Archive - Jul 2010 - Story

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 22/07/10

Here in Paris, the stores on avenue Matignon and rue du Faubourg Saint-Honoré are packed and long lines snake into the Louvre and other museums – the summer is wonderful. And in London and New York, as well as the Côte d'Azur and the Hamptons, it is just the same, as those with money and credit leave their worries behind. It’s hard to believe that the world isn’t in great shape. As a bear, sometimes I even feel guilty for harboring negative thoughts and raining on the triumphal parade of the ruling classes. The wealthy centers of the European and American capital cities do look better and better every year, but the business and editorial pages of the leading papers tell another story. The financial picture is deteriorating at an accelerating pace, and now even the major governments, bulwarks of the free market system, are threatening to slide into trouble. The latest phase of this has been the creation of large amounts of high powered money, issued to benefit and support crucial financial actors within the system. Finding a home for this excess liquidity has resulted in a continuing series of bubbles, large and small (one of which is the beautifully renovated monumental buildings in central Paris).

- John Taylor, FX Concepts

Another week has passed, and it is time for the US to issue another $100+ billion in coupons. The US Treasury has just announced next week's bond issuance calendar, this time 2s, 5s and 7s. This has nothing to do with the weekly issuance in hundreds of billions in Bills: already this month we have redeemed over $400 billion in short-term debt. (And, for purists, it is indeed not a monthly but a bi-weekly event: the US still continues to issue about $200 billion in coupon debt each month).

• July 27 - $38 Billion 2 Year Bonds
• July 28 - $37 Billion 5 Year Bonds
• Jul 29 - $27 Billion 7 Year Bonds

Luckily, Bernanke is on TV preaching hopeful signs, and a faith in the almighty printer, and he will make sure this latest indication of just how very much under control the US budget deficit is, proceeds without a glitch.

Actually, the quote was in the "unlikley" case of spillover from European debt crisis. Even the Chairmesiter has a sense of humor. But the meaning is clear. We are on the verge: a few more negative data points (guaranteed), and/or just a month before all of PIIGSy Europe gets back from vacation (around August 15), realizes it still has no pensions, bonuses and 14th monthly salary, and proceeds to storm various parliaments, and the Fed will be back, baby.

The debate over inflation and deflation has just hit a spread of almost 10%, with deflation (10 Year Yields) barely budging from near record lows, while inflation (stocks) are at a level last seen when the 10 Year was at 3.25%. In other words, one is right and one is wrong, with the convergence between the two now at almost record levels of around 9%. At this point the markets can continue diverging as 10 Year yields drop even as stocks do their irrelevant thing, or, at some point, the correlation desks can get their act together and realize that this spread makes no sense and unlike a Schrodinger Thought Experiment, you can't live in a world in which assets predict both inflation and deflation at the same time. Perhaps all it takes is for some person with a dose of common sense to "observe" this discrepancy and collapse the wave function of the insanity that our market has become. The snap back will be violent.

One of the most conveniently ignored data points from today's NAR report, is that the inventory of existing homes available for sale rose to 3.99 million, representing an 8.9 month supply at the current sales pace. This is up from 8.3 months in May, and is the worst number since August 2009, when it was at 9.2 months. Of course, if one adds the shadow housing inventory estimated by Morgan Stanely at around 5 million, and we get shadow inventory of just under two years. Obviously this is deflationary as it kills the pricing power of any household trying to sell their home. And in other news, the market now spikes on deflation concerns.

The acrobatics in the gold market resume, with ongoing jagged moves in spot indicative not of normal buying or selling but far more fundamentally wrong with the market itself. Gold just jumped $12 in the span of minutes, on what appears to be "reverse liquidation." This is happening as Bernanke notes he is sticking with Keynes and thinks a return to the gold standard would be a mistake. And a quick snapshot of the market where implied correlation is once again approaching unity, and everything is trading on the back of everything else. And a quick snapshot of the market where implied correlation is once again approaching unity, and everything is trading on the back of everything else. Apparently the catalyst was a "better than expected" existing home sales number, which came at 5.37MM on expectations of 5.1MM, still a material decline from the prior 5.66MM but the first piece of good news out of the past 18. Of course, the fact that ever more houses are being "sold" at distressed prices and that banks may finally be rotating the shadow inventory is completely lost on binary speculators. So the market thesis now is we may just have a slow down in the double dip based on accelerating job losses (see today's initial claims for the ignored data).

Same prepared remarks, different audience, identical theater. Watch the full thing live and commercial free here (CSPAN).

As long as OI continues to decrease, look to fade rallies. When you see the market sell off and OI go up, then shorts are getting in, and that should put you on alert for a possible bottom coming, but not a buy signal. The buy signal comes when OI turns upward in a rally, then selling rallies is not advised, as weak hands are out and fresh longs are coming.

"The current positives for investors include moderate valuations, rising corporate earnings and the likelihood we’re already in a recovery. On the other hand, I continue to feel consumers are too traumatized to resume spending strongly, and I see unpleasant and rarely contemplated long-term possibilities including those discussed above. In particular, conservatism, austerity and increased savings are good for economic units individually but bad for a stagnant overall economy. Bottom line: anyone who invests today in a pro-risk fashion out of belief in the recovery must be confident he’ll be agile enough to take profits before the long-term realities set in." - Howard Marks, Oaktree

• Every bankrupt bank prepares to pass the Stress Farce, latest one: Bank of Ireland, Allied Irish Said to Pass EU's Stress Tests (Bloomberg)
• The tax tsunami on the horizon (IBD)
• Merkel hails "robust" German recovery (FT)
• BOJ Official Voices Caution on Yen (WSJ)
• British economy set for triple whammy, admits Bank chief (Independent)
• IMF Sees Euro-Zone Debt Hobbling Growth (WSJ)
• Bernanke's Fed exit door now swings two ways (Bloomberg)
• EU Banks May Disclose Sovereign-Debt Holdings With Stress Tests (Bloomberg)

And some were skeptical that bankrupt continents could not put up industrial numbers that beat every single expectation.... And if you thought these numbers are amazing, just wait until the next 5 Year Plan is implemented.

• Euro-Zone PMI Composite 56.7 higher than expected Consensus 55.5 Previous 56.
• Euro-Zone PMI Manufacturing 56.5 higher than expected Consensus 55.1 Previous 55.6.
• Euro-Zone PMI Services 56.0 higher than expected Consensus 55.0 Previous 55.5.
• Euro-Zone Industrial New Orders SA for May 3.80% m/m 22.70% y/y
  higher than expected Consensus -0.10% m/m 20.00% y/y Previous 0.60% m/m
  21.90% y/y (Revised from 0.90% m/m 22.10% y/y).
• Germany PMI Manufacturing 61.2 higher than expected Consensus 58.0 Previous 58.4.
• Germany PMI Services 57.3 higher than expected Consensus 54.5 Previous 54.8.
• France Business Confidence Indicator for July 98 higher than expected Consensus 94 Previous 96 (Revised from 95).
• France Own-Company Production Outlook for July -9 lower than expected Consensus -7 Previous -7.
• France Production Outlook Indicator for July -2 higher than expected Consensus -6 Previous -4.

etc.

And now, another cold shower for chasers of unemployment inflection points: last week's jobless claims came at 464k, worse than consensus of 445k, and an increase of 37k from a previously revised 427k (down from 429k). More notably, those collecting Emergency Unemployment Claims plunged by 404k in the week ended July 3 as over a million people have now lost their extended insurance premiums. Yet with futures completely ignoring this data, at this point the market is once again caught in a self-fulfilling momentum driven feeding frenzy in which bad news are ignored and one or two positive straws are latched on with vice like precision. In the meantime the 10Y at 2.90 is once again completely disconnected with the giddy reality that stocks are attempting to portray. With bonds pricing in full blown deflation, while stocks hanging on to inflationary hopes, one or the other will very soon have to be proven wrong.

Yields on Hungary 12 Month Bills surged in the just completed Bill auction, jumping to 5.75%, or by 32 bps, since the last auction two weeks. This is just tight of what Greece would likely have to pay for a comparable maturity. Investors were focused on this deal as it was the first issuance by the troubled country since the breakdown in IMF relations over the weekend, leaving the country in the liquidity cold and without a €25 billion lifeline. Surely, European investors are far more transfixed by backward looking industrial production numbers that served to feed the massive surge in Chinese imports over the past month (not to be repeated for a while), and totally ignoring the continuously deteriorating liquidity situation in their continent (Eur LIBOR just hit a fresh year high). And speaking of China, it was announced by the European Trade Commissioner (proudly at that), that China's SAFE had been accumulating bonds of bankrupt Greece and semi-bankrupt Spain, purchasing several hundred million in ECB-backstopped paper of the two countries. Just like SAFE ran home to its communist parents, asking for rescue capital after its US investments blew up in May, so this too will serve as a preamble to comparable self-punishment.

• Asian shares lower after U.S. losses; stronger yen hits Tokyo.
• Bank failures could be key to European Union's stress test success.
• Bernanke signalled that no moves were imminent to bolster the economic recovery.
• China shares rise for 4th day, led by real estate and metals.
• Dubai World to meet with its lenders to win approval for its $23.5B restructuring plan.
• Financial Overhaul is law, now comes battle over its rules.
• IMF calls for more ‘stress-test’ openness; unconvinced by stringency criteria.