Archive - Aug 9, 2010 - Story

As Automotive News points out in its expose on better than expected volume and top line results at GM and Chrysler, "Reports of robust post-bankruptcy sales at General Motors Co. and Chrysler Group need an asterisk." The reason, based on internal documents obtained by the publication: digging behind the headlines indicates that retail sales, or those that actually matter and are indicative of a vibrant end consumer (with or without rebates), are actually down year to date: 1% at GM, and 19% at Chrysler. "Essentially, GM and Chrysler regained the fleet business they lost during their troubled 2009 trip through bankruptcy. Counting fleet of all types and retail sales, GM is up 13 percent this year, and Chrysler is up 11 percent. That's close to the industry's 15 percent gain." So basically if one were to strip away the rental companies, all of which themselves were on the verge of bankruptcy in early 2009, and have recently found themselves in a position of strength, courtesy of cheap floorplan financing and various cheap ABS conduits, the two bankrupt auto companies are doing worse off YTD than they did in 2009. If this is not indicative of the "strength" of the US consumer when it comes to medium-ticket purchases, little else is.

Last week the Treasury Secretary penned an Op-Ed titled "Welcome to the Recovery" which in retrospect now appears was a terrific top tick indicator. First, the NFP number immediately following was a major disappointment and confirmation that the economy continues to follow a downward path despite trillions in fiscal and monetary stimulus. It has gotten so bad that if the Fed does not announce some form of new QE tomorrow, stocks will likely experience an unpleasant downward kneejerk reaction. The alternative, of course is just a bleak: once input prices surge, should QE2 be enacted, and banks use a new influx of risk-free reserves to bid up commodities of all shapes and sizes, currently record corporate margins will plummet, and corporate earnings will suffer correspondingly. Yes, this will occur 1-2 quarters in the future, and with a market preoccupied with the here and now, and a once-over scan of rosy headlines, the realization of what QE will do to earnings will be appropriately delayed. Yet a more notable indication of just how ill-timed Geithner's pamphlet is, was today's announcement by Freddie Mac that lost $4.7 billion and needs a fresh $1.8 billion from the Treasury. This follows last week's Fannie report of a $1.2 billion loss and a request for another $1.5 from Mr. Geithner. So yes: welcome to the recovery indeed - make sure you have your begging hat in hand when you visit the SecTres to congratulate him on a job truly well done.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 09/08/10

We already noted that last Friday's NFP number was a major disappointment for everyone objective enough to acknowledge it for what is was. Here is David Rosenberg's even more aggressive condemnation of the continuous lack of economic recovery in this country, whose only impact it appears is to drive futures higher (not regular hours trading mind you - it is far easier to push the market in a desired direction when there are ten people and a few computers trading).

Barclays' head of quantitative strategy Matt Rothman provides some additional information on one of the most notable facets of the current market regime, namely the record implied correlation and thus, near record low stock dispersion, in other words, the phenomenon that all stocks trade as one, regardless of fundamental differences across different publicly traded companies. While nothing a slight dip in 1 month implied correlation from all time records near 70% hit in the past month, Rothman observes that "low levels of stock dispersion generally correspond with difficulty in picking individual stocks...This high level of cross-sectional correlation also has implications for how certain characteristics are being priced. For if stock return dispersion is low but underlying fundamental (economic) performance of factors remains relatively constant then it would appear that mispricings in the market may be beginning to take root." In other words, as we noted last time we observed the record low stock dispersion a month earlier, alpha (continues to be) dead. Yet for those who are eagerly anticipating the dispersion to finally rise, Rothman says that the market is basically back to mid-2009, when high quality stocks were largely undervalued compared to low quality: "High Quality companies are cheap right now relative to low Quality companies. We believe this is due both to a compression of returns in the market and because of the current macro-economic environment that has favored lower Quality stocks." Of course, shorting high beta names in a Fed-mediated market, has led to nothing but implosion.

CNBC notes the apparent cause of death of the recently popular BP skeptic was a heart attack. More details as we get it. A conflicting report according to WLBZ cites the source of death as drowning.

Wheat prices may be lower now that the dramatic spike higher has seen various speculators coming out and betting on a reversion, but little has been resolved yet, as Russia now debates extending the grain export ban beyond the December 31, even as fires in the Russian countryside continue to burn, and a record heatwave and lack of winds have concentrated a huge toxic cloud of carbon monoxide above the Russian capital. To be sure, some development has been noted with fires now affecting "only" 170,000 hectares of land, compared to the peak of 190,000, although firefighters are still having a difficult time materially containing the blaze. The worst consequence of the inferno: the mortality rate in Moscow has doubled as a result. The FT reports: "The death rate in Moscow has doubled due to the toxic smog hanging over the city from wildfires raging around the Russian capital and the worst heatwave since records began, a senior city health official said on Monday. Andrei Seltsovsky, the head of Moscow’s health department, said the number of people dying daily in the city had now reached about 700, while the death rate normally averages about 360 to 380 people a day. “The mortality rate has doubled,” the official told reporters." And taking things from bad to worse is the breaking news that Russia has just declared a state of emergency in Ozersk, where one of the largest nuclear storage and fuel-reprocessing center Mayak is located.

The problem that nobody is talking about, yet everyone continues keeping a close eye on, namely the trillions in commercial real estate under water, is quietly starting to reemerge. In the attached letter from the Commercial Real Estate lobby, it reminds politicians that the hundreds of billions in loans that mature in the next several years won't roll on their own, and we see the first inkling of the lobby asking congress for much more taxpayer aid, in this case in the form of Shelley Berkley's proposed legislation to "enable banks to convert troubled loans into performing assets through modest tax incentives to attract new equity capital to existing commercial real estate projects." The letter tacitly reminds that there are thousands of regional banks whose balance sheets are chock full with underwater commercial real estate (and for the direct impact of this simply observe the 100+ banks on the FDIC's 2010 failed bank list). So in case taxpayers are wondering where the next fiscal stimulus will end up going, wonder no more: "The new investments would be specifically used to pay down debt,
resulting in lower loan-to-value ratios of existing loans as well as
improved debt coverage ratios." As the CRE lobby concludes: "By giving lenders the ability to responsibly refinance debt and
rebalance capital reserve levels, the CRE Act will provide the
opportunity for additional lending capacity that will help stimulate
lending to small businesses, job formation and economic growth in
communities across the country." In other words, it is time for taxpayers to help purge banks of existing toxic debt, so that these same banks can resume lending like drunken sailors, in unviable commercial real estate projects just to guarantee that the next major market blow up also destroys the regional banking system, in addition to the TBTFs.

USDX at important pivot point-- markets will be finding direction soon and USDX will pave the way.

Just in case you missed Goldman's economic team shift to outright bearishness, Jan Hatzius presents several key observations that other economists (particularly BofA's Bianco and Dutta) have yet to grasp. And even as Goldman openly expects a recommencement in debt monetization tomorrow to the tune of $1 trillion, Hatzius openly acknowledges that this decision could be delayed... And such a decision would be a major mistake, as it is already priced in: "Such a decision could prove to be a serious mistake, because a
significant part of the recent easing in financial conditions is
probably due to market expectations of a more expansionary monetary
policy.  Indeed, if a disappointment on Tuesday results in a significant
renewed tightening of conditions, the decision might ultimately hasten
the transition to further easing steps." In other words, it is pretty much QE or bust for stocks.

• Systemic Regulator Risk: Does the Fed of New York Need a Haircut? (Institutional Risk Analytics), also Zero Hedge will have much more to say on the persona of Sarah Dalgren shortly
• U.S. Investors Regain Majority Holding of Treasuries (Bloomberg)
• Here comes Big Brother: US to Pay Big Sums For Wall St Tip-offs (FT)
• Fed debates winding road to more easing (Reuters)
• Trichet Market Rally May Let Bernanke Hold Off on Bond Buying (BusinessWeek)
• Bank of Japan Expected to Hold Rate Steady (WSJ)
• One Chart To Rule Them All, One Chart To Find Them (Out) (Fistful of Euros)
• The end of responsibility: From homeowners to government, the buck stops nowhere (Post)
• China Buys $5.3 Billion of Japanese Bonds in June, Set for Annual Record (Bloomberg)

• Australian home-loan approvals decline 3.9% as rate increases cool demand.
• China buys $5.3B of Japanese bonds in June, set for annual record.
• China orders 2,087 steel mills and factories to close to meet efficiency goals.
• Clawbacks divide SEC; Aguilar pushes harder line for executives at accused firms.
• Euro slightly changes against dollar at $1.3274.
• Fed set to downgrade outlook for US; big new steps to boost growth unlikely: FT.
• German exports rise 3.8% in June, 28.5% higher versus previous year.
• Goldman Sachs cuts forecasts for Japan, US on waning stimulus, exports.

So much for trading perfection. After posting a flawless, and statistically impossible without cheating, trading record in Q1, Goldman followed in Bank of America's footsteps and posted 10 trading day losses in the quarter in which we saw the Dow plunge by 1,000 points intraday, and when the S&P ended broadly lower. The firm disclosed 3 trading days with losses of more than $100 million. But most notably, days with $100+ MM daily profitability dropped by more than half from 37 to 17. Of course, as usual, the statistical variance looks nothing like a standard Gaussian distribution. Elsewhere, Morgan Stanley reported 11 days of losses, but $100MM+ profitable trading days at 19, better than Goldman. Is the Morgan Stanley starting to outgun the biggest gun on Wall Street?

On Friday, following Goldman's downward GDP revision, we speculated "Look for ... the 2011 S&P consensus to decline accordingly." Turns out we are right much faster than anticipated, and not surprisingly the first bank to lower its S&P forecast is none other than Goldman. The firm has decided to boost its 2010 EPS estimate from $81 to $83, but lower it 2011 projection from $93 to $89. And the temporary bullish revision higher for 2010 action is to be ignored: as David Kostin says "We have reduced our S&P 500 price target by 50 points to 1200. The new target reflects a 7% expected return over the five months until year’s end. Our 12-month target equals 1250, roughly 11% above the current level...At the end of May – just eight weeks ago – we raised our 2011 EPS estimate to $93 from $90. It was a badly timed decision in retrospect. The economic landscape has changed significantly during the last two months. The macroeconomic data that seemed to indicate improvement in April and May deteriorated sharply in June and early July. Cutting our 2011 EPS estimate to $89 represents a reversal for us and reflects the more challenging economic environment we now face compared with the backdrop just a few months ago. At this time we are reminded of Winston Churchill’s famous response when asked why he changed his mind, “When the facts change, I change my opinion. What do you do, sir?"" As a reminder the firm's old 2010 and 12 month estimates were 1,250 and 1,300 respectively. The attached chart shows the revised Goldman estimates, which are basically a broad reduction in the curve by 50 points lower.

Some interesting geopolitical news to start off the day from Reuters: "North Korea fired artillery rounds into the sea off its west coast on Monday, a South Korean military official said, heightening tension on the divided peninsula. YTN cable news channel reported dozens of rounds were fired into the North's waters near the border with the South soon after a South Korean naval exercise off the west coast officially ended at 5 p.m." This follows earlier news that North Korea held a South Korean fishing vessel with seven people on board, after it crossed into North Korean waters. As the Kospi is closed it is difficult to estimate the unexpectedness of the event. We will follow the news to see if the already tense situation between the two Koreas is affected by this development, and if South Korea, which conducted extensive join-US drills recently, retaliates.