Archive - Oct 25, 2011 - Story

The US Treasury just completed the first of 3 bond sales, which as Zero Hedge observed last week, will take total US Debt to GDP to over 100%. Today's auction was more or less plain vanilla, with $35 billion in 2 Year bonds pricing at 0.281%, just inside of the 0.29% When Issued, higher than the September 0.249%, and with the Bid To Cover declining modestly from a near record 3.76 to 3.64 this month, which however is still the second best BTC for 2011. That said, the interest was not due to Directs who saw their take down share drop from 12.16% (and an LTM average of 14.30%) to just 8.21%, the lowest since February 2011. Yet while Directs (China's London-based buyers, PIMCO) Dealers stepped up and bought 52.57% of the auction, the highest since June. Naturally as has been the case recently, the bond priced well inside 3M USD Libor of 0.422%, something which in an era pre-central planning would be quite laughable, but now: perfectly normal.

We have good reason to be waiting for Lehman—our current situation is simple and stark: Sovereign nations and individual citizens are over-indebted—to the point where they cannot pay back what they owe. We all know that this overindebtedness at the sovereign and individual level is going to end, and end badly: Worse than 2008.  So along with everyone else, I’ve been waiting for Lehman—and fruitlessly trying to guess which will be the Lehman-like event this time around. Will it be the bankruptcy of Dexia? BofA? UniCredit or SocGen or one of the Spanish banks? Will it be a war in the Middle East? Bad producer index numbers from China? A fart by a day-trader in Uzbekistan?

When will Lehman arrive!?!?

But lately, my thinking has changed: Like the characters in Godot, I think that we’re waiting in vain. The Lehman-like event will never arrive because it won’t be allowed to arrive. So this miserable slog we are going through will continue—indefinitely. (Yeah, I know: Sucks to be us.)

We last presented the chart below following the most recent UMichigan consumer confidence data. We update it for today's Conference Board update, which regardless of how one looks at the data, confirms that either consumer confidence, or retail data is being either massively manipulated, or there has been a revolution in mass psychology whereby the more depressed and hence broke a US consumer is, the more they shop. But going back to reality, this divergence is absolutely unsustainable, and we are certain that any and all calls by fly-by-night journalism majors calling for an end to the US recession, driven purely by an overhyped short covering rally in the stock market, will shortly, and mercifully, cease.

The low prices sure were fun while they lasted. In other news, Spam is still cheap. And now, it is time for the CME to scramble to reinforce "risk management" and send margins to 100% because this aggression against "sound" money will simply not stand (oddly enough the 14% or so jump in the ES and various other equities contracts was not sufficient to prompt corresponding margin hikes).

The growing consensus among technical and fundamental analysts is that the stock market has bottomed for the year and is now in full rally mode. There are five basic arguments in favor of a "real thing" rally that runs higher for months to come:

1. Stocks almost always rally in November-December, and end in positive territory in the 3rd year of the presidential cycle (2011)
2. September data in the U.S. was mildly positive, fears of recession have faded
3. Corporations like Google and Catepillar are posting blow-out earnings
4. Europe is finally solving its debt crisis in a comprehensive fashion
5. China is still growing and thus is still the tugboat pulling the global economy ahead

There are seven factors on the other side of the ledger...

Here is the draft document with our thoughts inserted directly into the document. As more actual details or termsheets become available we will attempt to analyze them as well.

Over the next 24 hours expect many post of this nature:

• DE JAGER SAYS ITALY NEEDS TO TAKE EXTRA GOVERNANCE MEASURES
  
• GREEK BONDHOLDER LOSS WILL BE 60%, ANA CITES VERHOFSTADT SAYING

Liesman spin on how 60% losses is not a CDS trigger event coming in 10 minutes.

While the US may have its "committee" decision to every problem in the world, Europe has the "summit meeting" which in the past would kiss and make everything better. No longer. As the following chart from Reuters indicates, annotating the relentless rise in Italian yields (which have about 100 bps in buffer from full out Eurozone collapse: if the 10 Year BTP hits 7.00% it's game over), the half life of the mere meeting in terms of favorable impact is now negligible and in fact, negative. Just like BOJ (and, some would add, Fed) interventions in the market now do more harm than good, so hollow Eurozone meetings without any actual resolution, simply make the Eurozone troubles that much more acute. Keep a close eye on the BTPs. They are already at 6% following last week's tumble first documented on Zero Hedge. If the price drops that much more, that will be it for the EMU experiment.

Certainly not helping European sentiment is the report from the FT that "Silvio Berlusconi’s centre-right coalition government in Italy appears in danger of collapsing over European Union demands for a demonstration of concrete action on economic reform by Wednesday’s summit of eurozone leaders. The EU ultimatum delivered to Mr Berlusconi in Brussels on Sunday risks breaking his coalition instead of giving it an external impetus to move ahead on measures to cut Italy’s debt and promote economic growth." So you mean that extending the retirement age by a few hours is not credible reform? That surely is news to Bunga Bunga. And after all, remember the dedication with which Italy promised it would promptly enforce austerity after it was admitted to the SMP bond monetization program, only to completely forget all promises 48 hours later? It seems Europe, which has had enough of being humiliated by the corrupt pederast, has remembered: "The ultimatum was delivered as part of efforts to resolve the eurozone sovereign debt crisis, but the Italians’ failure to reach agreement on reform threatens EU leaders’ stated goal of finalising at Wednesday’s summit a comprehensive solution to the crisis." So the question is: how long before The Guardian refutes all FT speculation that Italy is scuttled with a well-timed rumor at 3:45pm?

Gold finger? Or did the market just get it through its greasy, vacuum-tubed head that the only option for the status quo cabal to preserve said status quo is to print, print, print? Or, perhaps this headline from the FT is finally getting some play: "Italian government on brink of collapse." Or, perhaps this one: "Eurozone crisis fund ‘may be weeks away’." Or, has the break out, predicted yesterday, commenced? Stay tuned to find out.

So much for the US consumer confidencing [sic] his way up to buying houses and other stuff. even with 2000x leverage. According to the Conference Board, October Consumer Confidence, plunged from a downward revised 45.4 to 39.8, the lowest since March 2009. The forecast looked for an increase to 46.0. Current conditions were even more horrendous, dropping to 26.3. And with crude on its way back to $100 (thank you Dudley) and gas back to $4.00, this number is not going higher any time soon. But wait, there's more: the jobs plentiful dropped from 5.5 to 3.4, jobs hard to get also dropped from 50 to 46.1, and the cherry on top is that 1 Year inflation expectations are, well, anchored at 5.8% versus 5.7% previously.

As we warned an hour or so ago... Euro plunges.

Not like it matters considering it is pretty much November, but back in August, the Case Shiller index once again missed expectations. The overall index declined 3.8% compared to an expectation of 3.5%, but more importantly, to all those calling for a bottom to housing, we draw your attention to the Composite Top 20 Seasonally Adjusted index, which declined for a 4th consecutive month, in August dropping to 140.56, a decline of -0.05%, following a revised drop of -0.15% in July. No good news were to be found in the prepared remarks either: "The 10- and 20-City Composites posted annual returns of -3.5% and -3.8% versus August 2010, respectively. At -8.5%, Minneapolis posted the lowest year-over-year return, but has improved in each of the last three months. Detroit and Washington DC were the only two cities to post positive annual returns of +2.7% and +0.3% respectively." Here is the bottom line: the seasonally adjusted data has posted 4 consecutive declines; and 14 out of 15 consecutive drops. The Top 20 SA index is now at 140.56, the second lowest in years, and better only than the 140.39 in March 2011. In other news - there is no housing bottom.