Archive - Sep 2010 - Story

Citi's Robert Buckland is out with the must read report of the weekend, especially for all the optimists who believe that despite the ongoing depression (and as many have demonstrated, all the talk about a double dip is moot, as America has never left the depression, or as Rosie calls it a period of prolonged economic subpar activity: the latest NFP number merely reinforces the theme of economic deterioration), and despite the 17 weeks in retail equity outflows (which would be a contrarian signal if there was hope that retail would ever feel safe enough to return in stocks. After nearly 5 months of no change in trend, the debate can be put to rest, if at least for 2010) there is still hope. There very well may not be - Citi has just pronounced the "Equity Cult" dead: "It has taken 10 years, and two 50% bear markets, to reverse this cult. European and Japanese equities are already trading on dividend yields above government bond yields. US equities are almost there as well. An immediate reincarnation of the equity cult seems unlikely. Global corporates, especially the mega-caps,  rushed to exploit cheap financing as the equity cult inflated. They have been slow to redeem equity now that the cult has deflated. Equity oversupply remains a drag on share prices." And as more and more companies and investors shift to a de-equitization theme, the trendline in allocation for the US pension assets will soon revert to that seen when the "Equity Cult" began, or roughly 20% of all assets, with bonds taking on an ever greater precedence of asset allocation (incidentally the UK is already back to the equity/debt relative investment levels of the early 1960s). What does this mean for capital flows? "A reduction in equity holdings back to pre-1959 levels (around 20% of total assets) would indicate considerable selling pressure to come. For US private sector pension funds alone, that would imply a further $1900bn reduction in equity weightings. The evidence suggests that there could still be considerable institutional selling to come."

Ever get the feeling that the Bureau of Truth is not being completely truthful? Feel like the ADP is to the NFP like the ISM to the regional Fed Surveys, and as the surging Mfg ISM employment diffusion index is to the plunging Service ISM employment diffusion index (i.e., both can not possibly be correct)? You are not alone. David Rosenberg summarizes which recent data releases are so blatantly incomprehensible, one wonder when the government will announce an AXA Rosenberg-like computer glitch and say all its data for the past 12 months has been compromised. Either that, or we await the introduction of the Birth/Death adjustment to every single data series released in America imminently.

BN  10:03 *GOLDMAN SACHS SAID TO PLAN TO CLOSE PROPRIETARY TRADING UNIT
BN  10:03 *GOLDMAN PRINCIPAL STRATEGIES TRADERS IN NY MAY JOIN OTHER FIRM
BN  10:03 *GOLDMAN PRINCIPAL STRATEGIES HEAD SZE MAY START A HEDGE FUND

So as long as you do one flow trade a year, you are considered a flow trader? Brilliant.

In providing commentary to the FASB's attempt to solicit public response on its recent foray into bringing some transparency into "loans held to maturity" by Wall Street banks, Goldman Sachs does a terrific job of exposing the very prevalent, and very conflicted phenomenon better known as "lending to play" in Wall Street firms' attempt to get an allocation on the IPO underwriter syndicate of public company candidates, in exchange for providing debt to the same firm on very disadvantageous terms to both the underwriters' shareholders, and to secondary purchasers of such debt. In addition to providing broad mispricing incentive to an entire capital structure product, this practice also completely destroys the credibility of the ratings of the newly public company by the Underwriter syndicate due to tremendous conflicts of interest.

It is par for the course that with oil hovering between $70 and $80 per barrel Americans have continued to buy SUVs and Trucks at a rapid pace. Politicians don’t have constituents screaming at them because gas is $4.00 per gallon, so it is no longer an issue for them. They need to focus on the November elections. It is no time to discuss a difficult issue that requires foresight and honesty. It is no time to tell the American public that oil will be over $200 a barrel within the next 5 years. Anyone who would go on CNBC today and declare that oil will be over $200 a barrel would be eviscerated by bubble head Bartiromo or clueless Kudlow. Bartiromo filled up her Escalade this morning for $2.60 a gallon, so there is no looming crisis on the horizon. The myopic view of the world by politicians, the mainstream media and the American public in general is breathtaking to behold. Despite the facts slapping them across the face, Americans believe cheap oil is here to stay. It is their right to have an endless supply of cheap oil. The American way of life has been granted by God. We are the chosen people. A funny thing happened on our way to permanent prosperity and unlimited cheap oil. The right to prosperity was yanked out from underneath us by the current Greater Depression. The worldwide economic downturn has masked the onset of peak cheap oil. Therefore, when it hits America with its full fury, it will be a complete surprise to the ignorant masses and the ignorant politicians who run this country. A Gallup Poll in August asked Americans about our most important problems. Where is the concern about future energy supplies? It isn’t on the radar screens of Americans. They are probably more worried about whether The Situation will hook up with Snookie on the Jersey Shore reality show.

There are permabulls, and then there is Jim O'Neill. The Man U fan explains why, after it has been consistently discredited, people do not believe in decoupling: "because they are not prepared to get it." And just because people are really stupid and just don't get it, O'Neill pitches Indonesia, Turkey, Nigeria and Bangladesh, and, oh yes, Iran, as the "Next 11" once again. Because, gasp, 9 of them are up year to date. We wonder if Jim recalls what happened to the Russian market in 2008. Somehow we think his selective memory may have shut that one out. Also, it turns out Jim O'Neill does not appreciate fan mail bourne out of "weird blog site" commentary: "I received quite a few incoming hostile emails in response, and references to some weird blog sites who apparently opine on my views." Oops.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 03/09/10

The ECRI Leading Indicator Index just came at -10.1%, a drop from last week's -9.9%, once again inflecting into double dip territory. One can only imagine what the spin proffered by the index creators will be this time: it was suddenly very credible last week, hopefully that credibility persists as it reaffirms a definitive double dip yet again.

Correlation desks = today's full retard

ISM Services comes in at 51.5 vs expectations of 53.2, and a previous print of 54.3. This is the second lowest Service read of the year. And keep in mind services are what drives America. AUDJPY plunges on the news. All components come in below expectations (New Orders, Employment, Business Activity), except prices, which is almost deflationary, but not quite. And most critically, the employment read came in at 48.2: the first posted contraction since January 2010. But the US economy lost only 54K jobs (and over 160k not adjusting for birth death), ergo all is well and double dip is off the table. Crazy pills time.

You knew it was just a matter of time before prudent Larry looked for greener pastures. Courtesy of William Banzai, we bring you Larry Summers' LinkedIn profile. No matter what you think of it, it is a victory for the bulls.

The survey of households featured a rebound of 550,000 in the labor force, split almost equally between increases in employment (290,000) and unemployment (261,000). As a result, the unemployment rate conformed to expectations, rising to a "high" 9.6% (9.642%). The rebound in the labor force was slightly less than ½ the cumulative loss registered over just the past three months. This underscores the difficulty of bringing unemployment down; if more increases are in the offing, as seems likely on trend, the trend in net hiring-perhaps best measured by private payrolls-will not prevent further increase in unemployment. Over the past three months, private payrolls have risen just 78,000 on average. And, despite last month's large increase in the labor force, the broadest "U6" measure of underemployment also went up, to 16.7% from 16.5%.

Today's NFP number means QE is now firmly off the table until 2011: monetary stimulus is stuck with QE lite for at least 3-4 months. Incidentally, this was the big catalyst that everyone was looking for to go all in on stocks. And with the economy still deteriorating, the only option is fiscal stimulus, but don't call it a stimulus as that costs political brownie points. So what are the options that Obama has before him? Goldman's Alec Phillips highlights the options which can be summarized as: a hiring credit, a payroll tax cut, a small business tax cut, bonus depreciation, and an extension of the Build America Bond program. His full thoughts below.

Private payrolls come in at +67K as Birth Death adds 115K, compared to just 6K previously, as U-6 rises from 16.5 to 16.7%, highest since April. Total Part time workers (all industries) increased by 401k from 18,157 to 18,558; part time workers for economic reasons increased by 331K. Workweek unchanged month over month at 34.2 hours, with average hourly earnings up slightly from 0.2% to 0.3%. 42% of the unemployed were out of a job for 27 weeks or longer, compared to 44.9% previously; average duration of unemployment at 33.6 weeks.

• Is this the reason for Japan's unwillingness to intervene: Japan Said to View U.S. Opposition as Yen Intervention Obstacle (Bloomberg) - Japan views probable U.S. opposition to intervention in the foreign-exchange market to address the appreciating yen as an obstacle to taking unilateral action, according to three Japanese government officials.
• LOL European Stress Tests: Lenders Shunned on Stress Tests Doubts (FT)
• LOL v2: White House: No Second Stimulus Being Considered (Reuters)
• East coast braces for Hurricane Earl (WSJ)
• French government vows to face down pension strike (Reuters)
• Chinese Funds Post Huge Losses in H1 (Caixin, h/t Mark)
• Bundesbank Asks German President to Dismiss Sarrazin After Race Comments (Business Week)
• Does Grandma Cause Unemployment? (Barrons)