Archive - Jan 18, 2011 - Story

Life in Camden, NJ has never been fun. Frequently ranked as America's most dangerous city, whose only claim to fame are the corporate offices of Campbell's Soup, Camden is about to get even more dangerous as it is among the first to experience wholesale cuts to its government labor pool. Bloomberg reports that "as many as 383 workers, representing one-fourth of the local government's work force, are expected to lose their jobs, including about half the police force and one-third of the city's firefighters." It seems cuts have already commenced: "police officers are turning in their badges as part of deep municipal layoffs that began Tuesday." It's a good thing then that unlike the rest of the world, New Jersey does not (yet) have surging food inflation as otherwise one may be tempted to argue this could be a rather interesting hot spot in the future, especially with the local police force deciding to find better pastures even as it starts collecting 99 weeks of unemployment benefits.

According to Bloomberg, in the week ended January 14 S&P 500 insiders sold $163 million worth of stock in 54 separate transactions. They bought exactly $0. That's right, in the last week, there was no insider purchasing. This is the first time in years (and possibly for ever) in which we have seen a week during which there was not one purchase by an insider. Surely, there is no need to comment on this result.

Earlier we reported rumors that the reason for a major and sudden plunge in the 10 Year had to do with a supposed fat finger on Tradeweb. It took the Reuters, which describes itself as "a leading global provider of online marketplaces for fixed income and derivatives" unit just two hours to publish a refutation: "Reports of a multi-billion dollar customer trade error on Tradeweb this morning are completely false. Indeed, Tradeweb has a number of safeguards and warnings incorporated into its electronic markets to prevent 'fat-finger' errors of this type." That's great. So it simply means that our original thesis that vol in bonds (not to mention FX) is now substantially higher than anything than can be experienced in stocks. Thank you Ben for completely inverting the concept of risky assets.

While Zero Hedge is confident that Bernanke will have absolutely no option but to continue with bond monetizations well beyond June, if for no other reason then because foreign Treasury buyers continue to be on a buying strike (except for the "UK" buyers of course) as confirmed by today's TIC data, which coupled with another $3 trillion in deficit funding needed over the next two years, means the Fed will increasingly have to step in and fill the debt issuance void which is now entirely picked up by the Frost-Sack FRBNY dynamic duo. That said there is one major trade off, and it is surging commodity price inflation, which as we have been predicting for over a year, will take the world by storm (literally and metaphorically) as excess liquidity finds new and unmet markets (and leading to such side effects as now well-publicized revolutions). Then again, Ben does not see it and thus it must not exist. By now everyone is aware that Benanke's self delusion is unmatched by any previously in the history of the world, so this can and will go on for a long time, until the same "excess slack" which forced the presidential overthrow in Tunisia reverberates around the developed world. And while we are confident that Bernanke will not stop at anything in his plan of global genocide to provide for infinite banker wealth, others such as David Rosenberg are not quite as sure. Here are Rosie's latest thoughts on the probability of yet another round of QE to follow once the current one is completed in June.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 18/01/11

While deadly protests in Africa have been largely ignored, because, well, they are in Africa, and they don't even have iPads there and Kindle WhisperNet coverage is spotty if any, the world may be forced to start paying just a little more attention as food riots get ever closer to the center of the oil extraction infrastructure in the Persian Gulf. From BBC Monitoring, which discusses the latest outbreak of protests sweeping Oman "Most participants in the protest were reluctant to be quoted as they were government employees. However, some said they protested against low salaries and soaring prices." Luckily, for now the protest is still peaceful. The thing about hunger is that it doesn't go away if you ignore it. And as Oman borders the UAE, all it takes is for the riots to jump one more border and then it gets interesting. And to all those observent enough to note that soaring prices continue to occur in countries with "growing unemployment" i.e., economic slack, and wonder how this is possible, after all the Fed said record slack can never lead to inflation, don't worry - you are certainly not alone.

Today, just after the TIC data was released, there was a major sell off in the 10 Year. While some attribute the move to the disclosure which Zero Hedge pointed out first that China had sold $11 billion in Treasurys in November, this should not come as a surprise: we have been claiming for months now that the primary goal of QE 2 is just as much to push stocks higher as it is to replace China as a marginal buyer of Treasurys (although China could easily be buying bonds through the UK - truth is until Ron Paul asks Tim Geithner we won't know). And while this could certainly be a factor, the latest rumor is that there was in fact a Tradeweb fat finger, with some novice (and now recently unemployed) trader putting in a sell order for $6 billion instead of $6 million. The result is presented below. Of course, if we were a sellside advisory we would say nevermind the facts, the reality, and the market manipulation, and just buy the dip. Nevermind that market liquidity across every asset class today is non-existent, and as Citi results demonstrated there has been a complete and utter collapse in trading in the last quarter. Alas, ongoing manipulation whose sole purpose is to fool the greater fools back into the market, is failing, meaning the close loop will continue a little longer... until Chaos theory confirms that not even Ben Bernanke can hold an infinitely multivariable equation together.

"Hinde Capital would like to share our “fears” about social, economic and financial eventualities. How predictable for a gold focused firm to dwell on such negativities we hear you say. We like to think our fears are not born of pessimism but realism. We have a positive expectation of this misery (as perceived by others of our mental framework)...We want to address our generic fears and then make some sense of what this could entail for financial markets within the context of our rapidly evolving socio-economic and financial order (macro). Our framework will be based on empirical and subjective analysis by which to qualify the outcomes that we believe may befall us." - Hinde Capital

No surprise from the NAHB, whose Housing Market Index came at 16, unchanged for a 3rd consecutive month, missing expectations of 17. This is not surprising as the housing double dip is now fimly in place, and the only way to resolve this issue will be for the Fed to validate Bill Gross' MBS purchasing thesis and refresh QE2.5 with a fresh purchasing of MBS. We are confident the headline scanning machines will find some correlation that translates this into a massively bullish number and close stocks at multi-year highs.

A portfolio manager submits the following modest proposal on how to fix a centrally planned, and utterly busted and discredited, stock market: "Here is my proposal. Starting from the assumption that the equity market is probably a tad expensive on fundamentals, like the chocolate bar that prices at $1.20 even if really it should only be priced at $1.10, then governments should introduce “sale periods” and stock promotions. Sale periods would attract retail buyers “en masse”, awakening in them their “bargain hunting” animal spirit. Exchanges should be able to organize these sale periods in pre-market trading hours, on a quarterly basis. If shoppers are forming night queues for Iphone 4s, I am sure that they would turn on their laptops at 4am for a heavily discounted stock sale. Shares should be allocated on a first come first serve basis, like ticket concers on ebay, for limited amounts only. Companies that allow their shares to trade in this sale windows, should be granted presidential mention and a medal for helping to build their nation wealth. Stock promotions would instead be managed by company directors on a discretionary basis, and could be associated to disposal of personal holdings in the stock by the very same directors. Stocks sold on promotion would carry the same voting rights than any other stock. There should be a collateral agreement in place that as soon as promotion ends, those market participants that have deep enough pockets to “BUY THE FUKCING DIP” should intervene to readjust market prices. "

As we get Treasury International Capital data for one more (delayed) month, we realize just why QE will be a part of our financial landscape for a long time. In November, the formerly largest US credit (before it was overtaken by the Fed), lowered its Treasury holdings by $11.2 billion from $906.8 billion to $895.6 billion. And while overall there was strength in purchases of domestic securities by international entities, both private and official, which came at $93.9 billion in the month, split $61.8 billion in UST, $14.2 billion in agencies, $4.7 billion in corporate bonds and $13.3 billion in equities, the inflow into equities from foreign sources is far less than US sourced equity purchases of foreign stocks. But once again the biggest threat continues to be the rotation by China out of US Treasurys and into other securities... unless of course the UK continues to do China's bidding. UK holdings of US debt surged by a ridiculous $34.2 billion as direct bidders consolidated their holdings. Somehow the UK now holds $511.8 billion in US debt compared to $477.6 billion in October. What is troubling is that at this rate China will drop below Japan in total US holdings, a differential which has dropped to just $18.4 billion.

In the past few years, the concept of economic globalism has revealed itself as quite the Trojan horse; once posing as the next step in the evolution of “free market” capitalism and the savior of third world nations striving for development status, now revealed as a fiscal plague spreading delirium and destruction wherever it touches ground. There is no denying that the economies of the world are irrevocably tied to one another, but until recently, this was always thought of as a “good thing” in mainstream financial circles. Today, the great failings of engineered interdependency are painfully apparent. The EU’s many peripheral nations are dropping one after another like flies in a fog of DDT, rising economies in Asia are bloated with investment capital escaping from debt default in the West, causing impressive levels of inflation, and the U.S. is on the verge of a currency implosion as the Federal Reserve opens the floodgates of fiat in a bid to hide our system’s extreme destabilization and maintain what little international faith is left in our ability to service our rampant liabilities. Globalism has led us to disaster…

• One in three Hackney families too poor to heat their homes (Hackney Citizen)
• Just modestly inflationary: Wheat Advances, Corn Reaches 18-Month High on Rising Demand, Lower Stocks (Bloomberg)
• CDS continues to be the most predictive instrument around: Default Swaps Outshine Bonds at Highlighting European Stress (Bloomberg)
• US public pensions face $2,500bn pensions shortfall (FT)
• Borrowing Returns from the Future (Hussman)
• Fed Officials Signal Growth Pickup Won't Alter Bond Purchases (Bloomberg)...oh so the stimulus induced pick up in fudged numbers will not lead to a removal of the stimulus? You don't say
• Citi posts $1.3 billion profit as revenues fall (Reuters)
• Apple's Cook Faces Product Development Challenge, Google (Bloomberg)
• China’s lending hits new heights (FT)

US Empire Manufacturing (Jan) M/M 11.92 vs. Exp. 12.50 (Previous number getting the traditional BLS treatment and being revised from 10.57 to 9.89 to make the number a beat). Important Empire index components: Employment: 8.4 vs. Prev. -3.4; an improvement in New Orders: 12.4 vs. Prev. 2.6; and the most critical and inflationary one: Prices Paid: 35.79 vs. Prev. 28.40. Also no surprise: inventories, that good old stand by jumps from -15.91 to 4.21. From the release: "the most widely cited factor restraining hiring plans was low expected sales growth (31 percent)."

The data calendar is very light this week. The most of important piece of data is the Empire manufacturing survey which will or will not confirm recent uptick in industrial production. Claims will be of note as well after last week's uptick. We are still far from seeing a trend confirming the job market is on stable footing. If this continues we will end up with yet another disappointg NFP headline and lower unemployment rate as the participation rate in the active population keeps dropping. Most of the focus will be on the international scene: food riots in Algeria and Tunisia where it led to the ousting of the president are not without reminding me of those observed in 2008. As I was in France over the weekend I did get much closer to the situation with Tunisian protesters creating havoc in Paris and gruesome scenes of violence. The level of public anger is scary and there is little doubt that this is something a lot of political leaders around the world should watch and reflect upon: it could happen to any of them faster than anyone thinks. - Nic Lenoir