Archive - Jul 1, 2011 - Story

In his latest Things That Make You Go Hmmm, Grant Williams dissects the key misconceptions at the end of the first half of the year, and isolates 5 specific topics that were supposed to not be an issue, yet somehow the market completely mispriced, such as 1) High oil prices are NOT going to be a problem, 2) The chances of gold becoming the world’s most important reserve currency in the next 25 years are only slightly better than those of the Euro, 3) A Greek default impacting US banks too severely, 4) The European debt crisis derailing the US economic ‘recovery’, and, "last but not least" 5) The sustainability of Greek debt should the austerity program be voted through and carried out. Williams does not (yet) focus on the key misconception that dominates the speculative stock community as we enter the second half. Luckily, he will have more than enough time to do so when it is disproven in a few weeks. In the meantime, here is TTMYGH with a nice healthy dose of inverse revisionist history.

The week's most concise summary of key bullish and bearish events.

Bank of America just can't catch a break. First it gets caught in a trap of a "non-settlement" settlement which will only expose it to billions more in legal fees and other reserve fund increases, and now this. From the WSJ: "New York state Attorney General Eric Schneiderman has issued subpoenas seeking new depositions from the Charlotte, N.C., bank's chief executive and other current and former executives, according to people familiar with the situation. The subpoenas are a sign that Mr. Schneiderman, who became New York's top law-enforcement official this year, doesn't intend to drop the civil-fraud investigation of Bank of America begun more than a year ago under predecessor Andrew Cuomo." Perhaps it is about time Ken Lewis finally get some primetime TV exposure where he belongs: on the defendant's chair. "Mr. Lewis, who retired partly because of rancor over the Merrill deal, declined comment through his lawyer. Mr. Price's lawyer couldn't be reached to comment." Considering the complete disaster New York prosecutors have now completed with the DSK arrest, they will need a very high profile arrest and conviction to make up for it. Kenny boy sounds like just the type to fit the bill.

In a prior post I compared the 2007 SPX topping pattern to the current May 2011 high. The assumption being the US economy is on the verge of an economic recession now as it was in December 07 when the recession officially began. The similarities were unquestionable (chart below). The unknown is are we building point E. Those believing recession is at hand will say yes, those saying it is a soft patch will say no. Well what do the credit markets say and what explains this 40 basis point move in the 10 year. The end of QE1 actually showed yields falling so history would be on the side of the bond market catching a bid versus the relentless selling going on this week. Well the comparisons with the 10 year treasury in the second half of 2007 and the current period are again striking similar. Equally striking is that we have precedence for such a parabolic move in the 10 year yield.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 01/07/11

In lieu of the shocking absence of Laszlo from the Comcast lineup of this week's permabulls, we take liberty to extrapolate the S&P 2011 closing price based on the tried and true Birinyi Associates method of predicting the future through a ruler and a pencil, and the last several days of market action. And the result (in log scale) is...

To many the significant beat of today's Manufacturing ISM was not very surprising based on yesterday's higher than expected Chicago Purchasing Managers Index. As most economists know, the Chicago PMI has traditionally been a spot on predictor of that other more comprehensive survey, the Mfg ISM. Indeed, as Wikipedia explains, "The Chicago-PMI survey registers manufacturing and non-manufacturing activity in the Chicago region. Investors care about this indicator because the Chicago region somewhat mirrors the nation in its distribution of manufacturing and non-manufacturing activity." Traditionally the correlation has been in the 80s and higher. Sure enough, anyone who simply bought the market on an expectation that the ISM would replicate the Chicago PMI won. Yet the biggest surprise was beneath the surface, where a more granular read indicates some very violent schizophrenia. As Goldman said earlier, when reporting on the ISM: "a sharp increase in the inventories index (from 48.7 to 54.1) explained 1.1 points of the 1.8 increase in the headline index." Said differently, nearly two thirds of the total beat came from a jump in inventory levels. Yet what happened in the Chicago PMI yesterday? Well: take it from the horse's mouth. The Chicago Business Barometer called it a "precipitous decline" after it plunged from 61.6 to 46.96, the biggest drop in years.

With market volume below abysmal levels, and with market breadth at the highest in what appears ever, many are wondering how it is possible that the S&P could move by about 70 points in one week. Simple. As the chart below shows, NYSE short interest for the week ended June 15 was the highest in 2011, at 13.5 billion shares, a jump of 333 million share in two weeks, which certainly persisted into the second half of the month, just in time for the market to realize that with QE2 ending, and nobody left to buy bonds, rates have nowhere to go but up. The net result is one of the most epic short squeezes in recent history, coupled with one of the most rapid moves out of bonds and into equities, and if judging by the 5 Year bond, the most rapid ever. What the message from all of this is, aside from the fact that higher interest rates are supposed to somehow be better for the economy, is that the entire market now has adopted a HFT modus operandi, where nobody even bothers to discount, and all the action is reactive. We are not sure about readers, but the fact that the market has lost its most fundamental feature - discounting - is just a little troublesome, if not surprising. Such is life under centrally planned capital markets.

Ever wonder why the US is a shining city on a Ponzi hill? Wonder no more. Cause heeeeeere's reverse decoupling^TM.

Ever since the famous Stanley Druckenmiller Op Ed published in early May, which called for an outright default of the US, saying it would not be
the end of the world, and in fact the US would emerge stronger as a
result of finally taking the first steps to getting its fiscal house in
order, there has been a visible shift regarding the US debt ceiling discussion, with republicans (so far) digging in and refusing to budge on the issue. After all, on the surface Druckenmiller is absolutely correct: with interest rates near record lows for the past 3 years, interest payments would be manageable for a long time even if general rates were to surge due to the Treasury's fixing of low cash coupons over the past 3-4 years, amounting to about 20-30% of all annual tax receipts. There is however one very big problem with this argument, one which we pointed out back in April 2010 when we said that "What people don't realize is that...unless the UST can roll its debt not on a monthly
but now weekly basis in greater and greater amounts, the interest rate
doesn't matter. All it takes is one semi-failed auction and it's game over as hundreds of billions in bills become payable." Enter the always forgotten maturing debt argument. And as a just released presentation by the Bipartisan Policy Center titled "Debt Limit Analysis" reminds us, aside from the actual deficit funding math, which is that in August there is a $134.3 billion cash shortfall that has to be funded with debt, there is a far greater risk. Or, put numerically, 467.4 billion risks. This is the amount of debt that matures through August 31, and has to be rolled over or the US is bankrupt... in every sense of the word. Once again, America's politicians and media get broadsided by the definition of gross versus net. Because, in reality, the inability to issue more debt post August 3 means a halt to all new debt issuance. Which, unfortunately because it means Geithner's scaremongering is actually correct, would imply the end for the debt ponzi.

I tend to be years early on identifying trends, but three that will make a difference going forward are what I call "The Three Ds": Delegitimization, Definancialization and Deglobalization. Broadly speaking, the global economy and thus globalization and its sibling, financialization, depend on the legitimacy of centralized institutions. These include nation-state governments, international organizations such as the IMF, central banks, the mainstream global media, and various Central State agencies tasked with reporting data accurately, for example the Securities and Exchange Commission (SEC) in the U.S. and equivalent agencies in other trading blocs. By far the grandest experiments in legitimization of the past 20 years are the European Union (EU) and its common currency, the euro, and China's one-party rule combining a command economy with a quasi-free enterprise model, i.e. "Capitalism with Chinese characteristics." The vortex of insolvency gripping Europe is rapidly chewing through what remains of the legitimacy of the euro and the EU institutions tasked with overseeing the financial sector...As for the euro and the EU's grand integration experiment, we can turn to George W. Bush's inimitable phrase for a summary: this sucker's going down. The subprime mortgage meltdown offers a cogent preview of Europe's future.

As the table below demonstrates, the bond vigilantes are now eviscerating the belly of the US Treasury curve: the weekly percentage move higher in the 5 Year yield is now the largest...Ever. For those wondering if PIIGS should be renamed to PIIS following the brief rescue of G, perhaps it is time to officially rename it PIISA.

Just out from Reuters:

• STRAUSS-KAHN ACCUSER ADMITTED SHE LIED TO GRAND JURY ABOUT WHAT HAPPENED FOLLOWING PURPORTED ATTACK - D.A.
• STRAUSS-KAHN ACCUSER CLEANED ANOTHER ROOM AFTER INCIDENT, CONTRARY TO WHAT SHE TOLD GRAND JURY - NY PROSECUTOR
  

More as we get the full letter sent out by D.A. Cyrus Vance.

The much-awaited filing of the Farmville creator's $1 billion IPO can be found here.

Some highlights:

• Q1 2011 revenue: $235.4MM, up from $100.9MM YoY, LTM revenue $731.9 MM
• Q1 Net Income: $11.8MM up from $6.4MM YoY, LTM Net Income: $96.2MM
• Q1 Adjusted EBITDA: $112.2MM, up from $93.5MM, LTM EBITDA: $411.4MM
• Adjusted EBITDA definition also excludes stock based comp and change in deferred revenue
• Cash: $995.6MM, almost the same size as the entire proposed IPO
• Working Capital: $603.4MM

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.