Archive - Jul 2010 - Story

According to the latest broad poll conducted by Bloomberg, Americans, except for those on Wall Street of course, have never been more pessimistic on the economy, despite the administration's efforts to push stocks to 36,000 by Halloween. In a nutshell, 63% of respondents confirmed things in the nation are headed in the wrong direction, 71% disbelieve Kool Aid pushers and say it still feels like the economy is in a recession, with 13% convinced a double dip is coming, and just 14% who see the economy as being on solid ground. And the result that should be very troubling to the Keynesian fanatics out there, while 70% say reducing the unemployment rate is a key priority, 28% say that reducing the budget deficit should be first and foremost for Washington.

I have often said we can never eliminate risk, only manage it based on what the market is telling us. Our tactical asset allocation is directed towards the active management of risk versus reward in defining how we approach the financial markets. Our focus is to preserve wealth by controlling our exposure to risk assets, based on a number of quantitative and qualitative data points. In my opinion, a buy and hold allocation is a dead decision during markets such as we have now. Asset allocation, in my opinion, is an art involving quantitative analysis of financial markets combined with common sense. One critical factor in our process is finding the “sleeping point,” which I define as that level of risk exposure that allows you to sleep at night. Or, as one of my clients stated recently, “Cliff, I do not want to go back to eating spam.” We are here to make sure your investment process protects against the spam effect. We have had the worst May in stocks since 1940. No credit still equals no jobs. China is destined for turmoil as its real estate market unwinds. The Consumer Confidence Index is down to 52.9 in June from 62.7 in May. Fair value on the S&P for me is 950, which would indicate another 7% decline in stock prices from here. - Cliff Draughn, Excelsia Investment Advisors

The record slaughter of shippers continues as the BDIY posts the largest overnight drop of 4.5% in the most recent 34-consecutive day trounce in dry bulk shipping rates. Short term Capsize and Panamax charters for Pacific delivery have hit $29k and $19k, respectively, both approximately 30% lower than comparable Atlantic delivery rates as the Chinese transit corridor is now massively oversupplied. At this point it is not a question of if but when the bulk of shipping companies, especially levered ones, start going bankrupt and flood the seas with yet more anchored rusting dry bulk hulls.

The deflation threat continues as the drop in total retail sales persists, with the latest number coming in at -0.5%, once again worse than expectations of -0.3%, compared to a prior revised number of -1.1%. Ex autos come in at -0.1%, in line with expectations. The biggest plunge was in "Motor vehicle & parts dealers" which plunged 2.3% in June. From the release: "The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $360.2 billion, a decrease of 0.5 percent (±0.5%) from the previous month, but 4.8 percent (±0.7%) above June 2009. Total sales for the April through June 2010 period were up 6.8 percent (±0.3%) from the same period a year ago. The April to May 2010 percent change was revised from -1.2 percent (±0.5%) to -1.1 percent (±0.2%)."

The attempt to reflate housing seems to be officially dead. The Mortgage Brokers' Association reported that demand for loans to purchase U.S. homes sunk to a 13-year low last week, and refinancing demand also slid despite near record-low mortgage rates. As Reuters noted, "requests for loans to buy homes dropped 3.1 percent in the week ended July 9, after adjusting for the Independence Day holiday, to the lowest level since December 1996, the industry group said....Rock-bottom borrowing costs are helping borrowers with pristine credit to buy and those who still have equity in their homes to refinance." Also, from the MBA release, "the average contract interest rate for 30-year fixed-rate mortgages increased to 4.69 percent from 4.68 percent, with points increasing to 0.96 from 0.86 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The effective rate increased from last week." If even at sub-5% rates potential homeowners are not interested, it will take a whole lot of Intel CPU purchases to reverse the double dip in the economy as consumers refuse to purchase that primary bank balance sheet "asset."

• Asian stocks advance; Samsung climbs on Intel's record revenue.
• Americans in 70% majority see more jobless as deficit widens: Bloomberg Survey.
• Asian stocks advance; Samsung climbs on Intel's record revenue.
• BOJ may hold policy stance on Japan rebound forecast endangered by Europe.
• Fed divided on how aggressively the central bank should act if the economy slows further.
• U.K. consumers became more pessimistic, according to a monthly survey.
• AAR Corp misses by $0.02, reports Q4 EPS of $0.29. Revs rose 0.2% to $372.3M.

As we reported earlier, the June US budget deficit came in around as expected, at $68.4 billion. Yet an interesting observation that we have touched upon previously, is that over the same period, the US borrowed a whopping total of $210.9 billion. Once again, as has been the case over the past four years, the US borrowed far more in any deficit month, then it needed simply to close the deficit. Case in point, the June differential was $142.5 billion more borrowed than "needed", the YTD (fiscal) differential is $290 billion, and the cumulative differential since the beginning of the 2007 Fiscal year (October 2006), is a whopping $1.5 trillion. Over the past 3 years and 9 months, the US has accumulated an incremental $4.7 trillion in new debt, even as the budget deficit has grown by "only" $3.2 trillion. One wonders just what the reason for this differential is, which amounts to half the cumulative budget deficit over the same time period? The cumulative data, as well as the stunning differential between the two time series is presented on the attached chart.

Remember when a week ago the world was slowing down? Apparently all it takes to forget reality is for Europe to sweep the fact that its banks are insolvent under the rug courtesy of a systematic farce conducted by the very system the banks are part of, rendered even more "credible" since as of today it appears no banks will fail the stress test. On the US earnings front, a materials company beating reduced expectations and a chip maker having just record the best quarter in its history (what growth next for Intel: 80% margins? 90%? every household in China buying an i7 980 for their 7th toaster in their 5th house?), even as global trade is paradoxically stalling following an all time record month for Chinese trade? Americans may be unemployed and homeless but they sure like their iPads and their fast PCs. Either way, to remind readers that despite the latest market run up on no actual positive economic data, here is Dominic Wilson, Director of Global Macro & Markets Research at Goldman, with advice to clients on how to navigate the "slowdown."

After he read a book that he didn't understand, David Brooks came up
with another crackpot distortion of capitalism. This time, he finds a
sharp contrast between bankers and hedge fund managers, whom he lumps
together all other business entrepreneurs. In his latest column he writes:

The smooth operators at the big banks were playing with
other people's money, so they borrowed up to 30 times their investors'
capital. The hedge fund guys usually had their own money in their fund,
so they typically borrowed only one or two times their capital. The social butterflies at the banks got swept up in the popular
enthusiasms. The contrarians at the hedge funds made money betting
against them. The well-connected bankers knew they'd get bailed out if
anything went wrong. The solitary hedge fund guys knew they were on
their own and regarded their trades with paranoid anxiety.

Because they weren't playing with other people's money, hedge fund
managers were more careful than the big banks? How fatuous is Brooks'
analysis? Let's count the ways:

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 13/07/10

Broke US states are probing new lows with each passing day, as money continues to stubbornly refuse to grow on trees (unless you have discount window access of course). The latest funding fiasco comes from Texas, which Reuters reports is planning on selling $2 billion in debt just to refill its empty unemployment trust fund. We are confident that bondholders will be ecstatic to put their money into a extremely rapidly amortizing "asset" that will begin depleting from day one and will likely have no collateral recourse in under a year. But after all, it is other people's money, so we are confident this particular Citi/BofA led bond offering will close and price and sub Treasury rates.

At this point there is little one can add or say. Today the marching orders were for an S&P 1,100. And we will get it. One way or another.

Welcome to reverse distribution. The Bid-Offer stack in the ES is telegraphing the intentions of market participants who can't wait to offload positions, yet are doing so in a way that is pushing the market higher: any bid-side interest is occurring via market trades lifting the ES price courtesy of a massive ask-side inventory which however is locked into limit positions and refuses to go VWAP or market. Yes - sellers outnumber buyers two to one, but unlike panicked shorts who are urgently covering exposed positions, are willing to wait to get their desired price. And with every lift, the NBBO ratchets up one notch higher, creating a feedback loop. The more ask side interest, the faster the market rips, even as the imbalanced market with much greater sell-side interest clears progressively higher! Nothing like selling causing rising prices in this latest installment of the bizarro market. 

June budget outlays came in at the largest ever for the month. Also 2010 Federal individual income tax collections are running 4.4% lower, or $31 billion below 2009 levels: the economic "recovery" sure isn't causing greater tax receipts. And from the report: "The federal government incurred a deficit of just over $1.0 trillion for the first nine months of fiscal year 2010, CBO estimates, $81 billion less than the roughly $1.1 trillion deficit incurred through June 2009. Revenues so far this year are slightly higher than they were last year at this time; outlays are about 3 percent lower. CBO estimates that receipts in June were $36 billion (or 17 percent) higher than collections in June 2009. Morethan half of that difference stemmed from an increase of $19 billion (or almost 60 percent) in net receipts from corporate income taxes. Gross receipts from those taxes rose by $15 billion (or 37 percent), primarily because of higher estimated payments for the current year; a $4 billion decline in corporate income tax refunds also bolstered net corporate receipts."

It seems everyone is perplexed by the most recent irrational bout of July market action. Like clockwork, once July rolls in, the market surges, no questions asked. This year, the ramp is particularly blatant because as the attached chart demonstrates, bonds, which are a far more credible barometer of market (in)sanity, indicate the S&P is rich by at about 50 points. As this spread will most certainly converge eventually as we discussed previously, a short stock, short bond position would generate some much needed P&L in this world of deranged fractal algorithms. As to what may have caused the most recent bout of irrational exuberance, David Rosenberg has the most logical, and generic solution: excess liquidity and a short covering spree, and "nothing fundamental here."