Archive - Mar 2011 - Story

Some big picture observations on the market and inflation from deflationist David Rosenberg: "There is a great debate both in the markets and among Fed officials about whether QE3 will be necessary. Atlanta’s Lockhart was the latest to voice his view that such will be unwarranted, and he seems to find support from the likes of Richard Fisher from Dallas and Charles Plosser from Philadelphia. But there are others like Janet Yellen and Bill Dudley who appear to desire even more doses of stimulus. Bernanke is keeping his cards close to his vest. All we can say is that by the time the decision will be made, the headline U.S. inflation rate is very likely going to be at or above 3%, so the Fed is going to have a real job on its hands to convince everyone that “core” is the measure to watch (though even here we can expect to see fuel kick into airlines and cotton seep into apparel)."

UBS' Andy Lees reminds all those who forgot the carnage in restaurant stocks in the spring/summer of 2008 when oil hit $150, crushing food margins and causing patron visits to plunge due to the $5 gas prices, that the next carnage (once the market starts trading back with some fundamentals) will be in... restaurant stocks. "FTI consulting suggests that it is not just the emerging market countries being squeezed by food inflation, but also a lot of the smaller US food chains. Last year restaurant chains such as Uno Chicago Grill pizza, Fuddruckers and Charlie Brown’s Steakhouse filed for bankruptcy. A lot of the smaller food chains apparently have large debt servicing costs and with cash flow being squeezed by higher input prices they are struggling to keep up payments. Larger companies with strong finances are not falling under these pressures."

Has anyone seen the latest Whitney Tilson NFLX reshort memo? Because if the news that Facebook and its 600 million registered users is entering the video streaming market is true, and it appears to be, the "value inventor" should promptly forget that he topticked the market with his short cover a few weeks back, swallow his pride and actually make money. As for Netflix, the world's most ridiculous zero barriers to entry business model is about to realize why most SWOT analyses typically at least cast a casual glance at said barriers to entry. Because when there are none, you can go from hero to zero in a like amount of time. All Things Digital reports: "The social media giant is taking its first step to connect you with
movies and TV shows, while collecting a fee in the process. It’s going
to let users rent movies directly from the site, using Facebook Credits
to pay for the transaction. First up is “The Dark Knight”, from Time Warner’s Warner Bros.. It will
cost 30 credits, or $3, for a 48-hour rental, via an app the studio has
built for the site. More movies, along with the ability to purchase the
titles outright, are coming." And so, the race to the bottom in Netflix margins begins. Next up: we repeat our prediction that NFLX will be forced to come to market with an equity offering, which will promptly cut the value of the world's most overpriced stock by at least 33%.

• Global Bond Rout Resembling 1994 Seen as Inflation Exceeds Benchmark Rates (Bloomberg)
• Libya Rebels Push to Regain Town as NATO Weighs No-Fly Zone (Bloomberg)
• OPEC Members Rush to Raise Oil Output (FT) Since Refuted by both OPEC Member and Goldman Sachs
• Divisions Emerge on US Foreclosure Settlement (FT)
• Policy Disputes Spill Over Into Spending Fight (WSJ)
• Keynes would denounce policies associated with his name (Washington Times)
• Monsters that lurk in the shadows of Wall St (FT)
• China Faces 60% Risk of Bank Crisis by 2013, Fitch Gauge Shows (Bloomberg)
• China Looks to Lift Imports (WSJ)... and to double exports
• EU Watchdog sets tough 2011 bank stress test (Reuters) criteria include whether traders can count to 10 without an abacus
• Rain and Snowfall Ease Drought in China (NYT)...  Cause China said so

While most of the focus continues to be on North Africa and the Middle East, the not inconsequential matters of the European sovereign debt crisis and the US’ dire fiscal situation continue to bubble away beneath the radar. Greek and Portuguese bonds have taken another hammering this morning. The Greek 10-Year yield has surged to 12.44% (TD: make that 12.764%), up another 35 basis points today alone, and Portuguese 10-Year has surged to 7.58% (TD: make that 7.66%), another 22 basis points. The recent “bailouts” and failure to properly restructure the debt shows that the sovereign debt crisis is far from contained. The US recorded its biggest monthly deficit in history yesterday with a $223 billion deficit for February alone, the 29th straight month of deficits – a modern record. This does not bode well for the beleaguered dollar and could result in further sharp falls in the value of the dollar. Lloyds TSB's Assetwatch survey finds gold and silver beat all other assets in 2010 due to investors looking to “protect the value of their investments amid the renewed uncertainty over the global economic outlook including the debt concerns in the eurozone and rising inflation.”

Markets are mixed this morning as they await Thursday’s EU meeting on the future of the EFSF. Yesterday showed that rising oil prices will likely cause a debate within the Fed as the rise could either accelerate inflation or even halt economic growth. Dallas Fed President Richard Fisher told conference attendees that QE2 may need to be scaled back to prevent inflation while Atlanta Fed President Dennis Lockhart supported a possible QE3 to avoid another recession. The debate will likely escalate along with ongoing violence in the world’s oil centers. Consumer credit rose for the fourth consecutive month, increasing $5.0B in January v $3.5BE, led by federal government lending. Meanwhile, revolving credit fell $4.2B, showing a still cautious consumer despite higher borrowing. Today’s NFIB survey release at 95.0E v 94.1 prior came in at 94.5. The rise is indicative of easier lending and improved employment figures, but we note that small business still lag large ones in economic progress.

Crude dropped overnight, after the FT joined the BBC in the "False Rumor Spreading Korner", after the Libyan Investment Authority held newspaper said some OPEC members are looking to raise oil output to avoid any supply shortfalls. Too bad that just like every other previous rumor-based attempt to drive oil lower, this one was refuted within minutes by the same OPEC members that were allegedly boosting their capacity (which does not exist in the first place). Perhaps if the FT had read the note sent out at midnight by Goldman's David Greely, which noted that there is virtually no spare OPEC capacity left, they would have known why they should have come up with a more credible rumor: like Gaddafi committing suicide after watching the latest episode of Sheen's Korner. So much for the rumor mill. Now on to facts, where instead we see a development which threatens to send oil surging far higher. Reuters reports that formerly peaceful Kuwait has just joined the ranks of demonstrators, demanding the resignation of the prime minister in a peaceful protest early in the day, with a larger one expected later in the day: "Kuwaitis demonstrating outside parliament for the prime minister's ouster came up with a new symbol of Arab discontent on Tuesday by handing out watermelons. "This is for the parliament's poor performance," one of the small band of protesters shouted as he gave a watermelon to a lawmaker making his way into the parliament. The significance was not spelled out, but in local parlance, a person who has a lack of understanding or holds an unrealistic point of view sometimes is called a watermelon. A potentially larger rally was expected later, inspired by spreading Arab protests that toppled leaders in Tunisia and Egypt before sparking the insurrection in Libya and spreading to other Gulf countries including Bahrain, Oman and Saudi Arabia." Kuwait, for those keeping track, is the 4th largest oil exporter in the world.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 08/03/11

Wonder why the US mint has not sold a single ounce of silver so far in March? Here is a clue: "The United States Mint today announced that it is requesting public comment from all interested persons on factors to be considered in conducting research for alternative metallic coinage materials for the production of all circulating coins. These factors include, but are not limited to, the effect of new metallic coinage materials on the current suppliers of coinage materials; the acceptability of new metallic coinage materials, including physical, chemical, metallurgical and technical characteristics; metallic material, fabrication, minting, and distribution costs; metallic material availability and sources of raw metals; coinability; durability; sorting, handling, packaging and vending machines; appearance; risks to the environment and public safety; resistance to counterfeiting; commercial and public acceptance; and any other factors considered to be appropriate and in the public interest."

On Friday, free and efficient market champion Ted Kaufman, previously known for his stern crusade to rid the world of the HFT scourge, and all other market irregularities which unfortunately will stay with us until the next major market crash (and until the disbanding of the SEC following the terminal realization of its corrupt and utter worthlessness), held a hearing on the impact of the TARP on financial stability, no longer in his former position as a senator, but as Chairman of the Congressional TARP oversight panel. Witness included Simon Johnson, Joseph Stiglitz, Allan Meltzer, William Nelson (Deputy Director of Monetary Affairs, Federal Reserve), Damon Silvers (AFL-CIO Associate General Counsel), and others. In typical Kaufman fashion, this no-nonsense hearing was one of the most informative and expository of all Wall Street evils to ever take place on the Hill. Which of course is why it received almost no coverage in the media. Below we present a full transcript of the entire hearing, together with select highlights. The insights proffered by the panelists and the witnesses, while nothing new to those who have carefully followed the generational theft that has been occurring for two and a half years in plain view of everyone and shows no signs of stopping, are truly a must read for virtually every citizen of America and the world: this transcript explains in great detail what absolute crime is, and why it will likely forever go unpunished.

One of the more important data points in today's G.19 (consumer credit release) statement was that the Loan To Value ratio on vehicle financings (at least those reported by the government) in January dropped to 80%, from 81.8% in December, which is a new all time low in the history of the series. The recent swing in this ratio has been very perplexing: the plunge from 95.1% in July 2008 just before Lehman to 84.9% in September of 2009 is explainable: after all lending virtually ceased and banks were cautious with lending out any money absent a material depreciation buffer (and yes, at the peak of the credit bubble, the LTV ratio hit 100.4% in September 2006, when banks were willing to finance more than the value of the car, confirming just how much excess credit money was sloshing around courtesy of a cranking securitization ponzi and a humming shadow banking system). Then following the March 2009 lows, LTV ratios once again moved higher and peaked in December 2009/January 2010. They have been in decline ever since, and the decline has accelerated over the past 4 months, when it was 86.5% in September, down to 80% in January. In absolute terms, this means that in January the amount financed was $26,673.4 per car, the lowest since February 2009. Yet this has happened even as the average car prices continues to rise, and the implied January 2011 car price was $33,342. In other words, the average equity check that buyers have to finance is a record $6,668!

My take is that there's nothing inherently wrong with unions, as long as they are voluntary associations of people – they're just associations working in certain trades or in certain places. It's natural. Sure, why not? But there are problems with the way unions exist in reality today, particularly when membership is made mandatory. That's a violation of the human right to work. When you can't work unless you join the union, and union membership is limited – often to people with political connections or family relations with union officials – it's clear that the union is not a defender of the little guy, but a kind of protection racket. It's a fraud. That doesn't just harm the individual worker who may wish to enter a unionized field; it has broad economic consequences. When only union members can work, the union can set wages at whatever level they want. That makes the product or service in question more expensive for everyone in society. In other words, unions don't help the average working man – they only help those who can get into the unions. They hurt everybody else: non-union workers, employers, and consumers at large. And it gives union bosses extraordinary power.

The last time Charles Biderman appeared on CNBC, he was carted onstage (and promptly off) in the late hours before Christmas Eve, when it was virtually assured nobody would hear the self-evident truths out of his mouth such as this one: "individuals have been selling, companies are net selling, insider
selling and new offerings are swamping any buyback and any cash M&A
activity since QE 2 was announced. Pension funds and hedge funds don't
really have that much cash to invest. So what nobody's asking is what
happens when QE 2 stops: if the only buyer is the Fed, and the Fed stops buying, I don't know what is going to happen...When
I was on your show a year ago I was saying the same thing: we can't
figure out who is doing the buying it has to be the government, and
people said I was nuts. Now the government is admitting it is rigging the market." Now that the great muni scare forced retail to take proceeds from muni liquidations and invest in stocks just as the market topped out, CNBC brought Biderman on again, hoping to get something, anything, bullish out of the flow of funds expert. Wrong. "In December of 2009 received a lot of ridicule for saying that the Fed is rigging the market which as everybody is well aware." As for the "sustainable economic recovery" i.e., what happens to Quantitative Easing: "They probably will end for a while, we think there is going to be a QE3 and 4, or until the market says: "No Mas - we are not going to believe this game the Fed is playing... The Fed is printing over $100 billion a month to buy other assets and pay bills, and economic growth is picking up at a $200 billion annual rate. This is very inefficient method of boosting the economy, and then how do we repay these trillions that have been created out of thing air in the future." At which point the producer "screams get him off my show."

After consumer credit seemed poised to be at a critical inflection point in December, after total credit increased by $6 billion, and all important revolving (i.e., credit card) credit component increasing by $2.3 billion, and the government - recently the only source of incremental consumer credit - largely absent from the monthly pickup, the January number confirmed this single month occurrence was largely a fluke, and was predicated by the already discussed consumer weakness seen in the beginning of the year. Not only did today's consumer credit update indicate last month's increase was revised lower by 33%, to just $4.1 billion (revolving revised from $2.3 billion to $2.1 billion), the revolving credit improvement is now dead and buried, after there was another drop in total revolving credit to the tune of $4.2 billion, more than wiping out last month's increase and printing the 28th of 29 consecutive monthly declines in revolving credit. Yet what is most troubling is that while non-revolving credit increased by $9.3 billion, $24.9 billion of this increase was due to the Federal Government, while the traditional source of credit: consumer banks, plunged by $15.1 billion M/M, the biggest monthly drop since the securitization-commercial reclassification in March of 2010. In addition all other holders of debt saw their notional amounts decline with the exception of savings institutions which increased by a token $345 million. Unfortunately for the Fed, consumer deleveraging is alive and healthy, meaning that the US government will need to fund the private sector indefinitely in the future, which also means monetization of the relentless surge in debt (note today's record $224 billion monthly budget deficit) will continue.

And the imminent update, which is just as expected: "AL JAZEERA SAYS INTERIM REBEL GOVT REJECTS GADDAFI OFFER OF MEETING TO CONSIDER HIS RESIGNATION"

Just out from Reuters: "AL JAZEERA SAYS GADDAFI OFFERS REBELS TO HOLD PEOPLE'S CONGRESS TO LET HIM STEP DOWN WITH GUARANTEES"