Archive - Nov 15, 2010 - Story

The question of the night is whether Wal-Mart can absorb a 30% price increase in cotton products, because as Bloomberg reports, it will very soon have to. Gap Inc., J.C. Penney Co. and other U.S. retailers may have to pay Chinese suppliers as much as 30 percent more for clothes as surging cotton prices boost costs. Reports Bloomberg: "It’s a little terrifying to deal with cotton suppliers now," said Vicky Wu, a sales manager at Suzhou Unitedtex Enterprise Ltd., a closely held, Jiangsu province-based clothes maker that counts Gap and J.C. Penney among its clients. This is not an exaggeration - in last week's What I Learned This Week, 13D.com's Kiril Sokoloff, a China expert, noted: "We bought cotton back at around $0.99 because we thought the fundamentals were still very powerful. We liquidated the entire position on October 26 at around $1.29 because many Chinese clothing manufacturers were nearing bankruptcy and the Chinese government was cracking down on hoarders, speculators and investigating position sizes." Note the completely unwanton use of the word "bankruptcy" by the otherwise mellow Bulgarian - what has happened in cotton prices is setting off a seismic shift for low-margin retailers, and many traditionally safe and stable companies will soon be forced to attempt to pass on surging costs, or go out of business, especially as the ranks of low-cost vendors goes up in smoke. Bernanke's inflation exporting model is about to backfire with a vengeance. In this most direct consequences of excess liquidity-driven near-hyperinflation, the best possible outcome would merely a total collapse in margins. If you think a very irrelevant Dick Bove hates Bernanke now, wait until you listen to the Walton family's thanksgiving dinner...

Earlier, we pointed out that over the past five years (with an emphasis on the past two), government worker compensation has exploded. As the topic appears to have touched a nerve, and will shortly become the topic du jour across every radio and talk show, here are some additional observations on this parabolic blow off top of a different nature from ConfluentResearch.

Once again option speculators confirm they are nothing but macro momentum chasing lemmings who never anticipate an inflection point until it is well in the rear-view mirror. Last week's CFTC data, which was released with a delay today, due to Veterans' Day, shows that after the reflation trade appeared to be peaking in the past two weeks, so has non-commercial spec demand for commodities, all of which were virtually unchanged from the prior week. In currencies, we saw a resumption of the same old, with the brief renaissance in the USD tapering, and net positions once again declining toward a short bias. CHF sentiment was flat, JPY was down, while the GBP was up: in essence mimicking the actions in the underlying. And the most important chart which we believe is the UST spec distribution by 2/5/10Y, showed that bets for a decline in the 2 year accelerated, the 5 Year was flat, and speculation that the 10 Y would strengthen increased: precisely the opposite of what has since happened, even as expectations that the UST curve would continue surging near 2010 highs.

For all those wondering how to cut down on government expenditures, here's a thought: cut the skyrocketing salaries! A study by USA Today, using US Office of Personnel Management data, confirms what has been widely known: that the biggest beneficiaries of government largesse over the past 5 years as a worker cohort, are none other than Federal workers themselves. The numbers are stunning: those earning over $150,000 in the past five years have grown from 7,420 to 82,034, a 1,006% increase. More shockingly, those earning over $180,000 has surged from just 805 in 2005, to 16,912 in 2010: a 2,001% increase. And it is on the background of this that Congress is planning on giving 2.1 million federal workers another 1.4% across the board pay raise! Additionally, it appears that the bulk of the gains have taken place since Obama took office. Can someone please stop the lunacy: this country is beyond bankrupt and it turns out that in addition to Wall Street (which everyone knows does nothing but transfer wealth from the middle class to a few choice CEOs and groupthinking Bloomberg terminal operators), the biggest thief is the very government itself, which has perfected the art of giving with one hand, and taking with 10, almost as well as those enclosed in glass corner offices on Park, Lexington and Broad (and now West).

Tomorrow's Guardian front page - pretty much self-explanatory. Domino 2 is done.

John Paulson's September 30 13F has been released. Total long stock holdings reported amounted to $22.9 billion, unchanged from June 30. As expected, and following hot in the footsteps of David Tepper, Paulson dumped nearly 20% of his Bank of America and Citi stakes (30 million shares and 82.7 million shares respectively), sold about 11% of Wells Fargo and Capital One, and dumped his entire 1.1 million Goldman position. Keep in mind all this was before BofA stock got crushed in October: the next 13F will be even more interesting.Other divestitures included two thirds of his stake in Family Dollar Stores, a third of his position in Starwood Hotels, and over half of his Mead Johnson Nutrition position. While Paulson did not touch much of his gold exposure (he did sell 6% of Anglogold Ashanti), he kept GLD is biggest position (for the gold denominated holdings) at $4 billion, and added about 17 new positions, the biggest of which were Anadarko (13.4 MM shares), Hewitt Associates (7.6MM shares), NBTY (6.1 MM shares), McAfee (5 MM shares), and then some notable Merger arbs: Genzyme, Burger King and Potash, in which he added 500,000 shares. Either Paulson will now have to like Potash on its fundamentals, or he will have to sell this position. Oddly enough, today's market showed remarkable unwillingness on behalf of the arbs to dump their POT holdings. One wonders how long this will continue. Additionally, Paulson sold his entire half a billion dollar stake in Exxon, a position that he held for just one quarter. In other news, obviously, the love affair with financials is at least partially over, and at this point the future of the Recovery Fund may well be in doubt if even Paulson does not see the upside case for names such as BofA which a year ago he had a PT of $30 as of 2012.

Any chance America has to curb the uncheckable 'central planning' mandate recently adopted by the Fed, which in the absence of any fiscal policy for the next 2 years, has been delegated to a control over the entire US economy, would have to come from Congress which sooner or later will have to adjust the Federal Reserve Act of 1913, and especially the 1977 provision for the Fed's dual mandate of maximum employment and stable inflation. With everyone increasingly concerned the Fed's policies may spark hyperinflation, it only makes sense that going forward the Fed should be limited to just that: focusing on inflation, and leaving employment to America's legislative bodies. This overture is precisely what Congressman Mike Pense noted on CNBC earlier, when he said (staring at 6:45 into the interview): "I appreciate the independence of the Fed, but I think it might be time to reconsider the dual mandate of the Fed, that was established in 1977...I think the Fed ought to be about the mission of focusing on protecting the fundamental strength and integrity of the dollar and protecting the assets of the American people." Is this the first shot across the bow of how the republicans plan on busting Blackhawk Ben's rotor?

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 15/11/10

Today's sudden spike in yields across the curve is being widely attributed to a conversation between Moody's Steven Hess, Senior Credit Officer covering sovereigns, and Market News, in which Moody's has given the point blank warning that a permanent extension in the Bush tax cuts may lead to a downgrade of the US, putting yet more pressure on the president, who despite having shown a conciliatory stance recently vis-a-vis permanent tax extensions, may suddenly find himself boxed once again, and without much choice but to prevent an all out compromise. As the market has recently been running higher on expectations that a tax cut extension is pretty much guaranteed, today's announcement by Moody's pours cold water over yet another "priced in" concept, which suddenly may not materialize. The net result: a smackdown in the 10 Year which is slowly migrating to all risk assets.

The paradigms which undergird the global status quo are broken; doing more of the same (the current strategy) will not fix them. I think a strong case can be made that each of these paradigms is either already broken or in danger of breaking. Studies have shown that when presented with factual evidence that their core beliefs are wrong, humans respond by clinging even more tightly to their fallacious beliefs. I think that is precisely the reaction of the global Status Quo.

With even dummies being fully aware what the robosigning scandal means for the housing sector and for home prices in general, Reuters has released "Everything you need to know about... The Foreclosure Freeze." The 10 simple cartoons should explain what robosigning means to even the most staunchly Adderall-addicted segments of US society.

Hedge Fund Net has released its preliminary October HF performance breakdown by strategy. Aside from the winners and losers (biggest winners were not surprisingly funds focused on the bubbling Emerging Markets space, the losers were short-biased funds), the notable news for October is that following a sizzling QE2-hype driven September in stocks, engineered in part to prevent redemptions and liquidations, HFN reports that allocations to HFs surged to the highest in 2010, as assets in the hedge fund community hit what we believe is a record $2.4 trillion. In a way this is merely compensation for outflows from traditional retail fund outflows, which as we have been documenting have hit nearly $100 billion for the year, as the rich continue to benefit from Bernanke's economic policies (which is what they are at this point), as everyone else, who has just a token stake in stocks, continues to suffer and withdraw capital for maintenance requirements.

The administration is doing everything it can to make sure that the worst IPO in history, that of Government Motors of course, will not be DOA. The latest news is that Getco has been appointed to be a DMM for the year's most important IPO. As Bloomberg reports: "The Chicago-based firm will be tasked with helping trading go smoothly when the auto maker returns to the New York Stock Exchange after a 16-month absence, expected to occur Thursday. NYSE Euronext (NYX) spokesman Christiaan Brakman confirmed that Getco was selected from among the exchange's five designated market makers, who are responsible for buying and selling shares, smoothing trade imbalances and providing liquidity in designated symbols in return for incentives paid by the exchange." Well, by now it should be all too clear what "providing liquidity means."

Even as today's POMO is helping risk assets, but doing nothing for rates (and leading to a flattening of the curve), leading some to speculate that the bond market is getting very nervous about what the FRBNY's intervention may mean for rates, there are some who believe that the Fed will continue to influence the curve favorable, leading to ongoing tightening (and flattening) of the yield curve. One of these, of course, is David Rosenberg. Another, as presented below, is Guggenheim's Scott Minerd, whose previous insights on markets have always been controversial and certainly though provoking. To wit: "I don’t believe in the urban legend of the bond bubble. On the contrary, I believe the yield on the 10-year note will continue its decline, to 2.0 percent, and possibly lower. The “old news” happening to a new economy will most likely be  a prolonged period of low long-term interest rates and low yields. While the idea of a sustained low-yield environment may be unfamiliar to the current generation, it’s not unfamiliar to the former one – just ask anyone who remembers the 1940s, a time when the average yield on 10-year U.S. Treasuries was 1.99 percent, for the entire decade." Then again, the 1940s were a rather simpler time, in which the rate framework did not define about $1 quadrillion of interest-rate derivative products. The reverse feedback loops created now are so unpredictable and confusing that anyone who claims they know what might happen in either extreme case is certainly full of it. Amusingly, even Minerd realizes this, and in his outlook for the long-term (beyond five years) he acknowledges that the endgame is afoot: "Nonetheless, just as a broken clock is right twice a day, the economy
will inevitably reach a point where interest rates will rise. When they
do, I believe they will rise for a long, long time. What happens after
that? The ultimate end game, I believe will be a paradigm shift for
money".

In a way, the administration is correct in that with so many different voices each having their own opinion on how to cut the US deficit, it is next to impossible to reach a consensus. Yet the time bomb is ticking: in 2015 the projected budget deficit will be $418 billion (and likely more). This number will grow to $1.345 trillion by 2030 (both from the CBO, and thus fatally flawed). So here is your chance to give budget balancing a try: the New York Times has launched an entertaining interactive feature that allows readers to attempt to plug the upcoming $1.3 trillion hole on their own, using cuts to domestic programs and foreign aid, the military, health care, social security, existing and new taxes. Incidentally, of all proposals, the one that would have the biggest bang for the buck would be capping Medicare growth starting in 2013, which would almost halve the budget deficit in 2030, leading to a $562 billion recovery in government spending. The bulk of other "material" adjustment comes in the "New Taxes and Tax Reform" category, which is why we are certain that readers should enjoy their current tax bracket for as long as they can. It won't be around too long...