Archive - Aug 28, 2010 - Story

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Not China, not Russia, not North Korea, not Iran, not terrorists...According to Mike Mullen, the Chairman of the Joint Chiefs of Staff, the "single biggest threat" to American national security is the US national debt, which is either $8.85 trillion (public debt), $13.4 trillion (total national debt), $20 trillion (total debt including GSE debt), or $124 trillion (total debt including unfunded obligations), depending on one's definition of the word "debt." And as Zero Hedge has long been warning, the imminent increase in interest rates (sooner or later), will eventually put the country in an untenable funding position. "Tax payers will be paying around $600 billion in interest on the
national debt by 2012, the chairman told students and local leaders in
Detroit." The Chairman (the real one, not his pale imitation over at Marriner Eccles) politely forgot to add that the successful rolling of nearly $600 billion in debt per month is likely an even greater threat to national security.

The firm that was long the biggest bull on Wall Street, Morgan Stanley, with its initial 5.5% target on 10 Years by the end of 2010, has finally folded: "We are downgrading our outlook for second-half growth to 2-2.5% from 3-3.5% previously. This downgrade from above-trend to below-trend growth has  important implications for forecasts of the unemployment rate, inflation and monetary policy." Ostensibly it also has implications on rates, with the firm now actively calling for a flattener, just in time for the 10s30s to start creeping out again. Of course, this being Morgan Stanley, nothing is ever easy, and the firm obstinately refuses to see the plunge in H2 GDP as anything more than just a temporary blip: "we don’t think this slowdown will last beyond H2, much less morph into a downturn. In his Jackson Hole speech, Chairman Bernanke seemed to agree that the current economic weakness does not augur a weaker outlook for 2011. We agree. Among the reasons: Downside risks probably will prompt policy actions, balance sheet repair will be more advanced, and we expect net exports to improve in the second half of 2010 and into 2011. In fact, we see no reason to downgrade 2011 and possible reasons to upgrade, especially if policy turns more stimulative." Ok, Richard Berner, your colleague Jim Caron's rates call already lost a ton of people even more money : we will be sure to remind you of the bolded statement on January 1, 2011.

Goldman's David Kostin continues to pitch the firm's recent "SIRP" investment strategy, highlighting that while the S&P was down 0.6% in the past week, the recommended trade of buying low operating leverage companies (long / short ), was up 1.5%, while a recent push into dividend payers resulted in a 1.2% move higher in the firm's dividend growth trade (long / short SPX). Some other observations in this week's summary chartology: "Companies with low operating leverage have less risk to their earnings outlook from lowered revenue guidance than stocks with high operating leverage. Shortfall in mature market consumer PC demand caused Intel to cut its 3Q 2010 sales guidance by 5% and gross margin by 100 bp to 66%, implying a GAAP EPS cut of 10.5%."