Archive - Apr 17, 2012

Between the erratic housing starts report and the sputtering industrial output report with its various headline and multi-layered trends acting in confusing ways, the one thing we can admit is that assessing the US economy is not so easy anymore. That nice period of unbridled strength has taken a backseat to the economy that raises question marks - again. Growth pessimists can revel in the new developments while optimists can begin to work on what's left of their fingernails. Meanwhile, we are back grasping at straws as data-trends turn erratic and inconsistent even more than they have turned weak. But there is some of that too. A little something for everybody but not enough for optimism...

While many are celebrating the all-clear again as Spain manages to sell Spanish bills to Spanish banks at a huge risk premium to the last time it did the same, it is perhaps not surprising to hear that this was the biggest gain for the broad European equity market since November. What concerns us most is the absolute schizophrenia that the market is undergoing as the swings in European (and for that matter US) markets is extremely reminiscent of the absolute chaos that reigned last summer as markets suddenly flip-flop +/-2 standard deviations. The sad fact is how quickly our memories (or the algos that surround us) forget just last week we saw the same - exact same - euphoric response to Italy managing to sell short-term Italian bills to Italian banks (again at a significant yield premium to their prior attempt) and the mainstream-media's irrational pump that this is somehow important or noteworthy (remember even Greece managed to sell short-dated bills during the middle of its PSI discussions). European equities are back to pre-NFP levels (same as last week) and credit markets have snapped tighter today (just as they did last week as they got squeezed). This time, however, financials are lagging still and the squeeze in credit is not as hard as overall they remain less ebullient than equities. Sovereign spreads are following the same path as last week also, Italy and Spain yields compressed - though we note that they remain (especially Spain) notably wider than last week's rally. Will the rest of the week play out in a similar manner to last week? As longer-dated auctions and financials weigh heavily on risk sentiment?

Yesterday the Wall Street Journal's Jon Hilsenrath was kind enough to present to the general public some 515 pages of massively redacted Fed transcripts from the oh so very interesting period of 2007-2010, ahead of schedule. Unfortunately those curious to find out the details of just what was going on in that critical period between March 2008 and March 2009 will have to wait another 3 years for the full declassification to take place. That said, digging among the unredacted data, one does find the occasional pearl. Such as the following exchange between CHAIRMAN BERNANKE and the Fed staff, from the October 28-29, 2008 meeting, in the days when AIG was dying, when Lehman had failed, when money markets had frozen and when the end of the world was nigh. Ironically, it is this one unredacted piece of data that pretty much says it all.

• I’d like first to do the open market operations, which I hope are not too controversial. [Laughter] (source: page 231 of 513)

And that, as they say, is that.

After Obama's "fairness doctrine" was roundly rejected by the Senate last night as the doomed from the beginning Buffett Rule was voted down, Obama needs to find some more evil villains for society to demonize, and whom to blame for the failure of central planning, or rather its success in pushing gas prices to all time highs. Today - it is that mysterious, amorphous blob of vile, conspiratorial henchmen known as "oil speculators." Forget that these "speculators" are merely conduits for the Fed to conduct its open market operations, forget that the same free liquidity that drives stocks up relentlessly in nominal terms (what? no demonization of evil stock pumping speculators?), even as it produces ever increasing inflation in all those items not tracked by the Fed, forget that Obama's speech is about to be replica of Jimmy Carter's Crisis of Confidence platitude in 1979. Finally forget that the biggest speculator is none other than the White House with its periodic release of SPR release rumors any time WTI approaches $110. Forget all that, and merely focus on the hypnotic, undulating intonation of the engrossing, populist sermon: that is all that is demanded of you. Everything else is to be ignored. And now since the time of "fairness" is over, it is time to do a shot every time "speculator" is uttered. And get ready for many, many CL margin hikes.

The Federal government is supporting its dependents and its crony-capitalist Elites with borrowed money: $1.5 trillion every year, fully 40% of the Federal budget. It is in effect filling the gap between exploding costs and declining income, just like the middle class did until they ran out of collateral to leverage. The dwindling middle class, now at best perhaps 25% of the workforce, has been reduced to tax donkeys supporting those above and below who are dependent on Federal largesse. Fisher found that this cycle ends in transformational political upheaval. No wonder; even as the class paying most of the taxes shrinks and is pressured by higher costs, the class of dependents expands as the economy deteriorates and the super-wealthy Power Elites continue to control the levers of Central State power.

With S&P futures, and most notably financials, staging the second overnight opening surge in a row, we thought it perhaps worth reflecting on five quite concerning fundamental reasons why dip-buyers (as anesthetized as they have become thanks to central bank 'protection') could face a tougher time. As Mike Wilson of Morgan Stanley notes, for those looking for a cause or explanation of recent weakness, feel free to blame it on the more hawkish Fed minutes, Draghi’s comments that it was now “up to governments to do the right thing” or the soft US payroll numbers. After such an uninterrupted run, some kind of correction was inevitable and simply a matter of timing. The bigger question to resolve is whether this pull back will look like what we experienced in 2010 and 2011 or end up being more muted. Obviously, the key variables for this analysis remain growth and liquidity expectations. The 'payback' that we have been warned about for such an unseasonably warm winter is upon us (as macro data surprises increasingly to the downside) and that is the first flaw in BTFD logic. Wilson goes on to point out that NFIB small business hiring intentions have dropped precipitously, GDP growth is weak but earnings growth is now catching up (down) to that weakness and for many stocks is rapidly falling towards zero, we remain in a 'liquidity lull' as central banks stand on the sidelines and reflect, and perhaps most worrisome is the rapid deterioration in the Bloomberg financial conditions index. All-in-all, these sum up to suggest a greater-than-5% correction is more than likely.

By now everyone is aware of Argentina's disturbing plan to nationalize YPF over the protests of Spain, and soon EU. And as we noted yesterday, the equity value of YPF is essentially a doughnut as BofA stated, if somewhat more correct politically. YPF continues to be halted on the NYSE as per a T2 halt (aka "The news has begun the dissemination process through a Regulation FD compliant method(s).") and there is little availability for price discovery at the first derivative level. However, where discovery is ample is at the second degree, namely Spanish Repsol-YPF which is a majority owner of YPF, whose CDS continue soaring, and hit a whopping 391 earlier today, well over 100 bps compared to the Friday closing spread. For a massive energy production company this is a big move and we can only hope its Spanish bank shareholders are well insulated from mark to market losses, although somehow we doubt it.

Gold has moved rather rapidly in the past few minutes and many are scrathcing their heads just why this is happening? The reason is simple: central planning script 101, page 1. As we noted earlier, the RBI did a  surprising overnight rate cut from 8.5% to 8.0%, in other words it has just joined the global central planning cartel in attempting to stimulate the economy nominally, even as inflationary packets still abound across the land (see China). Yet what does that mean from a modern monetarist standpoint: why crush gold as an alterantive to the local paper currency of course.  Sure enough:

• INDIA ECONOMY SECRETARY: EXPECT TO LOWER GOLD CONSUMPTION IN ECONOMY - DJ

And there you have it: because the last thing India needs is a surge in gold buying now that it too has joined the global reliquification parade. That said, we are curious in what parallel universe will liquidity easing result in less demand for hard assets. Aks the algos who are selling on nothing but headlines.

Today's futures pop on short-term bill auctions in Europe (that remain in a world of their own and should not be considered as anything but emergent in nature rather than indicative of investor demand) and ad hoc data in Germany that disconnects from any sense of reality in true economic environs only confirms Morgan Stanley's Mike Wilson's perspective that there still isn't much fear out there. We remain in the midst of a longer-term deleveraging cycle, of that there can be little argument in reality (unless of course exponential trends are natural) and as Wilson points out we are likely to remain in the wide trading range that we have been in the past two years - however, many investors appear to disagree (not the least of which the effusively exuberant 'Ace' Greenberg this morning). Few expect a correction more than 5-10%, Buy-lists are already in great demand, and put-call ratios remain muted. "Of course, this is what happens when an animal becomes conditioned to buy the dip in a pavlovian manner over years during which they have remain unscathed by some of the biggest financial risks we have ever witnessed. As the saying goes, “the only fools bigger than those that are playing are those that are watching.” Of course, having some Fed official speaking every other day to remind us they are there to save the day in the event of trouble helps perpetuate this unnatural one way market." However, his bottom line is that slowing/disappointing economic data, zero percent earnings growth and a liquidity lull sounds like a recipe for more than a 5% correction.

The Brent-WTI spread has compressed under $14 for the first time in 10 weeks but it is being led by the margin-hiker-in-chief's most visible indication of dastardly speculation - the WTI contract as Brent remains close to unchanged. Perhaps, just perhaps, there really is little to no speculation (remember there is a speculative seller for every speculative buyer no matter how many speculator-surveilled market participants there are). As WTI breaks $105 for the first time in almost three weeks, we suppose this is not what Obama was hoping for and just as we pointed out earlier - just as every failed attempt at central planning, all Obama will achieve is another spike in crude prices - an hour later - we are proved right.

Industrial production is the latest economic miss, expected to rise from a previously unchanged print, to 0.3%, instead posting another flat print. The reason: blame it on the weather. From the Fed: "Industrial production was unchanged in March for a second month but rose at an annual rate of 5.4 percent in the first quarter of 2012. Manufacturing output declined 0.2 percent in March but jumped 10.4 percent at an annual rate in the first quarter. The gain in manufacturing output in the first quarter was broadly based: Even excluding motor vehicles and parts, which jumped at an annual rate of nearly 40 percent, manufacturing output moved up at an annual rate of 8.3 percent and output for all but a few major industries increased 5 percent or more. In March, production at mines rose 0.2 percent and the output of utilities gained 1.5 percent. For the quarter, however, the output of utilities dropped at an annual rate of 13.8 percent, largely as a result of unseasonably warm temperatures over the past several months, while the output of mining fell 5.4 percent. At 96.6 percent of its 2007 average, total industrial production for March was 3.8 percent above its year-earlier level. The rate of capacity utilization for total industry edged down to 78.6 percent, a rate 2.1 percentage points above its level from a year earlier but 1.7 percentage points below its long-run (1972--2011) average." In other words, blaming both cold and hot weather is now a solid excuse for anything that does not go according to the best laid plans of central bankers. Got it.

Today's housing starts number is merely the latest datapoint confirms the housing bottom callers will be once again early. In March, housing starts, expected to print at 705K (which is crawling along the bottom as is, so it is all mostly noise anyway, but the algos care), came at a disappointing 654K, the lowest since October 2011, and a third consecutive decline since January. Want proof that the record warm Q1 pulled demand forward? This is it. As the chart below shows, the all important single-unit housing starts have not budged at all since June 2009. So was there any good news in today's data? Well, housing permits, which means not even $1 dollar has been invested in actually 'building' a home soared to 747K, from 715K in February, and well above expectations of 710K - the highest since September 2008. That a permit is largley meaningless if unaccompanied by a start, not to mention an actual completion goes without saying. However, what is notable is that even the permit dat was skewed: single unit structures came at 462K, lower than February's 479K. Where the ramp was in 5 units or more, aka multi-apartment units, aka straight to rental. It appears that now everyone is piggybacking on the administartion's REO-to-rent plan, and instead of buying "home to buy", all future constrcution will be apartments to rent. Which is great: since rents have been going up, builders are already redirecting their attention to the one segment in the market that is not moribund. As a result, in a few short months expect a glut of rental properties, which will kill even the incipient possibility of a recovery, as the supply drowns any latent demand, as more and more households shifts from owner to renter mentality.

When it comes to evil, evil speculators driving stocks higher on endless gobs of cheap zero-cost liquidity, one will hear nary a peep out of the administration: after all: wealth effect or bust. However, when someone hears oil speculators, run and hife. Indeed, now that Obama's uber-central planning mandate has proven completely powerless to redirect the flow of zero-cost money from acquiring real, as opposed to paper-based, assets (read crude), the Teleprompter in Chief will have a sit down with the nation at 11:10 am and in the latest sermon from the White House mound, will "confront" oil speculators once and for all. His plan: why encourage margin hikes of course - the same principle that crushed the spine of the gold and silver spike in 2011. Unfortunately, unlike gold and silver, whose trading is still dominated by the Comex, energy has numerous alternative venues, such as the ICE, and increasing exchanges in China, which also happens to be the marginal demand setter with 3 consecutive months of near record imports. Which is why we are 100% confident that just like every failed attempt at central planning, all Obama will achieve is another spike in crude prices, just in time for the next global reliquification cycle, just in time for 2012's debt ceiling scandal, and just in time for the reelection.

Matthew Bishop, the US Editor of The Economist, has been interviewed by the Wall Street Journal TV about gold and why “people have lost faith in the 20th century religion of government backed fiat money." He says that he has become an agnostic or an atheist with regard to his belief in government-backed money as he fears that governments are in a position whereby they are going to debase currencies such as the “paper dollar and “paper euro” “in a big way.” Gold becomes one of the “alternative religions” in that environment. History shows that a deleveraging downturn takes a long time and can take 7 or 8 years. Inflationary pressures are building and will be seen in the second half of the cycle, according to Bishop. Bishop says he would put some of his money into gold but is prohibited from this due to the investment policies of The Economist.  He advocates owning gold as a “portfolio of money” and diversification and advocates having 5% to 10% of one’s money in gold.  The Economist magazine has a strong Keynesian bias and has been one of the most anti-gold publications in the world with many simplistic, unbalanced and ill-informed articles.  The publication has suggested on many occasions since 2008 that gold is a bubble. Clients of GoldCore have told us that they were prompted to sell their gold bullion as long ago as 2009 after reading such articles in The Economist. 

Goldman's earnings are out and at revenues of $9.95 billion and EPS of $3.92 (compared to expectations of $9.41 billion and EPS $3.55), coupled with an increase in the dividend from $0.35 to $0.46 per share (exp. $0.40), the company appears to have done solidly better than expected. And yet, not all was sunny skies.  As expected, declining secular markets continue to impact the company, whose ongoing secular decline is shown on the chart below. The reason - volume, which continues to slide for reasons already discussed extensively. To wit: "Net revenues in Investment Banking were $1.15 billion, 9% lower than the first quarter of 2011 and 35% higher than the fourth quarter of 2011....Net revenues in equity underwriting were significantly lower than the first quarter of 2011, primarily reflecting a decline in industry-wide activity. Net revenues in debt underwriting were lower compared with a strong first quarter of 2011, primarily reflecting a decline in leveraged finance activity." Thank god for CDS (aka derivatives): "Net revenues in Fixed Income, Currency and Commodities Client Execution were $3.46 billion, 20% lower than a solid first quarter of 2011, as higher net revenues in interest rate products were more than offset by lower net revenues in the other major businesses....Net revenues in Equities were $2.25 billion, 3% lower than the first quarter of 2011, as higher net revenues in equities client execution, reflecting an increase in derivatives, were more than offset by lower commissions and fees, consistent with lower market volumes." DVA loss for Q1 was $225 million. Finally, on the revenue side, hurray for Goldman Prop, aka the Asymmetric Information Initiative, aka "Investing and Lending" which generated $1.911 billion in revenues in Q1, the highest since Q1 2011. Still, the 22% top-line decline from Q1 2010 appears relentless. As for the only thing that matters to Goldman employees, implied full year comp dropped to $350,864 per average employee, the lowest in two years, even as the firm cut headcount from 33,300 to 32,400 in the quarter, the lowest number of employees since Q4 2009.