Archive - Jul 12, 2010 - Story

The US government is another $35 billion in the debt sink hole. The cost of this marginal addition to our existing debt load ($10 trillion? $100 trillion? who cares) was just 1.055%, which was gobbled up briskly at a 3.20 Bid To Cover. The bulk of the buying came from Primary Dealers who took down the highest portion of the auction, or 45.1%, since May of 2009, when PDs were responsible for 56.6% of the takedown. Indirect bidders, coming in at 40.6%, was the lowest indirect take down since January, when they were responsible for just 38%. The balance of 14.3% was left to the Direct Bidders. The Bid To Cover at 3.20 came in well above the LTM average of 3.03%.

The traditional hot bed of haute couture and fashion retail is experiencing an unprecedented plunge in end demand as Italy, absent trillions in fiscal and monetary stimulus boosts, has become a prime example of what US retail would look like absent the generosity of the government and the Fed. According to this Bloomberg TV report, "sales are worse than last year and business is getting worse and worse. The situation is not good." Summer sales revenues are expected to be down 5% across the board. Another factor blamed for poor sales: the weak performance by the Italian football team, and the resultant glut of jerseys. And when Prada and Gucci are seen offering extra discounts just to get shoppers into the stores, the whole concept of ultrapremium retail goes out of the window, putting the "aspirational shopper" paradigm on hold.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 12/07/10

Some market views from Minyanville:"On July 1 when the market was down over 300 points and it felt like the world was just about to end, we put out the following alert: Taking Profits in Inverse ETF Positions in which we closed our inverse ETF positions. The Dow Jones Industrial Average has rallied almost 600 points in just seven trading days since that call. The inverse ETFs that we covered for substantial profits had a powerful reversal just as warned. In that alert we also wrote the following: “The market is getting very oversold and the risk is high being long or short right here. On 5/6/10 the market looked like it was ready to collapse. We then had a powerful rally off the “Flash Crash” lows. The markets then made a new low on 5/25/10 before staging another rally. On 6/8/10 the market made another new low and looked like it was about to collapse but once again staged a powerful rally. Each time the market looked like it was about to fall off a cliff, it had some outside force help it rally." Well, that big rally is happening now because once again a powerful “outside force” intervened to stop prices from collapsing. Folks, these aren't natural, free-flowing markets we're dealing with here. If they were, then the market would more than likely have crashed to the July 2009 lows by now."

Following up on our earlier observations on the Spiegel article about Germany change in posture vis-a-vis the European Stability Fund, here are some additional summary thoughts from Thermidor.

In our base case, we project the general government gross and net debt burdens to continue on an upward trend toward 90% and 85% of GDP, respectively, in 2014. A sustained increase in the general government debt burden above these already relatively high levels, would, in our view, reduce the government's capacity to respond to future shocks and increasingly weigh upon the economy's growth potential. We therefore believe such an increase in the debt burden above our base case would be incompatible with a 'AAA' rating.

In a rare dose of realism, Reuters reports that the BOE's Monetary Policy Committee member Adam Posen said there is a distinct chance the UK economy could slip back into a recession. Not surprisingly, the BOE member said eurozone public sector cuts would add as a drag on the UK economy. He also added that he hopes the recovery would continue but it can not be guaranteed. As the BOE has demonstrated no problems in the past with activating money printing QE episodes, is this merely a preamble to yet another round of English quantitative easing? As was pointed out on Zero Hedge over the weekend, recent changes in excess reserves in the US have provided the implicit benefit of nearly $200 billion in new Fed money entering the pursuit of risky assets, and everyone knows that the ECB is now on crash course with Germany over its own most recent monetization regime. It should thus come as no surprise that the UK feels alone and will likely do all it can to pursue the same currency devaluation techniques that seem to be prevalent across the globe, and not be left too far behind.

The big news out of Europe this morning, and the reason for the drag on the euro is an article in Der Spiegel, "Merkel's rules for bankruptcy" according to which Germany is now actively (and very secretly) pushing for a plan outlining a set of insolvency rules, which would require that private investors bear a portion of the rescue burden, and much more importantly, would see at least a partial give up in state sovereignty, where a new insolvency trustee (the "Berlin Club", which we fail to see at least for now, how it differs from the Paris Club) would take implicit control over and override a default nation's treasury, in essence pushing the bankrupt country into a form of Feudal vassal state-cum-reparations subservience. Welcome to financial warfare in the post-globalization period.

Stocks are once again doing their own thing, detached not only from credit, but also from FX. The early ramps in stocks on little volume which is the HFT Monday morning pattern we have all grown to love and expect, saw no validation in either bond spreads or the carry trade. In fact, stocks have decoupled from the AUDJPY by as much as 8 points early on. As usual, there is nothing in the factual arena to validate this kind of move. Incidentally, there is now scientific evidence that validates the fact that HFTs distort markets. We will post on it shortly, although anyone who have been trading stocks over the past year is more than aware of this.

With the imminent launch of the Q2 earnings season, below is a summary of consensus for year-over-year top and bottom line performance. In summary, the outlook is for a 12% pick up in top line YoY (ex fins), and pretty much staying flat at that level of outperformance for the next 2 quarters, and for a 41% rise in EPS compared to Q2 of 2009 per Bloomberg consensus estimates. For those looking for further granularity, David Rosenberg presents a detailed break down sector by sector, and warns of the risks to betting it all on the earnings parade, even as analysts are once again at near all time record bullishness on stocks.As a reminder, the consensus view is for a 2010 absolute EPS of 82, and for a simply ridiculous all time record 96 in 2011, higher than the 88 seen all the all time high three years ago, when the economy had the benefit of a multi-trillion shadow credit system. Who knows, maybe the Fed can take over that full responsibility as well.

Gold gained some ground Friday, opening at 1198.5 and closing at 1209.8, its highest close of the week. The trend seems to be reversing this morning however, as it is down slightly this morning. Also, Part 3 of the Gold/ Comex Arb - The EFP and Pot-Odds

• Kan election loss may impede effort to cut debt (Bloomberg)
• Chinese Dagong credit rater gives China higher credit rating (AA+, stable) than US (AA, neg outlook) (BusinessWeek)
• Staring into the abyss (Economist)
• Bank profits depend on debt-writedown abomination (Bloomberg)
• Niall Ferguson: "A US debt crisis is on its way" (TechTicker)
• If BP asset purchase rumors are true, Apache is about to incur a whole lot of extra debt (Bloomberg, WSJ)
• Housing gets sick on Keynesian rollercoaster (Bloomberg)

Don't panic - the fact that capesize operators are on the verge of losing money on charters and facing bankruptcy is irrelevant: China just announced the biggest export balance with the US on record. And that very credible number must surely mean all is good, and trade by Pacific Ocean rail is surging. In the meantime, the BDIY dropped 3.3% to 1840 from 1902, a 32nd sequential decline and a the longest drop in 9 years.

• Australian home-loan approvals climbed in May, first gain in eight months
• Bank of Korea raises country's 2010 growth forecast to 5.9%.
• Big election losses could hinder Japan ruling party attempts to revive economy.
• China shares rise led by banks and property developers.
• Euro falls below $1.26 in morning European trading; pound also lower.
• Frankfurt airport passenger numbers up 7 percent on year in June, 1.4 percent in 1st half.
• French President Sarkozy to go on national television amid scandal involving L'Oreal cosmetics.
• Taiwan Central Bank seeks to curb housing speculation as prices surge 20%
• Oil falls to near $75 in Asia.
• Yen weakens against Euro on Japan elections; Asian exporter stocks advance.

Two more European auctions have closed at terms that show continued deterioration in sovereign demand conditions. Earlier, Italy auctioned off €7.5 billion in one year BOT (bills) at a yield of 1.399% and a 1.659 bid to cover. This compares to the precious auction that closed at 1.377% and a 2.359 BTC. Elsewhere, the German government had to retain 15%, or €807 million, of a €5 billion 6 month bubill issue to "sell" as much as had been hoped for. The issue came at a 1.9 bid to cover, excluding the government retention, compared to 2.2 previously, and had to double the yield on the issue from 0.1923% to 0.4226%. Of the €2.153 billion in non-competitive bids were obviously accepted 100%, it is the non-competitive ones that were problematic. It was the 5.765 of competitives that were an issue: just 2 billion of the competitive bids were found to be "acceptable" to the government, meaning €2.8 billion offered rates far too high to be accepted. Is the German curve starting to bear flatten as well?