Archive - Apr 13, 2010 - Story

Today's 4 week $26 billion auction closed at a 0.145% high rate, which, just like yesterday's 3 and 6 month Bills, was a lower rate than the preceding auctions, indicating that flattening pressures are once again receding. The auction bid to cover was a solid 4.35 a big jump from prior week's 2010 low of 3.56. Indirect bidders dropped to a one month low at just 22.2%, as direct bidders once again came in to save the day, taking down 17.2% of the auction. The hit rate on the Primary Dealer take down of 60.6%, was 17.2%. One thing is certain- direct bidders now play a just as important role in short-end auctions as indirect bidders.

You have all seen the Chanos interview snippets made available last week. Now watch the full interview by Charlie Rose in which Jim Chanos deconstructs China. Goldman's (make that Jim O'Neill) response: "BRIC BRIC decoupling BRIC baltic dry BRIC Goldman Nepal office BRIC." Chanos destroys the Friedman defense to never short countries with $2 trillion in foreign currency reserves: he points out that the last two countries that had similar foreign currency reserves relative to the size of their economy was Japan in 1989 and the US in 1929. I will let that be the end of that discussion. It has no bearing on whether there is a domestic credit bubble. Countries embark on domestic credit bubbles often tend to accumulate foreign currency reserves." After listening to the full 26 minute interview, we are confident that the Dow will hit 36,000 in anticipation of the Chinese collapse, as the IMF is forced to expand its just amended $550 billion bailout facility to a cool quadrillion. Full transcript attached.

RANsquawk 13th April US Afternoon Briefing - Stocks, Bonds, FX etc.

Gary Shilling is now firmly in the anti-China contrarian bandwagon. In this interview with Bloomberg's Erik Schtazker the legendary investor, who called Japan's lost decade when everyone was just as bullish on Japan as Goldman is now on China, Shilling shares the same view on Chinese record excess capacity as Hugh Hendry did some months ago: "You can't trust the [Chinese] numbers... They have kickstarted their economy in the last year - it's a stop go economy, they can do it fast, they don't have to worry about EPA audits, they just let the bulldozers roll when they want to build a new road or whatever. The point is they build an awful lot of excess capacity and the question is how are they going to use it because American consumers aren't buying their exports the way they used to and their domestic economy isn't that strong... Chinese consumer spending is 36% of GDP and is a declining share over the last two decades. They don't have a a big enough middle class. In China there were 110 million people with over $5k per capita income, enough to give them discretionary spending but that was only 8% of the population. In this country it is 80% of the population." And on the yuan: "If they took off all the controls and Chinese could invest abroad, the yuan would probably go down because people would want to diversify... I think the political leaders are aware of that possibility they sure don't want to be pushed around, and Obama made a huge in trying to push them again. Remember China was dominated by European in the last century and they want to run their own country." While we completely agree with Schilling, we believe that the current transformation in US society, which is in the last throws of contract abrogation, in not paying mortgage and credit card bills, we may well see a last push in Chinese imports, after which any disposable income in the US middle class will plunge and will take the US economy down with it as well. The problem, as we have repeatedly pointed out, the cash return on such "assets" as iPads and Kindles is zero, not nearly enough to pay down 39.95% APR credit cards.

Well that particular bailout lasted all of 24 hours: that's what happens when the markets habituate to endless non-bailout bailouts. The half life of each successive one is now half the previous. The Athens Stock Exchange is once again seeing deep red (-2% at last check), and now the ever critical 10 Year bonds are starting to get dumped. This follows a massive move in the EURUSD from up 100 bps to now down 15 or so. The 10 Year has now blown back out to 368 bps over Bunds. NBG, Alpha and Piraeus are all trading down 5%. In the meantime, nothing, nothing can touch the US stock market. Computers are now fully sentient and realize that Ben Bernanke will never in his lifetime allow a downtick.

A month ago we discussed the imposition of virtual capital/tax controls when it comes to the avoidance of taxes by high net worth individuals in the US who park their money abroad. Yesterday, we also discussed that the only practical way for the administration to reduce its massive budget deficit is to target the richest 1% in America with tax rates that could potentially spike to as much as 91% according to Brookings. Sure enough, also yesterday, the IRS took the next step to create what is slowly becoming a global capital outflow prevention system, by establishing the "globalization of tax administration" in anticipation of other countries' attempts to lure America's richest. As CNSNews reports, IRS commission Doug Shulman had this to say to the National Press Club on Monday: "Through our new global high wealth operating unit we are taking a unified look at the entire web of business and economic entities controlled by high wealth individuals so we can better assess the risk such arrangements pose to tax compliance. The IRS is using our robust and evolving enforcement program that ensures that everyone pays what they owe." It is near certainty that once the system is in place, the hammer will fall on not just the uber-wealthy but middle class expats who no longer reside in the US. And since the entire world is bankrupt, all other countries will be happy to apply a game theory construct to this development so that all can share from the money extracted by those who attempt to evade what is rapidly becoming an oppressive US tax climate.

The hearing by the Permanent Subcommittee on Investigations is starting its grilling of WaMu executives on "The Role of High Risk Home Loans." Watch the hearing live and commercial free here.

Below are the scheduled appearances and testimonies. The full 666 page exhibit list can be found here.

And here we were thinking that a $2 billion successful Bills auction, (not really) backstopped by everyone and the kitchen sink would sound the all clear on the country with the 16% budget deficit. Alas, with the 10 Year still at 350 bps over Bunds nothing at all has changed for Greece. And here comes Deutsche Bank, which has billions at risk among the PIIGS, saying Greece will very likely be forced to protect its creditors asap, or within the next month, whatever comes first if it has no market access. Alas, as real Greek bonds are still trading just south of 7%, this pretty much means the market doesn't care about the country's long-term prospects, which in our books is equivalent to "absent market access" to anything more than oilve oil and Ouzo. And the cherry on top: several European governments will be forced to have a parliament vote to approve the bail out. It appears the market still has not figured this virtually certain collapse trigger to the rescue package. When it does, the end game for Greece will truly be there.

Obama's plan to spur US exports sure is starting with a bang. After reporting a $40 billion trade deficit in January, the US once again was a net importer (no surprise there) to the tune of $39.7 billion. This is worse than the $38.5 billion consensus. Both import and export prices increased by 0.7% (with an import price consensus of +1.0%). The largest deficit increase was in the consumer goods category, which increased by a sizzling 3.1% as everyone is stockpiling Kindles and iPads for that moment when the irresistible force of the US budget deficit finally meets the immovable object of reality (which lately has been quite movable). The next question: with China now also a net importer, and joining such illustrious peers as the US and EU, just who is exporting?

Here are the key observations on the number via Goldman, which now anticipates the need for a GDP estimate reduction as a result. That's ok, we are sure the administration will promote legislation to the GDP equation that will make net imports actually a GDP positive.

The NFIB Small Business Optimism index came in at 86.8, a decline from the March's read. As the NFIB itself confirms: "The persistence of index readings below 90 is unprecedented in survey history. “The March reading is very low and headed in the wrong direction,” said Bill Dunkelberg, NFIB chief economist. “Something isn’t sitting well with small business owners. Poor sales and uncertainty continue to overwhelm any other good news about the economy.” Main Street America's optimism is at an 8 month low, ignoring completely any sense of optimism the algo, Fed and momo rally may be attempting to generate. "The index has posted 18 consecutive monthly readings below 90. In March, nine of the 10 Index components fell or were unchanged from February’s not-so-great readings." As for credit condition: "Regular NFIB borrowers (35 percent accessing capital markets at least once a quarter) continued to report difficulties in arranging credit. A net 15 percent reported loans harder to get than in their last attempt, up three points from February. However, 89 percent of the owners reported all their credit needs met or they did not want to borrow." Even Goldman Sachs is unable to spin this information in a favorable light.

• Propaganda: Tim Geithner Op-Ed in WaPo - How to prevent the next financial crisis (WaPo) - start by voting me out of office
• The bank bailouts created the crisis (RCM)
• More surprising revalations about Lehman book-cooking which the SEC has and will ignore - Lehman channeled risks through alter ego firm (NYT)
• Hu tells Obama: China to make its own call on yuan (Reuters)
• JPMorgan profit may show decline on consumer lending (Bloomberg)
• UK market may face turmoil as overnight-count campaign fails (Bloomberg)
• Small business confidence hits 8 month low as mirage economic imporvements (i.e. DJIA) have no bearing with reality (Bloomberg)

Greg Peters, and other strategists from Morgan Stanley are out warning anyone who will listen that what is going on in the economy is a fool's rush (we would add predicated by momos who know nothing about reading financial statements but everything about dollowing a trend) and that MS' core advise to clients is to "sell into strength." Here is how Morgan Stanley differs from the consensus. Also discussed are returns before and after the EPS season, and how to hedge surging implied asset correlations.

Greece is giddy about not only placing 3 and 6 month Bills, but also upsizing the issues from €600 to €780 million. Well, when the yield involved is more than double that of just 3 months ago, and an all time records, and the country has the full backing of the EMU, and the IMF just created a $550 billion new bailout credit facility to make sure nobody ever fails, we are shocked it took yields of 4.55% and 4.85% to get these done. To be sure, without the bailout of Germany et al, Greece would have been paying 7% on both, meaning the 2% differential is now implicitly (for now) borne by German and American taxpayers - that amounts to $42 million. Next up: let's see if Greece can price something beyond the immediate near-term horizon, especially past the guaranteed 3 year point.

• Asia stocks, metals decline as Alcoa sales miss estimates; Yen strengthens.
• China may float Yuan by June 30, avoid one-off revaluation, Bloomberg survey.
• China's biggest banks face $70B capital shortfall, ICBC's Yang says.
• Global IT spending expected to rise 5.3% in 2010 - Gartner.
• Hu says China to follow own path on Yuan as Obama pushes for 'market' rate.
• Profits for big banks dimmed by home-equity loan loss seen at $30B
• World oil demand to hit record high this year

RANsquawk 13th April Morning Briefing - Stocks, Bonds, FX etc.