Archive - Jul 1, 2011 - Story

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

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

DSK who has just left New York court, has been advised he will be released on his own recognizance, however the prosecution is not dropping its case, as expected, he will not regain his passport, he will regain his cash bond back, and will appear in court again on July 18. Perhaps the best approach at this point is to get the maid's story on all the latest developments that have emerged instead of having an infinity+1 conspiracy versions of what may have happened.

"The Institute for Supply Management (ISM) rises unexpectedly in June, up 1.8 points to 55.3. As the median forecast and ourselves had looked for a decline, this is clearly an encouraging upside surprise. The composition of the report, however, was on the weaker side. Specifically, 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. If anything, an increase in inventories is a negative for future activity. The remaining 0.7 point of the headline increase was due to small increases in new orders (by 0.6 point to 51.6), production (by 0.5 point to 54.5), supplier deliveries (0.6 point to 56.3) as well as a more sizable increase in employment (1.7 points to 59.9)."

After the "Japanese renaissance" component of the global economic rebound thesis was effectively negated yesterday following the release of the worse than expected Tankan manufacturer index, today we get point blank evidence that the second leg of the economic recovery is now completely debunked, after GM, whose June car sales were up 10.2%, broadly missing expectations of an 18% pick up, but far more importantly, and as we have been pointing out for a year now, the bulk of GM production does not ultimately lead to any sales, but merely more and more channel stuffing in the form of month end dealer inventory which in June just hit 605,000. Point being: the Japanese supply shortage is a strawman that has nothing to do with actual demand which to the chagrin of the Koolaid drinkers is a critical component in determining clearing prices, and which is simply non-existent despite the government's eagerness to provide subprime loans to everyone (or no one as the case may be) who wishes to buy a GM vehicle.

While all the algos are scanning the ISM general business conditions headline, the New Orders Less Inventories spread, which leads the broader index by 3 months, has tumbled and the divergence between it and the ISM Composite is now at near record wide levels. The last time this spread closed in a favorable fashion was back in 2010, when QE1 and 2 goosed the market and the general manufacturing space. This time around, in the absence of another stimulus, the spread will close again all right, but not the way it did last time around, and explains why an ISM analyst just said new orders "not where we'd like it to be." The sub 50 ISM print is coming. Just not this month.

Just like earlier in the year, the global recovery is once again on the shoulders of the US. Manufacturing ISM just printed at 55.3, a major beat to expectations of 51.3, and up from 53.5 before. How this meshes with PMI data that is contracting across the globe is irrelevant: just BTFD as America is once again expected to push the world out of the "soft spot" although this time with no QE or fiscal stimulus. Among the various indices, employment mysteriously increased from 58.2 to 59.9 despite consistently weak initial claims and NFP numbers missing expectations, New Orders increased from 51.0 to 51.6 despite a collapse in comparable metrics in recent regional Fed surveys, and prices paid dropped from 76.5 to 68.0, despite ongoing inflationary pressures.

In true bizarro fashion, the latest catalyst for the stock jump is the latest miss in UMichigan consumer confidence, which missed expectations of a rebound from May's 71.8 to 72.0, instead printing at 71.5, dashing our hopes that there would be more BS-base baffling. In doing so, UMich has confirmed the Conference Board's indication that consumers are now less confident, despite a substantial drop in gas prices in the last month (a decline which has now been largely reversed). More importantly, 5 year inflation expectations continue to be firmly lodged in and came unchanged from last month at 3.0%. 1 year inflation expectations however did drop from 4.0% to 3.8%, a number which will likely reverse if gas prices continue trending straight up. And now, all eyes on the ISM.

In a piece oddly reminiscent to what our friends at Minyanville put up over a year ago, JP Morgan has just released a short report looking at the "Five stages of Greece", a reference to to Kübler-Ross model of Denial, Anger, Bargaining, Depression and Acceptance. Supposedly Minyanville's piece didn't get enough billing because despite being spot on, and absolutely correct in every aspect, the world was literally a year behind the curve to appreciate it. The full article can be found here. In the meantime, here is JPM's summary of where Greece was and where it is heading, based on inferences from clinical psychology.

The one and only clearest indication of just how effective the recovery and QE2 in general has been, comes courtesy of the USDA, whose just released update of April participation in Supplemental Nutrition Assistance Program (SNAP), better known as "foodstamps", shows yet another record, this time 44.647 million people, an increase from May's 44.587 million. And after rising modestly in the last month, the average monthly benefit per household dropped again to a post April 2009 revision low of $282.38/month.

Two down. 48 to go until Meredith Whitney is proven correct beyond a reasonable doubt. After New Jersey was forced to reach out to JP Morgan for an emergency bridge loan a few days ago, it is Minnesota's turn. From ABC: "Minnesota's government has shut down, ahead of the holiday weekend, for the second time in six years after state leaders failed to find common ground on resolving a $5 billion budget deficit. Thousands of state workers will be laid off, state parks will be shuttered, the issuance of fishing licenses will be halted and the Minneapolis zoo will be closed. Road projects will also grind to a standstill just as people hit the road for the holiday. A midnight deadline passed without an agreement as talks between Democratic Gov. Mark Dayton and top Republicans unraveled over Dayton's proposal to impose taxes on the state's top earners, a move on which top GOP officials have refused to budge...Some programs that will continue unabated include critical services including the State Patrol, prisons, disaster response and federally funded health, welfare and food stamp programs." Granted this is not a first: "Only four other states -- Michigan, New Jersey, Pennsylvania and Tennessee -- have had shutdowns in the past decade, some lasting mere hours. Minnesota's government partially shut down under then-Gov. Tim Pawlenty in 2005 over a budget fallout." However, if NJ is any indication, as predicted, expect ever more states to bypass the municipal route of funding, and appeal directly to commercial banks. Which will generously provide as much Fed-generated one and zeros...in exchange for 80% LTV collateral of course.

• Strauss-Kahn Case Seen as in Jeopardy (NYT)... yes, the soap opera is back.... although don't expect Lagarde to hand the keys back to DSK - after all the mission has been accomplished. Though president DSK would be a shoo in if cleared of all charges.
• China Salutes 90 Years of Communism (WSJ)... US salutes nearly 100 year of Federal Reserve central planning
• Obama Pushes for a Deficit Deal by July 22 (FT)
• China manufacturing at lowest in 2 years (FT)
• German Banks Agree to Greek Aid Deal (WSJ)
• Ex-Goldman director Gupta SEC Case Postponed Indefinitely (Fin Alternatives)
• Greek, Italian Bonds Lead Peripheral Rebound as Default Concern Ebbs (Bloomberg)
• Republicans boycott trade vote (FT)
• Obama Pushes for a Deficit Deal by July 22 (FT)

Yesterday, the Italian government introduced additional fiscal austerity measures that aim to reduce the general government deficit by €47 billion (3% of 2011 GDP) by 2014. Despite these measures, however, we believe substantial downside risks to the government's debt-reduction plan remain, primarily due to Italy's weak growth prospects. in light of Italy's weak growth (per capita GDP growth averaged minus 0.9% between 2005 and 2011) it is our opinion that far more substantial microeconomic and macroeconomic reforms will be required to incentivize private investment and match wage levels with productivity. Without such measures, we believe Italy's economic potential will not be realized. This will imply insufficient wealth creation to deliver meaningful declines in the general government's debt-to-GDP ratio, which was a high 119% at end-2010. As a consequence, we continue to hold the view that there is an approximately one-in-three likelihood that the ratings on Italy could be lowered within the next 24 months, as reflected in our negative outlook.

Today's ISM manufacturing index will be watched by everyone for signs that America is reverse decoupling again (despite a 70% services-based economy), following the overnight barrage of ugly global PMI data. The median forecast has risen modestly to 52.0 even as regional Fed indices and other June data predicts a sub 50 print. And to baffle everyone with BS, we fully expect that the UMichigan index will come stronger than the median forecast of 72.0, even as the Conference Board consumer confidence index missed earlier this week. Oh yes: there is no POMO today.

According to Bloomberg, instead of the crude released by the Strategic Petroleum Reserve going into circulation, "Some of the oil being released from the U.S. Strategic Petroleum Reserve to bring down prices may be held by traders for later sale rather than sent directly to refiners for processing into gasoline or other fuels." In other words, instead of being held in storage by the US government, the oil which is supposed to be used immediately to alleviate supply pressure, will be held in storage by the Too Big To Fails, most likely in storage tankers floating offshore, just like back in late 2008, early 2009, to be released only when the prevailing price is sufficiently higher (not to mention courtesy of added demand from the SPR as it seeks to refill it 5% depleted inventory). But wait, wasn't the release predicated upon it being a supply emergency with a need for immediate release? Ironically it is JPM's own Lawrence Eagles, head of oil research, who said that "every additional barrel of oil stored in the U.S. is a barrel that does not need to be imported, ultimately freeing up barrels to move to Europe. It worked very effectively after Hurricane Katrina in 2005 and should do so this time around." What he did not specify is held by whom. And here is the kicker: "The DOE has no preference for bids from refiners versus traders and both have participated significantly in past sales,” an official from the Energy Department wrote in an e- mail. “There is nothing to stop buyers from putting the oil they have purchased into their own storage." Well in that case the DOE would be advised to know that JPM, which is expected to bid and purchase a substantial portion of the crude to be released, together with Goldman Sachs, have already been alleged to be a supply-limiting cartel when it comes to LME commodities. In its infinite stupidity, the administration and the IEA have merely moved supply constraints from one oil cartel, OPEC, to another: one led by the Too Big To Fail banks.