Archive - Feb 2011 - Story

Markets positive this morning. Treasuries experienced a bullish move yesterday as economic numbers managed to disappoint lofty expectations. Advance retail sales released yesterday showed a weaker than expected increase at 0.3% v 0.5%E. Today will see the release of housing starts, PPI, and industrial production. An increase in the latter would represent a third straight month of growth.

Over the past few weeks, Citi's Steven Englander has not exactly kept it a secret that in his view, the US Dollar is due for the kind of flash dash that only stocks trading on the NYSE and BATS are capable of doing after reporting horrible news (bizarro market, remember). In an overnight note, Englander presents several scenarios on how to capitalize on what he notes are EURUSD "fat tails that are getting fatter" - specifically i) Long 6-month EUR Put USD Call 1.2500 At-Expiry Digital with KO at 1.3875 and ii) Long 6-month 1.3000/1.2000 EUR Put spread with KO at 1.3875. The 4 reasons why Citi believes conditions are ripe for sharp move in the pair are i) European sovereign debt is far from resolved, ii) Uncertainty emerging from governmental changes in the Middle East, iii) Unwinding commodity price inflation, and iv) Homeland Investment Act-2.

This may be a highly distasteful proposition, but just for a moment, I want you to sit back, and imagine that you are a member of the corporate banking elite. You are a walking talking disease ridden power mad pustule who naively believes himself intellectually superior to the vast majority of humanity and above the inherent laws of conscience, honor, and general good taste. You are a villain in the purest sense, in that you not only do great harm to the world, you actually SEEK to do great harm to the world, if only to benefit yourself and your exclusive circle of “friends”; a clan of degenerate blood thirsty sociopaths with delusions of omnipotence that stalk the night like Armani wearing Chupacabra exsanguinating the joy from poor unsuspecting cultures. You are capable of anything, and sadly, you take “pride” in this fact…The issue is, how do you convince the general public that all is well until you are ready to unleash hyperinflation and fiscal Armageddon? How do you make them believe with all their hearts that they are not in the midst of a debt meltdown and the end of their financial sovereignty, but basking in a full-on economic recovery?! Here is a step by step guide to fabricating an economic recovery out of thin air….

Surging inflation? Check. Negative GDP growth? Check. Increasing unemployment? Check. Dropping wages? Check. Looks like we have a stagflation bingo. Per Bloomberg: "U.K. unemployment claims unexpectedly rose in January, underlining the fragility of the labor market a year after the economy emerged from recession and as public spending cuts start in earnest. The number of people receiving unemployment benefits rose 2,400 to 1.46 million, the Office for National Statistics in London said today. The median of 25 forecasts in a Bloomberg News survey was for a 3,000 drop. Unemployment based on International Labour Organization methods rose by 44,000 in the fourth quarter to 2.49 million." And this is just the start of what real austerity means: "Prime Minister David Cameron is counting on hiring at private companies as his government embarks on budget cuts that will cost 330,000 public-sector jobs over the next four years." And more economic humor: "There is a risk unemployment could rise” this year, Philip Shaw, an economist at Investec Securities in London, said before today’s report. “It’s possible that the public-sector job cuts happen straight away and you don’t see a pickup in private-sector job creation.”" Coming soon to every centrally planned regime near you.

Meet Axel Weber's replacement

Housing starts, PPI, industrial production, and the FOMC minutes….Small 05/15/2021 – 11/15/2027 POMO for $1.5-$2.5 billion.

The patently obvious deterioration in housing just took one big step for the worse, after the Mortgage Banker Association reported that the Market Composite Index, a measure of mortgage loan application volume, decreased 9.5 percent on a seasonally
adjusted basis from one week earlier. The Refinance Index decreased
11.4 percent from the previous week and is the lowest Refinance Index
recorded in the survey
since the week ending July 3, 2009. The seasonally adjusted
Purchase Index decreased 5.9 percent from one week earlier. And for the obligatory quote that confirms that Ben Bernanke's plan to fix the economy by raising rates or something, is about to blow up: "Mortgage rates remained
above 5 percent last week, up almost a full percentage point from their
October lows, and refinance
volume continued to drop," said Michael Fratantoni, MBA's
Vice President of Research and Economics. "Applications for home
purchases also declined on a seasonally adjusted basis.  Buyers
have not returned to the market as rising rates have reduced
affordability, to some extent." Bottom line: few people care to refinance (which is also making the QE Lite component of QE redundant), and even fewer people want to buy homes. So, again, what recovery?

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 16/02/11

The small country of Bahrain has promptly been displaced in the docket of revolutionary news, by recent developments in Iran. Yet the peace on the Saudi island neighbor is deteriorating as demonstrations escalate. According to ABNA.ir, "Tens of Bahraini Army jeeps surrounded the main square and attacked the protesters. Thousands of Anti-Government protesters filled a main square in the Bahrain capital due to discriminations posed by the government. Security forces at first appeared to hold back as the crowds poured into Pearl Square in Manama. After a while, in an extreme violent action the army released more than 50 war vehicles to the square, which resulted in shameless and violent attacks against the righteous freedom seekers. The dramatic move Tuesday comes just hours after a third protester died in clashes with police in the strategic Island Kingdom, which is home to the U.S. Navy's 5th Fleet." So while we wait for Al Jazeera or anyone else for that matter to start covering the protests in Manama (which could be a while: the world has suddenly developed revolution burn out), below we present a photographic update from the island nation.

In advance of tomorrow's FOMC minutes releasae (2pm Eastern) Goldman shares some interesting thoughts on what may be disclosed. The key variable is whether, just like in the minutes from early 2010, the Fed will once again jump the shark (what is the creature of jump choice when jump is done twice in one year?) and commence discussions of exit strategy. If, as Goldman expects this might be the case, expect the market to plunge as there is nothing organic about this Fed liquidity driven pump of over 600 S&P points. To wit: "Is the FOMC turning its attention back to its ultimate exit strategy?  It is premature to assume that the FOMC has any preset schedule for the “exit strategy” that was discussed widely—inside and outside the Fed—in early 2010.  After all, the LSAP program is only about half completed, and the default assumption appears to be that it will run its course until mid-2011.  That said, it is never premature for the committee to revisit its options, particularly during the longer two-day sessions that allow time for more strategic thinking.  Thus, we would not be surprised to see some discussion, if only a brief review of familiar tools and strategies for the exit strategy that will ultimately be needed.  The mere existence of such a discussion would not be meaningful in itself, though obviously the language surrounding it would have the potential for market impact, whether justified or not."

Jan Hatzius is the bellwether of the sellside economist crowd. When he was bearish (2009), most were bearish, when he turned bullish (early half of 2010), everyone else followed suit. Then he turned bearish again (early August 2010) and convinced his friend and former co-worker Bill Dudley to launch QE2. Then, in December, he turned very bullish again. And now we are here. We expect Hatzius to be fake bullish for another 3 months max, at which point he will have no choice than to start telegraphing to Jon Hilsenrath that it is time for QE3. In the meantime, for those who are not too familiar with his work, here is an extended interview with Bloomberg TV, in which the GS head economist talks about Goldman's call for 18% gain in stocks this year as well as trends in jobs, inflation and other data indicators.

And so our bureau of central planning has once again made distressed investing a relic of the past. Famous distressed PM Bruce Karsh, who runs Oaktree's distressed investment fund, has just decided to return $3 billion of the fund's $10 billion previously raised from investors due to a lack of investing opportunities. Basically, in preventing failure for a select few, Bernanke made failure impossible for everyone (which begs the question: how long before the specialized restructuring boutiques of the world - the Houlihan Lokeys, the Miller Buckfires, and the Alix Partners, continue to exist, let alone sustain on IPO any time now hopes). So after Bernanke destroyed long/short, sometimes incorrectly called "value", investing, he has now eliminated another formerly profitable vertical of the market that rewarded spotting arbitrage opportunities. The only funds that will remain soon as the Long-onlies and the momos of the world - also known the dumbest money imaginable. And when this whole thing crashes, and only shorts would be able to make money, there will be no-one making money, as there will be no capital available to short strategies. Bernanke's plan of killing all the bears has succeeded. Next up: it's the bulls turn.

After close today, Trian Fund Management, Nelson Peltz' asset management company, filed a 13D indicating the fund had amassed a 10 million (7.9%) share stake in FDO, and more importantly, expressed a vague, preliminary, non-binding and highly-contingent interest in acquiring discount retailer Family Dollar (closing regular hours at $44). As the proposed price indicated in the letter is $55-60, the shares are expectedly surging, meaning the letter alone resulted in nearly a 20% ($13) gain for Peltz 10 million share investment: $130 million for a few minutes worth of work: not bad. Yet is this anything more than a red herring? After all these kinds of fully contingent letters were all the rage during the bubble years, when funds would "express a purchase interest" with so many contingencies Arnold could drive his Hummer through all the "outs." As soon as the stock surged, the letter writer (and more often than not, the cabal of silent co-investors) would cash out, and slowly the buying interest would evaporate, with the price slowly dropping back to historical levels. In fact, for Trian this is not the first time - the company did an almost identical thing with Chemtura back in 2008, only to completely leave the company in March of 2009, months ahead of CEM's filing for bankruptcy (resulting in major losses for Trian). Which is why we urge readers to be very careful before chasing into FDO stock here: we are very concerned that this is nothing more than simply another attempt on behalf of Trian to stir up buying interest in which to sell its 10mm holdings with no real acquisition interest, since with all the non-binding clauses it is extremely difficult to take this letter seriously.

Still hungover from Saturday to comprehend what happened with the Great Obama Budget presented yesterday? Then this video is for you. Using shot glasses of Jack Daniels it takes just under two minutes to lay out in layman's terms not only the essence of the proposed budget, as well as the "Draconian" cuts contemplated, but also insinuates heavily about the level of blood in the alcoholstream of those government workers who came up with the "50% rise in government revenues over 2 years" assumption.

In Britain, they call it "DADA." It means Decide. Announce. Defend. Abandon. In America we call it "NIMBY" - "not in my back yard." It applies to all kinds of infrastructure construction, from airports to roads. But it is electric and gas utilities that feel the brunt of local opposition. These localized forces of "no" have caused the buildup of a substantial backlog of infrastructure projects, not only for sexy green-energy technologies but also for the traditional needs of energy production and distribution - pipelines, power lines, replacement of aging equipment and the construction of new facilities to meet new loads and move the energy infrastructure into the 21st century. It also includes old-fashioned technology - meters, switches, transformers - to get new green electricity to the consumer. A new study, from a group advocating upgrading energy facilities, says the pent-up need for utilities to start these projects is so great that if the impediments can be dealt with, 250,000 jobs can be created almost immediately, without action from Congress or a raid on the federal treasury.