Archive - May 2012

With the end of Operation Twist's USD volatility repression, fading LTRO benefits, and various event risks (from elections to sovereign refinancings and bank downgrades/collateral calls) occurring, the gap between EURUSD implied volatility and European equity implied volatility is becoming excessive. FX volatility is extremely low (complacency high) but relative to equities it seems to offer a low-cost-long-vol bet on the chance of a risk-flare occurring. The last two times this has occurred (in the last year), EURUSD implied vol has rapidly caught up to equity's risk - why not third time the charm?

There is hardly any more long-suffering investor in this market than anyone who has held the stock of that worst of breed American bank: Bank of Countrywide Lynch (BAC), which following the worst M&A transaction in history, namely its purchase of Countrywide, has found out that one does not pay billions for hundreds of billions in contingent liabilities, which will manifest themselves in tens of billions in putback claims against the underreserved bank over time. But all that is now known, grudgingly, after being pointed out here back in 2010, and when all is said and done, BofA will be finished, with the contingent liability pool spun off in a special purpose entity which files for bankruptcy, while the equity remaining at the successor entity will be worth pennies on the dollar. The question is what are the catalysts that get the bank there. Luckily, yesterday the bank itself highlighted what the key driver to put events in motion may be, after it disclosed that should the bank be downgraded, which it will be as Moody's has warned, it would need to post up to $6.2 billion in collateral: an amount which would cripple the bank's liquidity,  and send its stock plunging as visions of AIG resurface, and concerns about a toxic downward spiral emerge.

There is little doubt, even amongst the most uninterested and apathetic of people, that America has reached the threshold of a dangerous new era in 2012.  Economically, the paper thin facade of recovery created by Federal Reserve fiat easing is beginning to fade, and the debt turmoil we currently see in the European Union is beginning to surface right here at home.  Socially, Americans are being subversively divided by the false left/right paradigm and the exploitation of artificially induced race tensions by the mainstream media.  Politically, Barack Obama’s presidential approval rating has hit all time lows, and the approval rating for Congress has hit a historic bottom.  The path our country has been set upon can only lead to disaster; that much is certain. 

Fraud ... What Fraud?

Quantitative Easing (QE) is/was seemingly a magic remedy, at least in the short-term. As GLG's Pierre Lagrange notes, central bankers can conjure up money out of thin air and use it to purchase assets - transforming transferring toxic debt, stimulating demand for risk assets, devaluing currencies (this deflating debt), and maintaining low interest rates on govvies. The ECB's more restrictive mandate, however, does not allow them to print money for any other purpose than lending and so direct QE was out of the question and so, as the chart below demonstrates, they ingeniously created the LTRO - delivering an infusion of liquidity (potential profits from carry and hope for capital raises).

Back in February Zero Hedge was first to point out that while jobs may be growing (modestly) and the unemployment rate declining (rapidly, on the back of all those leaving the labor force), it was the quality of jobs that was troubling. Indeed, as today's NFP report once again showed, the average hourly earnings barely budged at $23.38 from $23.37 last month, and in fact declined on an inflation-adjusted basis. Why? Because as we predicted both in February (and in 2010) the US is increasingly becoming a population of part-time workers, as full time jobs disappear for good, and are offshored abroad at best. April confirmed everything we had been warning about: in the month, full time jobs dropped to 114,478,000 from 115,290,000 an epic drop of 812,000 in full time jobs which was the biggest since... March 2009! The offset? Why a surge in part-time jobs of course, which increased by 508,000 in the month of April. So while seasonally adjusted, birth/death recasted jobs may have increased by 115,000, the real quality jobs, imploded, which unfortunately is merely a part of a longer-term secular trend as part of the new part-time normal.

The April jobs report was 'worse than expected'. While some will tell you that with revisions is was 'as expected is say: Huh? Do they mean that now that March job gains are stronger at +154K it is more likely that we would have projected a slowdown to +115K jobs in April? Really? As expected net of revision? On what planet? No We think you should look at the headline numbers and revisions as separate events to some extent. When you do you learn a lot more. On balance we think there may be room for optimism in this dismal-seeming report. But it's guarded and speculative optimism.

Propaganda unemployment rate: 8.1%; Real unemployment rate: 11.6%. Reason for difference: organic growth of labor force which grows alongside the broader population. Don't be confused by cheap explanations on TV why the labor force should be declining (especially with ZIRP meaning pre-retirement workers have to stay in the labor force ever longer to supplant their meager fixed income): the widely accepted definition of the labor pool, that used by the CBO and all other government forecasting agencies, assumes a 90,000 growth in the labor force every month as it has to keep in line with the growth of the US population! The implication is simple: using a real labor force participation rate long-term average of 65.8%, the real unemployment rate in April was 11.6%, based on the 5.4 million additional workers that should be counted as part of the U-3 which then means that the real number of unemployed is not 12.5 million but 17.9 million, which in turn implies a 11.6% unemployment rate in the US. This also means that the spread between the propaganda, and the real number is now 3.5%: the most it has been since the early 1980s.

Sunday marks the day in Greece, France, parts of Italy and Spain. May 6 will stand out perhaps as the day when the fortunes of Europe were reversed and if not reversed; re-programmed. There has been a lot of talk about this of course and a lot of speculation in the Press and, one would think, that it had all been discounted by the markets but not so fast. The discount will only go as far as the political implications are generally understood and we would submit that the particularities of the European elections are not well understood at all. We think the markets’ reaction is a first blush notion which does not get close to the more pressing questions of what some of the potential changes in power will mean past the revelry of the election night parties. Mr. Hollande, in fact, represents the wave that is sweeping all across Europe which is a return to Nationalism, to tribal pride, to economic self-protection as the European Recession, as driven by the “austerity measures” and fiscal restrictions imposed by Berlin deepen both the economic travails and the reaction to finding your nation under the economic jack boots of Berlin. All of the changes of guard in Europe are going to have a profound effect upon the marketplace in my view. There will be a widening of credit/risk spreads, a decline in the equity markets, a decline of the Euro against the Dollar as Fear climbs back in the driver’s seat and as uncertainty is the prevalent theme of each day.
 

Last weekend we first warned our readers that Goldman just pulled the rug from under today's NFP number, by slashing their NFP forecast to 125,000, which was among the lowest (LaVorgna's 175,000 call was only 50% off... as usual). At the end even Goldman was high. Here is Hatzius' post-mortem.

The comedy continues: the April "Not in labor force" seasonally adjusted print: 88,419,000. And yet, the maximum reading permitted by St Louis Fed Not in Labor Force (LNS15000000) graph: 88,000,000. The data has now officially dropped off the chart. No further commentary necessary.

WTI crude just broke $100 (traded $99.99) - an almost 3 month low having dropped its most in the last 3 days since mid-December 2011. Remember: it has long been known that Obama, pardon Bernanke, will not allow THE NEW QE until a barrel of the black gold cost double digits. He just got his wish.

The seasonally adjusted non-farm payroll number rose by 115K in April. That's great: it was a miss but such is life. Here is what the unadjusted data that led to this number says. The seasonal addback in April was +22K, a rapid break from the last 3 years when April saw a negative seasonal adjustment following the traditional huge positive adjustments in the January-March period, which in turn means that the record warm winter give back has not even started! As a result, the seasonal addbacks in 2012 are now a massive 4,499,000 jobs: jobs that have not been added but are expected to materialize based on historical seasonal patterns. And just as importantly, in April the Birth-Death addition was a whopping 206K, far greater than the comparable addition in 2010 and 2011, and much bigger than expected, which brings the year total now to a +20K cumulative total. It means, that by rough estimation, the reality is that in April the unadjusted, unbirth/deathed number was a decline of -111,000, and likely far worse once the true weather adjustments start taking place. This number is corroborated by the Household Survey which dropped by 169,000. So much for the recovery.

Presented with little comment except to note that in the minute or so before the actual sanctioned release from the dark little room at the BLS, S&P 500 e-mini futures slumped by 7 pts, surged and then slumped again by 7pts - double the entire overnight range in those 30-45 seconds. So after all the efforts to maintain the integrity of the NFP release, it seemed someone knew something early...

it is just getting sad now. In April the number of people not in the labor force rose by a whopping 522,000 from 87,897,000 to 88,419,000.  This is the highest on record. The flip side, and the reason why the unemployment dropped to 8.1% is that the labor force participation rate just dipped to a new 30 year low of 64.3%.