deficit-control treaty at the 17th summit since the outbreak of the crisis. The treaty puts tighter  restrictions on spending. A test of Europe’s commitment to austerity will come when the region debates whether to ease the deficit-reduction target for    Spain, which is part of the overnight downbeat mood in stocks after PM Rajoy announced that the deficit target for the coming year is 5.8% of GDP and the 4.4% deficit goal is unattainable. The European Central Bank said overnight deposits soared to  a record after its second allocation of three-year loans. Elsewhere, investors are complaining that the European Investment Bank doesn’t deserve the same exemption from losses on its Greek bond holdings as the euro region’s central bank because it didn’t buy the notes to support monetary policy. Well - don't complain, and merely just say no to the PSI. Treasuries steady; Bloomberg’s Soveriegn Debt Movers shows Greek yields plunging, Portugal slightly higher. European stocks mostly higher, U.S. futures steady. Will this downbeat mood remain - all depends on which way the momentum algos move, and whether they have been recalibrated from the prior program of following crude with a positive correlation.

When explaining the practical effect of Wednesday's second and certainly not last LTRO, we said that "when it comes to explaining why Europe's banks are not only not deleveraging but increasing leverage while paying an incremental 75 bps on up to €700 billion in deposits soon to be handed over to the ECB, one needs all the favorable spin one can muster." We also estimated that net of rollovers and other tangents, the true net liquidity add would be €311 billion and "the final number by which the ECB's deposit account will increase will be about €210 billion less than the overhead number" of €529.5 billion. Sure enough, as of this morning, which takes into account the full settlement and allocation of the second LTRO cash installment, the ECB's deposit facility has soared by precisely as expected, rising by €302 billion overnight to an all time record of €777 billion, or just over $1 trillion. In other words, Europe has now successfully managed to fool everyone that it is executing the carry trade, when it is doing nothing like that at all, and it continues to park record amounts of cash with the ECB on which not only is it not earning a carry spread, but it is losing 75 basis points as it is paid a meager 0.25% for a deposit that cost it 1.00%. Said otherwise, instead of building a cash position and retaining earnings to fund €3 trillion in debt rollovers over the next three years (by the time the LTRO matures incidentally - good luck paying down that additional €1 trillion, which makes it a total of €4 trillion in maturing debt), roughly 800 European banks will bleed by €6 billion in the next year just to store their cash with the ECB. So much for promises of the carry trade. And we certainly commiserate with all those who bought European bonds on the assumption that they were frontrunning banks who are buying up BTPs, Bonos and what not. They were only frontrunning themselves.

• Brazil declares new ‘currency war’ (FT)
• Postal Cuts Are Dead Letter in Congress (WSJ)
• China state banks to boost selected property loans (Reuters)
• ECB Says Overnight Deposits Surge to Record (Bloomberg)
• Van Rompuy confirmed for 2nd term as EU Council president (Reuters) - you mean dictator
• BOJ Shirakawa: Japan consumer prices to gradually rise (Reuters)
• IMF Says Threat of Sharp Global Slowdown Eased (Reuters)
• Eurozone delays half of Greece’s funds (FT)
• BOJ Openings Can Shape Monetary Policy (Bloomberg)