Archive - May 17, 2011 - Story

It is no secret that CLSA's Russell Napier has not been a fan of QE2. As he pointed out in his recent prominent note, "whether equities will fall further depends on how flexible and successful the Fed’s next monetary package will be. Given the risk, investors are better off watching from the sidelines." He further explained: "A risk to reflation would send equities sharply lower. The failure of QEII will undermine investor faith in a monetary solution. With equities near bubble valuations, based on cyclically adjusted PE, a failure to reflate risks major downside. The Fed will try again with a new package, but investors would do best by waiting to see how it plays out." Since as of now we still don't know when and if there even will be a package, here is Napier once again, interviewed by the FT's Long View, presenting his updated views on the economy. His outlook, which we agree with entirely, is that first we will see another major deflationary shock, following which the Fed, already boxed in a corner, will have two choices: let major financial institutions fail, or proceed to monetize outright. Regardless of which outcome is picked, Napier's target for the S&P, which just happens to coincide with that of Albert Edwards, is not pleasant for the bulls: 400 (or somewhere in that vicinity). And that will be the true generational buying bottom.

Just as POMO ends, the floor gets taken out of the market. And this was just a $6.4 billion operation (monetizing the recently issued 5 year). To think there still are those who believe the Russell 2000, pardon, the economy and the wealth effect can be sustained absent quantitative easing. The market is finally, with about a 3 month delay, pricing in the end of QE2. We wonder how long before it starts (since 2011 is a replica of 2010) pricing in QE3...

For everyone anxious to read a comprehensive update (of sketchy credibility, but better than nothing) on the Fukushima situation, a progress report out of Tepco, and the current status of the firm's "roadmap to recovery" (seems to be a catchphrase these days), Tepco has just released a progress status of the "Roadmap towards Restoration from the Accident at Fukushima Daiichi Nuclear Power Station." From the release: "With regard to the accident at Fukushima Daiichi Nuclear Power Station due to the Tohoku-Chihou-Taiheiyo-Oki Earthquake occurred on Friday, March 11th, 2011, we are currently making our utmost effort to bring the situation under control, and on April 17th, we put together a road  map towards restoration from the accident. Today, as a month has passed since we presented the roadmap towards restoration, we would like to present the status of the progress." And the by now "too little too late" apologies: "We would like to deeply apologize again for the grave inconvenience and anxiety that the broad public has been suffering due to the accident at the Fukushima Daiichi Nuclear Power Station. We will continue to make every endeavor to bring the situation under control." How about providing the public with a true and honest update of what is really happening?

You asked for it, and Next Media Animation delivers.

The most profitable strategy of Q1 is shaping up to be, not surprisingly to Zero Hedge readers, identifying and shorting Chinese fraud stocks. As one of the premier hunters of reverse merger fraud, Kerrisdale Capital, notes, it generated an unbelievable 89.1% return gross of fees and 73.2% net, beating the performance of the S&P by about 68%. Since inception, the fund is up 299.5% net of fees and 405.6% gross of fees. Kerrisdale notes: "As one of the first funds to expose scams within the  U.S.-listed Chinese reverse merger universe, we benefited from our intimate knowledge of the sector. Most of the frauds exposed this quarter contributed to our returns in some shape or form, as did equity declines in many Chinese fraudcaps that were not exposed." Indeed, as we predicted back in November 2010, Chinese fraud hunting would soon be a pervasive and very profitable strategy. And since neither NYSE, nor Nasdaq, and certainly not the SEC cares one bit about investment integrity, we anticipate many more profitable days for those who focus purely on isolating market fraud. "The Chinese “fraudcap” space imploded this quarter. Chinese reverse merger stock scams were down anywhere from 10% to 80%, with many stocks down 50%+. On average, 1-2 frauds were exposed per week, with long, detailed reports put out by a wide variety of research firms, including Muddy Waters LLC, Glaucus Research, Citron Research, etc." Don't worry: there is plenty of it to go around.

Just out from Reuters: "Shokri Ghanem, chairman of Libya's National Oil Corporation (NOC), has defected from Muammar Gaddafi's government and is on his way to the Tunisian capital, a Tunisian security source told Reuters on Tuesday. Another source said earlier on Tuesday that Ghanem had arrived on the Tunisian island of Djerba after fleeing Libya." It is unclear if this will have much if any impact on the Libyan oil production which continues to be halted, and lately even the rebel have seen their output halted due to lack of supplies. One thing is sure: Saudi Arabia will scream loud that it will be more than happy and willing to replace any lost production even as it continues to cut its output as it now enjoys $120 brent a little too much. And yes, the Japan rebuilding effort will be run on chlorophyll.

If nothing else, last month's 62,000 minimum wage, part time-job expansion program by McDonalds generated lots of commentary on whether it should or should not be counted in the April NFP number. While paying a bunch of janitors (sub) minimum wage will have precisely 0.00% impact on GDP, the possibility that America could convert even more full-time into part-time jobs, generating a few more press opportunities for the teleprompter was certainly bullish, sure generated a lot of contradictory blog posts. Alas, even paying minimum wage appears to be too much of a chore for the world's largest burger chain. Enter computers. From Fox Biz: "McDonald's is jumping on the technology bandwagon with a new system that will soon change the way European customers order food -- picture computers instead of humans asking whether customers prefer fries and supersizes. The fast-food restaurant, known for its golden arches, Big Mac burgers and Happy Meals, will replace cashiers with touch-screen terminals and swipe cards at its 7,000 chain restaurants in Europe, according to the Financial Times. That would mean, in part, the end of cash payments." Also picture no more millions of job applicants for something, anything at the Golden Arches. And like that another several million of America's lower class are about to become outsourced to robots.

And another contractionary economic data point: Industrial production in April was unchanged M/M on expectations of a 0.4% increase, and following a downward revision to March's 0.7%. Additionally, capacity utilization dropped to 76.9% from 77.4%, and substantially less than the expected 77.6%. And there is your "slack in the economy" redflag that the Fed loves so much, and which traditionally is one of the key variables in determining future monetary loosening. Also, as the chart below shows, we may have well peaked in the recent capacity utilization cycle. As for specific industry groups, there was more weakness than the headline indicates: "The production of consumer goods decreased 0.7 percent in April because of weakness in the output of consumer durable goods. The index for business equipment fell 0.4 percent in April following a loss of 0.5 percent in March. The production index for defense and space equipment was unchanged in April after decreasing 0.3 percent in the previous month. Among nonindustrial supplies, the output of construction supplies declined 0.1 percent in April. The output of materials to be processed further in the industrial sector rose 0.3 percent in April after increasing 0.9 percent in March." The Japan effect is starting be felt.

Last week we learned that the BATS, the third- largest U.S. stock exchange operator, filed for an initial public offering as it seeks cash to compete amid the busiest period for industry takeovers. In other words, in the great scramble for consolidation in a market place fragmented beyond repair, BATS suddenly realized it is woefully behind, and needs cash to compete with such HY-funded LBOs as the now off-the-table Nasdaq acquisition of NYSE. Which in turn makes BATS itself a possible acquisition target. As such, once again courtesy of Nanex, we decided to take a quick look at typical value added provided by the exchange and its constituent robots. As the trading chart of TJX companies below shows, it is none other than some BATSy algo that enjoys testing the stupidity of other robots by sending out a bid about 10% from the NBBO. What is impressive is that at least one other algo really was stupid enough to fall for this bottom fishing strategy, and as the white dot indicates, hit the bid at $50.22. And that is true price discovery. Ironically, perhaps we need many more such BATS algos to push prices to real fair market value.

Since the triple dip in housing was recently circumvented courtesy of QE2, and was "transitory" in theory today's subpar housing starts and permits data is the beginning of the quadruple dip. And subpar it was: starts came at 523K on expectations of 569K, down from revised 585K previously. Permits were also ugly, missing expectations by a comparable account, printing at 551K, with consensus of 590K(and the previous revised this time lower from 594K to 574K). In starts, annualized single-family units dropped from 415k to 394k, with declines in Northeast and South, and increases in the Midwest and West. The actual, non-annualized number of starts was 46.8k, with 36.2k in single family units. Completions increased modestly from 532k to 554k. And the most interesting number was the number of houses under construction, which hit a fresh all time low on an annual, seasonally adjusted basis, or 418k. At this point it is probably passe to bring up the Cramer clip calling the housing bottom back in 2008.

• TEPCO admits nuclear meltdown occurred at Fukushima reactor 16 hours after quake (Mainichi)
• New York Investigates Banks’ Role in Fiscal Crisis (NYT)
• Confidential Federal Audits Accuse Five Biggest Mortgage Firms Of Defrauding Taxpayers (Huffington Post)
• IMF chief claims consent in hotel 'attack' (Post)
• Ryan pushes spending cuts as U.S. hits debt limit (Reuters)
• Merkel rejects Greek debt restructuring (FT)
• "Hidden" debt raises Spain bond fears (FT)
• As Case Unfolds, France Speculates and Steams  (NYT)
• Draghi Backed by Euro Finance Ministers as Next ECB President (Bloomberg)
• Israel Leader Outlines Points Before U.S. Trip (NYT)

A week ago it was called "Sovereign Liability Management Exercise" following the politically corrected definition of the Greek bankruptcy by Goldman Sachs. However, after Zero Hedge proposed the unpopular acronym SLiME to capture the essence of this idea, the latest appellation of the current Greek metamorphosis stage from solvency to bankruptcy appears to be "reprofiling." Per Bloomberg: "European finance ministers for the first time floated the idea of talks with bondholders over extending Greece’s debt-repayment schedule, saying that last year’s 110 billion-euro ($156 billion) rescue has failed to restore the country to financial health. Europe would consider “reprofiling” Greek bond maturities as part of a package including stepped-up sales of state assets and deeper spending cuts, Luxembourg Prime Minister Jean-Claude Juncker said. “If all these conditions are fulfilled, we can discuss the question of reprofiling,” Juncker told reporters late yesterday after chairing a meeting of euro-area finance chiefs in Brussels. “It’s not reprofiling or nothing. It’s measures, measures and measures, and then maybe reprofiling.” (And speaking of simple profiiling, perhaps someone can tell us why the Rikers island inmate directory is still down, now for almost 12 hours, and since the time of DSK's admission). But back to Greece, where "reprofiling" is merely the latest term to push for what will likely end up being a consensual restructuring: "Introducing that prospect marks a break in Europe’s crisis- fighting strategy, with governments potentially shifting some costs to bondholders instead of relying on taxpayer-funded bailouts to stamp out the debt crisis. The talks were clouded by the absence of International Monetary Fund Managing Director Dominique Strauss-Kahn, who was denied bail in New York yesterday after being arrested on sexual-assault charges." Of course, when that fails, there is always the last case definition: the "muddling through" one, which is the one known as the "rolloff" where reality finally meats the can in the street, and freefall bankruptcy follows.

Following the report of the leaked HP memo which indicated much more weakness in the current quarter than expected, the firm was forced to scramble and released earning early, with the full number coming out at 7:30 EDT. And neither the market, nor John Paulson who recently bought a $1 billion stake in the company, is happy with the disclosure. While the company beats on current quarter top line and EPS, ($31.63 billion vs $31.55 billion exp. revenue, $1.24 EPS vs $1.21 EPS expectation), it was all about the outlook. The firm said it is "revising full year GAAP diluted earnings per share outlook down to at least $4.27 and non-GAAP diluted earnings per share outlook down to at least $5.00." This is a problem as previously it had seen the full year EPS range at $5.25-$5.28, and the outlook was $5.24. It also said that for Q3 "HP estimates revenue of approximately $31.1 billion to $31.3 billion, GAAP diluted EPS of approximately $0.90, and non-GAAP diluted EPS of approximately $1.08." For the full year HP now expects revenue in the range of $129 billion to $130 billion. Previously this was $130-$131.5 billion. And for all those scratching their heads how long before the Japan get out of jail free card is used, here it is: "HP’s revised outlook for the third quarter and the full year fiscal 2011 reflects an expected near-term impact from the Japan earthquake and related events, continued softness in sales of consumer PCs, and reduced operating profit expectations for Services. "

Once again we get validation that the ever accelerating stagflationary episode in the UK is taking far more than 15 minutes to sort out. Today, as MNI reports, consumer prices rose at their fastest pace on record
in April as the timing of Easter saw airfares rise sharply, according to
figures released by National Statistics Tuesday. Naturally, there has to be some seasonal offset in there somewhere, just like there was in the month prior, and the month before. Oddly, the Royal wedding was not implicated. From the BBC: "The rise was due to a jump in transport costs, particularly Easter rises in air and sea fares, and alcohol and tobacco. However, the Retail Prices Index (RPI) measure of inflation - which includes mortgage interest payments - fell slightly to 5.2% from 5.3% in March. The rise in CPI was bigger than analysts had forecast and follows a surprise fall in the index last month. CPI is now at its highest level since October 2008. The Office for National Statistics (ONS) said "by far the largest upward effect" on prices came from air transport, where fares rose by 29% between March and April. Sea fares rose by 22.3%. It said the fact that Easter was in April this year but in March last year partly explained the jump in prices." As to how people are coping with the fact that they can buy increasingly less, Easter or no Easter, "Alcoholic drinks and tobacco rose by a record 5.3% in April."

The confirmation of George Soros ETF gold sale has again garnered much media comment. Soros’ $28 billion fund decreased its holdings of the SPDR Gold Trust, the exchange traded fund. Soros had bought gold to protect against possible deflation, though his fund now believes there is a reduced chance of such a condition, the Wall Street Journal recently said, “citing people close to the matter”. Should Soros and his fund think that inflation is now a greater risk than deflation then it is curious that they would sell all their ETF holdings. It is also curious as Soros is on record regarding having serious concerns regarding the outlook for the euro and the dollar and the dollar as reserve currency of the world. There is of course the precedent of other hedge fund managers , such as David Einhorn, who have also sold their gold ETF holdings but bought physical bullion in allocated accounts due to a concern about counter party and systemic risk. This would allow Soros to discreetly accumulate bullion away from the public and media spotlight that result from SEC filings. Paulson & Co., the $36 billion hedge fund founded by John Paulson kept its largest holding - $4.41 billion in the SPDR Gold Trust. Paulson’s belief in gold is seen in the fact that those who buy his fund can have their stakes denominated in gold rather than in dollars, meaning the value of their investment rises and falls with the price of bullion – lessening exposure to the dollar. Paulson, unlike Soros, is on record as having purchased gold to protect against inflation. PIMCO, the largest bond fund in the world, are also increasingly allocating funds to gold in their global equities portfolio. “The largest position in [our] fund is gold, which we think is a very good form of protection against what can go wrong,” said Anne Gudefin, PIMCO’s global equities portfolio manager, told Fortune magazine May 12.