Archive - Mar 2012

As we all wait with baited breath for the events to play out in Greece, I thought it would be fun to have a look at some developments in the manufacturing sector in the Netherlands. I also got a kick out of all the stuff posted yesterday on the Chevy Volt.

Mitsubishi is pulling out of Colt and Smart Forfour manufacturing in Born, Limburg and is looking to sell its assets there. Wikipedia gives some background on Nedcar for those who are interested.

Paging the eurozone: Coercing banks to lend into a recession didn't work here in 2008. It made things worse.

Hint: Gold

On February 29, gold dropped 4.8% and silver 6.2% (based on London fix prices). That's quite the fall for one day. We've seen prices that have risen that much, too. But as I'm about to show, these ain't nothin', baby. Based on our experience, we've been saying for some time that volatility will increase as the markets fight their way to the mania phase of this cycle – and that once there, the gyrations will jump even higher. This call doesn't exactly require one to go out on a limb; it makes sense since more investors will be crowding in – and volatility was high in the 1979-'80 mania.... There are some definite conclusions we can draw from the historical picture: First, if history repeats, or even rhymes, our biggest days of volatility are ahead. And they will be normal. Second, big price fluctuations will be common as we enter the mania and approach the peak. In fact, when large daily movements become the norm, the historical record suggests we will be nearing the end of the cycle. Third, since current volatility has thus far been lower than what was experienced during the final phase of the 1970s bull market, we are not in a bubble, nor yet in the mania phase, and nowhere near the top. Remember that the next time you hear some nincompoop spew bubble talk on CNBC. What can an investor do with this information? Prepare yourself for bigger daily swings – in both directions. And buying on those outsized drops is probably a good strategy… Because we now know what volatility looks like.

Those curious in tonight's episode of soothing political theater which gives the peasantry the illusion they are in control of something, anything, can quench their thirst for GOP primary irrelevancy at the following real time update (as we learn Newt Gingrich has already been proclaimed winner of the Georgia Primary, and Romney gets Virginia where the only other candidates was Ron Paul). As a reminder, as it has been said that the only candidate who will lower America's debt during his tenure will get no coverage, and certainly no votes, so it shall be. Diebold approves of this message.

Murdochgate may just taken a detour into the tragic following reports that two senior Murdoch journalists have attempted suicide. MSNBC reports: "Two senior journalists working for Rupert Murdoch's News International have apparently attempted suicide as pressure mounts at the scandal-hit publisher of the now-defunct News of the World. The suicide attempts follow weeks of intense scrutiny of the role of The Sun, another Murdoch paper, in the phone-hacking scandal and police bribery case. The man and the woman, who were reportedly involved in separate incidents, were rescued in time, a friend of one of them said, according to a report Tuesday on stuff.co.nz....The two journalists who attempted suicide have been checked into the hospital, according to a report Tuesday by the Financial Times. The newspaper reported that their care is being paid for by News International.   The London Evening Standard reported that other News International journalists are “terribly stressed and many are on the edge.” The company has reportedly offered psychiatric help to any journalist who wants help." While certainly sad, it is curious why one would move to such a dramatic step instead of simply putting one's belongings in a box, and walking out of the office door for good. Especially if one is innocent of anything. Just how putrid will the Murdoch spying stench be when all is revealed, and just how high up does it go in other parallel media organizations who most certainly acted in comparable ways in the pursuit for that most elusive commodity - information? And will this be the end of any near-tragic stories associated with the billionaire media mogul? Somehow we doubt it.

For all the drama surrounding Wall Street bonuses in a year in which Wall Street profitability was cut in half to just $13.5 billion, the worst since the collapse and bailout of 2008 and 2009 (and compared to $27.6 billion in 2010 and $61.4 billion in 2009), one would think that the average banker would see zero bonus in 2011, or in some cases, especially if they worked at a Greek bank, be told to pay for the privilege of working. The truth is that according to official data from the NY City Comptroller, the average bonus dipped by just 13% in 2011, declining modestly from $138,940 to $121.150. In fact, while a number of large firms announced reductions in cash bonuses for 2011 (with several firms reporting reductions in the range of 20 to 30 percent), personal income tax collections indicate a smaller decline in the overall cash bonus pool. A big reason for this is deferred bonuses from prior years hitting this year's payroll and thus smoothing the impact. Still, bankers being forward looking people, are looking forward and probably not liking what they see. Yet while 2011 data for comprehensive pay is still not available, in 2010 the average salary rose by 16% to $361,180 as more firms shifted to a base-heavy comp structure. Indicatively, the average Wall Street salary is 5.5 times higher than the rest of the private sector at $66,100. And no matter how one feels about them, one thing is true: the New York economy would founder without taxes paid by bankers: "the securities industry in New York City accounted for 23.5 percent of all wages paid in the private sector despite accounting for only 5.3 percent of all private sector jobs" and more importantly, "each job created (or lost) in the securities industry leads to the creation (or loss) of almost two additional jobs in other industries in the City. OSC also estimates that each new Wall Street job creates one additional job elsewhere in New York State, mostly in the City’s suburbs." Hence - Wall Street's bonuses have become "Too Big Too Fall", as the entire economy of NY City and the state is now held captive by Wall Street's exorbitant bonuses.

A dysfunctional system takes its toll.

German leaders, particularly Merkel and Schäuble see the writing on the political wall: that both Greece and France are likely going to find themselves with new leadership that is pro-socialism, anti-austerity measures, and most certainly anti-taking orders from Germany. Thus, Germany must be aware (as the EU, IMF, and ECB are to some degree) that it is ultimately fighting a losing battle by participating in the bailouts. Indeed, Schäuble even went so far as to recently call Greece a “bottomless pit” where money is wasted (having just participated in Greek bailouts that exceed the entirety of Greece’s GDP, I have to admit he does have a point here). So while a “deal” may have officially been struck for Greece, there are deep underlying tensions that could bring proceedings to a crashing halt at any point.

After months of incessant rises in average gasoline prices in the US, we note that prices actually fell today. The dramatic 0.3 cent drop in Regular (0.4c in Mid and 0.2c in Premium) may be just the implicit tax cut that the stagnant-wage-growth deleveraging-consumer needs to spur the next leg up in the new normal recovery that is priced into equities.

The most profitable business of the future will be producing Space Available and For Lease signs. Betting on the intelligence of the American consumer has been a losing bet for decades. They will continue to swipe that credit card at the local 7-11 to buy those Funions, jalapeno cheese stuffed pretzels with a side of cheese dipping sauce, cartons of smokes, and 32 ounce Big Gulps of Mountain Dew until the message on the credit card machine comes back DENIED.  There will be crescendo of consequences as these stores are closed down. The rotting hulks of thousands of Sears and Kmarts will slowly decay; blighting the suburban landscape and beckoning criminals and the homeless. Retailers will be forced to lay-off hundreds of thousands of workers. Property taxes paid to local governments will dry up, resulting in worsening budget deficits. Sales taxes paid to state governments will plummet, forcing more government cutbacks and higher taxes. Mall owners and real estate developers will see their rental income dissipate. They will then proceed to default on their loans. Bankers will be stuck with billions in loan losses, at least until they are able to shift them to the American taxpayer – again.

As Iran tensions mount, even the US Military needs a break and where better than The Hamptons to practice desert-driving skills? As SouthamptonPatch notes, a military spokesman said M1117s that drove through Southampton, East Hampton and Southold were not on the East End for a funeral, as previously reported. Perhaps its nothing more suspicious than a cabal of FX traders and hedge fund managers building their own fortification to protect their champagne but we must all appreciate them filling up with gas and helping our economy recover (credit or debit?).

Something interesting happened when the ECB announced last week that its balance sheet was about to rise by €1 trillion gross, and hit a record €3 trillion net earlier today: the EURUSD barely budged. Why? Because as a reminder, the key driving relationship for relative risk performance of 2012 as we forecast back in December is the correlation of the Fed and the ECB's balance sheets, and the EURUSD, respectively, because while we may pretend that there is still alpha in this joke of a market, the truth is that in this new normal only beta matters (the more lever the better), and the only beta that matters is that generated by relative USD strength/weakness. In this context, we bring back readers to the chart that may be the only one that matters: the cross-correlation of the Fed/ECB total assets, and the EURUSD spot, where the first thing that stands out is that the pair should be 1000 pips lower at least. And yet it isn't. The reason for that is that the FX market is actively expecting, despite all rhetoric otherwise, an injection from the Fed. What is convenient is that the chart allows us to calculate how much the expected QE3 will be: since the absolute value of the Fed/ECB size (currency invariant) is now 0.9685m or the lowest in history, the ratio would have to raise to 1.18 for EURUSD asset implied parity. Which means the Fed's balance sheet would have to increase by about $650-700 billion promptly.

We have been warning that the stocks of the major US financials are on weak ground for a few weeks as credit (and implied vol) markets for the TBTFs had been underperforming notably. Today saw the financials ETF, XLF, have the largest down day in three months (dropping over two standard deviations), breaking its uptrend and heading for its 50DMA. As volumes in stocks and stock futures surged to year-highs, we note that the major financials were much worse hit than the broad ETF, roughly separated into 3 groups: Good (JPM, WFC), Bad (GS, C, BAC, GE), and Ugly (MS). While the market is 'only' down around 2%, it is worth noting that Financials and Energy stocks are back at five-week lows, while Industrials and Materials are back at two-month lows as the growthium hope fades. Risk was very highly correlated on the downswing today and along with significantly higher than average volume suggests more broad de-risking than idiosyncratic profit-taking as some would like to suggest. Commodities made headlines as Silver is now down over 5% on the week but Gold stabilized for much of the post-European close session around $1675. The vol term structure snapped flatter today, catching short-dated premium sellers fingers as it tends to, ripping to its flattest in 3 weeks as VIX jumped almost 3 vols to around 21% (back above its 50DMA for the first time since Thanksgiving), with its biggest rise in three months.