Archive - Jan 2011 - Story

This week's key themes presented by Goldman's David Kostin: "The weak fiscal condition of federal, state and local governments, and corporate tax reform dominated our discussions this week with hedge fund and mutual fund portfolio managers. So far, 207 firms in the S&P 500 have reported 4Q results (55% of total cap). 45% of companies reporting have beat consensus earnings estimates by more than one standard deviation (above the historical average of 41%) and 9% have missed estimates (vs. average of 14%). The average EPS surprise has been nearly 10%, above the 4% historical average. Excluding Financials, there are fewer positive surprises (44%) and fewer negative surprises (6%)." For now Kostin is still sticking to his 1,500 forecast: "The S&P 500 rose 1.5% this week. Industrials was the best-performing sector (+3.0%) while Consumer Staples was the worst-performing sector (-0.5%). We expect the S&P 500 to rise to 1500 in 12 months (+15%)." We give this forecast three months max. After all, the path for QE3 must be paved with good intentions. And the kicker: "We expect a  combination of 8% sales growth and 30 bp of net margin expansion to 8.8% will combine to boost EPS by 14% to $96 per share." Ongoing margin expansion as most companies are prewarning about maring collapses... This is beyond painful. 

Not many exchanges are open on Saturday. But the one that matters in a contagionary light sure was. And the drubbing it took was not pretty. "Saudi Arabia's stock exchange tumbled by over 6 percent on Saturday,
setting the stage for other regional markets to drop as concerns mounted
about the violent protests in Egypt. The Tadawul All Shares Index fell 6.44 percent to close at 6,267 points.
The market in Saudi Arabia, where the start of the work week is
Saturday, was the first to react to the violence in Egypt and the drop
in the TASI offered a window into the potential battering that could
emerge when other regional markets reopen on Sunday. On the Saudi market, there were no gainers as investors sold off holdings. Hit hard was
Sabic, one of the world's largest petrochemical companies and the
largest publicly traded firm on the exchange. Sabic's shares fell 8
percent, closing at 97.75 Saudi riyals." And this is just the beginning. If there are any further rumors (or confirmed sighting) of protests in Jeddah and elsewhere, regional markets will go bidless, oil will go offerless, GETCO and other NYSE SLPs will go bankrupt in their attempt to keep the stock market alive, and Bernanke will just go, once the entire world realizes that Genocide Ben, which is what ZH has been calling him for quite a while now, is really much more appropriate an appellation for the man who gives a bad name to helicopters.

The same two bears who explained Quantitative Easing so that even the ADHD afflicted could understand Bernanke's indirect subsidies to the PDs, once again simply finance and in 6 minutes explain the core issues behind the bank bailouts. Concepts explained include the Too Bigger To Fail banks (the JP Morgan Chase Bear Stearns Washington Mutual and the Bank of America Countrywide Merrill Lynches), Goldman Sachs' HoldCo position over the US government, the "very real evil empire's" Goldman Sachs profiting on the AIG, the reason why the failed CIT's boss is the same person who bought a $70,000 desk, and why "when you constantly get the bailouts you don't care about the shame." Also explained are NY Fed boss, The Timothy Jeethner, The Change brought from The President Obama, why The Ben Bernank will not lend you money, and The Screwing Of The American People.

Curious to link a place with a protest you have seen on Al Jazeera (and only Al Jazeera: US "media companies" can send journos to Davos... and who can forget what Marc Faber thinks of all those who have gone to Davos... and spend $100K+ per person, but can't cover, at no cost, what is rapidly becoming the most important event of the decade) over the past two days? Here is your chance: the New York Times has put together an interactive map of Cairo highlighting the key protest areas, which also happen to be the key choke points in the geography of the Egyptian capital.

GATA has compiled what is probably one of the best and most comprehensive reports on the history of the gold market, the "special" place gold holds in the central bankers' world, the interaction between the physical and gold paper markets, and the documented historic evidence and definitive proof that the gold price has long been the most manipulated concept in the history of modern capital markets. Must read for all interested in the dynamics behind the price of gold.

While the biggest threat to the Middle East region is the possibility that the population of Saudi Arabia may try to imitate what has been happening in the area, thereby bringing total chaos to the established regional geopolitical and more importantly, energy, structure, the first protests in the Saudi Arabia city of Jeddah are already in the books. The clip below shows the peaceful demonstrations that have taken place recently, which as Fedupmontrealer explains are "taking place in front of the Municipality in protest of the severe lack
of infrastructure, and corruption, that led the city to be inundated this week causing billions of dollars of damages for the second time in two years." That this is even occurring in a state where the average wealth is orders of magnitude greater than in Egypt is remarkable. On the other hand, we expect more news such as those from yeserday that Kuwait is paying its citizens $3,500 plus free food for a year to keep calm. Oddly, visions of money dropping helicopters, infinitely extendable unemployment insurance and tax breaks keep dancing in our head. Those who wish to follows the latest developments out of Jedda which appears could be the lightning rod for Saudi riots can do so by tracking #JeddahProtests on Twitter.

Instead of the “model for the protection of man in a state of freedom and order” that Jefferson imagined it to be, the American state, both before and after its founding, was a model of conquest and subjugation – not only of the continent’s native inhabitants and the millions of others imported from another continent but of the human detritus endlessly washing up on its shores.xi As such, the American state is simply another state and, like any state, is therefore “an evil inflicted on men by men” that persists solely through the indoctrinated enslavement of its people. And to make matters worse, even some who are not indoctrinated but, on the contrary, recognize the state as the evil that it is, compound that evil by maintaining that the preservation of society nonetheless “justifies the action of the organs of the state.” This is a very serious proposition – so serious, in fact, that the very foundation of human morality hangs in the balance, and with it the very viability of civil society

Goldman's John Noyce once again confirms that he is the signal to Thomas Stolper's endless noise (pun intended). After Goldman did its traditional flip flop yesterday on the EURUSD, Noyce has been steadfast in his position on where he sees the euro. Indeed while Stolper was chasing the bouncing ball, and recommending every nano-uptick, and bailing the second there was a more than 10 pip pullback, Noyce actually has had some actionable long-term advice. That said, with Noyce's report coming out on Thursday ahead of Friday's EURUSD rout, he did provide some critical resistance pivots that appear to have been sustained, and it seems the interim top in the EURUSD is now fully in place even based on technicals (as for fundamentals, should the North Africa crisis jump across the Suez and hit Jordan, Syria or Saudi, watch as the scramble to cover dollar carry shorts goes into overdrive).

From Foreign Policy Magazine, August 2009: "Lost in this Egyptian Kremlinology is the fact that neither Gamal Mubarak nor Omar Suleiman presents a clear departure from the present state of affairs. Neither offers the new social contract that so many of Egypt's 80 million citizens are demanding in strikes and protests. The prevalence of the Gamal vs. Omar debate, more than anything, highlights the low expectations ordinary Egyptians have for a democratic succession to Hosni Mubarak's 28-year reign. Those low expectations come with their own quiet tyranny, too."

Some developing news out of Egypt, where president Mubarak has just appointed Omar Soliman as vice president. This is a notable event as it is the first time since 1981 that Egypt has a Vice President, indicating just how much of a pseudo-dictatorial system the Mubarak regime has been. We are rather confident that the people will not be all that excited about getting the former head of the country's intelligence (read spying) service as the second in command. And just like in Russia during the Yeltsin-Putin succession, we are confident that Mubarak will promptly fade from the scene as soon as Soliman gives him reps and warranties (preferably better than those by Bank of America) that he will not be prosecuted. Incidentally, the last time Egypt had a VP was when Anwar Al Sadat appointed Mubarak as VP. Al Sadat was assassinated shortly thereafter.

With "billions under management" at risk and thousands of nervous hedge funds playing with 3x leverage (thanks to Bank of America Prime Brokerage), everyone wants to know if now is the time to "make a killing" by going short stocks. After reviewing many charts, it sure looks like another "Get Out of Dodge" day.

Tyranny thrives by feeding on human necessity. It examines what sustains us, what we hope for, what we desire, what we love, and uses those needs as leverage against us. If you want safety, they will take it away and barter it back to you at a steep price. If you want success or respect, then you must bow to the existing arbitrary pecking order and play the game nicely. If you want to raise a family, then you must accept the state as a part-time parent. If you want kinship, then you must settle for a thin veneer of empty pleasantries and insincere associations. If you want independence, then you are simply labeled as a threat and done away with altogether. Autocratic rulers are first and foremost salesmen; they convince us that life itself has a “cost”, that we are born indebted, and all bills must be made payable to the establishment. First and foremost, we are sold on the idea that in all of this, we are ultimately alone… It is within these manipulated concepts of cost and isolation that we discover the foundation of all totalitarian cultures: Collectivism.

The steady climb in Fed assets continues, with the left side of Bernanke's balance sheet swelling to just under $2.5 trillion, as US Treasury holdings hit $1.13 trillion, implying that the Fed's DV01 continues to increase on a daily basis with every single POMO, as we have been pointing out since last summer, and which the Fed decided to address last week by changing its "accounting" rules and guaranteeing its assets can never decline. The differential between the US and China is now $233 billion and rising. We expect our now second-largest creditor to realize the game theory balance of leverage (no pun intended) is shifting away from its favor (and to the Fed), and to respond accordingly. Alternatively, maybe someone will finally readjust the UK's holdings to properly reflect what could very likely be simply Chinese debt accumulation.

Over the past few weeks we have dedicated quite a few articles to the WTI-Crude spread which today once again hit an all time record wide (here and here). Yet no matter the reason for the divergence, what is certainly lacking are explanations for why arbitrageurs have not stepped in to take advantage of this mispricing. While there has been much speculation, nobody has provided a comprehensive answer. Until today. Below we present the Weekly Tanker Opinion from Posen & Partners, "Light Sweet Dire Divergence" which gives what we believe could be the most credible explanation. Bottom line: just like in gold, there appears to be a dramatic divergence being created between the paper and physical markets in WTI. "The Brent crude oil benchmark currently represents the pricing benchmark for over 65% of the world’s traded physical crude oil. The WTI contract represents a pricing benchmark for about 30% of the world’s traded physical crude oil, while physical supplies of WTI are quite scarce. It should be noted, most of the crude oil being priced off the WTI contract is already trading at a significant premium to the contract itself implying that the market has already compensated for WTI’s lack of physical relevance. This could explain why shipping rates have remained depressed in the face of such a dramatic price discrepancy between the two contracts. It would also support the growing chorus of analysts, traders, and pundits calling for the Brent contract to be more indicative of fundamental demand for physical crude oil (versus speculative demand for paper WTI contracts)." Much more in the full note...

Following the first quantitative revolutions (of the variety inspired by quantitative easing) in history, we now have the first images of what quantitative looting looks like. If this is any indication of what to expect the next time Waddell and Reeds sells a few extra contracts, we are going to need much bigger forklifts.