Archive - Feb 2011 - Story

Over the years we have not spared our praise for the Nasdaq: the one exchange to first legalize frontrunning aka Flash Trading, to actively promote churning via HFT erection-inducing liquidity rebates in stocks and options, to create novel and ingenious ways to skirt Rule 611, and, most recently, to overtake the NYSE as host for greatest number of fraudulent Chinese reverse-mergers, the Nasdaq has never kept a secret that it cares far more about its clients than the investing public. Yet little did we know that in addition to pervasive manipulation we can also add thorough security breach and compromise to the exchange's list of transgressions. According to the WSJ, "Hackers have repeatedly penetrated the computer network of the company that runs the Nasdaq Stock Market during the past year, and federal investigators are trying to identify the perpetrators and their purpose, according to people familiar with the matter." Now it is sadly ironic that the world's "electronic exchange" (whatever that means in a world devoid of any carbon-based traders) is the one that would succumb to an outside incursion. What, however, is punishable by even the most mentally retarded, transvestite midget porn-obsessed SEC minion, is that US investors have to learn that practically any stock transaction in the recent past may have been frontrun by illegal means (as opposed to just legal ones that are available to any one with a few Mahwah collocated Cisco machines), through a newspaper.

Tense and terrible times inevitably summon an odd coupling of two very different and difficult human conditions; honesty, and brutality. Certain painful truths are revealed, and often, a palpable fury erupts. Being that times today are particularly tense, and on the verge of being spectacularly terrible, perhaps we should embrace both conditions in a constructive manner, and become brutally honest with ourselves. This begins by admitting to that which most ails us. It begins by admitting how far we have fallen…

Zero Hedge has previously demonstrated the improbable, for lack of a better word, upward bias in revising initial jobless claims applications. Today, we look at an even greater statistical problem at the BLS: that of Non-Farm Payrolls. Courtesy of today's full year revision announced by the BLS, and a granular sort by John Poehling, we have discovered that while revisions added a whopping 55k jobs in the years 2006-2008, NFPs have now been revised to remove 538k jobs in the 2009-2010 period. In other words, based on data revisions, under President Obama, America has suddenly created over half a million jobs less (even if all of them are part time) simply due to statistical adjustments. We won't even go into analyzing just how much worse the S&P would be trading if all those monthly "upside" NFP reports had reflected true and not completely fudged numbers. At an average 22.4K downward monthly revision for every single monthly NFP report in the past two years, we are 100% confident that not even Iosif Shalom Bernanke would be able to offset the market plunge that would ensue each and every of the past 24 months... if fundamentals were ever to be remotely meaningful again, of course.

It was less than three years ago that oil went to $140 per barrel and the commodity index climbed over 3 standard deviations and 60% above its 4-year average. An extreme like that should statistically occur about once every century, but despite dropping below the 4-year average for half of 2009, we are now about 2.7 standard deviations and 50% above it, and still climbing. This is a big surprise and a big problem for global prosperity. Now, the turmoil in Egypt has lifted the fear component in the oil price as well. Furthermore, a deep political rift between the US, as Israel's protector, and the newly democratic but primarily fundamental Egypt and its allies in the Islamic world is a distinct possibility. Saudi Arabia could come under pressure. The most negative near term result of this split would be OPEC's refusal to increase oil output, despite the rising price, something similar to the situation after the Yom Kippur War in 1973. - John Taylor

There are two reasons why I think the Fed will be loathe to remove QE. The first is the huge benefit (from the government’s perspective) of creating an inflation problem for China which will eventually force the Chinese to strengthen the Yuan. Congress has been pressing for harsher measures to force the Chinese to strengthen the Yuan (link here) for years and QE2 is turning out to be exactly the kind of pressure that just might work. I’ve long argued that this is a case of be careful what you wish for because the second the Chinese allow the Yuan to strengthen materially, the prices for everything that we buy from China (which is basically every single item on Walmart’s shelves) will rise an attendant amount. The other reason why QE is going to be with us for a long time is the ongoing need to support the massive size of monthly Treasury issuance. With the US expected to run a $1tr - $1.5tr deficit this year and another $2.5tr in maturing bonds to roll, there is very little chance that the US could continue to issue bonds at the current low rates without huge support from Mr. Bernanke’s POMO operations. Our total new borrowing and refunding needs will be greater than $300bn per month which is simply astronomical. Even bond investing legend Bill Gross is calling the US Treasury a ponzi scheme. If Bill Gross isn’t buying Treasuries who is?

Our administration in a nutshell: in the just released "Semiannual Report on International Economic and Exchange Rate Policies" by the Treasury, the conclusion is that while China isn't really a currency manipulator, which it obviously is via the CNYUSD peg, inasmuch as the US also is courtesy of the Hewlett Vissarionovich, "progress thus far is insufficient and that more rapid progress is needed." Win win for everyone, as the global FX attrition war continues (we lob inflation at them, they lob it back ten fold). In the meantime, the status quo is great and let's all pray that the global revolutions end with Egypt, which a month ago few even could point out on a map.

Yesterday, while we were listening to the Chairsatan(^© Bill Gross), we made the following semi-serious realtime translation of Bernank's presentation to the sycophants' club: "Let me explain it to you: 9% unemployment: NFLX $300; 8%
unemployment: NFLX $500; 6% unemployment: NFLX $1000. Kapishe?" And while we were mostly joking in our correct interpretation of the Fed's massively wrong understanding of causality between the market and the economy, Nicholas Colas of BNY today took a comparable idea and analyzed what the level of the S&P should be for unemployment to get to a Fed acceptable level based on empirial data. We quote: "By our analysis of the last forty years of history for the S&P 500 and unemployment rates, in order to get to the Fed’s 8% target in 2012, the U.S. equity market needs to climb another 35% in 2011, putting the S&P 500 at 1755. That’s not our price target, but it just may be the Fed’s." Since this is most likely the entire "sophisticated" plan laid bare of one Iosif Vissarionovich Bernank, expect to see a complete elimination of volume as the mutual fund cartel continues with the never-sell collusion, and the only incremental buying is PDs with taxpayer money and HFTs' bid-bias fully compensated by rebates for providing the PDs with the "liquidity" they need to send stocks up another 350 points. Luckily, few if any care what the joke that is the stock market actually does.

Non-Farm Payroll day has traditionally been one of the top three most volatile and highest volume days each month. No more. If the primary scourge for the banking community has been the total collapse in market participation, leading to a drop in flow and commission revenues, then Q1 earnings will be a bloodbath. Today alone ES volume is 25% below average, and this is on the week's traditionally most active day. So once again we wonder out loud: is anyone left trading stocks at all, or has everyone now shifted to the far less manipulated FX, bond and commodity markets? And, following up with our second question: when will CDS trading for retail finally be approved? Obviously nobody wants to trade equities any more, and Goldman will be more than delighted to skim pennies off the top as OTC goes global.

Ok, someone needs to step in here before people get hurt... Well, more. The chart below is not of some biotech strategically bought by various CT hedge funds having just announced a successful obesity Phase 3 trial. It is corn: one of the most widely consumed commodities in the world. And while corn appears to be today's limit up commodity, elsewhere cotton has just limited down as a continuation of the recent ICE plundering, courtesy of the exchange's margin hike; rice, after touching on highs, has decided to drop aggresively, as have cocoa (never mind the Ivory Coast government vacuum) and coffee. This is the kind of environment in which companies that do not have commodity price hedges can go bankrupt in a span of months. Which reminds us to create a basket of companies that do versus those that do not have input price hedges. That could be one of the most profitable pair trades in 2011.

What is the only thing better than the neverending Liesman-Santelli Saga (7 minutes into the clip), where Rick is correct once again (check our previous observations on the huge spread between the SA and NSA U-6 number)? First runner up - David Malpass saying "I really think there is an improvement in the economy though you can't see it." But the undisputed winner is Gary Kaminsky telling administration lapdog Mark Zandi (who is trying so hard to be a shoe in for the Tim Jeethner replacement position) he is full of it (3 minutes into the clip). Luckily, a defensive Moody's "strategist" (of the same grating [sic] agency that downgraded Egypt on the Monday after the revolution) has tipped his cards:"here's an intrepid forecast for you, I'll put myself on the line. Next month, because of the weather effect we are going to get a 250k-300k print."  Ok Joe Biden. And when you are proven wrong again, as usual, can everyone please relegate your worthless ramblings to the same predictive compost heap as the ADP's irrelevant private payrolls number? And of course, none of this is relevant. The economy will certainly triple dip in April just in time to set the stage for QE 3 (pardon QE 2 Lite).

"There is no doubt that the weather exerted a major impact — wouldn’t the consensus have realized that ahead of time? It’s not new news that January was a terrible weather month and that the data would be impacted. Then again, yesterday all we heard on CNBC was how the chain store sales data were unaffected by the inclement weather, but somehow the labour market was! Go figure. Maybe instead of looking for work, people were choosing to stay warm in the malls and spend their extended unemployment insurance cheques and newly received payroll tax deductions. What an economy!" - David Rosenberg

Every time we revise the attached chart, its looks worse and worse. The first time we did an analysis of how many jobs per month the US has to generate each month to get back to the same payroll number as of November 2007, right before the start of the Greater Depression, and when accounting for the 90K/month natural growth to the labor force, something the administration continues to blissfully ignore (with the labor participation rate plunging to a 26 year low) it was in the mid 220s. As of today, the number is almost quarter of a million, or 246,600. That is how many jobs the US has to generate every single month until November 2016, or the end of Obama's improbable second turn, for the unemployment rate to get back to where it was when accounting for population growth. And while this is obviously impossible, one other thing that is concerning is that post the revised NFP numbers, not only do we now get a lower cumulative low of all jobs lost, at just over 8.6 million attained in February 2010, but as the highlighted area demonstrates, the recent trend in jobs is one of accelerating deterioration. If in the offchance it were to, gasp, snow in February, March will likely have the first negative NFP print since September. Oh yes, post today's revisions, we now learn that the months June through September actually lost jobs (granted, inclusive of census adjustments). One thing is certain: 5% unemployment will not be back for the next 5 years. 100% guaranteed.

US Afternoon Briefing - Stocks, Bonds, FX – 04/02/11

Jim Rogers, in his latest interview, cuts right to the chase: "I don't own many equities, because I don't know what is going to happen in the world economy. I expect more currency turmoil, more social unrest, more governments collapsing. So I am investing in currencies and commodities rather than stocks." Pretty much like everyone else, as we have been suggesting for quite a while. Rogers snaps at the trademark CNBC question of what he would be investing in: "I have been explaining to everybody on CNBC for a year and half or two now that food prices are going to go through the roof, they're going to explode. We have serious shortage of everything developing, including shortages of farmers... The average age of farmers in one major agricultural state is 58 years old. In 10 years it will be 68 years old. In parts of Japan they have no farmers... It takes 7 years for a coffee tree to mature. Orange trees, palm trees: you don't just suddenly snap your fingers and suddenly get some more palm oil. All of this takes time." So all those who believe that the surge in people rushing to fill the ag arbitrage holes will produce immediate results, may need to wait 3-7 years, dependant on access to manure.