Archive - Jul 20, 2010 - Story

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 20/07/10

The WSJ's Greg Zuckerman has published a Q&A with one of the world's biggest deflationists (who nonetheless admits that once QE 2 begins all bets are off): David Rosenberg. Here is how Rosie sees the world of finance over next 2 years, and provdes more color on his currently favorite investment strategy (aside from bonds): SIRP (Safety and Income at a Reasonable Price... and in keeping with acronyms RIP GARP).

In June, 20 states posted a (seasonally adjusted) unemployment rate greater than the US average. At 14.2% Nevada was once again the state with most idle hands (excluding Puerto Rico, which since the earthquake nobody cares about anyway). Michigan is second at 13.2% as those unemployed for 20 years or longer (the vast majority of the population) are now presumed to be dead, thus causing a downward inflection point and a major improvement in the state's economic perspectives. California, Rhode Island and Florida rounded out the top 5 states. Yet the gimmickry at the Federal level is making the state picture better as well: in reality the main reason for the improvement on a state by state level is the decline in the labor force, so even as the unemployed in California declined by 30k, the labor force contracted as well, by 23k, and, carry the four, the net result was a loss of 27.6k workers. In other words, more data that is gradually becoming completely irrelevant.

Update: Comments from Spain's Salgado taken out of context according to a Spanish official. Appears a caja or two will be sacrificially thrown to the lions after all. The Farce must go on!

• All Spanish banks pass stress tests
• All French banks pass stress tests
• Pretty much all Greek banks pass stress test

HA HA HA

The farce will continue until bullshit flows freely

Not only is economics the must futile, destructive and worthless "science" in the known world, but now it is actually occupying the very limited attention of corrupt congressional critters, who are participating in a hearing titled "Building a Science of Economics for the Real World" (obviously paid by taxpayers). Here is the reason for the hearing: "The Subcommittee on Investigations and Oversight will hold a hearing on July 20, 2010, to examine the promise and limits of modern macroeconomic theory in light of the current economic crisis. The Subcommittee has previously looked at how the global financial meltdown of 2008 may have been caused or abetted by financial risk models, many of which are rooted in the same assumptions upon which today’s mainstream macroeconomic models are based. But the insights of economics, a field that aspires to be a science and for which the National Science Foundation (NSF) is the major funding resource in the Federal government, shape far more than what takes place on Wall Street. Economic analysis is used to inform virtually every aspect of domestic policy. If the generally accepted economic models inclined the Nation’s policy makers to dismiss the notion that a crisis was possible, and then led them toward measures that may have been less than optimal in addressing it, it seems appropriate to ask why the economics profession cannot provide better policy guidance. Further, in an effort to improve the quality of economic science, should the Federal government consider supporting new avenues of research through the NSF?" Since there are no more pressing issues, Congress has to decide on whether or not economics is actually a science. And as the ansdwer is and has always been no, perhaps they could have held this hearing a century ago when the country still had a chance to avoid bankruptcy, ruin and social catastrophe, all facilitated by the false religion of Keynesianism.

Interest in the ECB's weekly 3-'On (Monetization Sterilization Operation) assault on free markets, also known as the Fixed Term Deposit Liquidity Absorption Tender was high, and came at precisely the same level as last week's. €97.2 billion worth of bids were chasing after €60 billion of ECB-regurgitated sovereign bonds, resulting in a 1.6 Bid To Cover, exactly the same as last week, when €98.3 billion of bids were after the same amount of ECB-sterilized worthless Spanish bonds. Of course, in other countries the Ponzi occurs by the ECB accepting collateral from banks which purchase their own sovereign debt. As Reuters reported earlier, 90% of the most recent 26 Week Greek Bill operation was purchased by Greek banks which subsequently received 100 cents on the dollar for each bond from the ECB- if there is a more accurate definition of a pyramid scheme we have yet to hear it. The marginal rate on the Tender came at 0.64% with a 1.00% max rate. The weighted average allotted rate was 0.56%. 88 banks participated in the auction, a slight increased from last week's 85. Elsewhere, demonstrating that real liquidity in Europe is bad and getting worse, 3M EUR Libor rates rose yet again, now well over 0.8% at 0.81125%, the highest since August 26, 2009. The ECB's deposit facility saw a plunge in usage, dropping to just €52.5 billion yesterday, as banks now have to look under the cushions for any and all free euros to allocate. Good luck European Small and Medium Businesses in trying to get a loan.

The biggest surprise in Goldman's Q2 8-K was the firm's disclosure that Trading and Principal Investment revenue plunged by 43.2% sequentially, and 42.4% quarter over quarter. The firm's once unbeatable trading operation is finally showing cracks. If a firm backed by the full faith and credit of the risk free discount window is not showing record trading revenue growth quarter over quarter, what can the rest of us do? One wonders if the firm may have finally started following guidelines on prop from flow information segregation. While the 8-K does not disclose profitable trading day information, we are confident that when released, the 10-Q will demonstrate that this quarter Goldman had at least 10 trading days in which it lost money in the current quarter: a stunner compared to the recent near flawless performance in the past several quarters. Either Goldman's Achilles heel has been exposed or the firm is blowing money on purpose.

Yesterday’s activity was correctly predicted by the option market. Puts finished the day Friday quite bid on the short end, and that spilled over into Monday. Most put buying these days on Comex is a proxy for GLD put buying interest as the ETF has bigger volumes than the future market. This alone should be cause for systemic risk alarm bells. Another example of a derivative trading more than the underlying it tracks. But I digress.

• Pimco sells black swan protection as Wall Street markets fear (Bloomberg)
• Obama urges end to stalemate on benefits (FT)
• Tourre says he relied on Goldman, denies SEC fraud claims (Bloomberg)
• Hungary's IMF revolt augurs ill for Greece (Telegraph)
• Ireland fully funded until Q2 2011 - debt agency (Reuters)
• America's AAA rating cut in land of bubbles (Bloomberg)
• Columbia president to lead New York Fed (WSJ)
• BOJ would consider action at 85-Yen level (WSJ)
• Ferguson: today's Keynesians have learned nothing (FT)
• Case in point from Brad DeLong: It is far too soon to end expansion (FT)
• Fed eyes options for looser monetary policy (FT)

No surprises in the housing starts and permits data, which continued the disappointing recent macroeconomic trend. June starts came in at 549K on expectations of 575K, even as May data was revised down from 593K to 578K. Of course, with roughly 12 million vacant units still to clear out, 8 of which in shadow inventory, it is a little odd this number has not been at zero for about the second year running. Futures, somehow, ramp on this disappointing number.

• Asian stocks gain on outlook for China's economy; Yen weaken.
• Backed by moderate Republicans, Democrats expect to extend jobless benefits.
• China loosens rule on yuan banking in Hong Kong as it promotes currency.
• China needs higher interest rates or stronger yuan to avoid inflation and 'hard landing'.
• Oil hovers below $77 as mixed signs from economy, stock markets extend malaise.
• Optimistic start for Farnborough Air show fuels hope that worst is past for airlines.
• UK June public sector borrowing $22.1B, slightly less than last June.
• Griffon to buy lawn and garden firm Ames True Temper for $542M
• Emirates orders 30 Boeing 777 planes for $9.1B.

Things are so back to normal in Europe that even a country living exclusively on ECB life-support can barely pull off a 3 month Bill auction. The interest on the just auctioned off €1.95 in Bills which had to be completed as else Greece will be officially bankrupt (as opposed to just make believe) with existing bills rolling and no more cash in the Treasury, was a whopping 4.05%, compared to 3.65% in the most recent April 20 auction. Yet despite this ridiculous yielld, the Bid To Cover still declined from 4.61 to 3.85. Also compare this to the 4.65% yield on the 26-Week Bills issued last week, and you get a postcard picture of financial health emanating from the beaches of the Aegean. One thing is certain: Euribor and short-term funding are completely unavailable to any Greek institution.

Just a quick technical update on the S&P future. We had recommended shorting around 1,087 (a touch early) but the market has shaped a very clean bearish impulse from 1,099. Currently we see a target at 1,045 for this move, after which we could see a rebound to 1,070/1,079 before further downward pressure. Our big picture view remains very bearish, but the wave pattern from 1,003 to 1,099 is unclear to me. One could argue we had a bullish impulse from the lows but honestly the wave count is very shaky as the volumeless melt-ups show no participation and act a lot more than a Fixed Income or a FX carry trade than a proper bullish risk appetite impulse. In that sense I picture the move from 1,003 to 1,099 more as a corrective rally, and we would now be in bearish wave 3 of III. If that is the case after seeing 1,045 or slightly lower (1,041.50 is the 61.8% retracement of the bounce up) we could consolidate back up to 1,070 and possibly 1,079 (1,080 should not be bypassed) before accelerating lower. - Nic Lenoir

The day every sane investor has been waiting for is here - today marks the end of the Radioschack LBO rumors. After 3 years, 4 months, 50 days. 8 hours and 44 seconds (give or take) of hourly rumormongering that the increasingly irrelevant electronics retailer was supposed to be bought "any given day now" at a 10x+ EBITDA multiple by each and every PE firm in the universe, and with allegedly intelligent investors falling for it each and every time, it appears the end is here. Incidentally, according to preliminary calculations, a dedicated investor that would have done nothing but short RSH on every rumor spike would have returned about an 80% CAGR over the past 3 years. Couple this with selling RSH CDS and the ROI would have been the highest recorded in human history. From Reuters: "Blackstone Group and TPG Capital are unlikely to continue to pursue a possible bid for RadioShack Corp (RSH.N), two sources familiar with the situation said on Monday. Bain Capital had been interested earlier but is no longer in the auction, sources previously told Reuters." And with this, an entire section of rumor disseminators at the NY Post will suddenly find themselves praying Congress passes the unemployment extension bill later today.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 20/07/10