Archive - Apr 2012

Despite the eloquence of our taxer-in-chief, the facts, as noted by Professor Antony Davies in this clip, are that whether you raise or lower taxes at the highest-marginal or average tax rate, the share of the GDP pie that government gets to take out of our pockets remains stubbornly flat at around 17-18%. It seems growing the pie may be a more attractive approach than raising taxes but then how would that play in an election year with below trend growth and stagnant income.

Since the 1980s, the U.S. Has Secretly Helped Japan Build Up Its Nuclear Weapons Program ... Pretending It Was "Nuclear Energy" and "Space Exploration" ...

It seems like we are back in coin-tossing mode as S&P futures are trading in a very narrow range this morning at exactly the post-NFP volume-weighted average price level. Perhaps the current sell-off in European banks will bias that coin a little to the downside...

A strong case can be made that the fundamental supports of the housing market-- demographics, employment, creditworthiness and income--will not recover for a generation. It can even be argued that housing has lost its status as the foundation of middle class wealth, not for a generation, but for the long term. Let's begin by noting that despite the many tax breaks lavished on housing--the mortgage interest deduction, etc.--there is nothing magical about housing as an asset. That is, its price responds in an open, transparent market to supply and demand and the cost of money and risk. There are a number of quantifiable inputs that feed into supply and demand--new housing starts, mortgage rates and income, to name three--but there are other less quantifiable inputs as well, notably the belief (or faith) that housing will return to being a "good investment," i.e. rising in price roughly 1% above the rate of inflation. If this faith erodes, then the other factors of demand face an insurmountable headwind, for the most fundamental support of housing is the belief that buying a house is the first step to securing middle class wealth.

The fact that the High Yield ETFs are trading at a discount should be a big concern to anyone in the high yield market, not just those who own the ETF.  There is a real risk that this discount can translate into arb activity which leads to further declines. We are very concerned that the same index-arbitrage process occurring in CDS markets can occur in the HY bond market and liquidity, as bad as it is in a strong market, is far worse in a down market.  As of yet there is no sign that this is happening in a meaningful way, but JNK has seen outflows for a few days and HYG saw outflows yesterday.

While equity trading last March trading was affected by the excess volatility arising from the Fukushima explosions a year earlier, and the Japan earthquake induced volatility in general, today's monthly volume update by the NYSE shows that no matter what the reason for the volume collapse, toplines for banks and traders will suffer, on both a Y/Y as well as sequential basis. Per the NYSE: "European and U.S. Cash ADV Down 13% and 24% Year-over-Year.... NYSE Euronext European cash products ADV of 1.6 million transactions in March 2012 decreased 12.7% compared to March 2011, but increased 0.5% compared to February 2012. NYSE Euronext U.S. cash products handled ADV in March 2012 decreased 23.6% to 1.8 billion shares compared to March 2011 and decreased 0.6% from February 2012." An even bigger year-over-year collapse took place in the one product which everyone thinks is taking the place of individual stock trading: the synthetic CDOs known as ETFs: "NYSE Euronext U.S. matched exchange-traded funds ADV (included in volumes for Tape B and Tape C) of 222 million shares in March 2012 decreased 29.3% compared to March 2011, but increased 4.1% compared to February 2012. In the first quarter of 2012, NYSE Euronext U.S. matched exchange-traded funds ADV of 221 million shares was 21.8% below prior year levels." The YoY collapse in trading volumes for derivatives was less compared to cash, but the sequential drop from February 2012 was even more pronounced: "NYSE Euronext global derivatives ADV in March 2012 of 8.1 million contracts decreased 11.5% compared to March 2011 and decreased 15.4% from February 2012 levels." We can only hope that banks have found some innovative ways of compensating for this collapse in overall market participation, such as traditional revenue pathways like underwriting and advisory fees, as well as lending and arbing the carry trade. Alas, as the following Bloomberg piece points out, this will hardly be the case, as Zero Hedge has warned previously.

On a long enough timeline... the zombies will arise, and exhibit a sudden craving for brain stew. So what is a person who will have survived the great central bank collapse to do?

Americans have been listening to the mainstream financial media’s song and dance for around four years now.  Every year, the song tells a comforting tale of good ol’ fashioned down home economic recovery with biscuits and gravy.  And, every year, more people are left to wonder where this fantastic smorgasbord turnaround is taking place?  Two blocks down?  The next city over?  Or perhaps only the neighborhoods surrounding the offices of CNN, MSNBC, and FOX?  Certainly, it’s not spreading like wildfire in our own neck of the woods…Many in the general public are at the very least asking “where is the root of the recovery?”  However, what they should really be asking is “where is the trigger for collapse?”  Since 2007/2008, I and many other independent economic analysts have outlined numerous possible fiscal weaknesses and warning signs that could bring disaster if allowed to fully develop.  What we find to our dismay here in 2012, however, is not one or two of these triggers coming to fruition, but nearly EVERY SINGLE conceivable Achilles’ heel within the foundation of our system raw and ready to snap at a moment’s notice.  We are trapped on a river rapid leading to multiple economic disasters, and the only thing left for any sincere analyst to do is to carefully anticipate where the first hits will come from. Four years seems like a long time for global banks and government entities to subdue or postpone a financial breakdown, and an overly optimistic person might suggest that there may never be a sharp downturn in the markets.  Couldn’t we simply roll with the tide forever, buoyed by intermittent fiat injections, treasury swaps, and policy shifts? The answer……is no.

The Apple comparisons have come thick and fast but today's Bloomberg Chart-of-the-day really highlights the macro fundamental weakness in Europe and the micro-bubble in corporate America's shiny new toy. Apple's market cap is larger than the combined market cap of companies in Spain, Portugal, and Greece.

Today's import price update from the BLS was another warning red flag of margin compression for local manufacturers, as import prices, across both fuel and nonfuel imports, soared by 1.3%, well above consensus of a 0.8% rise, compared to the revised February decline of -0.1%. There is likely much more pain in store as the 3.8% increase in fuel import prices in March was a fraction of the 9.7% and 7.6% recorded in March and April in 2011 when crude and gasoline were trading at current levels. In other words, foreign makers can still absorb costs domestically before passing it on to the US. We expect this will change quickly, and the April fuel import prices will soar far more than even in March. As for the bottom line that the Fed does track, nonfuel imports, it rose 0.5%, also the most since April 2011. By all appearances, this means that the market will have to seriously tumble for the Fed to proceed with more easing at this moment, although ease it will. It is only a matter of time: about $30 trillion in excess debt demand it, and $2 trillion in Treasury debt/year needs to be monetized somehow.

As North America comes to market, there is a lot to digest. European equity markets are trading higher, with the FTSE MIB in particular outperforming after a volatile morning’s session, with bargain-hunting the active theme among investors. The first major risk event came and went with the Italian T-Bill auction. Participants were looking for a poor auction due to the ongoing Eurozone woes, and although bid/covers fell short and yields did increase, the auction was not as poorly received as many had feared.  As such, Italian and Spanish 10-yr spreads have tightened with the German Bund, with the Spanish spread closing in on 400BPS, with talk of domestic buying in the periphery and profit-taking from the last few sessions adding to the tightening effect.  A flashpoint of the day was the German Bund auction; results came in showing the auction to be technically uncovered, failing to sell the expected EUR 5bln. Analysts have pinned the poor auction on the Bund having record low yields providing a disincentive to buy the German security. Following the minutes after the auction, around 25,000 contracts went through on the Bund, spiking lower around 20ticks.

Chinese gold demand remains very strong as seen in the importation of 40 metric tonnes or nearly 40,000 kilos of gold bullion from Hong Kong alone in February. Hong Kong’s gold exports to China in February were nearly 13 times higher than the 3,115 kilograms in the same month last year, the data shows.  Shipments were 72,617 kilograms in the first two months, compared with 10,564 kilograms a year ago or nearly a seven fold increase from the record levels seen last year. China’s appetite for gold remains strong and Chinese demand alone is likely to put a floor under the gold market.

While luckily not as powerful as last year's Japanese earthquake, which in turn led to a catastrophic tsunami, this morning Indonesia has been battered by a series of magnitude 8+ quakes and aftershocks in the Banda Aceh and Sumatra regions of the country. Also unlike last year, the nature of the quake made it less likely a tsunami was generated because the earth moved horizontally, rather than vertically, and therefore had not displaced large volumes of water, Bruce Presgrave of the United States Geological Survey told the BBC. The geological map and update from the USGS below summarizes all the action we have seen to date.

• Subprime bubble is back: Lenders Again Dealing Credit to Risky Clients (NYT)
• Housing bubble is also back: AIG Is Planning a Return to U.S. Property Investing (WSJ)
• Spain and EU Reject Talk of Bailout (FT)
• Coeure Suggests ECB Could Restart Bond Purchases for Spain (Bloomberg)
• IMF Set to Recognise Shrinking Chinese Surplus (FT)
• Government to Propose New Mortgage Servicing Rules (AP)
• Japan Currency Chief Warns Against Delay Over Finances (Bloomberg)
• The 'Michael Corleone' of Libya (Reuters)
• North Korea Says Fuel Being Injected Into Rocket (Reuters)
• SNB Reaffirms Vow to Cap Swiss Franc (FT)