Archive - Jun 22, 2012

Infamous for his prediction of the great recession, Europe's demise, and the collapse of the US financial system (as well as profiting extremely handsomely from said predictions), so well captured in Michael Lewis' book "The Big Short", UCLA's Dr. Michael Burry undertakes UCLA's Economics Department's commencement speech with much aplomb. In this "age of infinite distraction", the astounding truthiness of this 15 minute speech is stunning from single-sentence summation of Europe's convulsions that "when the entitled elect themselves, the party accelerates, and the brutal hangover is inevitable" he reminds us that Californians, and indeed all Americans, should take note. A quarter-of-an-hour well spent from a self-described 'chicken-little' who was "just trying to figure it all out".

One week to solve all problems, or else....

The "Syrianna" story from this afternoon, which many were quick to label as merely a lot of diplomatic hot air and rhetoric, just turned uglier, after Syria not only did not officially apologize as Turkey PM Erdogan implied had happened previously for the shot down Turkish F-4 fighter jet, but instead turned the tables on Turkey, and gave itself an out for what is now a definitive military action. From Reuters:

The Syrian military said it shot down a Turkish military aircraft "over Syrian territorial waters" on Friday.

 

"Our air defences confronted a target that penetrated our air space over our territorial waters pre-afternoon on Friday and shot it down. It turned out to be a Turkish military plane," a statement by the military circulated on state media said.

The only question remains whether Syria's act was offensive or defensive. Naturally, its version is one of self-defense. Turkey obviously will claim it was in its right to be wherever the plane may be, and will say this was an act of provocation. Then NATO, read Hillary Clinton, will promptly step in, and make this a case in which Turkey was in its right and that Syria committed an act of aggression. From there, things will just escalate, and can potentially deteriorate to a far more troubling scale, because as we reminded earlier, Syria has recently become a major symbol for NATO vs the Russia-China axis.

The no frills summary of the past week's key bullish and bearish macro events.

Bearded Maniac Vampire Squid Killer...

We have no doubt that everyone is tired of bad news, but we are compelled to review the facts: Europe is currently experiencing severe bank runs, budgets in virtually every western country on the planet are out of control, the banking system is running excessive leverage and risk, the costs of servicing the ever-increasing amounts of government debt are rising rapidly, and the economies of Europe, Asia and the United States are slowing down or are in full contraction. There's no sugar coating it and we have to stop listening to politicians and central planners who continue to downplay, obfuscate and flat out lie about the current economic reality. Stop listening to them.

Early weakness in Treasuries (rising yields) and an acceleration in WTI prices back over $80 provided the 'contextual' support for an almost perfect 38.2% retracement bounce in S&P 500 e-mini futures today. Key support/resistance at the 1330 level was restested on dismal volume with a late-day surge but average trade size and activity picked up rather notably into the bell and ES cracked back almost 7 points to a 'mysterious' VWAP close. HYG outperformed today (as did VXX - and implicitly VIX which closed around 18% dropping 2 vols) but it appeared medium-term that equities were reverting to HYG's less sanguine view of the last month rather than HYG really leading. Financials were strong performers but all of those gains were at the open with XLF (and JPM which was unable to break VWAP in the afternoon) unch from 930ET and MS/GS/BAC/C all down 0.7% to 1.6% from the open (with a late day give back). Gold, Silver, and Copper are pretty much unchanged from the 4pmET close levels of yesterday while WTI is up over 2% closing back above $80. The long-bond underperformed +7bps on the day but outperformed on the week (as the 7Y and 10Y underperformed on the week) and provided the support for equity's levitation but this seemed as much QE-hope unwind as any implicit weakness. FX markets were dead with slight strength in AUD and EUR and weakness in JPY as USD basically trod water +0.8% on the week.

Beginning in 2011 the Federal Reserve begin releasing its economic forecast for the present year and two years forward covering GDP, Unemployment, and Inflation.  The question is after 18 months of forecasting - just how good has the Fed at forecasting these economic variables?  I have compiled the data from each of the releases for each category and compared it to the real figures and used a current trend analysis for future estimates.... The Fed has been slowly guiding economic forecasts lower since 2011.  The reality is that 2.6% economic growth is not a boon of economic prosperity, corporate profitability, increasing incomes or a secular bull market.  It is also not the "death of America" or the return to the stone age.  What is important to understand, as investors, is the impact on investment portfolios, expectated real rates of returns and the realization that higher levels of market volatility with more frequent "booms and busts" are here to stay.

Confused as to how to position your equity portfolio? Need to BTFD? Unsure of what is going on now that Bernanke has left you alone in the dark with reality? Have no fear. These simple three charts, that perfectly describe the process top-down for arriving at a view on US equities, will allay all your fears of missing the next great bull market leg. Equity Prices track Earnings Estimates; Earnings track ISM; and Real-Time Surveys indicate ISM going down. @Not_Jim_Cramer provides this clarifying confirmation of what we noted yesterday with regard to oil prices and slowing global growth (or a lack of printing) - equities appear alone in their hope for now.

With every passing day, we learn that those pesky socialists in charge of the "Evil Empire" were right all along:

• HOLLANDE SAYS THOSE WHO BENEFITTED MOST IN PAST 5 YRS WILL PAY
• HOLLANDE CALLS ON `PATRIOTIC' FROM WHO EARNED MOST TO CONTRIBUTE

In other words, Obama's "Fairness Doctrine" has just gone airborne. And judging by history is very contagious. Only this time the "other people's money" has run out as the ECB's announcement of condom wrappers as collateral, showed us this morning.

And final score: Greece JA JA - Germany NEIN NEIN NEIN NEIN. Too bad the real Grexit doesn't have to be decided in 90 minutes.

Today's EURO 2012 quarter-final between the diminutive (in stature and in economic might) Greeks, who surprisingly made it to the knock-out rounds - 'giant-killing' Russia on the way, and the hulking football genii Germans, promises to be as packed with prowess as it is punch. Don't write Greece off too soon though as they won the whole thing in 2004, and we can only imagine there is more than a little 'payback' in mind as they walk onto the field today. While we assume the entertainment will be a little less comedic than Monty Python's famous Philosophy International between the two nations, it is must-see viewing if for nothing else to watch Frau Merkel's face as she ducks and weaves the crowd's abuse. Will there be a little friendly wager between Samaras and Merkel? Santorini perhaps in exchange for four-more-years? ESPN3 Live Stream link below. Odds are that Germany wins 2-0 (with 33-to-1 odds on a 5-0 win) as the Greek defense won't cope with Klose first to score. For the long-shot, the odds of a Greek win is 9-to-1 - about the same chance they have of staying in the Euro.

For those with doubts after a nine-month correction in gold (and especially over the last few days), Brent Johnson of Santiago Capital reminds us that 'nothing has changed'. Starting from the three propositions that: 1) Money is extremely misunderstood; 2) 'Fiat' money is a poor store of value; and 3) Gold is an excellent store of value, Johnson provides, in a little under 10 minutes, a succinct summary of all the reasons to remain long the shiny yellow stuff. As it reverts to being 'the most marketable commodity' once again, with the 'good-as-gold' USD continuing to lose its purchasing power over time, Johnson provides some thoughts on the periods of deflation and how gold plays into that end-game: "If gold were not a good store of value, why do all the central banks of the world store it and hold on to it - even when crises abound?"

While this morning saw a rumor of junior bank bondholder haircuts (and burden-sharing) rapidly denied by Spain's de Guindos, it appears the country's smarter individuals are realizing that perhaps a 'bail-in' (a la Citigroup in 2009) is the better way to go than an unending 'bailout' when it comes to the problem banking system. The bigger issue is not the insufficiency of the loan but the fact that such a relatively small loan was impossible for the sovereign to raise itself as no private investors believe their solvency - implying Spain has reached its debt saturation point. Neither government nor taxpayers can afford to take on more debt (which is what the bailout is). The solution, a precedent set by the good ol' USofA with the Citi preferreds, is to cram-up bond-holders. A compulsory debt-for-equity swap for the subordinated and senior unsecured liabilities, "whereby investors bear the vast majority of the cost of their own mistakes, without liquidating the banks and without pushing the Spanish economy into bankruptcy" may initially cause some turmoil in the interbank lending markets (which would need to be supported by the ECB in the interim as it is already). It would be extremely painful for shareholders (who will see massive dilution) and bondholders (arguably rightfully so) but would offer 'real' hope for improving market belief in solvency.

If we pursue the line of inquiry established by Chris Martenson’s recent call to Buckle Up -- Market Breakdown in Progress, we come to these basic questions: When will the market reflect the fundamental weakness of the global economy? And when will the market finally hit bottom? Clearly, the correlation between market action and the underlying economy is weak.  While many would declare the stock market to be a “lagging indicator” of recession, even that may be overstating the connection. If we have learned anything in the past three years, it’s that weakening the dollar to foster the illusion of rising corporate profits, central bank monetary easing (QE), and central state borrow-and-spend stimulus can goose the market higher even as the underlying economy remains weak or recessionary. Will the Fed continue to support the U.S. market with QE programs every time it sags? Will QE always work as well as it did in 2010 and 2011? If the history of the deflationary-era Nikkei is any guide (and the BoJ's unprecedented monetary easing while the central government has borrowed and spent unprecedented sums on fiscal stimulus), the bottom could be a year away.