Archive - Aug 2010 - Story

• 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

HFT began with the observation that there is “structure” to the tick-by-tick movement of the markets, that as market participants – analog Hedge Funds, Real Money Investors, Brokerage Houses – made their trades, there were patterns to the price movements that could be predicted, and therefore profited from. From this position, it is a natural next step that as HFT trading bots become a large part of the transaction volume of the stock market (they are) that the algorithms that power these HFT trading bots should look to exploit the “structure” provided by other HFT trading bots. A logical next step, no doubt, but we are really at what I call “the end of the rationale road” of this stock market thing. We created this stock market thing so Montgomery Burns with capital, could get that capital to Transatlantic Zeppelin, which needed capital, in an efficient manner. Now, who knows why it exists. And concomitant with the rise HFT trading bots is an increasing correlation between the individual components of indexes[1] (e.g. all the stocks in the S&P are moving in lockstep). That great line that traders started in the 80?s “The ticker symbol is just a name on my screen, I don’t even know what the company does” has now become in the roaring 10?s “The name is just a line in the computer code, I don’t even know what the fucking name is anymore!?!”

These are the Top 10 most read posts of the prior week:

1. Marc Faber: Relax, This Will Hurt A Lot
2. Ever Wondered How You Know You Are In A Depression? David Rosenberg Explains
3. Guest Post: Gold Swap Signals the Roadmap Ahead
4. "It's Not A Market, It's An HFT 'Crop Circle' Crime Scene" - Further Evidence Of Quote Stuffing Manipulation By HFT
5. Jim Rickards Compares The Collapse Of The Roman Empire To The US, Concludes That We Are Far Worse Off
6. LBMA Closes Off Public Access To Key Bullion Bank Trading Data
7. S&P Priced In Gold: Comparison Between The Great Depression And Now
8. Warren Pollock Warns Of Emergency Drug Shortage As EMTs Told To Go To "Alternate Protocols"
9. China Calls Our Bluff: "The US is Insolvent and Faces Bankruptcy as a Pure Debtor Nation but [U.S.] Rating Agencies Still Give it High Rankings"
10. Already Bought A 3D LCD In Anticipation Of QE "Instarefi" 1.999? You May Want To Consider A Refund

As we all know there is an unlimited amount of ways to trade the financial markets. Each person sees the market in a different way, has different skill sets, trading experience and risk tolerance levels. While some individuals create and use complete systems to make money there are some very basic trading strategies which still work well and require nothing more than basic charting, patience and a little money management.

For the definitive confirmation that the Fed is and has always been very open to, at least philosophically, pushing the market higher no matter what the cost (if not in practice - they would never do that, oh no, Liberty 33 would never stoop so low), is this quote from former Fed chairman Alan Greenspan who was on Meet The Press earlier, where he said the following stunner: "if the stock market continues higher it will do more to stimulate the economy than any other measure we have discussed here." In other words, the Fed's dual mandate of maximizing employment and promoting a stable inflation rate have been brushed aside, and the one and only prerogative for Chairman Ben currently, and for the short and long-term future, is to keep the Dow Jones (because nobody in the administration, even the Fed, has heard about the S&P yet), above 10,000. Yet Greenspan, who now apparently is off the reservation concludes with this stunner: "There is no doubt that the federal funds rate can be fixed at what the Fed wants it to be but which the government has no control over is long-term interest rates and long-term interest rates are what make the economy move. And if this budget problem eventually merges to the point where it begins to become very toxic, it will be reflected in rising long-term interest rates, rising mortgage rates, lower housing. At the moment there is no sign of that because the financial system is broke and you can not have inflation if the financial system is not working." In other words, we will be in deflation until the broke financial system becomes unbroke... and then we will have hyperinflation. Well, ladies and gentlemen, Q.E.D.

In his earlier presentation, David Kostin (way back on page 28), candidly admits that anyone who follows rule #1 in finance, which is "Always Follow the Money" can easily skip through the first 27 pages of his presentation and realize that there is simply no way that the market can meet the permabullish strategist's expectation for equity inflows for the full year 2010. While way back in December, Kostin speculated that stocks are so undervalued they would see $600 billion in net equity inflows, with seven months down, there have been only $57 billion on inflows Year To Date, of which retail flows are actually negative $16 billion. Will stocks be able to make up the $543 billion shortfall in 5 short months even as the market is unchanged for the year, and would be far lower if it weren't for the constant HFT intervention on low or no volume to stuff assorted bids ever higher? The chart below shows just what a great disappointment the market has been year to date for all those who seek validation in sizable net inflows.

David Kostin has put together a ton of pretty charts in this attempt to convince everyone that the fair value of stocks is precisely +/- 1,350. The presentation gets interesting after page 26 (in fact you can skip part one which is merely the obligatory propaganda, and confirmation that Kostin refuses to read Jan Hatzius).

The Bearish: "Bottom line summary. The tale of two economies theme remains valid and intact for now. We are seeing a huge divergence between large and small business condition outlooks at present. A divergence we have never seen in modern historical experience. Large businesses represent the micro in terms of the positive of company specific earnings. They are the large S&P 500 companies whose earnings are more dependent on the rhythm of the global economy as opposed to the domestic US economy specifically. They are the large companies whose reported "operating" earnings are not falling apart, despite a few bumps in the road now and again. Alternatively, we see the small business community representing the domestic US macro. They are the job and ultimately personal income creators. They are largely the service sector, the largest driver of domestic US economic outcomes. The NFIB numbers are simply telling us of a deceleration in macro economic activity ahead. And herein lies the tension for investors. What will be more important in decision making immediately ahead, the tone and rhythm of the US macro economy inclusive of jobs and personal income, or the micro of reported quarterly "operating" earnings of truly large and globally centric companies whose job and personal income creation activities largely lie abroad? It's why we need to remain focused on this "tales of two economies" theme. Is it really going to be the case that the S&P 500 companies alone (as a proxy for large corporations) experienced a headline economic recovery in the current cycle while small businesses never even left the post recessionary starting gate? It's sure looking that way for now. In terms of "counting cards" as per a potential US double dip recession outcome, the NFIB puts a checkmark in the plus column for the double dip scenario. Just keepin' a list."

M&A and Underwriting bankers are all too familiar with a Sources and Uses of Cash analysis(and yes, for our NYT readers, this is far more popular, practical and worthwhile than a DCF analysis). Yet we had never seen an Sources and Uses conducted for the entire market prior to this table created by Goldman Sachs which demonstrates succinctly and to the point precisely how roughly $2.25 trillion of cash was raised in 2009 by the S&P 500 (ex Fins and CNBC parent General Propaganda), and what this cash was used for. It is not surprising that nearly 50% of cash was generated from operating cash flow ($1 trillion) while $600 billion came from new debt issuance (the rest from asset disposition). Yet despite consistent claims that companies have massive deleveraged, just $635 billion of debt was repaid, meaning only $35 billion of debt was actually retired! What the flow was used for, however, was to extend maturities, and to shift debt across different sections of the S&P500's balance sheet, lowering the debt cost of capital. And while $400 billion in new cash was used for CapEx (far less than the recent historical average), only $189 billion was put to use in the form of dividends: a fact that shareholders are certainly not too happy about. In a comparable operation, while just $63 billion of new equity was issue, double that amount was bought back, thus boosting EPS by reducing the denominator. Yet total shareholder friendly cash in 2009 (dividends and buybacks) amount to just over $300 billion: a small fraction of the total $2.25 trillion used by companies for various purposes.