Archive - Jul 11, 2012

Today's release of the FOMC's minutes should be helpful in gauging the near-term monetary policy outlook. Goldman's Jan Hatzius (who just cut his Q2 GDP outlook to a way below consensus +1.3%) believes they will confirm his expectations, for the July 31-August 1 meeting, of an extension of forward rates guidance to 'mid-2015', but no move to further asset purchases yet (not expecting NEW QE until late 2012/early 2013). In the minutes, Hatzius notes four specific issues to focus on: how many FOMC members expect further eventual easing, and in what form; how close the committee was to either doing more or less than Twist 2 at the June meeting; how much discussion there was of qualitative changes in the forward guidance; and how much more negative the Fed staff has become about the economic outlook. In other words, the minutes may provide more information about whether the weak data that have arrived since June 20 - another subpar payroll gain of just 80,000 and sharp declines in high-profile business surveys such as the manufacturing ISM and the Philly Fed - are likely to be sufficient to trigger additional moves.

First Goldman released this just after the trade data came out:

The trade deficit improves broadly as expected to $48.7bn in May, as nominal exports rise (+0.2%) and imports fall (-0.7%) on the month. (The April trade deficit was revised up slightly from $50.1bn to $50.6bn). The improvement in the trade deficit, however, was driven by a decline in petroleum imports (and thus an improvement in the petroleum deficit) while the real ex-petroleum trade deficit actually widened from $40.3bn in April to $41.4bn in May. The trade report is a slight negative for our Q2 GDP growth tracking estimate which we lowered from 1.5% to 1.4%.

And, moments ago after the wholesale Inventories was released, Goldman came out with this:

Wholesale inventories rose in line with the consensus expectation in May (up 0.3%), but from a downward revised April level. As a result, we revised down our Q2 US GDP tracking estimate to +1.3% from +1.4%.

Luckily there aren't another 13 releases today or we may be in recession right now.

First thing this morning when discussing the upcoming festivities in Europe in the aftermath of Spain's decision to hike sales tax from 18% to 21%, while making sure it is the common people who get hurt in the upcoming bank nationalization in which sub notes and hybrid debt is impaired, largely held by retail investors as the FT showed yesterday, we said that "Spain promised to crush its middle class even more by impairing retail held sub debt and hybrids, while forcing them to pay more taxes, a move which will lead to some spectacular Syntagma Square riotcam moments." Three hours later and the riotcam is now live.

Wholesales inventories were revised lower for the previous month but met current expectations with a modest 0.3% rise. However, under the surface (as ever) things are not quite as muddle-through-like. Wholesale 'sales' plunged by their most since March 2009 with Lumber (but but what about the housing recovery) dropping the most MoM in durables and Farm Products dropping the most YoY among non-durables. This plunge in sales pushed the relatively stable Inventory-to-Sales indicator up to its highest in 19 months.

We believe that we are in the early stages of what will happen with LIBOR.  As we wrote yesterday, we believe there are two distinct phases the pre-crisis phase which saw potential manipulation of small amounts in both directions, and the crisis phase where LIBOR was allegedly much lower than the rate at which banks would realistically lend to each other.  Much of this is supported by the FSA case against Barclays. If lawsuits start, banks have a few hopes, including "The 'central bank' made me do it" but banks will have to do everything they can to prevent being sued by 3rd parties.  If they cannot prevent that, this could get very ugly in a hurry for some banks.

While virtually every European risk indicator is now being gamed to underreport the true nature of the capital flow panic on the continent, one remains steadfast: Swiss nominal yields, which as we pointed out a month ago, have become the only true indicator of liquidity stress. And as noted this morning, Swiss 2 Year bond just hit a record nominal -0.37% (which coupled with record low yields in German yields explains everything about where money is sprinting to in Europe, and just how much "confidence" in the system is left). And while the SNB continues to suffer massive losses on its EURCHF peg, the reality is that it continues to offer a free put to all those who wish to move away from EUR exposure and into the relative safety of the CHF (the risk of cantonal disintegration is still relatively low). Which is why the only recourse authorities have in dealing with the now record flight to Swiss safety is brute force. Sure enough, as Reuters reports, clients of the two largest Swiss banks: Credit Suisse and UBS was raided in two independent, but likely linked, operations in Germany and France, respectively, in a show of force that moves beyond mere tax-evasion and has a goal of scaring anyone who still thinks of keeping their money in the relative safety of Geneva and Zurich bank vaults.

Anticipating another leg-down in commodities (and mining stocks) before sufficient stress emerges in markets to force a decisive policy response - which will create an attractive buying opportunity - UBS joins our ranks of the anti-reflexive NEW QE front-running 'small-crowd'. Laying out five clear signals that keep them cautious: Equity valuations remain well above the October 2011 lows; Positioning is short in base metals and less long in oil and gold – improving this contrarian signal; China’s policy stance is not sufficiently stimulative to trigger restocking, and we see structural declines in commodity intensity there; and, Europe and emerging markets are in the early stages of destocking, with no stocking due in the US; UBS believes that investors will buy gold and gold equities early this cycle - correctly suggesting that it is right to move just ahead of the broader investor community, and buy gold and gold equities now. Clearly, buying gold early into a downturn carries greater risks and will be volatile – consequently, they advise investors wishing to go long gold and gold equities to hold a short or underweight copper and copper equity position against it. Interestingly within industrial commodities, they also like being long oil and short copper on a 3-year view.

Who knew the next black swan would be deep fried? The biggest piece of imminent food inflation news over the past months, coupled with what is shaping up to be another record hot summer (for the best tracking of real-time electricity consumption primarily for cooling news we recommend the following PJM RT tracker of power load), has been the collapse in the corn harvest due to the worst drought since 1988 as 56% of America is in drought conditions. Today, the US just added some burning oil to the popcorn by cutting the corn-crop forecast by 12% to 13 billion bushels on expectations of a 13.5 billion harvest. Then again, who needs corn, when you can have cake?

Prepare to have your minds blown courtesy of what is easily the most astounding chart we have seen in a long, long time, prepared by the economists at the, drumroll, New York Fed, which finds that absent what the Fed calls "Pre-FOMC Announcement Drift", or the move in the S&P in the 24 hours preceding FOMC announcements, the S&P 500 would be at or below 600 points, compared to its current level over 1300. The reason for the divergence: the combined impact of cumulative returns of in the S&P on days before, of, and after FOMC announcements. But, but, fundamental, technical, coffee grinds, Finance 101, Oprah Winfrey, Jim Cramer and Econ 101 analysis (in declining order of relevance and increasing order of voodoo) all tell us this is im-po-ssible? Because if the Fed is right about the Fed induced drift, it is all about, you guessed it, easy money. 

The Labor Department released a report Tuesday investigating possible leaks of economic data and raised concerns about self-identified new organizations that primarily serve high-speed stock traders. These 'news' agencies - enabling profits to be made from the millisecond early data release include (and have since had access revoked) 'Need To Know News' and RTTNews. But the most telling insight from the report, noted by USAToday, is the following: The room where news organizations, including The Associated Press, receive early copies of the employment report is supposed to be secure. Before the data were released, reporters gave up their cell phones and temporarily lost Internet access. But the system still suffered from security flaws, according to the report conducted by Sandia National Laboratories on behalf of the Labor Department. So, it seems that BLS has consistently been leaked 'early' as the report outlined 'ways that technology could be used to bypass security and prematurely leak the data... including hidden transmitters in computer equipment and compromised phone or data lines," and proposes access be granted to 'the room' based on "whether a news outlet produces original reporting and distributes it to a wide audience".

A lack of transparency, a lack of enforcement of law and a compliant media which failed to ask the hard questions and do basic investigative journalism led to the price fixing continuing and the manipulation continuing unchecked on such a wide scale for so long - until it was exposed recently. Similarly, the gold market has the appearance of a market that is a victim of “financial repression”. Given the degree of risk in the world – it is arguable that gold prices should have surged in recent months and should be at much higher levels today. The gold market has all the hallmarks of Libor manipulation but as usual all evidence is ignored until official sources acknowlege the truth. However, like LIBOR the gold manipulation 'conspiracy theory' is likely to soon become conspiracy fact.  It will then – belatedly - become accepted wisdom among 'experts.'  Experts who had never acknowledged it, failed to research and comment on it or had simply dismissed it as a “goldbug accusation.”  Financial repression means that most markets are manipulated today - especially bond and foreign exchange markets.

It is the ring of the auction house; “Going, Going Gone” as the final bang of the auctioneer’s gavel is about to fall. It is the awful sound of the whoosh of the guillotine manned by the Lord High Executioner that will fall upon ears and eyes wide open. It will be the final night of a failed play and the melodrama of the Operatic tragedy that will be documented in history books and perhaps recorded in some literary masterpiece that is yet to be written. The economic conditions in Europe are deteriorating with an alarming speed and the affects, coming to the United States in this quarter, will be worse for the balance of the year. It is to be recession there, recession here and some measly cup of porridge for all. Those expecting Prime Rib for dinner are about to be disappointed as it will be gruel and the Petrus wine of last year will be Annie Greensprings poured from a plastic box.

If anyone still actually cares, or trades, we just saw the third California muni bankruptcy in two weeks, German bonds priced at record low yields, and Spanish 2 year nominal yields just hit all time lows of -0.37%. Abroad Spain promised to crush its middle class even more by impairing retail held sub debt and hybrids, while forcing them to pay more taxes, a move which will lead to some spectacular Syntagma Square riotcam moments, yet which has sent Spanish bonds slightly higher. As for US equity futures, they continue the headless chicken dance higher even as company after company now rushes to preannounce horrifying Q2 earnings. And that's it in a nutshell.

• San Bernadino: Another Calif. city goes bankrupt (247)... It appears Hell's Angels don't pay municipal taxes after all
• Rajoy announces 65 Billion Euros Of Cuts To Fight Crisis (Bloomberg)... And Spaniards prepare to not pay taxes
• Spain pressed to inflict losses on savers (FT)... And Spaniards prepare to sue
• Spain to Cede Bank Control (WSJ)... And Spaniards prepare to protest
• Rate Scandal Stirs Scramble for Damages (NYT)... but who do you sue: the Fed?
• Paulson Ex-Lieutenant Caught in Fund's Slide (WSJ)
• ILO warns 4.5m jobs at risk in eurozone (FT)
• Global economic crunch confirmed every day: Airbus Scraps Target of 30 A380 Sales as Demand Dwindles (BBG)
• Same old: Finland says requires collateral from Spain for bank aid (Reuters)
• Cameron and Hollande clash on tax (FT)
• Wen Says Boosting Investment Now Key to Stabilizing China Growth (Bloomberg)