Archive - Aug 2, 2010 - Story

Nothing notably new here from the man who has called for a Chinese crash in as little as 12 months. Now that the Chinese PMI came at the lowest level in 17 months (in line with the drop in the US ISM but completely the opposite of Europe's PMI as everyone makes up their own data on the fly now with no rhyme or reason), Faber seems to have mellowed out a little on the Chinese end-play. He now sees the China government stepping in and prevent a collapse of the economy when needed, as the economy has dropped from a near 12% GDP growth to a collapse in the PMI in the span of a few months, even as Chinese banks lent another quarter trillion renminbi billion in July, and issued who knows how many hundreds of billions in CDOs to keep the ponzi afloat.

Goldman's Jan Hatzius continues to be one of the most skeptical people when observing recent economic data. His interpretation of today's ISM is no exception. In the meatnime, the market once again doesn't care about anything than a forced headline number (sub 3% 10 Year be damned): "Although the ISM manufacturing index came in higher than our expectation and the median forecast, the composition was weaker than implied by the modest setback in the headline. In particular, the orders index fell 5 points to 53.5 and the production index fell 4.4 points to 57.0. Meanwhile, the inventory index rose 4.4 points to 50.2. Although this algebraically added 0.9 points to the change in the composite index, the combination of a falling orders index and a rising inventory index is clearly not positive for future growth in manufacturing output. At 3.3 points, the difference between the two is the smallest since February 2009, four months before the recovery got underway. On the basis of this composition, we have judgmentally reduced by one point what otherwise would be a US-MAP reading of zero."

From comments earlier by the Fed Chairman:

10:10 08/02 BERNANKE: 100,000/MONTH JOB GAIN INSUFFICIENT TO CUT UNEMP MUCH
10:10 08/02 BERNANKE: SLOW LABOR MKT RECOV,JOB UNCERTAINTY HURTS CONF,SPNDG
10:10 08/02 BERNANKE: TO TAKE 'SIGNIFICANT TIME'TO RESTORE 8.5MLN LOST JOBS
10:10 08/02 BERNANKE: SMALL BIZ HARD HIT BY TIGHT CREDIT; BANKS MUST LEND
10:10 08/02 BERNANKE: BANKS BETTER BUT MUCH TROUBLED LOANS, TIGHT LEND STDS

The PMI came in at 55.5, a smidge better than expectations of 54.5, yet worse than June's 56.2, and the lowest since December 2009, yet expectations set by a roundtable of Ph.D.'s are all that matters. Among the various indices, New Orders came in at 53.5 versus 58.5, the lowest since Junr 2009, while both Employment and Prices Paid came in better than before at 58.6 and 57.5 respectively. Deterioration was also spotted in Production, Backlog of Orders, and Imports. Yet this seemingly "better than expected" report was overshadowed by the sampling of negative responses:"Business in July was strong, the best month since October 2008." [don't tell this to Arcelor-Mittal] (Fabricated Metal Products), "Slow economy has killed sales for new equipment orders." (Machinery),"Quoting activity and sales are slow, and backlog is dropping." (Computer & Electronic Products),"Business continues to be sluggish and has fallen slightly as the economic ills continue." (Nonmetallic Mineral Products),"Retailers are still unwilling to gamble on inventory." (Printing & Related Support Activities).

The Goldman Markets team has put together this handy analysis on a proposed set of metrics that could be used to spot capitulation days, based on such inputs as VIX, options skew,daily trading volume relative to the 50 DMA, magnitude of sell-off, return from S&P’s intraday low to close, and the Fama-French winner/loser momentum. Based on the correct spotting of true capitulation days, Goldman predicts that those buying stocks following dramatic sell offs leads to abnormal profits. On the other hand Goldman refuses to mention the alternative: shorting the market on dayswhen stocks, which now have an implied correlation of about 1 and no associated volume, melt up alongside the risk-FX squeeze. Furthermore, there is no accounting of those situations where after a several hundre d point drop, the Federal Reserve refuses to get involved, which as Alan Greenspan pointed out, is unlikely, due to the Fed's perception that the market is the one true indicator of economic health (and nothing less than a case of the tail wagging the dog.) Lastly, one should not forget the abysmal track record of Markets' group top 2010 trade recommendations, presented below as of today: with 2 out of 9 top recommendations profitable, clients who have bet against Goldman's sell side advice have made a mint.

Last weeks activity in Gold was a welcome respite from the last month’s blood bath for the longs. What we are curious about was the reason for last week’s rally. Was it:

1. Small short squeeze on the physical side, and a sign of things to come?

2. A Technical dead cat bounce before the trend lower continues?

3. The market reassessing the BIS swap deal somewhat?

4. QE2 beginning to be priced into the markets?

Things in the middle east are back to normal (which means the usual deadly massacre), although with a twist. An earlier rocket attack on the Israel port city of Eliat missed its target completely, and instead slammed into Aqaba, in neighboring Jordan, located 6 miles away just over the border. Instead of firing the rockets from Israel and prompting immediate airborne retaliation, the launch point for today's attack was Egypt, which prevent Israel (or should that be Jordan) from retaliating. Sky News reports that the reason for the shelling is connected to a recent agreement that will see the Palestinian authorities talk face-to-face with the Israelis, and radical elements, who do not want that to happen, are escalating the violence as a means to stop it. It is unclear if Jordan will also escalate now that its own territory has been impacted in the ongoing conflict, and it is also to be seen how Egypt will react should it become perceived as a peripheral zone of cross-border attacks.

• U.S. Spies Buy Stake in Firm That Monitors Blogs, Tweets (Wired)
• Analysis - FX intervention may be a losing game (Reuters)
• Big investors fear inflation (WSJ)
• Time to Buy Dollars as Euro Economies Reach Limits of Austerity (Bloomberg)
• Japan Limits Forex Trades of ‘Mrs Watanabes’ (FT) perhaps the record vol in FX seen over the past 2 months will finally decline, although nobody is holding their breath
• Bernanke recouped personal losses in 2009 (Reuters)
• Talk On High-Speed Trading Hacks Pulled From Security Conference (Forbes)
• Just because generating profits based on "optimistic projections" about debt writedowns is a guaranteed way to generate value, HSBC and BNP profits "beat" forecast after bad debts tumble (Reuters)
• For good economic forecasts try flipping a coin (Bloomberg)

• Asian stocks rose, extending 4 consecutive weekly gains, on improved earnings outlook.
• Banks in Europe’s most indebted nations need to refinance $122B of bonds this year.
• China's manufacturing activity expanded at the slowest pace in 17 month in July.
• European stocks rise on strong manufacturing data, solid start to banking reporting season.
• Executives at US Cos expect revenue improvements in next 12 mts- KPMG Survey.
• German machinery industry sees powerful 62% increase in June orders.
• Iraq to sweeten contract terms for its 3rd bidding round for its natural gas fields.
• Luxury-home prices in central London declined in July for the first time in 16 months.

With the US well on its path to an increasingly socialist (if not worse) system, yet still home to one of the world's highest GDP per capita metrics in the world, Goldman's Erik Nielsen presents an interesting matrix in which he plots GDP per capita versus the Gini coefficient - a measure of income inequality. Countries that have the lowest Gini are those in which incomes are more or less flat across the board. The US, on the other hand, has the highest income inequality per its Gini of 0.38, a phenomenon about to be blatantly abused by changes in the US tax code. A relevant question here would be whether greater income inequality leads to a higher GDP? As Nielsen points out, "correlation does not imply causation" (a fact long-lost on the market dominant HFT market makers), although an important question is whether an attempt to grow US economic output should be predicated by a push toward further income equality, or a world in which the rich get richer. As the regression in the chart below would seem to suggest, the latter is what the Obama administration should be aiming for, and may explain why Obama's advisors have been so hell bent on perpetuating the wealth of those who should have lost everything in the crash of 2008. Of course, the one exception to the rule is socialist Norway, which has a higher GDP/capita than the US, but which however also happens to be one of the most resource rich countries in the world.

After 3 Month Euribor dipped on Friday for the first time in 3 months from a 2010 high of 0.899% to 0.896%, the critical interbank lending metric has once again resumed its steady advance higher, with the August 2 fixing coming in at 0.898%. And as has been postulated previously, a rise in overnight funding immediately leads to a rise in various EUR pairs. At last check the EURUSD was up to $1.3071, as the pair mimics each tick in (deteriorating) money market conditions.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 02/08/10

Now that the Greek striking truckers have been placated and the obliterated critical tourist season can attempt to salvage itself with just one month left as gas is finally once again (partially) available, some were hoping for at least a brief return to normal in the ECB/IMF-subsidized country. Alas, no such luck, as Greece has now become an accelerated version of the US' own slow progress to all out insolvency. As the country's foreign debt hole has been plugged for the time being with limitless cash infusions, and the financial system lives day to day as Greek banks are allowed to pledge whatever trash they find in the dumpster to the ECB, the next flash point are defaulting local governments, the equivalent of our own state and municipal crisis. Late last week, Kathimerini disclosed that the Athens port town of Piraeus has decided to stop "all payments following a central government decision to stop funding the debt-ridden authority. Having seen the kind of moral hazardallowed to his sovereign equivalents, the mayor Panaytois Fasoulas essentially says he believes he is owed a preferential debt restructuring: "Fasoulas said his municipality was not seeking privileged treatment but wanted to renegotiate the payment of its debts, paying larger installments at a lower interest rate." Surely, he is fully entitled to his ludicrous demands after what happened in Europe in the first half of 2010, and in the US in the past two years. We are only surprised that our own bankrupt cities haven't figured out that the right approach is precisely this: refuse payments unless demands are met. In fact, as reported in St. Louis Today, the near bankrupt city of East St. Louis, which just laid off 30% of its police force, has announced it would not make a scheduled $500,000 payment. "On Friday, the city approved a proposal to defer bond payments until next year in order to free up $500,000." In realizing that creditors don't really have a loaded gun pointed at their heads, US cities are finally waking up to what has been all too obvious to Europe for many months now. Look for the domino chain of state and municipal failures to really pick up in earnest over the next several quarters now that the creditor vs debtor battle lines have been openly set.

Global macroeconomic policy seems to be veering between world-historic deficit spending (as is the case in the U.S.) to near-Dickensian austerity measures (as is the case in the United Kingdom). But both policies fail to understand what got us to the current mess—which is why both policy prescriptions are misguidedly trying to recapture the good ol' days before the current depression. But those days of Hummers and McMansions are not only gone—they were a lie. Here's why. - Gonzalo Lira