Archive - Mar 2012

For a third year in a row mainstream economists and analysts are once again planting the seeds of hope for a return to stronger GDP growth.  The White House, if you look at their budget estimations, are banking on it as part of their long term deficit reduction plan.  Unfortunately, it is highly unlikely that we will see growth in the economy return to 4% for a very long time.   Currently, the deficit between real GDP and the CBO's estimated potential GDP, is at the greatest deviation on record.  However, that data point really doesn't tell us much other than the economy is currently operating well below its potential level.  While most economists will point to the likely culprits of employment, wages, industrial production and consumption as the problem, which is correct, those issues are byproducts of the 50-Trillion pound Gorilla that sits quietly in the corner.  That seemingly invisible Gorilla is simply - debt.

One of the central premises of CDS is that the “basis” package should work.  An investor should be able to buy a bond, and buy CDS to the same maturity and expect to get paid close to par – either by the bond being repaid at par and the CDS expiring worthless, or through a Credit Event, where the price of the bonds the investor owns plus the CDS settlement amount add up to close to par. The settlement of the Greek CDS contracts worked well, but that was pure dumb luck. This leaves playing the basis in Portuguese bonds and CDS as a much riskier proposition than before Europe's PSI/ECB decisions - and perhaps explains why at over 300bps, it has not been arbitraged fully away - though today's rally in Portugal bonds suggests a new marginal buyer which given the basis compression suggests they may be getting more comfortable.

Last year, everyone blamed anything that came in even modestly worse than expected, be it EPS or economic data, on the occasional inclement weather, completely oblivious that that is precisely the reason for seasonal adjustments, and for forecasters to be paid seven digits  - i.e., to anticipate various outcomes. So far this year we had not heard anyone accusing the near-record warm winter for much, especially since the data has been coming blisteringly hot (something which everyone from Goldman, to Bank of America, to David Rosenberg is convinced will cause a major "Cash to Clunkers"-like hangover in the spring and summer courtesy of front-end loaded consumer demand). Until now: the following Hudson Square Research report blames the deterioratin in Netflix traffic patterns on, you guessed it, warm weather.

Headlines only via Bloomberg for now, with some very modest downside in the stock for now:

• *CONSUMER REPORTS STUDYING WHETHER APPLE IPAD POSES INJURY RISK
• *CONSUMER REPORTS SAYS IT'S TESTING IPAD AMID REPORTS OF HEATING
• *APPLE'S IPAD SUBJECT OF THERMAL ANALYSIS BY CONSUMER REPORTS

Perhaps this is Apple's way of allowing us to eat iPads warm? A new feature not a bug? Or perhaps it is really smart as we see gas prices rise as a way to heat our homes more efficiently (although in the new normal cold weather is a thing of the past so it may have been unnecessary)?

As noted yesterday, Paul Ryan proposed a 2013 budget, which has no chance of passing, and is "focused on deficit reduction." An hour ago, the full 5-page detail was released to the public. And if this is the plan that hopes to cut US budget deficits, then America is royally screwed, as according to page 5, the first time that the US resume a budget surplus is in... 2040.

Fourteen months, one MF Global carcass and $1.6 billion in "vaporized" funds later, does the CFTC still regulate the futures markets by fax?

Housing remains a mess and recovery continues to be something found best in Disneyland at fantasy land (although not in Disney's movie-making business). The sector is showing only feeble growth as the American nightmare continues to chip away at the American dream. Or If every man's home is his castle, what am I doing in the moat,and why won't my banker lower the drawbridge?

Every once in a while an event crystallizes the stark reality behind the lacy curtain of propaganda and artifice. Here is one such event. Correspondent R.T. is a retired accountant who has resided in Arizona since 2001. Prior to 2001, he resided in California. On March 14, he received a letter from the California Franchise Tax Board (the agency that collects income taxes) claiming that he owed $1,343 for the tax year 2006. This was the first notification he'd ever received of this claim. This was an interesting claim given that R.T.:

• Did not reside in California in 2006
• Did not file a State income tax return in California in 2006
• Did not have any outstanding tax issues with California in 2006
• Did no business in California in 2006
• Owned no property in California in 2006

Based on Bloomberg's US Average Gasoline price index, we are now back above $4 per gallon for the first time since May 2011. We also note that the average price for a gallon of gas across the EU is inching ever closer to the $10 mark.

China is best known as the world's export driver as the hopes of every exporting nation in the world are pinned on the eventual transition of the economy to domestic consumption and hence greater imports. While China has contributed most to Global GDP growth in the past few years, some argue that this growth is not as 'helpful' as US growth to other countries - since China does not import much other than commodities (and less steel now). However, as UBS' Tao Wang points out today, that claim is not quite as valid now as before the financials crisis. China's imports have far outpaced exports in the past 4 years, and trade surplus has shrunk from 9% of GDP in 2007 to 3.3% in 2011. China's 2011 import data shows two sets of information that should be common knowledge by now: 1) China imports a lot from East and Southeast Asian economies (and is the largest market for almost all major economies in the region); and 2) China imports a huge amount of energy and resources (metals and minerals) benefiting Australia and Brazil significantly. But exports to China have become increasingly important for developed economies such as Japan, Germany, and the EU in general and perhaps more concerning is the fact that large emerging market economies may find it increasingly difficult to 'decouple' from China. These two charts show just how large an impact any slowing in Chinese growth and demand will have on some of the largest and most 'decoupled' growth nations - it is clear the BRICs are increasingly self-reliant (and potentially self destructive).

There are those cynical elements out there, who think that the primary reason why Germany has been unhappy with Greece is that the Germany military-industrial complex has lost a staple buyer of its military products (recall: "Greece Spends Bailout Cash On European Military Purchases" and one wonders just how instrumental the brand spanking new PASOK leader, Venizelos, who was Greek Minister of National Defense, has been in such arrangements in the past). Well, Germany may have just found a way out.  Reuters reports:

• GERMAN DEFENCE MIN SAYS TO DELIVER ANOTHER SUBMARINE TO ISRAEL FOR WHICH GERMANY WILL PROVIDE FINANCIAL HELP

Over the past few month we have made it expressly clear that as part of its bailout of European banks, all Greek "bailout" funding in the form of super senior first lien debt funded by the Troika (since the Greek balance sheet now has 7 distinct debt classes), which counts the IMF among its backers, which in turn means you, US taxpayers, will go to European banks and most importantly, that most undercapitalized hedge fund of all, the ECB, LLC. Said funding has now officially commenced. There are those Greeks who may read the following headline from Reuters with delight "Greece receives first tranche of new bailout aid", at least until they get to the following part: "Greece  has received the first 7.5 billion euros of aid from its new EU/IMF  bailout, with the bulk of the payment going to repay bonds held by the  euro zone's central banks, government officials said on Tuesday." So while the Greek may particularly care that not only will they not see much if any of the actual bailout cash, and in fact will soon have to start using their gold to fill the capital shortfall as reported here, we are curious what the response will be from US taxpayers, who are on the hook for about 17% of IMF funding, as the money starts trickling in, however not for some old-fashioned concepts such as stimulating jobs, but simply to indirectly, with Greece as a conduit, bailout Europe's insolvent central banks.

Economic Surprise Indices have been rolling over for a month or two now. The trend of US macro data has also disappointed in a period when it would be expected (empirically) to accelerate. However, taken anecdotally or cherry-picked managers can find plenty of ammunition to support the to-infinity-and-beyond Birinyi forecast (though often it relies on the most manipulated and adjusted government provided time-series). Overnight's concerns on China show just how quickly confidence can be upset but Goldman's Jan Hatzius sees three main factors for why their GDP-tracking estimate is weakening already (more like 2% than 3-3.5% growth) and that we are seeing slightly softer data already. The end of the inventory cycle, the pulling forward of demand thanks to the warm weather aberration, and the already clear impact on consumption from higher gasoline prices will likely shift from an overstated economic trajectory to more muddle-through or worse for Q2 onwards.

Minutes ago, the US Census Bureau released the February Housing Starts data, which printing at 698K was a mild disappointment, as it was below expectations of 700K, and down from a revised 706K. However, as usual, the headline gives only half the story. Here is the reality: in February, only 48.1k homes were started (Not Seasonally Adjusted). This compares to 46.5K in January. However, of this number Single Unit houses, those which are relevant for actual housing demand, and not the 5+ units more relevant for rental purposes, declined from 33.0K to 31.5K. In fact, the 31.5K number was the weakest since December's 31.0K, and then all the way back to February 26.6K. What offset this? The surge in multi-family housing units, as usual, which rose from 12.3K to 16.1K. Recall that lately there has been a shift from owning to renting, and as such builders are focusing on this. All of this is summarized in the SAAR based (Seasonally Adjusted) chart below. It gets worse: looking at actual completions, far more important in this New Normal economy, where everyone is willing to take credit for a hole in the ground as "new housing" what really matters is the rate of completions. And in January, it was a meager 28.6K, a tiny rise from January, and lowest than any number in 2011, except for last February. Sorry - there is no housing bottom. If anything, true housing continues to creep along the bottom as can be seen in the chart below.