Archive - May 2010 - Story

RANsquawk European Morning Briefing - Stocks, Bonds, FX 03/05/10

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 03/05/10

The chorus of anti-Chinese sentiment is becoming troubling: after virtually every major hedge fund manager has recently voiced in support of a Chinese bubble pop, with today's most recent statement by Marc Faber just the cherry on top, could Farrell's rule #9 be relevant here and with everyone expecting the endgame, one would end up not occurring? Earlier Marc Faber said in a Bloomberg TV interview that "China’s economy will slow and possibly “crash” within a year as declines in stock and commodity prices signal the nation’s property bubble is set to burst. The market is telling you that something is not quite right. The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months." Roger's sentiment comes on the heels of the latest Chinese increase in the reserve requirement (RRR) which has had a nasty effect on Asian markets overnight (and, briefly, on US futures as well). Alas, the Chinese action is not enough, as even JP Morgan admits: "PBOC’s 50bp RRR hike underlines two messages on monetary policy: (1) More tightening in China is needed; (2) Pace of action will be moderate. BI should again signal it is in no hurry to hike."

Did the ECB just learn the last bastion of rating agency insanity, aka Moody's, is about to downgrade Greece? Today Trichet decided to abandon all caution, and has proceeded to officially recognize all Greek toxic garbage as collateral for ECB-backed loans. Looks like the ECB president has been paying careful attention during Bernanke 101 in which his transatlantic colleague has been advocating the collateralization of a sovereign currency with all sorts of gamma decaying substances, for well over a year now. Now Ben is starting to get woefully behind the curve in the devaluation race. In the meantime, using simple math, we wonder: if Greece, which as so many have pointed out is only 2.7% of European GDP, ended up costing 110 billion euros, does that mean that a full blown bailout of Europe will be over $5 trillion? Surely this is a bargain compared to the $20+ trillion that the rescue of the US ended up costing. Looks like a slam dunk relative default pair trade to us.

Who needs Conan when you have G-Pap: “We are shaping a truly new patriotism, which means that we change practices and conceptions. We are to highlight whatever best Greece and Hellenism has: ‘meraki’ (dedication to effort), ‘filotimo’, (sense of duty) solidarity, humaneness, hospitality, uprightness, imagination,creativity, alacrity of wit needed for productivity. This is our Greece of values." And the punchline - we are right, the markets are wrong: "We have been able to convince our partners that the problem of Greece is not solely our problem. It also concerns the functioning of the markets." Them must be some very smart partners.

Does anyone have a problem with the attached chart? Ignore for a second the sheer lunacy of anyone who thinks that the Greek government can grow GDP and decline the budget deficit in a straight line now that the country will see crippling strikes and rolling riots (not to mention blackouts) on a daily basis. But do note the black line, which shows the projected Debt/GDP ratio for the country as part of the bailout package. In essence Greece will go from having "only" a 133% Debt/GDP ratio to an insane 149% in 2013 before presumably dropping to 144% lower in 2014, still a good 11% higher than currently. Greece just got bailed out so it can get into even more debt! What psychopath of the Keynesian school thinks that this unbelievable trajectory is anything but a complete and utter waste of money? German, and US taxpayers, are merely giving Greece money so it can increase it debtor status with French and a few other European banks.To say that this is a viable solution is something that only those who bow at the altar of Alan Greenspan can do.

Our current market is also not driven by typical business growth. Yes, the percent returns
of fundamental valuations are up from last year’s very deep trough, but still far shy of past years
and the levels needed to support employment growth. (The Fed is not keeping rates low for
entertainment purposes.)
The gorilla in the room is the Federal Reserve. We all know this cyclical bull market is
liquidity driven. The unprecedented level of U.S. and global liquidity pumped into the economy
make this cyclical bull market “different” than the bull markets that ended in 1929, 1968, 1987,
2000 or even 2007. As the dissenting FOMC Governor Thomas Hoenig is trying to warn,
somehow somewhere, excess liquidity always finds its way into the markets. We have seen this in
Japan since 1993 as each cyclical bull market is fueled by a new round of quantitative easing, then
comes to an abrupt halt. The same can said for China’s Shanghai Index, which advanced 108%
from October ’08 to August ’09.

Movie Gallery's Chapter 22 just turned into a 7. The WSJ reports that the firm has decided to shutter all of its 2,415 stores and liquidate completely. Previously, the bankrupt movie rental chain had hoped to continue operating with a trimmed down asset base, and close just half of its stores. Alas, the melting of the icecube could not be stopped. This is nonetheless good news for liquidating advisor Gordon Brothers which just saw its bill double. As for main competitor Blockbuster, which itself is on the verge of bankruptcy (yes, those still do occur in the US, but the business must be really atrocious plus have no unionized workers anywhere within 50 miles of its operations), it is unclear whether the liquidation of Movie Gallery will be beneficial or merely too late. Tangentially, businesses all over America and the world which otherwise would benefit from the bankruptcy of their weaker competitors and flourish, are suffering just as much, courtesy of the no-risk/no-failure doctrine recently instituted by the administration, which has made Survival of the Fittest irrelevant.

Since we feel there is little need to post on the Greek "update" as we don't believe anything new has happened or anything has been resovled, we will instead provide that from Goldman's Erik Nielsen: "With the May liquidity crisis now practically dealt with, here are the risks for the rest of 2010 and 2011 (and beyond) as I see them: (1) Implementation of the program in the face of a social unrest; (2) the likely need for further adjustments when/if GDP doesn’t respond as expected; and (3) European approval of the second phase of their part of the package (which will emerge in their fiscal bills for the next two years.)"

Zero Hedge will not report on any of today's so-called Greece bailout news, because a) this is not news and b) Greece will still go bankrupt. According to latest polls, 53% of Germans oppose the bailout, with just 39% approving it. Guess what - same thing in Greece: per Reuters, "Opinion polls show the public opposes the measures and more than half of those asked in a recent survey said they would join protests against them." In other news, Greece has just expressed its appreciation of bankers and the European Commission, who as of noon today run the country, by blowing up an Athens HSBC branch.

"CNBC's house blowhard, Charlie Gasparino, laughed at the "securities fraud" line, saying, "Try proving that one." The Atlantic's online Randian cyber-shill, Megan McArdle, said Rolling Stone had "absurdly" accused Goldman of committing a crime, arguing that "Goldman's customers for CDOs are not little grannies who think a bond coupon is what you use to buy denture glue." Former Wall Street Journal reporter Heidi Moore hilariously pointed out that Goldman wasn't the only one betting against the housing market, citing the short-selling success of – you guessed it – John Paulson as evidence that Goldman shouldn't be singled out.

The truth is that what Goldman is alleged to have done in this SEC case is even worse than what all these assholes laughed at us for talking about last year." Matt Taibbi

The past few weeks I have been talking about the SP500 forming a top similar to the January top we saw earlier this year. Well the charts below show exactly what I have been waiting for to unfold and I think the time has come for the market to take a healthy breather before continuing this strong bull market which could last another 12 -24 months before really topping out.

As we were perusing the just declassified full 2004 FOMC transcripts, our attention was caught by two specific things in the December 14 uber-grouthink session. First, the original housing prophet is not Hoenig, not Lacker, and certainly no other Fed member: it is former Atlanta Fed president Jack Guynn, who prudently got out of dodge on October 1, 2006. Guynn was the first to point out, in the long ago days of 2004, that Fed policy could be leading to a massive housing bubble. Good thing the Maestro was more concerned about his misplaced dentures than to listen to voices of reason at the Eccles building. Yet speaking of the Maestro, we catch an amusing anecdote, in which it becomes obvious that none other than the Fed Chairman looks at the CFTC's Commitment of Traders reports to get an indication as to what may or may not happen to the relative strength of the dollar. When one considers this fact, and juxtaposes it with observation that the Fed runs the formerly free world, does it imminently follow that the people in charge are not brilliantly scheming and conspiratorial, but merely very, very, very dumb?

A few days after the economists have had some time to digest the latest GDP numbers, the results are coming in, and they aren't pretty... And to Obama's chagrin they aren't going to get any better. The end of the stimulus "sugar high" is approaching, and most likely will culminate with the mid-term elections: the attached piece by BofA only solidifies this observation. Bank of America, after Goldman, is now the latest major bailed out bank to join the bandwagon decrying US fiscal insanity (oddly enough, few have much to say about the lunatics in charge of monetary matters). And that's just for the medium-term. Speaking of lunatics, for those curious about the long-term, who can summarize it better than the Oracle of Constitution Avenue himself: "Unfortunately, we cannot grow our way out of this problem. No credible forecast suggests that future rates of growth of the US economy will be sufficient to close these deficits without significant changes to our fiscal policies." - none other than B.S. Bernanke. Furthermore, this is the real problem, forget all about G-Pap reelection chances (none to negative): Greece is just a pleasant distraction compared to what would happen if the US can't roll $700 billion in short-term debt each month.

Soon appearing on the Bernie Madoff Book to the Month club.