Archive - Jun 1, 2011 - Story

Remember when the president uttered the magic words back in March 2009, when he said that "profit and earning ratios [whatever the hell those are] are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it" giving the green light for the 2 year bear market rally? Well, if that was global market Risk On, Janet Yellen just gave the Risk Off command. To wit: "forward price-to-earnings ratios in the stock market fall within the ranges prevailing in recent decades, and are well below the early-2000 peak, although corresponding measures for small-cap equities (not shown) appear somewhat elevated....special questions included in the March 2011 SCOOS suggest an increase
in the use of leverage by some traditionally unlevered investors (such
as pension funds and insurance companies) as well as hedge funds during
the previous six months.
" Yup: small caps, aka the Russell 2000, aka the Economy according to the Fed's third mandate. Ironically, the Fed realizes the Catch 22 it is caught in, which we noted earlier, namely that stocks are pricing in QE 3, but for QE 3 to happen stocks have to drop 20% from here. Well, this may be the last warning from the Fed.

One chart stands out in today's Breakfast with Rosie: the comparison of yesterday's surprisingly weak Consumer Confidence number with comparable prints taken at financial crises and tragedies of the past such as the October 1987 markets crash, Desert Storm, LTCM, the dot com collapse, September 11, Katrina, and Lehman. No surprise: yesterday's was the lowest. And as a reminder, the president's reelection campaign kicks into higher gear in a few months...against the backdrop of the most unhappy popular sentiment in recent years. Just how do QE 3 skeptics believe he will succeed, when still faced with consumer confidence that two years into the "recovery" is lower than during any other previous economic "expansion", even as congress is about to unleash the most brutal wave of fiscal consolidation (aka austerity) in recent American history.

Just because it is GDP accretive. Actually, on second though, if the Princeton Economics Department is right, all those tornados crisscrossing the US over the past month should add at least 0.5% to Q2 GDP. Which, gasp, means that JPM's just lowered GDP forecast is really 1.5%. And it is supposed to double by the end of the year to 3.0%. On... what again?

It is one thing to watch squiggly lines, or pretty, but largely meaningless bubble charts explaining a snapshot phenomenon or one transpiring over time. It is something else to actually be in a rollercoaster which recreates the experience of the Vancouver real estate market. Which is why the following animation from Vancouver Condo Info is rather cool. "This is a roller coaster simulation of the last 35 years of the
Vancouver Real Estate market. The actual graph you're riding is the
inflation adjusted value of a house in Vancouver BC based on data
collected by Royal LePage and calculated by the UBC Centre for Urban
Economics and Real Estate. Some of the peaks and troughs have been
rounded to keep the train from flying off the tracks, but other than
that slight modification it is a precise scale model of the red line on
this graph: cuer.sauder.ubc.ca/?cma/?data/?ResidentialRealEstate/?HousingPrices/?housing-pri-vancouver.pdf. When the housing bubble of the early eighties popped in this city some house prices dropped by 50% over the next couple of years and didn't reach their inflation adjusted real price again for 25 years. What would a real estate market bust look like these days?"

About a month ago we indicated that Comex depository Scotia Mocatta "lost" 25% of its Registered (aka Physical) silver after the vault encountered a "reporting reclassification" which saw 5,287,142 ounces of silver moved from Registered to Eligible status, dropping the vault's true holdings from 11.8 million ounces to 6.5 million. Naturally, the response from the peanut gallery was that this was a tempest in a teacup and it was "temporary" and a-ha, any minute it would reverse, and all shall be well, everyone would live happily ever after, and the Comex would actually have silver available for delivery purposes. We decided to not hold our breath. Which after pulling today's most recent Comex warehouse data appears to have been a prudent decision, because for the first time ever total registered silver has dropped below 30 million ounces, after experiencing a 5% overnight drop across the board, primarily driven by yet another 1,456,488 ounce "adjustment" of warehoused silver from Registered To Eligible at Scotia Mocatta. As of last night, total Scotia physical silver was now 4,740,447 ounces, a 24% drop overnight, and a massive 60% drop from the total which we captured on April 20. Still think it's temporary?

It was big news last year when someone pointed out that 134 out of 143 S&P 500 points came on the first day of the month.  10 of 12 first days of the month in 2010 were positive.  Everyone was chattering about how great it was to go long ahead of the first day of the month.  This culminated in a nice 14 point gain on January 1 after a couple weeks of little movement.  By January 28th, an otherwise down day, the talking heads were kept bouyant by the prospects of big gains to be had the following Tuesday.  The market didn't disappoint and jumped 21 points on the first of February.  In spite of the hype going into March 1st the S&P saw a 21 point sell off.  That move seemed to take the wind out of the sails of that 'easy trade' and although we moved up 7 points on April 1st, On May 2nd we slipped 2 points and today we got slammed 31 points.  Now for the year we are down 12 points in total on the first trading day of the month.  Sadly, by the time my mother heard about on all the financial channels and started trading, she down 48 points.  So much for easy money.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 01/06/11

The bullish chartist and Johnny 5 portion of the stock market (which is about 99%) can not be happy: the next ES support is at the swing low of 1241.25, although the 200 DMA looks like a target at 1237.85. We believe a firm bottom exists at 400. And for all those asking, today's ES volume was the 2nd highest since March.

And to think they cut it from 3% to 2.5% just a week ago. Michael Feroli, take it away: "When we revised down our estimate of Q2 GDP growth last week to 2.5% we noted that the risks to this quarter were still to the downside. Given the hard activity data we've received since then -- particularly the auto sales and construction report -- it looks like those downside risks are being realized, and we are lowering our Q2 projection to 2.0%. Even with this revision we'd assess the risks as still a little to the downside. Most of our downward revision in Q2 is located in consumer spending, where we think growth this quarter is tracking close to 1.5%. If our new estimate for Q2 is realized, GDP growth relative to a year-ago would be only 2.4%, implying almost no closing of the output gap over the past year -- an abysmal performance given that the output gap is arguably greater than 5% of potential GDP, or less arguably, that there are still almost 14 million unemployed workers. Our forecast implicitly assumes the debt ceiling issue is resolved in a manner which does not see a technical default of the US Treasury. Of course if that assumption were not to hold all cards would be off the table and we almost certainly have to pencil in a much more severe downgrade to our growth forecast. Our Fed call is unchanged and continues to look for a first hike in 1Q13."

"Please sell anything that is not nailed down. Thank you. Oh yes, your invite to this year's Christmas elves party is in the mail"

15 Day realized vol double in last 6 week. 30 Day at 5 week high. 90 Day near highs of year. And just because the CME Group is so concerned about investors and their money, this is precisely the time for an ES margin hike. (Yes, we know, the irony would be priceless.)But we jest: just hike those SI and CL margins already. Nobody can see that coming.

Next up: Greece begins criminal proceedings against the rating agency for character defamantion and libel (or is that slander?). Also, Belgium is next. Yet most importantly, there is no mention in the downgrade if the "Vienna plan" currently contemplated, or the latest zany "debt rolling" proposal constitutes an Event Of Default, meaning the market will have even more uncertaintly to grapple with. From Moody's "The main triggers for today's downgrade are as follows: 1. The increased risk that Greece will fail to stabilise its debt position, without a debt restructuring, in light of (1) the ever-increasing scale of the implementation challenges facing the government, (2) the country's highly uncertain growth prospects and (3) a track record of underperformance against budget consolidation targets. 2. The increased likelihood that Greece's supporters (the IMF, ECB and the EU Commission, together known as the "Troika") will, at some point in the future, require the participation of private creditors in a debt restructuring as a precondition for funding support. Taken together, these risks imply at least an even chance of default over the rating horizon. Moody's points out that, over five-year investment horizons, around 50% of Caa1-rated sovereigns, non-financial corporate and financial institutions have consistently met their debt service requirements on a timely basis, while around 50% have defaulted."

So much for the interesting theory presented a few days back from Bernstein that one contrarian response from China to its electricity shortage problem is not to hike prices but instead to slow down its economy by pushing the margin producers out and allow the economy to slow down on its own. As a reminder, last Friday Bernstein analysts Parket and Leung, in discussing the 30 gigawatt power shortage currently gripping China, was the following: "a nationwide power price increase to alleviate the problem is not likely. Letting the current stand-off run its course – in the worst case scenario, allowing electricity shortages and the high price of fuel substitutes to force factories to shut down - would slow the economy. And that's the key point in our view: increasing electricity prices is inflationary while holding prices steady would achieve the NDRC's current economic goals." Alas, China has opted for the convention path, and as Business China reports, "China will raise prices for electricity used for industrial, commercial and agricultural purposes to curb demand from energy-intensive industries and encourage power generators to increase electricity supplies." Sigh - add more inflation, more resultant PBoC tightening, and more of the same dog chasing its tail failed policies that will lead the world's fastest growing economy nowhere fast.

Update: Hearing has been delayed until 3 pm.

While we await to find and bring to our readers the channel that will carry today's hearing between the House Financial Services Committee on the topic of "Federal Reserve Lending Disclosure: FOIA, Dodd-Frank, and the Data Dump" chaired by Ron Paul and Fed and NY Fed General Counsels, Thomas C. Baxter, Jr., and Scott G. Alvarez, below we present their prepared testimony that was just released by the New York Fed. The key section from the testimony: "We remain concerned that a more rapid release of information about borrowers accessing the discount window and emergency lending facilities could impair the ability of the Federal Reserve to provide the liquidity needed to ensure the smooth working of the financial system. If institutions believe that publication of their use of Federal Reserve lending facilities will impair public confidence in the institution, then institutions may choose not to participate in these facilities. Experience has shown that banks’ unwillingness to use the discount window can result in more volatile short-term interest rates and reduced financial market liquidity that, in turn, can contribute to declining asset prices and reduced lending to consumers and small businesses." Luckily, courtesy of $1.6 trillion in excess reserves, and the stigma now associated with Discount Window borrowings, for everyone except for Dexia, we doubt the Fed will ever have to worry about the discount window before the banking kleptoracy blows itself up once again.