Archive - Oct 2011 - Story

The latest Momo implosion as predicted:

• AMAZON.COM 3Q EPS 14C, EST. 24C                       
  
• AMAZON.COM 3Q REVENUE $10.88 BILLION VS EST. $10.95
  
• AMAZON.COM SEES 4Q SALES $16.45B-$18.65B, EST. $18.16B
  
• AMAZON.COM 3Q OPERATING MARGIN 0.7%
• AMAZON.COM sees 4Q operating income (loss) between $(200) million and $250 million, or between 142% decline and 47% decline compared with fourth quarter 2010

No, Paulson & Co. is not long.

Very simply, the facts of the current environment in Europe don’t equal the conclusion that a coordinated effort will restore confidence.  The fact of the matter is that European Sovereigns are massively indebted and European banks are massively under-capitalized.  The proposed solution of raising capital and issuing fresh debt to solve this issue is a joke.  If I walk away from a home I owe $200k on and its fair market value is $100k (a 50% haircut), does a loan to my bank for $100K from the institution overseeing it change the impairment?  No.  You’re shuffling the cards.  Instead of taking a $100k loss, they now have an asset worth $100k and a new liability of $100k.  The asset is still worth $100k. Even though their little maneuver technically gives them an asset of $100k and cash of $100k, my bank now has $100K less to lend against.  Thus, their leverage increases.  This analogy applies to European banks holding sovereign paper... and for that matter the countries themselves (ie Italy voting on whether Italy's debt should be purchased by the ECB/IMF/EFSF, etc).  At this point, any 'plans' are only slightly more creative than card shuffling tricks from a clown at an 8 year old's birthday party. 

If you are long, or want to get long here your stop losses will be wide and volatility based. Here are some tips on managing the positions:

• Silver Stop Loss should be $32.45. You can pick a tighter stop if you like, but this is the proscribed level for pullbacks to go to and the bull move to remain intact. Losses can be managed by adjusting volumes rather than tightening stops.
• Gold Stop Loss Should be $1680.00. This may seem less risky than silver, but that often means worse reward potential.
• Tomorrow morning trail stops higher as profits occur, use previous lows, highs on the hourly level or the top Bollinger Band line on the Daily chart previous session.
• Get ready to take profits aggressively: when these hit, 80% of the projected volatility based move is in the first 72 hours
• Get out if you are not in the money in 48 hours, even if your stop isn’t triggered. Momentum fades fast if you don’t get follow through from the immediate push.

And just as we were thinking of buying some deep OTM calls...

While Citi's Stephen Englander does not go as far as concluding that a collapse of Europe would be sufficient (but certainly necessary) to "ruin" the world, he does have a very relevant conclusion in a piece just released to clients: namely that central banks everywhere, but in Europe, are using the recessionary slow down in the insolvent continent, which nobody seems to believe any more will be able to avoid a recession (an event which S&P stated in no uncertain terms would lead to a downgrade in France and other core countries), as the perfect political smokescreen to push the turbo print button on their respective money printers. To wit: "Eurozone weakness has also generated indications that policy will be eased elsewhere (even if not in Europe). Policymakers in the US, UK and elsewhere [ZH: and Japan as of 2 hours ago] are using the euro crisis as cover to ease policy. For example, the FRBNY's Dudley yesterday characterized even the improved US numbers as disappointing and pointed to further measures if growth did not improve. Chinese growth targets and policy maker comments imply that measures might be taken if there is any sign of slowing. The BoE has already expanded it QE program. At a minimum the comments are suggesting that the policymakers are willing to take aggressive action to offset any weakness. Overall the bias towards stimulus appears to remain in place outside Europe." What is supremely paradoxical is that with the ECB stuck, any incremental QEasing by the world will merely result in an ever stronger euro, until exports by Germany become almost as impossible as those of Switzerland pr peg. As a result, organic European growth at whatever remaining centers of productivity and commerce will be truncated until it is gone completely, even as the EURUSD approaches 2.00, as the Fed embarks on what will be by then something between QE5 and QE10. And there are those who wonder why gold makes sense not only here, not only at $1570 a month ago, but at $1900 under two months ago...

In the aftermath of the wipe outs in former momo-stars Netflix and First Solar, for some inexplicable reason, we have been flooded with demands to present an updated portfolio of one JAT Capital Management. Always willing to oblige, here are the top 25 holdings.

Yesterday, to modest jeers, we advised readers that JPM had turned megabearish on that other momo darling, First Solar, cutting its target price to $50. It appears JPM was on to something. As of minutes ago, FSLR announced that "The Board of Directors of First Solar, Inc. (NASDAQ:FSLR - News) today asked its Chairman and company founder, Mike Ahearn, to serve as interim Chief Executive Officer. Ahearn has accepted. Effective immediately, Rob Gillette is no longer serving as Chief Executive Officer, and the Board of Directors thanks him for his service to the company. The Board of Directors has formed a search committee and is initiating a search for a permanent Chief Executive Officer." Time to hitting JPM's stock price target ? One day. At last check FSLR was trading 15% down at under $50. To anyone who shorted, congratulations. What is more interesting is that momo after momo darling are getting systematically monkeyhammered. Can Chipotle and Amazon really be that far behind?

Following the USDJPY touching on a fresh post-WWII low earlier today, not only has Noda made the transition from simply watching to outright panicking to being on suicide watch, but the BOJ has finally freaked out (something we predicted back in April only to be just 6 months ahead of the curve). Case in point: the Nikkei just reported that the BOJ "will discuss additional monetary easing measures to help blunt the mighty yen's impact on the economy when its policy board convenes for a meeting Thursday." Specifically, the BOJ may (read) will, expand the existing 50 TRN yen asset-purchase program by 5 TRN yen, and also may consider the purchase of bonds of more than two-year maturity, thus expanding scope of program and converting it into Japan's own Operation Twist. In other words, printing goes to Japan, now that it is widely expected that no matter what Europe does, the outcome will be one of EUR weakness. Everyone knows the proclivities of the deranged Chairsatan (and for those who don't just observed the dramatic backwardation in Crude observed here first yesterday), which only leaves Shirikawa. And he has just had enough. Which in turn explains the surge in gold: with the entire world once again entering hyprintspeed mode, the only safe repository of value is now exclusively gold (sorry CHF, you are no longer relevant: thank Hildebrand and the goonies at the SNB who are quietly padding up the asset side of their balance sheet with hundreds of billions of soon to be even more worthless euros).

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...