Archive - Aug 21, 2010 - Story

Some time ago we penned a post, titled"Mishkin On Iceland: "Nothing Is F*#&ed Here Dude" which discussed the former Fed director's March 2006 analysis "Financial (IN)Stability In Iceland." Those interested in our original observations of Mishkin's horrendous analysis (of what proved to be the first bankrupt European country of the new century, but certainly not last) can find them at the original link. Yet continuing with the Duderino references, today, new shit has come to light, which once again confirms that not only is the Fed populated by the most intellectually incapable and corrupt people, but that anything coming out of Columbia University (and the Ivy League in general) is not worth the paper it is printed on. Watch the attached clip to see a former Fed director go from comfortable, to fidgety, to stuttering, to thoroughly discredited, to in dire need of diaper change, in under 2 minutes. Last but not least, here is the soundbite of the year: "You have faith in the central bank." No further comment necessary.

As we pointed out on Wednesday, personal bankruptcies recently jumped to a five year high (a 20% increase over the prior year). While the recent increase in filings has been alarming, the truth is that it could merely be a mean reversion, which as the chart below shows, is precisely where filings used to be prior to the 2005 bankruptcy reform passed. As the economist, which created this chart points out, " The data suggest that an older trend is reasserting itself. This is could be more bad news for America—or it could just mean that creative destruction is alive and well." Either way, the chart is sure to see quite a bit of airplay this election season, as the populist rhetoric heats up. Don't be surprised however if the section before 2005 is cut off.

As has been widely anticipated, Iran is currently in the last stages of preparation before pushing the On button for its brand, spanking new (and 20 years in the making) nuclear power plant. As Reuters reports: "Television showed live pictures of Iran's nuclear chief Ali Akbar Salehi and his Russian counterpart watching a fuel rod assembly being prepared for insertion into the reactor near the Gulf city of Bushehr." Yet despite Russia's guarantee that it would collect spent rods that could be used to make weapons-grade plutonium, Israel is not taking this development lightly at all, and as Jerusalem Post reported earlier, warned that "It is totally unacceptable that a country that blatantly violates decisions of the United Nations Security Council and the International Atomic Energy Agency, and ignores its commitment to the Non-Proliferation Treaty charter, will enjoy the fruits of using nuclear energy," according to Foreign Ministry spokesman Yossi Levy said. Which in turn has prompted Ahmadinejad to warn that a strike on Iran would be answered with "harsh and painful" response. All in all, just another Saturday in the middle east.

Two weeks ago we posted the most recent interview by King World News of long-time market veteran Art Cashin, in which the UBS market strategist prophetically pointed out that the "Fed is walking a tightrope in a Hurricane." As the data has confirmed since then, the winds are picking up, and the market is starting to finally realize the gargantuan task the Fed is faced with, in its attempts to flood the market with a second tidal wave of free money. Today, Cashin is once again on KWN, discussing this week's disappointing data, primary the negative Philly Fed reading and the first half a million print in initial jobless claims in a year. Cashin summarizes the failed spin of the recoveryless recovery as: "the two main points of pain are employment and real estate, and both of them are showing no signs of getting any better." Another topic touched upon are technicals, which in addition to the much discussed Hindenburg Omen, investors also have to worry about the 50 DMA, and the market would have a second back to back close below the indicator if stocks do not pick up in the coming week. Cashin is also very skeptical on earnings, whose quality continues to deteriorate as it comes mostly due to SG&A cuts, resulting in wage deflation: "the pressure on wages continues and that is not inspiring a lot of hope." As for further Fed QE episodes, Cashin does not believe additional monetization would have any incremental impact: "what's happened is - Bernanke dropped the money, but when it came on the ground people raked it up, put in the garage and went back to sleep, so things are not happening." Lastly, Cashin says that "the bond market is discounting some very troublesome times ahead - people want the return of their money, rather than a return on their money. There is ongoing concern about the state of the financial system itself." Cashin's conclusion: "there appears to be a bull market in pessimism - the bond market has a slightly better record in calling things than the stock market." Looking forward, "you may get a small bounce if nothing geopolitcally happens over the weekend, there are concerns over Iran, so if nothing happens there you may get a small bounce, but I would be cautious until the market can prove to me its got it balance again."

The economic news has turned decidedly negative globally and a sense of ‘quiet before the storm’ permeates the financial headlines. Arcane subjects such as a Hindenburg Omen now make mainline news. The retail investor continues to flee the equity markets and in concert with the institutional players relentlessly pile into the perceived safety of yield instruments, though they are outrageously expensive by any proven measure. Like trying to buy a pump during a storm flood, people are apparently willing to pay any price. As a sailor, it feels like the ominous period where the crew is fastening down the hatches and preparing for the squall that is clearly on the horizon. Few crew mates are talking as everyone is checking preparations for any eventuality. Are you prepared? Apparent synthetic wealth has artificially and temporarily been created through the production of paper. Whether Federal Reserve IOU notes (the dollar) or guaranteed certificates of confiscation (treasury notes & bonds), it needs to never be forgotten that these are paper. It is not wealth. It is someone else’s obligation to deliver that wealth to the holder of the paper based on what that paper is felt to be worth when the obligation is required to be surrendered. It must never be forgotten that fiat paper is only a counter party obligation to deliver. Will they? Unfortunately, since fiat paper is no longer a store of value, it is recklessly being created to solve political problems. What you will inevitably receive will be only be a fraction of the value of what you originally surrendered." - Gordon T. Long

It appears that Kyle Bass doesn’t know how to be long stocks. Whether this is a personal problem or not, it brings up the central problem of a permabear. Being a permabear is painful like being long volatility during the summer of 2009. There is a time to be a bear, just there is time to be long volatility. The “perma” part is what sucks. It is cool to be a huge fan of long dated treasuries. The facts give indication that the United States—the global economy—is stuck in an irreversible cycle of deleveraging for some years to come. But that doesn’t mean there is no value in some equity exposure. At the very least, utilities generate reasonably reliable inflation?adjusted yield.

Shortly after adjusting his 2010 S&P target lower to 1,200, David Kostin continues to favor his Rosenberg-SIRP equivalent strategy of "low operating leverage, high dividend growth, strong balance sheet, large market cap, and 'low valuation'." In other words, with the entire market now turning defensive (but not David Bianco: David always has some funny wackiness up his sleeve that's for sure), it is a little difficult to see how stocks will push higher by 12% in the remaining 4 months of the year, especially with negative GDP prints anticipated for the remainder of 2010, which would be in line with the Zero Hedge-anticipated sub 1% Q2 final revision GDP. In other words the economy has stalled, and there is no stimulus coming: the $10-20 billion dribs and drabs pittances of fiscal stimulus here and there will do nothing to push the economy higher. Also, Kostin summarizes the findings of his latest Hedge Fund Tracker (we will post it shortly), which indicates which stocks are the latest HF hotels: in a nutshell these are EMC, ESRX, DVA, TYC, BIDU, PFE, INTC, and VIA. For people who have reservatoins against gold, and see it as a source of liquidity in a downturn, the same logic to the nth degree applies to these names. Should there be a selloff, these stocks will get decimates as HFs rush to get out. Also, Kostin summarizes the top ten S&P stocks by daily tading turnover, i.e., where the computers are running wild. These are Pactiv, US Steel, Abercrombie & Fitch, AK Steel, Apollo, Frontier, CF Industries, NVIDIA and DeVry: this is where the bulk of the binary action was in the past week.