Archive - Aug 2010 - Story

Some developments out of Iran, which after 35 years in delays is set to launch its first nuclear power plant, a fact confirmed by Ali Akbar Salehi, the country's atomic energy chief. This had been preannounced by Russia, which helped build the facility located next to the city of Bushehr. More surprisingly, Russia has formally announced that it would be the country supplying Iran with reactor fuel, effectively ignoring almost 4 decades of roadblocking by the West to bring the NPP project to a conclusion. Did Russia just (in)formally announce it is joining into a new axis with Iran?

And to think Friday 13th almost started off on a favorable footing. After JPM and even Deutsche Bank's Lavorgnia whacked their Q2 GDP revision estimates to the low 1% range, Goldman joins in the realistic crowd, stating that based on retail sales data, "The report is not far enough off expectations to move the dial on revisions to Q2 (currently pointing to GDP growth in the 1% to 1 ½% range from the preliminary 2.4% rate) or to expectations for Q3." Additionally, the firm now sees a 25-30% change of a double dip.

This was our feeble attempt at MSM headline creation. According to Bank of Spain data, Spanish banks were responsible for borrowing a third of all the amount lent out by the ECB in July, or €140 billion (and €130 billion net of redeposits). This number is higher than the already record €136 billion the month before. And even though it is presumably priced in, it is somewhat hilarious to think that an entire European country's banking system continues to subsist purely on the liquidity provided by the central bank: Spain continues to be locked out, joining Greece and likely Portugal in the biggest capital markets shut out in history as no matter what the National Lampoons Stress Tests (remember those?) indicate. But yes, thanks to the temporary EUR plunge to 1.16 Germany managed to pull off a record economic quarter as surging exports carried the eurozone for another month or two. All that is now over, and with the market anticipating QE2.1/3 out of our own Fed any time soon, dollar weakness will be persistently just around the corner, which effectively brings the European Golden Age to a close.

July US CPI reported at 0.3%, versus expectations of 0.2%, and a prior -0.1%, most of it coming from increasing energy prices. Year over Year was 1.2%, in line with expectations. The inflation-and-deflation theme continues. CPI ex food and energy was up 0.1%, also inline with expectations, and slightly lower than June's 0.2%. From the release: "The energy index posted its first increase since January and accounted for over two thirds of the seasonally adjusted all  items increase. Both the gasoline and household energy indexes turned up in July after a series of declines. The food index, in contrast, declined in July, largely due to the fourth consecutive decline in the fruits and vegetables index." Full release here. Elsewhere, advance retail sales missed expectations, meaning another GDP adjustment lower to come, pushing Q2 GDP further into sub 1% territory. "The U.S. Census Bureau announced today that advance estimates of U.S.
retail and food services sales for July, adjusted for seasonal variation
and holiday and trading-day differences, but not for price changes,
were $362.7 billion, an increase of 0.4 percent (±0.5%)* from the
previous month, and 5.5 percent (±0.5%) above July 2009." The expectation was for a 0.5% increase. Retail sales ex-autos was 0.2% (exp of 0.3%, prior at -0.1%), while retail sales ex auto and gas came at -0.1%, also worse than consensus of 0.1% (previous revised upward to 0.2%).

• Obama's economic tragedy - U.S. fiscal gap makes Greece look responsible (Washington Times)
• The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism, Part 1 (Minyanville)
• Fed's Effort to Bolster U.S. Recovery Fails to Calm Investors (Bloomberg)
• US Farmers to Benefit From Failing Wheat Crops (FT)
• Treasury's new idea for laggard banks: we'll sit at your meeting (WSJ)
• Record German Growth Drives Euro-Region Expansion (Bloomberg)
• Americans grim over economy before elections: poll (Reuters)
• It's confirmed - Central Banks in Europe Said to Have Purchased Irish Notes; Yields Decline (Bloomberg)... And with all the lies about banking stability, one wonders why Europe's periphery continues to be completely locked out of capital markets
• Irish Banks Rattling Nerves (WSJ)
• Hungary’s Recovery Halts as Austerity Stifles Demand (Bloomberg)

• Asian stocks rebound from 3-week low on earnings growth; Yen weakens.
• China shares up due to easy-credit policy hopes.
• French GDP rose a better-than-expected 0.6% in Q2 from the previous three months.
• Germany’s GDP grows 3.7% in Q2 - fastest pace since its reunification.
• Massive German growth helps eurozone expand by 1% in 2Q.
• Oil rises above $76 in Asia; bounces back from week's losses.
• Retail Sales in US probably rose in July for first time in three months.
• US car dealership count fell to 18,223 after 258 showrooms shut their doors in H1 2010.
• Autodesk's Q2 EPS at $0.36 (cons $0.27); revs rose 14% to $473M (cons $458.9M).
• Airport operator BAA and Unite union hold talks to prevent strike.
• BP to pay a $50.6M fine for failing to fix safety hazards at its Texas oil refinery.
• Brazil controls mean Petrobras can't turn oil price surge into profit gain.

One of the classic comedy themes of the year has been Goldman's series of failed recommendations on the EURUSD, where the hedge fund has had about a 1 out of 10 "success" rating (for its clients). Today, the Markets Strategist Mark Tan recaps the firm's 3, 6 and 12 month forecast on the EURUSD, which are, conveniently, 1.22, 1.35 and 1.38. That's like saying the S&P will be in a range of 950 to 1500. At least the firm is sure to "hit" its projected range.... And be sure to watch that major inflection point some time in December which send the dollar sharply lower: is Goldman implicitly saying the "real deal" QE will now come around New Year's, just after the elections and just before the government has to raise the debt ceiling regardless? One thing we agree with, as we have long claimed: look for strikes and other expressions of non-appreciation to spike once everyone is back from vacation. As Goldman says: "One of the main reasons we incorporated downside risks to our EUR/$ forecast (1.22 in 3-months) is to reflect the potential for rising political tension again. This could potentially occur as Europe returns from its summer lull and is confronted with the reality of unpopular austerity measures." What are the InTrade odds on CNBC broadcasting the next storming of the Greek parliament?

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 13/08/10

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Easily the most feared technical pattern in all of chartism (for the bullishly inclined) is the dreaded Hindenburg Omen. Those who know what it is, tend to have an atavistic reaction to its mere mention. Those who do not, can catch up on its implications courtesy of Wikipedia, but in a nutshell: "The Hindenburg Omen is a technical analysis that attempts to predict a forthcoming stock market crash. It is named after the Hindenburg disaster of May 6th 1937, during which the German zeppelin was destroyed in a sudden conflagration." Granted, the Hindenburg Omen is not a guarantee of a crash, and the five criteria that must be met for a Hindenburg trigger typically need to reoccur within 36 days for reconfirmation. Yet the statistics are startling: "Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and
usually takes place within the next forty-days." The last Hindenburg Omen occurred during the lows of 2009. Today, we just had another (unconfirmed) Hindenburg Omen. It is time to batten down the hatches - something big is coming.

What made America great was her unsurpassed ability to innovate. Equally important was also her ability to rapidly adapt to the change that this innovation fostered. For decades the combination has been a self reinforcing growth dynamic with innovation offering a continuously improving standard of living and higher corporate productivity levels, which the US quickly embraced and adapted to. This in turn financed further innovation. No country in the world could match the American culture that flourished on technology advancements in all areas of human endeavor. However, something serious and major has changed across America. Daily, more and more are becoming acutely aware of this, but few grasp exactly what it is. It is called Creative Destruction. It turns out that what made America great is now killing her!

Ideally, reforming the government-controlled mortgage financing
behemoths Fannie Mae and Freddie Mac would achieve three goals:

1) Minimize the government’s balance sheet risk from a future collapse in home prices.

2) Promote a more constructive pricing of risk that isn’t distorted by government guarantees.

3) Avoid an increase in borrowing costs that could come as the
government’s role is redefined. (Well, this goal might not be ideal:
There is something to be said for a world of lower home prices and
higher market-based credit costs, but any idea that produces that
result seems a political non-starter.)

Oil markets were crushed again on Thursday, with crude oil prices falling another $2.28, to bring the two?day loss to more than $4.50 a barrel. The Dow Jones Industrial Average (DJIA), the bellwether equities average, dropped 58.88 points to 10,319.95. The weakness in equities was once again a major contributing factor to the weakness in oil prices. The euro was also lower on Thursday, but hardly to the extent it was on Wednesday (see chart next page). We now have losses of $5.74/barrel in crude since Monday night’s higher close, which is the largest three?day decline since May, Dow Jones News noted in its daily roundup. Thursday’s losses were also propelled by another increase in unemployment. - Cameron Hanover

John Carney's New York Times op-ed piece is a tour de force, a paean to nonsensical thinking. In, "Fannie Mae and Freddie Mac: Too Big Not to Fail," Carney ignores the Fannie and Freddie of the real world. Instead, he goes after the Fannie and Freddie that exist only in his imagination.

Apparently what is good enough for Greenlight, SAC, Citadel and Goldman, is not quite up to snuff for Och-Ziff. The 7 West 57th-based, $25.6 billion AUM, hedge fund believes that it should be exempt from responding in an ongoing investigation by the bankrupt Lehman estate, which is probing the abovementioned hedge funds whether they engaged in rumormongering that may have brought down Lehman Brothers. And Lehman is unhappy: in a filing from the Lehman bankruptcy docket, the state claims that "Och-Ziff, one of the world's largest hedge funds, was involved with, or has information that pertains to, the "short-and distort" efforts." If this is indeed true, it is not very surprising that "Och-Ziff has already begun stonewalling to attempt to prevent this information from seeing the light of day by interposing frivolous and dilatory objections to the Debtors' Rule 2004 Subpoena." As the Lehman examination has already proven to be a gold mine for illegal practices conducted by Wall Street, we would not be surprised if the most recent 2004 investigation uncovers some new and even more shocking results. To be sure, Zero Hedge has never been a fan of the "short selling raid" theory - fair value can and always will find a way to creep up to the surface, unless of course it doesn't exist in the first place, like in Lehman's case. Additionally, funds would have to be extra stupid to keep written evidence of this kind of complicit and illegal activity. Which is why Och-Ziff's response is perplexing. And if the estate had credible reason to pursue Och-Ziff, we can only imagine the same must be true about Greenlight, SAC, Citadel and Goldman. Suddenly the Lehman bankruptcy case became interesting all over again.