Archive - Aug 2010 - Story

The Treasury has just released its most recent quarterly borrowing estimate for fiscal Q4 2010 and Q1 2011 (or the next two quarters in normal speak). The government now anticipates a funding need of $350 billion and $380 billion in the next two quarters. While the $350 billion number is a slight reduction from the prior estimate of $376 billion, historically the Treasury has been unduly and overly optimistic in determining its debt issuance requirements. With the June 30 total debt balance of $13.203 trillion, it means the Treasury itself now anticipates total debt at just under $14 trillion (or $13.93 trillion to be precise). This equates to about $13.88 trillion in debt subject to limit (which at last check was $14.3 trillion). Looks like the Treasury will not need to raise the debt ceiling before the midterm elections after all: perhaps this is what the market is celebrating today: nothing less than the latest and greatestexample of news slightly better than a worst-case scenario. We also learn that, "during the April - June 2010 quarter, Treasury issued $344 billion in net marketable debt, and finished the quarter with a cash balance of $290 billion, of which $200 billion was attributable to the SFP. In May, Treasury estimated $340 billion in net marketable borrowing and assumed an end-of-June cash balance of $280 billion, which included an SFP balance of $200 billion. The increase in the cash balance related to higher net cash flows and net marketable borrowing." And with every new auction pushing the US debt further higher into "never repayable"territory , the Bid To Cover grows ever higher. And in fact, don't look now, but the last time the market was at 1,125, the 10 Year was just 45 bps higher than the current 2.96%, confirming that all is perfectly illogical with the world.

And you thought you had a problem timing a currency that trades hundreds of thousands of pips up and down in the span of a month... UBS strategist Syed Mansoor Mohi-uddin can't wait to tell you all about his own personal troubles with the crazy European currency. In a nutshell, UBS, just like Zero Hedge, realizes that QE 2 would be the end of the USD. However, with Europe continuing to be a far weaker continent from a banking/financial standpoint, to believe that the race for the global currency bottom is close to over is more than naive.

July was a sizzling month for stocks, which posted the best return in a year (or some other stupid soundbiting data point). However, the only ones who seem to have taken advantage of this surge are 401(k) funds which will soon be mandatory anyway courtesy of imminent capital controls, and corporate CEOs, who merely are presented with a higher level from which to sell their stock to the general public. July for the "smart money" hedge fund community was a total wash, as the latest HSBC hedge fund performance data indicate. Below are the top funds and their MTD performance (thru July 23 for most): alas, the picture is less than pretty. Does this mean hedge funds will now all go on the same side of the trade like they did in March and April as they all seek massive beta upside, only to unwind at some point and have a flash crash repeat with or without the benefits of the HFT theft brigade?

And by now, as Zero Hedge first reported, we all know who dumped a boatload of shares of BP just as its sellside team was pushing the stock to a buy...

Just headline for now.

While hardcore readers will be quite familiar with the observations presented in the attached paper "Yield Curve and the Economic Cycles", by reader Kiril Yoradnov, novice bond enthusiasts should note the presented correlation between the shape of the yield curve and the phase of a particular economic cycle it resides in. Of note is that while the 2s10s was recently at all time record highs in the 290 bps range, the curve has since collapsed and was trading at 239 bps earlier even as the 2 Year is once again near all time record tights, an observation which in itself makesabsolutely no sense considering the stock market action, and is merely another validation of a market ill with Schrodinger's syndrome, where we now have inflation and deflation rampant concurrently, and, frankly, idiotically. Perhaps it is time to move on from colored swanreference when discussing the market, to those of felines caught in parallel states of existence until the vigilantes wake up and finally collapse Bernanke's middle-class theft function. Regardless, the question is whether the collapse of the 10 Year will continue, further flattening the curve, and setting of alarms everywhere (while illogical and manipulated stocks will no doubt be hitting 36,000 at about the same time just to prove to the world that Fed Chairmen see record stock levels and record economic output as precisely synonymous).

The attached slide deck from Morgan Stanley provides a convenient 5 minute summary of the current state of the global financial and economic picture. Discussing everything from fund flows (nearly $300 billion in domestic equity outflows since the beginning of 2007: strong like bull), to equity hedge fund outflows in Q2 (and fixed income and macro fund inflows), proceeding to the US economy, where the dip in final domestic demand is expected to follow the GDP inflection point shortly (does anyone even remember the disappointing Q2 GDP number posted a long, long time ago last Friday?), a consumer spending number that based on the current saving rate is unsustainable, to the endless rally in corporate profit margins as firms fire any and all non-essential overhead, to China's PMI drop, to Morgan Stanley's reiteration of the bullish Chinese groupthink, to observations of the exquisite correlations between the US ISM, China's PMI, and the MSCI EM Total Perf, the unprecedented decline in US manufacturing as a share of total world manufacturing (charted below), to a hockeystick projection for Emerging Markets where decoupling this time is most certainly different, and other useful, if not particularly original, tidbits of data.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 02/08/10

Certainly today started with a very strong risk appetite, and the ISM release will help carry the momentum with PMI/ISM giving the markets an excuse to shrug disappointing GDP data. It also feels like there is a buildingconsensus that going into the fall elections markets will have a strong bid. It makes sense to expect all sorts of stimulus, stimulus promises, and information spin, given that a populist approach where major equity indices are the benchmark of success for politicians has been the mantra for Western democracies over the past 30 years. Basically monetary expansion and propping of financial assets has been the response to the shocks of the 70s after the end of the fight against inflation, and please keep in mind when thinking about this issue that creditexpansion and monetary expansion are very different from rates policy, though both have been used to achieve the same goals over the past few decades. In that sense comments by Mr. Greenspan that a rally in equities would be more beneficial to the economy than anything else is very revealing, if not incriminating in my opinion...

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.