Archive - Nov 24, 2010 - Story

As a disclaimer to this update, I just want to reiterate once again that I firmly believe that the Euro is not viable, at least certainly not the way it is designed and I think the flaws in its conception are so profound that dissolution makes the most sense. With this assumption in mind, let us look at what the solutions are to the current woes. The individual bail-out route is not an option. When dominoes fall in panic the speed at which they fall tends to accelerate exponentially. Rewind the tapes to late July 2007: American Home mortgages files. The market goes on to make new highs but in January Bank of America takes over otherwise soon defunct Countrywide and by March Bear Stearns is belly up. The forced hand out to JP Morgan appeases the market temporarily, but by early September Fannie and Freddie are de facto nationalized, and so is AIG, Lehman collapses, Wamu is taken over by JP and at that point the government has no choice but backstop the entire system. Well, this is not unlike what we are witnessing here: We first had Iceland in November 2008, then Greece in the spring of 2010, now Ireland. Make no mistake if you let that fester enough or decide to bail them one by one without attempting a larger scale resolution by January Spain Portugal and possibly Italy will have been downgraded several notches, LCH will have raised the margins on all those bonds, and French and German banks will start dragging their country down the same slope. - Nic Lenoir

The October median new home price of $194,000 was the lowest recorded by the Census Bureau since the start of the Depression in December 2007.

US consumers are confident that their imminent bail out of an austere Europe will boost their living conditions, as austerity is now certain to never come to the US, thanks to the "wealth effect or bust" mandate of the Federal Reserve. Confidence came at 71.6 on expectations of 69.5. Since this number is a catch 22 which follows the respondents response to the stock market ramp it is nothing but a coincident indicator to stocks. Yet an actually relevant economic number, new home sales, came at 283k, on expectations of 312k and compared to the previous print of 308k. This was a 8.1% decline compared to expectations of a rise of 1.6%. The mood of the manic depressive market is now spilling over to virtually every economic category.

Take one look at Bank of Ireland stock this morning. Then read the following October 4 report on BOI from Goldman Sachs, and please join us in extended our congratulations to Goldman analyst Pawel Dziedzic who has joined the prestigious ranks of Cramer and Dick Bove of telling those who care to buy a bank days or weeks ahead of its bankruptcy.

A bunch of completely irrelevant numbers released by Ireland. At best these will achieve nothing but will kick the can down a few more months. At worst violent rioting will be a daily occurrence in Dublin within a week.

And so the downward Q4 GDP revisions begin. "New orders for manufactured durable goods in October decreased $6.8 billion or 3.3 percent to $196.0 billion, the U.S. Census Bureau announced today. This decrease, down two of the last three months, followed a 5.0 percent September increase. Excluding transportation, new orders decreased 2.7 percent. Excluding defense, new orders decreased 2.1 percent." Expectations were for print of 0.1%, with the main culprit for the unexpectedly bad miss being transportation: "Transportation equipment, also down two of the last three months, had the largest decrease, $2.9 billion or 5.2 percent to $52.3 billion. This was led by defense aircraft and parts, which decreased $1.6 billion." Most importantly, new orders declined in every single tracked category. Elsewhere the magic that is artificial growth by inventory restocking, now in its 10th consecutive month, continues: "Inventories of manufactured durable goods in October, up ten consecutive months, increased $1.3 billion or 0.4 percent to $316.7 billion. This followed a 0.7 percent September increase." When the liquidation begins watch out below. Of course, stockpilers will by then be able to sell it to the Fed's QE X.Y bid. While the data will be ultimately good for the final revision for Q3 GDP, it starts Q4 GDP with whimper, just as expected. And should the inventory contraction finally begin, watch out for the November and December data.

In what is now 38 times in 2010 (out of 46), the BLS has revised its prior weekly initial jobless claims number higher, from 439k to 441k. The most recent  number, which is far less relevant (as it will be revised worse next week) and much more volatile due to it being a pre-thanksgiving week, and layoffs plunge, came at 407k compared to 435k the expectations. Most importantly, non-seasonally adjusted claims increased by 45k. But of course, the government's adjustment is where it's at. Continuing claims were of course also revised higher as the BLS' charade of beating instant expectations has gotten boring: the prior number of 4,295k was pushed higher to 4,324k, once again confirming that anything the BLS reports has to be ignored until the next week revision. Lastly, the loss of extended claims started early this year, with those collecting extended claims and EUCs dropping by over 280k.

Somehow the China Daily story we pointed out yesterday morning that China and Russia are expanding their trading terms and will conduct all bilateral trade exclusively in local currencies, thus dropping the dollar as an intermediary, is only today starting to make the rounds. Alas, this story is nothing but more posturing for several reasons: Bloomberg notes: "China and Russia will drop the U.S. dollar for bilateral trade and use their own currencies for settlement, China Daily reported, citing Chinese Premier Wen Jiabao and Russian Prime Minister Vladimir Putin." Oddly enough this is an identical overture from June 2009: yet very little has happened in terms of actual dollar lock out since then. Note the following story from June 17, 2009: "The leaders of Russia and China agreed to expand use of the ruble and yuan in bilateral trade to lessen dependence on the U.S. dollar a day after they took part in the first summit of the so-called BRIC countries." And judging by the market's reaction, and the dollar resurgence overnight it appears that everyone has read through this as just posturing. Furthermore, keep in mind that Russia was not even a top 10 trading counterparty of China in 2010. If China does the same with any of its top 10 partners then there may be a reason to worry. For now, China is merely testing the waters, and has absolutely no intent on isolating the US, nor making its nearly $3 trillion US FX reserves lose a double digit percentage of their value overnight.

• Asia stocks continue retreat on Korea clash; shelling adds to uncertainty.
• China orders crackdown on commodity speculators in widening anti-inflation campaign.
• Euro drops to 2-month low against US dollar amid concerns.
• Fed considered long-term rate target in secret; Numerical inflation objective also discussed.
• Fed officials disagreed on benefits of $600B stimulus, FOMC minutes show.
• Fed trims 2011 outlook on growth, jobs : FOMC Minutes.
• Ireland credit rating cut two levels to A by S&P as bank bailout adds debt.

With bond spreads in Europe refusing to slow down for the Thanksgiving holiday (unlike the US, Europe will be open through the end of the week), and both Portuguese and Spanish spreads jumping to fresh records, with Spain nearly approaching the bailout threshold of 5%, it appears that the market has now pretty much skipped Portugal whose insolvency is a given, and has commenced the "pack of wolves" thing on Madrid. Expect to hear many accusations that CDS traders, and their naked shorting, is the spawn of satan any minute now, and for CDS trading limits to be imposed imminently (not to mention LCH hiking Portuguese and Spanish margins as early as today), even though as we have demonstrated repeatedly in the past, it is all cash bond sellers who are driving the price down. Nonetheless, it is a fact that "price action is now self-reinforcing" - what this means for Spain and for Europe is explained by Goldman's Francesco Garzarelli. Note that this is only a small part of the story. As Zero Hedge discussed first in early July, a far biggest systemic threat is what is happening (or rather, not happening) in the mortgage space, where just like in the US, Spanish Cajas continue to misrepresent the "phantom" bad debt on a national level, however unlike the US and the nationalized GSEs, there is no sovereign backstop to a nation full of delinquent mortgages. Back then the Stress Test farce brushed this biggest risk under the rug. Now that reality is back, this topic will soon come back with a vengeance.

The Mortgage Bankers Association’s index of mortgage applications is reported to have risen 2.1% in the week ended November 19. At this writing, we have no further details. Market wise, there will be no POMO today.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 24/11/10

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