Archive - Jul 2010 - Story

After a 0.5% decline overnight, the BDIY is now at exactly 1,700, marking the longest sequential decline since the launch of Windows 95. Little to add here. We anticipate that Tim Geithner will soon suggest stress tests to be conducted on dry bulk shipping vessels to the 5 or so Greek CEOs running the industry, with bailouts to come for those leaked to be in need for financing.

The just completed auction of Spanish 2025 Obligacions for just under €3 billion, came at a 5.116% yield, a substantially worse level than the last auction as of April 22, which was placed at 4.434%. The only redeeming feature was that the bid to cover increased from the prior 1.79 to 2.575, after €7.722 billion worth of bids noted an interest. Somehow we get the feeling the ECB has been busy this time around, as have been the Chinese, which were instrumental in last week's 10 Year auction. According to Market News, "Spain is "very confident" it will meet its forthcoming July redemption payments, given its cash position at the Bank of Spain." Furthermore, tax receipts are running in line with expectations, adding to the positive feeling. This is all wonderful, and occurs on the back of a just released Barclays report which (to be posted shortly), which notes that Spanish Cajas alone will likely require €36.2 billion euros to plug a capital shortfall. Luckily the ECB and China are more than happy to keep providing the funds necessary to plug this hole, which upon third, fourth and fifth reestimations will likely end up being one zero short of the true capital deficiency.

• Asia stocks, commodities decline as China growth slows, Fed cuts outlook.
• Back-to-school spending may rise as much as 16% in US - Natl Retail Federation.
• BOJ says Japan's growth will slow next year, keeps benchmark rate at 0.1%.
• China’s stocks dropped, after GDP growth eases to 11.1% in first half from year earlier.
• China’s June crude-oil processing rose at the most gradual pace in eight months.
• FDIC accuses 4 former executives of failed IndyMac of negligence in making loans.
• IMF sees Irish deflation through 2011; predicts a 1.8% fall in prices in 2010, a 0.5% fall next.

RANsquawk European Morning Briefing - Stocks, Bonds, FX -- 15/07/10

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 15/07/10

Tsy/equity diverging... bank earnings on deck... and a suspect rally meeting formidable 50 & 200DMA resistance. Time to turn the old risk off.

China just announced that its Q2 GDP came in at 10.3%, just below a consensus estimate of 10.5%. Surprisingly, for some odd reason the market seems to believe this "data." Although in retrospect, based on China's bottom up GDP goalseeking, the number, which we will show in a second is completely irrelevant, could very easily be true, based on two just announced stunners about the Chinese economy. The first comes from Fitch, which in a report released today titled Informal Securitisation Increasingly Distorting Credit Data, uncovers that China has in fact been massively underrepresenting the actual amount of new loans in the first half of 2010, courtesy of precisely the kinds of securitization deals that blew up half of our own banking system: "Adjusted for informal securitisation activity, Fitch estimates that the net amount of new CNY loans extended in H110 was closer to CNY5.9trn, or 28% above the official figure of CNY4.6trn...on a flow basis the volume of credit being shifted off balance sheets in recent times has been large and rising. Activity also is largely concentrated among just a few dozen banks, and institution-specific exposure is often much higher." And some are wondering why China's AgBank was scrambling to raise $20 billion via a hurried IPO... Yet this data pales in comparison with disclosure from a recent article in South China Morning Post, in which an economist at the Chinese Academy of Social Sciences noted estimates from electricity meter readings that there are about 64.5 million empty apartments and houses in urban areas of the country! This number is five times larger than the roughly 12 million in total US public (3.89 million) and shadow (8 million as estimated by Morgan Stanley) home inventory available currently. Forget Stephen Roach - China is covertly funding and creating a housing bubble that is at least 5 times as big as that of the United States. We leave it up to you to imagine the consequences of that particular bubble's bursting...

In his latest must read letter, John Taylor picks up where Goldman left off a few days ago, and follows up on the implications of Keynes' savings paradox, which as explained by Goldman, and now by Taylor, has to do with the fact that with the entire world entering an austerity phase and thus cutting off public sources of capital to offset private sector contraction and deleveraging (as per the Current Account equality), the slowdown in economic growth is virtually assured. It also explains why companies are hording cash. The result is a massive schism in perceptions between micro and macro analysts: "the result is that
the vast majority of the analysts that examine individual companies are
bullish and almost all of the macro analysts are bearish, many like us,
and dramatically so." Further adding to the dire macro picture, "because nominal GDP is growing more slowly than the outstanding national
debt is compounding, it is becoming a more oppressive weight on the
“non-S&P” economy, tightening the financial position of small
businesses and the consumer." Which leads Taylor to this simplistic and spot on conclusion: "if consumers build up their savings, we know what happens to retail
sales and the GDP. On top of this the money multiplier comes into play.
With the global banking system suffering under an extremely high load of
worthless assets – whether recognized or not – and being forced to
improve their capital allocation for risk by the Basel II and Basel III
rules, banks must cut back the amount of credit that they make available
to the economy. The multiplier will force global economies to shrink in
the years ahead. Cash is now king, worthless or not, so buy dollars." Brief, succinct and 100% spot on analysis.

In an interview on Tom Keene's Bloomberg radioshow today, Nouriel Roubini said Obama has to stop treating Americans as spoiled children and to finally be truthful about the state of the American economy. “We have to recognize that Americans are adults. Then we have
to speak to them straightforward about the risks and challenges that we
have, rather than kicking the can down the road.” While we wholeheartedly agree that Obama needs to stop not only with his daily teleprompter appearances, but for once to be frank and to strip away the perpetual layer of green shoot propaganda (Americans realize how bad it is - they merely grow to loathe the president even more when they hear and see him lie day after day about the "improvements" in the economy), we are puzzled by what Roubini says next, which is that Obama has to continue with precisely the same type of stimulus spending policies, be they fiscal or monetary, that got the US to the current unsustainable level. Roubini says Obama should stop kicking the can down the road, when he advocates doing just that - in essence he is saying don't talk to Americans like children, but certainly treat them as such. As for the weening them off the massive Keynesian teat - well, that can wait... indefinitely.

In this surprisingly candid and objective JPMorgan report, which looks at the consequences of the Flash Crash, the author shares his opinion on the five positive outcomes to arise from the flash crash (including stock specific circuit breakers, bringing more balance to the HFT discussion, proposal requiring HFTs to at more like the floor specialists they are replacing, discussion about "co-locations" and that cheapest does not mean best) while concluding that "the HFT industry may have gotten ahead of anyone’s ability to understand and monitor its capabilities and consequences" and may have resulted in a more fragmented  marketplace in which liquidity is temporal, and in less incentive to display limit orders or contribute capital to market-making. Yet the most glaring observation is that investor confidence, already at unprecedentedly low levels, has plunged as a result of the flash crash. Over the past year we have repeatedly disclosed who the culprits for this condition are, yet the SEC, in its perpetual pandering to future private sector employers once again proves that its mission statement, which claims that "its duty is to uphold the interests of long-term investors" is a bold faced lie, and until resolute steps are taken to curb the daily manipulation and outright marauding by various binary pirates and algorithmic kleptos, we suggest that the SEC's budget be cut to $0 as the agency continues to perform none of its chartered duties.

One wonders how many Ph.D. were consulted in the preparation of this report. Yet aside from the glaringly obvious, there are some other interesting observations. "An Israeli attack on Iran would be the start of a protracted conflict that would be unlikely to prevent the eventual acquisition of nuclear weapons by Iran and might even encourage it. Long-range strike aircraft acquired from the United States, combined with an improved fleet of tanker aircraft, the deployment of long-range drones and the probable availability of support facilities in northeast Iraq and Azerbaijan, all increase Israel's potential for action against Iran." According to the report, it might take three to seven years for Iran to develop a small arsenal of nuclear weapons if it decided to do so. Also, the report wisely states that an Israeli strike would be focused not only on destroying nuclear and missile targets but would also hit factories and research centers and even university laboratories to damage Iranian expertise. Shockingly, this would cause many civilian casualties. Oxford believes Iran's retaliation would include withdrawing from the nuclear Non-Proliferation Treaty and the production of nuclear weapons to deter further attacks. Other recourse would include missile attacks on Israel, closing the Strait of Hormuz to push up oil prices and paramilitary or missile attacks on Western oil facilities in the Gulf. Fun bedside reading.

The Editor-in-Chief of the otherwise quiet and non-descript Global Custodian magazine has written what can pass for an extremely controversial if not outright revolutionary essay on the topic of democracy, and specifically how our current regime has cannibalized itself, and is in dire need of a "revolution." Dominic Hobson says: "In a market, the cumulative expenditure of the modestly endowed easily trumps the expenditure of the rick. And even the rich are ultimately answerable to the market: They became rich by satisfying customers, and will remain rich only so long as they (or their investments) continue to satisfy consumers. Consumer sovereignty is far more powerful a constraint on the rich than political sovereignty. Indeed, even the erosion of the rich by democracy is ultimately self-defeating, for it eliminates that class of men and women in public life who are under no financial pressure to remain at their posts, pursuing policies in which they no longer believe. It is no coincidence that the democratization of politics has been accompanied by a decline in resignations on points of principle or of honor. The vast majority of modern politicians simply needs the money. But even the restoration of a rentier political class would not be enough to restore the blessings of good government. As long as politicians must compete for votes, they cannot govern honestly, or even disinterestedly. They cannot reverse decisions or policies that have proved unworkable. They must persist, even in intellectual error, and cannot escape a certain narrowness of vision. To release politicians from this predicament, a revolution is required. That revolution must be one not of blood, but of constitutional and political ideas. It must put an end to democracy without limits, before the prosperity of the species is destroyed and liberty extinguished...The only lasting solution to the plague of unlimited democracy is to attack democracy at its moral foundation: the political equality of the citizen." Well, the Greeks seem to have been wrong about a whole lot of other things. Is it so alien to ponder whether they also screwed up the most taken for granted concept of modern society as well?

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 14/07/10

It was only yesterday that Britain's societies of accountants and economists disturbed 5 o'clock tea, saying that - according to their calculations - the Empire's public net debts of £2 Trillion were more than double the official figure. This was a bad guess. It is £4 Trillion or again double that overnight. It appears Dagong's "AA-" rating is closer to the reality than the "AAA" given by Western rating agencies, who have so far only cautioned a downgrade in the distant future for the UK. But it still escapes my understanding how 3 major bodies can differ so widely on the key figure of these times: total government debt.

Jim Grant, one of the most respected voices in the financial industry, joins Zero Hedge and others, who see that the only choice the Federal Reserve has now that the temporary and shallow reprieve from the clutches of the deflationary depression is over, is to print more money in the form of another iteration of QE. Whether this will be another $2.5 trillion, like last time, which was the price of an 18 month delay of the inevitable, or a $5 trillion concerted global effort, as Ambrose Evans-Pritchard believes, is irrelevant: the only option the central printers, pardon, bankers, have left is to flood the market with yet more worthless paper (keep an eye out on the doubling in the price of gold the second QE2 is publicly announced, which will also double as the obituary for all fiat paper). In an interview with Bloomberg TV, Grant says that the first order of business tomorrow when the Fed's new additions officially join their new groupthink perpetuating employer will be "to try once more to print enough dollars to make something happen in the U.S. economy.” The ever-sarcastic Grant manages to completely skewer Janet Yellen, Steve Diamond and Sarah Bloom Raskin, to ridicule the Fed's 100% track record of not only focusing on the wrong thing time after time, but getting the response consistently wrong with 100% precision, and also manages to makes fun of the Fed's credentialed WSJ lackeys, who courtesy of the Fed's "editorial" control over the reporting process, get a direct line into leakable Fed strategy.