Archive - Nov 2010 - Story

Yesterday, we posted John Taylor's observations on where the EURCHF is headed (much lower). Today, right hand man Jonathan Clark follows up with his views on the EURUSD, which the world's biggest FX hedge fund now sees as testing 1.260 if 1.3160 is breached (which it probably will be as today's break in the EURUSD with ES means the AUDJPY once again is the funding carry pair du jour). Additionally, FX concepts does not see the pair passing a 1.3610 resistance, and recommend selling any temporary strength above the mid-1.36 area.

Goldman's Erin Nielsen is early in his weekly outlook report which however will not catch anyone by surprise. Somehow the Goldman strategist looks at recent economic data coming out of Europe, which even CMA said was indicative of a start of a double dip, and calls these "great macro numbers" - this kind of stunning subjectivity used to get analysts fired in the past; now it gets you promoted to partner; oh well, you can get the man out of the bias but you can never get the bias out of the man and all that. Furthermore, despite Germany making it expressly clear than any future bailouts will hinge on restructuring, Nielsen is adamant that this too is a misread: " I strongly disagree with some of the aspects of what has been reported in the press today as being the German proposal, particularly as it relates to making a future rescue conditional upon debt restructuring." Well, Erik, there is the German people, and there is your opinion. q.e.d. The balance of the note is filled with the same traditional permabullish fluff, which would have forced those who followed Nielsen's always rosy advice to incur irreparable P&L damage. But since the man has a verbiage quota to fill (regardless of content quality), and skeptics to amuse, we are confident he will have a long and prosperous career at Goldman. In the spirit of thanksgiving: we thank you Erik for providing countless hours of naive amusement.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 24/11/10

It seems that the European bailout buck will stop with Portugal for one simple reason: when Europe created the EFSF it did not think it would need to serially bail out everyone; now the EFSF does not have enough money to cover a bailout of Spain. From Dow Jones: "The European emergency fund, promoted as having the financial firepower to douse a financial crisis in the euro zone, may not even have enough money to cover a bailout of Spain. "[The fund] will be very close to the line, it will be precarious and it won't leave anything for anybody else," said Whitney Debevoise, a sovereign-debt lawyer with Arnold Porter and former World Bank executive director." Of course, if and when Spain is bailed out, other bail outs will be irrelevant, as at that point the vigilantes will focus squarely on Germany. At that moment, nothing less than a complete dissolution of the currency union and an unmitigated monetization ala Weimar will save what is left of the productive powers remaining in Europe.

An entertaining, and no holds barred fictional look at what America's post QE4 future may look like.

Any minute now, any minute, we promise, investors will regain all their confidence in this non-charade of a market which reflects all the fundamental realities of the economy. Just not yet: last week saw the 29th consecutive outflow from domestic mutual fund flows, which incidentally surged to $2.8 billion from the $677 million outflow the week prior. Sarcasm aside, nobody except for CNBC's Fast Money is putting money in the market. Well, so are the Primary Dealers, and to an extend the Hedge Funds. Although now that the letter no longer have access to pervasive insider info courtesy of expert network, it may be up to just the Fed, HFT and the 18 primary dealers to take the Dow to 36,000. After all, there is a wealth effect to be created. Also, ICI reports last week muni funds saw a massive $4.8 billion outflow. Have no fear - this will also be spun as bullish. Incidentally, from its 2010 lows in July, the market has risen to fresh all time highs as investors have pulled just under $60 billion from mutual funds. Once Bernanke is done with his latest mandate which is nothing short of genocide, he is a shoe in to replace David Copperfield at the MGM.

When reading the otherwise rosy stories in the mainstream media, the most glaringly simplistic and attention grabbing subsegments of which continue to proclaim the recession over, while conveniently ignoring that despite $4 trillion in monetary and fiscal stimuli underemployment is at 17%, foodstamp recipients are at all time highs (but who cares about that social stratum), discretionary purchases are continuing to be funded primarily from millions of delinquent homeowners who refuse to pay their mortgage (now on average between 18 and 24 months behind), companies are refusing to hire, capex spending is at all time lows, banks are hoarding cash for the imminent perfect MBS putback storm, commodity price inflation is threatening to collapse profit and net income margins, half of Europe is locked out from capital markets, rampant Chinese inflation is threatening to recreate Tianenman square, investors are pulling cash from markets for 29 weeks in a row, hardship withdrawals from 401(k)s surging, and the muni mess is one political decision from an avalanche of city and state defaults, one may be excused to have a comparable simplistic perspective of the economy. After all stocks are up. Which of course is precisely the response that Bernanke is hoping to elicit from these same simplistic interpreters of economic and market data, who are next supposed to take money procured from selling newsletters and other top and bottom-line declining products, and buy (Chinese) trinkets they don't need. It is these same people who will also conveniently ignore the sad reality that America's small business find themselves increasingly in: and for the most vivid example of this is the latest Reuters report which informs that small business are now calling of Christmas en mass. "The 2010 holiday season represents the worst
slump since the firm began polling 22 years ago, she said. Of 103
leading businesses queried, those holding a celebration of any kind fell
to 79 percent, down from 81 percent both last year and the year before,
during the height of the economic recession." Obviously Wall Street is not among those polled: the country's bankers are preparing to spend over $140 billion in compensation this year. Good luck booking a restaurant, club or lounge in New York in the next month.

The series of increasingly weak Treasury auctions continues with today's 7 Year $29 billion offering, which just priced at a 2.25% high yield. The yield was a materially higher 28 bps compared to October's 1.97%, and shows that the peak of the curve belly, the point that recently was most desired, is now being shunned the most. The Bid To Cover slumped to an 8 month low 2.63, the lowest since March's 2.61. And most notable, indirect bidders have come at an 8 month low as well, taking down just 42.2%, forcing Primary Dealers who have traditionally have a backseat role in stabilizing the 7 Year to step up and buy almost a majority of the auction (and 57.8% when including Direct Bidders). Now that as (so far only) Zero Hedge disclosed the Fed is the biggest holder of US Treasurys, we expect to see ever decreasing interest by foreign bidders in auctions going forward, especially in the belly, where the Fed will soon be the main holder of securities.

The biggest driver for today's stock market ramp, aside from the initial claims number which next week will be revised substantially worse, was the UMich Consumer Confidence index, which "beat" expectations of 69.5 coming at a five month of 71.6. The fact that a self-referential index can be market moving in the first place is mindboggling: this particular index is mostly driven by moves in the stock market, and any higher read in the index send the lithium addicted stock market higher, which in turn leads to a higher subsequent read in confidence and so on ad inf. This self-recursion probably explains why it is such a favorite of the Fed, which has now openly made clear that it will do anything to facilitate any and every ponzi component to the US economy, of which UMich is precisely one. Yet philosophical matters aside, what is most troubling is the ever increasing divergence between the UMich index on one hand, and another "confidence" index, which is far more comprehensive, far more exhaustive, and far more frequent in its polling: the weekly ABC Consumer Comfort index. If you have not heard of it before, it is precisely due to these three qualifications. And being far more indicative of the true state of how people perceive the economy, it is inevitable that there would be a massive divergence between UMich and the ABC indices. As the chart below demonstrates, this is precisely the case. While UMich is almost back to its December 2007 level, a reading that is so ridiculous when one considers that America now has 42 million people on foodstamps (and had under 28 million in Deceber 2007), the ABC index is now just 5 points away from its all time lows, and its yesterday print of -47 is the lowest it has been since August. All this begs the question: why does the market pretend to trade base off an index as discredited and flawed as the UMichigan Consumer Sentiment.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 24/11/10

The Federal Reserve's VISA credit card account offers a rare glimpse into the inner workings of the secretive Fed. This leaked transcript of the Federal Reserve's VISA credit card account provides a treasure-trove of insight into the Fed's recent actions. Nothing reveals a person or institution quite so indelicately as a list of credit purchases.

The first arrest in the insider trading probe is Primary Global's Don Ching Trang Chu according to a complaint filed by the State Attorney's office. Per his biography, Chu "is PGR’s bridge to Asia experts and data sources. Don was a 25-year veteran in Data Communications Industry. He was with Bell Labs for more than 10+ years in data, wireless, and telecommunications arena. He has great view of technologies sector in Taiwan and China from fab, fabless through OEM/ODM players. Don intimately understands the wireless broadband communications industry, and has deep connections and relationships in the technology industry. Finally, Don is just a fun person to travel with on the highways and byways of Taiwan." Chu promises to be an even funnier bunk mate in minimum security prison, unless of course, he rats out all of his co-conspirators. Which he most likely will. Oddly enough, Chu is not in the biotech space, which is the bulk of the focus of the investigation seems to focus. We expect many more arrests imminently.

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.