Archive - Apr 2012

All you need to read and more.

Following this week's ongoing battery of abysmal economic news out of Europe it will hardly come as a surprise that yet another indicator has been released and is pointing to a multi-year low in the deleveraging (elsewhere called incorrectly austere) continent, namely the Euro-area wide confidence index which just slide to the lowest leve since 2009, missing every single estimate and declining sequentially across the board... And with the UK, Greece, Italy, Portugal, Ireland, Belgium, Denmark, Holland, Czech Republic, and Slovenia now in re-recession, and Spain a definitive shoo in next week, the kicker is that German GDP will almost certainly now report a second consecutive GDP print in a few days, thus pushing the entire European continent in a double dip.

We start today's story of the day by pointing out that Deutsche Bank - easily Europe's most critical financial institution - reported results that were far worse than expected, following a decline in equity and debt trading revenues of 23% and 8%, but primarily due to Europe simply "not being fixed yet" despite what its various politicians tell us. And if DB is still impaired, then something else will have to give. Next, we go to none other than Deutsche Bank strategist Jim Reid, who in his daily Morning Reid piece, reminds the world that with austerity still the primary driver in a double dipping Europe (luckily... at least for now, because no matter how many economists repeat the dogmatic mantra, more debt will never fix an excess debt problem, and in reality austerity is the wrong word - the right one is deleveraging) to wit: "an unconditional ECB is probably what Europe needs now given the austerity drive." However, as German taxpayers who will never fall for unconditional money printing by the ECB (at least someone remembers the Weimar case), the ECB will likely have to keep coming up with creative solutions. Which bring us to the story du jour brought by Suddeutsche Zeitung, according to which the ECB and countries that use the euro are working on an initiative to allow cash-strapped banks direct access to funding from the European Stability Mechanism. As a reminder, both Germany and the ECB have been against this kind of direct uncollateralized, unsterilized injections, so this move is likely a precursor to even more pervasive easing by the European central bank, with the only question being how many headlines of denials by Schauble will hit the tape before this plan is approved. And if all eyes are again back on the ECB, does it mean that the recent distraction face by the IMF can now be forgotten, and more importantly, if the ECB is once again prepping to reliquify, just how bad are things again in Europe? And what happens if this time around the plan to fix a solvency problem with more electronic 1s and 0s does not work?

It was only a matter of time, and we were waiting patiently for the V-Squid to rear its ugly head. Presenting the newly improved version...

In the science of physics, we know that ice freezes at 32 degrees. We can predict with immense accuracy exactly how far a rocket ship will travel filled with 500 gallons of fuel. There is preciseness because there are constants, which do not change and upon which equations can be constructed.. There are no such constants in the field of economics since the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry. And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist. It is as if one were to assume a constant relationship existed between interest rates here and in Russia and throughout the world, and create equations based on this belief and then attempt to trade based on these equations. That was tried and the result was the blow up of the fund Long Term Capital Management, a blow up that resulted in high level meetings in this very building. It is as if traders assumed a given default rate was constant for subprime mortgage paper and traded on that belief. Only to see it blow up in their faces, as it did, again, with intense meetings being held in this very building. Yet, the equations, assuming constants, continue to be published in papers throughout the Fed system. I scratch my head.

On the whole, Goldman viewed today's FOMC meeting as moderately more hawkish than expected. The post-meeting statement was close to their expectations but a few changes added a more upbeat tone. Fed officials revised up their forecast for core inflation and down their forecasts for unemployment, in both cases by larger amounts than many had expected. Likely as a result, some participants also lifted their forecasts for the federal funds rate. The updated funds rate forecasts now contrast even more starkly with the “exceptionally low …at least through late 2014” guidance in the statement. Bernanke’s press conference was more neutral for the outlook than the statement and the updated SEP. On one hand, he defended a question about the Fed’s current policy stance by arguing that the committee was not willing to tolerate materially higher inflation. On the other hand, his comments on the policy options were tilted toward further easing. SchizoFEDia indeed.

Once again pundits are claiming that housing is "finally recovering." But they're overlooking three peaks: Peak Housing, Peak Financial Fraud, and Peak Suburbia, all of which suggest years of stagnation and decline, not "recovery." Once the belief that housing is the bedrock of middle class wealth fades, so too will the motivation to risk homeownership in an economy that puts a premium on mobility and frequent changes of careers and jobs. Only one aspect of housing hasn't yet peaked: property taxes. If the risks of homeownership weren't apparent before, they certainly are now as local governments jack up property taxes to indenture homeowners into tax donkeys.

The always-outspoken Doug Casey addresses a broader view of taxation and its costs to both individuals and society in general in this interview with Louis James. The Taxman can and will come for you, no matter how great or small the amount of tax he expects to extract from you. The IRS can impound your assets, take your computers, freeze your accounts, and make life just about impossible for you, while you struggle to defend yourself against their claims and keep the rest of your life going. But people should not just bow down and lick the boots of our masters. They can and should do everything they can to pay as little in taxes as possible. This is an ethical imperative; we must starve the beast.

Buckle Up

I have to confess, I am tired of writing "structured" articles, the ones where I have to limit my thoughts to 800 words.  So with this one I am taking a break.  This is an unstructured stream of thought, in no particular sequence.  

It seems the PR machine was in full swing today for everyone's favorite Muppet-slayer-in-chief as Goldman Sachs' Lloyd Blankfein did the business media tour. Bloomberg TV, in the clip below, were perhaps toughest on the domed demi-god as they pressed him on the public's perspective of his firm as the 'vampire squid' to which he responded in glib-yet-deferential terms that "it is hyperbole and we'll have to do a better job of explaining how important this industry is". Indeed Lloyd, indeed. A grand collection of ducking-and-weaving as Erik Schatzker peppered the CEO with questions on his changing priorities as a CEO (wealth creation for partners clients), conflicts of interest ("if you want to rule out conflicts of interest, you'll just give advice to one client in one industry and never do any lending or support for the capital structure of the firm.  It's just not feasible."), on Arthur Levitt's statement of Goldman's hypocrisy (as a market-maker we have to protect Goldman Sachs), being too big to fail, the markets and economy (tend to be a little more positive than what I am hearing from other people), and finally the Facebook IPO.

As if the Greeks haven't suffered enough from Northern European actions (admittedly in response to their own actions), it seems the anti-German sentiment is keeping the wealthy tourists away from the beaches. As Reuters notes today, 'German tourists are in short supply in Greece these days, frightened away by reports of visceral anti-German sentiment in some places'.  Data for the main summer holiday season shows pre-bookings from Germany down by some 30 percent. We guess the pictures of Molotov cocktails being thrown, city-wide strikes, and cardboard cities full of unemployed youths was too much but as one Greek tourist-shop-owner clarified "They're not coming because of the problems. But we don't have a problem with German people, only their government." Tourism - the one remaining possibility for Greece to drag themselves out of the quagmire (aside from olive oil and yoghurt) - is now under pressure as The Germans ("That's just the way Germans are: if there's trouble in some country, then Germans just don't go there on their holidays.") wage "an economic war against Greece". Sadly the xenophobic and nationalist tensions are indeed rising (as we warned many times in the past - and suggest will be the ultimate undoing of the political compact in Europe) as the crisis had revived anti-German sentiment from World War Two that most thought had long since disappeared. "The Greeks moved on and tried to forget, then this. If you ask me, Germany owes Greece billions for all the murders and war crimes. Germany should pay Greece what it owes."

A 2.7% gain in the NASDAQ, obviously dramatically aided and abetted by the squeeze-fest in AAPL +9% from last night's close, was the best gain in over four months for the tech-heavy index but still leaves it lagging the Dow (by over 2%) and S&P 500 (by over 1.5%) from the 4/9 highs in Apple. At the other end of the spectrum in the real economy, CAT's less than rosy outlook, saw it suffer its largest drop in 7 months dragging an impressive 37pts out of the Dow's lagging but positive performance on the day (now positive from the 4/9 Apple Top day). Of course the Apple-exuberance which seemed enough for the entire world's risk-asset markets to decide that everything is fixed started the day off gap higher in the US and late-to-the-game retail pushed equities higher out of the date this morning as the rest of risk-assets were generally steady. Europe's close seemed to have only minimal impact as everyone was focused on the FOMC statement and Bernanke's presser. Between the FOMC and the Bernanke conference, Gold, stocks, and the USD knee-jerked and retraced but Treasuries remained worse (higher in yield by 3bps or so). Once Bernanke began his quaking tenor, Gold pushed higher, Treasuries lower, stocks higher and the USD lower as hints of QE back on the table were dribbled in between defensive tacks on biflationary concerns. This QE-specific action was accompanied by low volumes though (as usual) but volatility did compress (a la typical QE trades) with VIX closing below 17% - its lowest in over a month and near its largest divergence from European volatility (V2X). Commodities in general lagged early then recovered as USD sold off on QE chatter from Ben - Silver underperformed on the day but outperformed notably off its lows after testing below $30 for the first time in 3 months. Treasuries pulled back positively off their high yields of the day in the late afternoon ending the week with the short-end (out to 5Y) flat and 10s/30s 2.5bps higher in yield. HYG was a dramatic high-beta outperformer today - now green for the month - even as HY and IG credit lagged the ebullience in stocks (though did improve to two-week highs). ES (the S&P 500 e-mini future) closed above its 50DMA on average volume today with some heavy and larger average trade size into the close ending just above Friday's highs - even after the dismal US data (Durable Goods) and Europe's issues this morning.

Since last night's blockbuster earnings by Apple presented yet another "paradigm shift" in how the company is presented to potential new investors (how many are left one wonders); namely, no longer reliant on incremental US purchases - just to avoid the thorny issue of wireless company subsidization - and one now dependent on Chinese consumer demand for future growth, we thought, in conjunction with William Banzai, to present a graphic simplification of what the Apple business model is all about going forward. Two words: "value added"