Archive - Mar 2013

"Mission Accomplished" - With CNBC now lost for countdown-able targets (though 20,000 is so close), we leave it to none other than Jim Cramer, quoting Stanley Druckenmiller, to sum up where we stand (oh and the following list of remarkable then-and-now macro, micro, and market variables), namely that "we all know it's going to end badly, but in the meantime we can make some money" - ZH translation: "just make sure to sell ahead of everyone else", just like everyone sold ahead of everyone else on October 11th 2007, the last time stocks were here...

• GDP Growth: Then +2.5%; Now +1.6%
• Regular Gas Price: Then $2.75; Now $3.73
• Americans Unemployed (in Labor Force): Then 6.7 million; Now 13.2 million
• Americans On Food Stamps: Then 26.9 million; Now 47.69 million
• Size of Fed's Balance Sheet: Then $0.89 trillion; Now $3.01 trillion
• US Debt as a Percentage of GDP: Then ~38%; Now 74.2%
• US Deficit (LTM): Then $97 billion; Now $975.6 billion
• Total US Debt Oustanding: Then $9.008 trillion; Now $16.43 trillion

On October 11th 2007, the 'old' Dow Jones Industrial Average reached its previous all-time high of 14,198.10 (with the all-time closing high of 14,164.5 on October 9th) as plans for the MLEC were rumored to save the world from the intensification of stress in the interbank funding markets. A week later, the Dow had dropped 5.5%; a month later it had dropped 8.5%; three months later it had slumped 18%. But, this time the 'wealth effect' will be different-er.

The world is a disparate place these days. It is dislocated. Central bank money buoying all of the markets; equities, debt, commodities while the underlying economies languish or dissipate. Month after month the division widens while even a slight whisper that the monetary creation might cease or falter hits the markets hard and then the leaders of the central banks assure everyone that it will go on ad infinitum and the markets all bounce back and begin to breathe again. The markets might be characterized as “Pucker and Sigh.” “Over the Rainbow” plays on non-stop in the media and those of us with a more skeptical eye are long past “If” and on to the “When.”

A prevailing theme that the pundits are trying to furiously push onto hapless lemmings in hope of forcing them out of bonds and into stocks, is that the current capital market is somehow comparable to that of 1994 and that the Fed rate hike of 1994 is imminent in our day and age too. Aside from the fact that the economy, or the market, is nothing like 1994, the subliminal suggestion is that the Fed may just pull a Greenspan, and proceed to hike rates one clear day, in the process sending the long-end soaring, so please dear lemmings: rotate greatly. So if one were to ignore the fact that for the Fed to hike it would imply that the $14 trillion in global central bank support would immediately start being withdrawn, and thus sending the S&P lower by over 1000 points, how does this particular fable work? Here is how Bank of America spins it.

• As ZH has been saying for months... Draghi Will Need to Push the Euro Down Some More (WSJ) ... but careful with "redenomination risk"
• Senate Report Said to Fault JPMorgan (NYT)
• EU Opens Way for Easier Budgets After Backlash (BBG)
• China Moves to Temper Growth - Property Bubble Is a Key Concern (WSJ)
• China bets on consumer-led growth to cure social ills (Reuters)
• Italian president mulls new technocrat government (Reuters)
• Grillo says MPS won't back technocrats (ANSA)
• The Russians will be angry: Euro Chiefs Won’t Rule Out Cyprus Depositor Losses (BBG)
• China Bankers Earn Less Than New York Peers as Pay Dives (BBG)
• Investors click out of Apple into Google (FT)
• Community colleges' cash crunch threatens Obama's retraining plan (Reuters)
• Alwaleed challenges Forbes over his billions - Calculation of $20bn net worth is flawed, says Saudi prince (FT)
• Guy Hands Dips Into Own Pockets to Fund Bonuses at Terra Firma (BBG)
• North Korea to scrap armistice if South and U.S. continue drills (Reuters)

Here is my take on the drivers of the foreign exchange market today and some implications.

If Friday and yesterday it was Europe's reporting of ugly and below expectation economic data that pushed US stock futures ultimately higher, today it will be Europe's modest economic data beats that will send futures, where else, higher, and result in the Dow Jones breaking its nominal all time highs at the open or shortly thereafter. Following the Chinese economic update in its State of the Union address, which as we reported earlier, saw China set more moderate growth targets for itself resulting in the SHCOMP nearly wiping out Monday's losses, it was Europe's turn to shine which it did following the report of various Service PMI, which unlike last week's horrible manufacturing PMI data, were better than expected with the natural exception of Spain which printed at 44.7, well below the January 47.0, the first drop since September driven by the sharpest job losses since March of 2009, and Italy which dropped from 43.9 to 43.6, same as expected. The core countries' Services PMI beat: France coming at 43.7, on expectation of an unchanged print from last month's 42.7, and Germany printing at 54.7 vs also an expectation of an unchanged 54.1. Not very surprisingly, however, it was not the EURUSD which benefited the most from this data, which has lost nearly 50 pips from its overnight highs following the better economic news, but the various equity futures which have one centrally-planned goal: to take out all time DJIA highs or else, and unless something changes in the next three hours, precisely this will happen.

The most notable overnight event was the release of the Chinese Government Work Report as part of the annual meeting of the National People's Congress which kicked off today and runs until March 17. This is the Chinese equivalent of the US State of the Union address, delivered in this case by the outgoing premier Wen Jiabao. In it, Wen summarized his administration’s achievement in the past ten years in some detail, but still voiced a sense of crisis when talking about existing social and economic problems. The key highlights were the closely watched economic targets for 2013, which while not surprising, were at the lowest levels in the past decade, confirming that the Chinese slowdown in both economic and loan growth is likely here to stay as the economy downshifts from its mercantilist approach, even while pesky inflation pressures persist.

Backwardation is when there is a (seemingly) risk-free profit to decarry the metal. It is fascinating that it persists. It’s been there for weeks! Does no one have gold to put towards this trade?

It has been four years since we first introduced the non-believing world to China's ghost cities. Two years later, we revisited to check on the widescale immigration that was expected to occur into these salubrious suburbs. Alas, another epic Keynesian fail as we so delicately described the 'if we build it, they will come' mentality. Now, four years after the news of the Chinese real estate bubble began to break on tin-foil hat-wearing blogs, the mainstream media (to wit, Sixty Minutes) have gone in depth - taking a wonderfully eery trip through these ghost cicties explaining the growing (and in some places popping) bubble in Chinese real estate markets. The incredulous host concludes this chilling saga, "Meanwhile, people who can afford it are still buying as much real estate as they can... potential buyers crowding buses to see new construction and new owners line up to register their new apts... Like us in our bubble, they just don't believe the good times will ever end." It's all make-believe -- non-existent supply for non existent demand.

Royal Dutch Shell has just released new forecasts for its ‘New Lens Scenarios’ program, which aims to predict how current business decision and policies may unfold over time and affect the markets in the future. The scenarios take two different approaches: one considers the world with a high level of government involvement, and the other looks at the markets when they are given more freedom to develop naturally. The results are intriguing...

It would appear from the chart below, that the world, in its infinitely capable manner, has not only managed to create 'wealth' from thin air, but can 'expect' growth in the future with no apparent impact on the price of the raw materials that will be needed to create that growth. Unless, of course, the growth that equities are discounting is central bank assets and joblessness...

“For many young Greeks, the election in Italy now provides a model. If the population of the third-largest economy in the euro zone so openly opposes the austerity measures, then the exit of individual countries from the euro zone is no longer taboo.” Der Spiegel 

Italy will be holding another election, which puts the country in a dead calm until there is a functioning government. The key in Italy is the outsider and comedian Beppe Grillo whose party has put the government in dysfunction and in parallel has created a monster of an uprising against corruption within both political parties. The movement itself is larger than Grillo and may be the well-springs of copycat movements throughout southern Europe that threatens the euro and the establishment. It’s a disruptive a movement and would be like a Ron Paul to U.S. political parties. No matter the outcome, the bottom line is Italy will remain a drag on eurozone equity prices until there is a resolution.

As is now confirmed, at least one of many JPMorgan margin calls directed at Lehman in the days before the world's biggest bankruptcy became fact, were based on glaringly erroneous information and an error so profound one wonders if this was not a premeditated "hit" on one bank by another bank. Yet a purposeful "hit" orchestrated by one bank, even JPMorgan, would require the involvement of the highest echelons of the US government. So was the US government complicit and give its blessing in this historic liquidation? The Abu Dhabi Investment Council would like to know.