Archive - Jul 26, 2011 - Story

So much for the IEA's intervention. Crude is once again comfortably over $100, and by the looks of things will be heading far higher before long. Yet the climb back to triple digits was not easy. Note the numerous plunges in CL where crude prices would tumble for no other reason than having way too many trigger-fingered headline scanning algos trading each and every commodity, and massively overreacting to the smallest piece of good or bad news. Elsewhere, we expect rumblings about gas at the pump, which is now set to resume its climb to $4.00/gallon to once again return, as economic models have to be adjusted even lower as that great whooshing sound is America's marginal discretionary purchasing capacity entering millions of gas tanks side by side with the unleaded.

The map below, which shows the gravity of America's pervasive pension and healthcare liability underfunding problem, should certainly raise a few eyebrows. Sourced from the IMF's Article IV presentation which in turn sources the data from the Pew Center, the map shows that even despite the near doubling in the S&P since the March 2009 lows, there are still at least 9 states that have a minimum 35% underfunding in their pension and liability obligations. As a result, we expect that just like in the case of Illinois recently, many more states will be forced to issue debt to fund various entitlement plans on a "paycheck to paycheck basis." It also means that ever more states will begin scrambling after high beta, low quality, and very high risk stocks (in many cases selling CDS), in order to refill their coffers. We can only hope that the biggest dip buyer of NFLX stock today is not the Louisiana Retirement Fund system (for example), but we have a feeling we would be quite wrong.

For those who live and breathe solely to know how Stevie Cohen has performed at any given moment, we have an update. According to Bloomberg's Hedge Funds brief, SAC Capital told investors last week that his main hedge fund is up 9.2% year to date. It is unclear if he provided any further insight into the firm's troubled relationship with various regulators and law enforcement officials. Some other fund update from Bloomberg. Balestra Capital Partners LP was negative 2.37 percent last month and has lost 7.63 percent year-to-date, according to its monthly results and commentary sent to investors. Brencourt Advisors LLC’s $260 million Brencourt Multi-Strategy Fund lost 90 basis points to drop year-to-date returns to 2.84 percent, according to an email update sent to investors. The merger arbitrage fund gained 22 basis points last month and has returned 2.17 percent through June 30. The Brencourt Credit Opportunities Fund lost 0.95 percent and has returned 3.39 percent in 2011. Broadfin Capital LLC’s Broadfin Healthcare Fund LP returned nearly 9 percent in the second quarter, according to its quarterly letter to investors, a copy of which was obtained by Bloomberg. Long positions in Alkermes Inc. and Hi-Tech Pharmacal Co. Inc. “were the largest drivers of the fund’s performance,” the letter said. The New York-based fund is managed by Kevin Kotler. Summarizing returns by strategy for 2010 and 2011 (table below) shows quite vividly that what worked back in 2010 is no longer in vogue, although the main exception - the best strategy for both years - continues to be Mortgage-Backed arbitrage. Although most curious for some may be that none other than John Paulson is now officially the biggest fan of John Boehner. Read on.

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ISDA is rapidly deteriorating to rating agency status when it comes to credibility. After it made it all too clear in the past few weeks that no matter what happens it would never "determine" Greece (or any other European insolvent country) to have breached a CDS trigger (as that would apparently destroy the world), the same trade association (logically enough comprised of the same firms that make up the heart of the status quo) has joined the rating agencies, and as of last night the CME, in making it all too clear that a debt ceiling plan (preferably Reid's because it achieves absolutely nothing) has to pass, or else, after it earlier announced that the US has precisely 3 days to cure any missed debt payment before US CDS are triggered. Obviously this can not be allowed to happen, so expect this latest development to be used by the president in his nighlty scaremongering session.

Less than an hour ago, Boehner had another TV appearance discussing his proposed plan. Judging by the networks' reaction even the general population is getting exhausted with this neverending soap. So here, courtesy of Bloomberg All, are the summary points he touched on. Nothing notable except for his assumption that the plan has a chance of passing both the House and the Senate, and that the house may vote on his plan as soon as Wednesday.

Is a second recession in so short of a time in the offing? It certainly seems that way. The hope for a continued recovery has grown dim as of late as many of the economic indexes are moving towards contractionary territory.  As we posted recently in "EOC Index Shows Economic Weakness" there are several concerns pressing the US economy and, in the words of David Rosenberg, chief economist at Gluskin Sheff, “one small shock” could send us into a second recession.  With the recent release of the Chicago Fed National Activity Index our proprietary economic index is just one small step away from crossing the 35 mark which has always been a pre-cursor to recession. We have discussed many times recently that with the unemployment rate remaining high, housing prices slipping into a secondary decline, consumer and business spending slowing, while gas and food prices remain high eating up more than 20% of consumers wages and salaries.  Add on top of these factors the likelihood of a Greek debt default, a slowdown in the Eurozone, a weaker dollar and Washington locked in debate over the debt ceiling - well, the list of risks far outweigh the positives.  However, that doesn't seem to deter Wall Street economists and main stream media which seem to all be wearing an extremely thick pair of rose colored glasses these days.   However, it doesn't take an economist to figure out that any one of these factors could send us tumbling into a second recession.

Another set of ugly economic data to add to the earlier Case Shiller miss: the Richmond Fed officially contracted despite expectations of a rise from 3 to 5, dropping to -1. This means that the recent rebound from negative to positive and back to negative is indicative there is something far more broken with the economy than just a transitory soft patch. New home sales also deteriorated dropping from 315K to 312K, on expectations of a rebound to 320K. The median sales price was $235,200, and the average $269,000, on 6.3 months of supply. As Joseph Brusuelas of Bloomberg said, "Nothing in data suggests any turnaround." Yet the irony is that the end consumer: the entity that is getting pounded daily by this administration and the oligarchy, just became more confident, with the number beating consensus of 56 and printing at 59.5... on Hopium! Yes, the current conditions declined from 36.6 to 35.7, but at least American have managed to revert to their standard optimistic outlook, and the six month outlook surged from 71.6 to 75.4. Hilarious. Nonetheless unlike before when this goalseeked data point would have been enough to set off a massive buying spree by the HFT algos, today it is insufficient, and following the relentless barrage of bad economic data ES just took out overnight lows.

The problem with bloated central planning is that when austerity hits, the bloat goes away, and millions of government employees suddenly find themselves trying to enter the private sector, realizing they have absolutely no real competitive and marketable skills (more or less like investment bankers and hedge fund managers). And while America has yet to even remotely sniff austerity, the unemployment rate is already set to spike, after the USPS just announced it was preparing to close 3,653 out of its 32,000 total post office sites. Per UPI: "The U.S. Postal Service is expected to announce a plan to close 3,653 post offices, mostly in small communities, in a cost-cutting measure, officials said. A USPS spokeswoman said the post offices were chosen because they get the "least amount of foot traffic and retail sales," The Wall Street Journal reported Monday." Trust the bureaucrats to try spinning this bad news as good: "They also were selected because there may be local businesses that could provide some postal services to the community, spokeswoman Sue Brennan said." Well by that logic there are private businesses that cover every aspect of the government's "job" much better, and much more efficiently, up to and including that of the Fed (sorry, that already is private). Does that mean we should outsource every aspect of the bloated centrally planned economy that America has become? Of course the answer is yes, but that just does not jive with the current iteration of kleptofascist socialism.

We have previously presented this data in tabular format but because we realize that some readers visual learners, here is a compilation of total US Federal obligations (read cash outlays) between August 3 and August 15, this time from Reuters, at which point all the money runs out no questions asked. The total: $246 billion.

Remember those June calls after April's (yes, two month delayed) Case Shiller report that housing has hit a bottom? Scratch them. The Case Shiller 20 City composite for May (so why anyone even looks at this is beyond us) just came at -0.05% M/M on expectations of an unchanged print, with the previous revised from -0.09% to 0.44%. On a Year over Year basis the 20 City Composite dropped 4.51% on consensus of a -4.50% drop (the previous -3.96% was revised lower to -4.22%) - this was the biggest drop since November 2009. Washington DC was up 1.3% Y/Y (2.4% M/M) and was the only city to gain on a yearly basis. Minneapolis was down the most: 12%. That said there were some modest improvements in several of the regions: “We see some seasonal improvements with May’s data,” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “This is a seasonal period of stronger demand for houses, so monthly price increases are to be expected and were seen in 16 of the 20 cities. The exceptions where prices fell were Detroit, Las Vegas and Tampa. However, 19 of 20 cities saw prices drop over the last 12 months. The concern is that much of the monthly gains are only seasonal." Good luck trying to extrapolate data away from seasonal adjustments: "May’s report showed unusually large revisions across some of the MSAs. In particular, Detroit, New York, Tampa and Washington DC all saw above normal revisions. Our sales pairs data indicate that these markets reported a lot more sales from prior months, which caused the revisions. The lag in reporting home sales in these markets has increased over the past few months. Also, when sales volumes are relatively low, as is the case right now, revisions are more noticeable."

Still confused by all the various plans offered by the two parties? That is to be expected: after all these change on a daily, if not hourly basis, which was great a week ago, but now with just 3 days until the absolutely latest deadline by which congressional legislation has to be enacted, which is this Thursday, some cohesion would have been good. Instead D.C. keeps pushing further apart with no chance of a compromise anywhere on the immediate horizon. And while it does provide daily TV opera, it does nothing to assuage fears that next week America may stop paying out its checks as soon as a week from today (the details of when Treasury runs out of cash are irrelevant: the absolutely drop dead date is August 15, but without the machinery in place to resume refunding well ahead of it, the market will have no choice but to begin discounting that fact). And while we know that S&P has now sided with the uber-fluffy Reid plan, which does nothing at all to address America's encroaching insolvency, the real question here, as in every other topic, is what does Goldman think. Because after all Goldman rules the world. Here is the answer.

• Frenemies: Two Greek Rivals Hold Nation's Fate in Balance (WSJ)
• Obama Attacks Republicans over Debt Talks (FT)
• Swift U.S. Action on Debt Needed in Global Interest: IMF (Reuters)
• FHA May Be Next in Line for Bailout: Delisle and Papagianis (Bloomberg)
• And the requisite NYT editorial piece: The Republican Wreckage (NYT)
• Bank Lobbyists Push European Members to Support Greek Debt Rollover Plan (Bloomberg)
• A Global Economy Held Hostage by Lehman (RCM)
• Banks 'Safe from Debt Defaults' But the Days of Double-Digit Growth May Be Over (Australian)
• Is Obama Wall Street’s Best Friend or Mortal Foe? (Bloomberg)

Market participants remained reluctant to invest in USD-based assets as the US lawmakers failed to reach a deal on raising the US debt ceiling, ahead of an August 2nd deadline, which resulted in the USD-Index to trade lower. European equities opened higher, led by financials, however as the session progressed prices moved back in negative territory, weighed upon by lacklustre European corporate earnings from the likes of BP (-2.36%), UBS (-2.37%), and Deutsche Bank (-0.68%). However, the FTSE 100 Index received support after GlaxoSmithKline said that its operating margin will begin to improve in 2012. Elsewhere, GBP received strength across the board following the release of second quarter advanced GDP data from the UK, which came in-line with expectations; however UK's ONS said that the quarterly GDP would have been 0.7% without taking into account special factors. Also, JPY weakness was observed following comments from sources that Japan's policy-makers are considering solo FX intervention as an increasingly viable near term option.

A picture paints a thousand words and a video hundreds of thousands of words and this is a very informative video about our modern monetary system, fiat currencies and gold. It shows how fiat money has led to wars, massive debt, social inequality, economic bubbles, rampant consumerism, and environmental destruction. It shows that a return to a gold standard would help ameliorate today’s monetary, financial and economic ills. “A gold standard will not cure every social ill in the world, nor will it stop all senseless wars. Nothing will. However, by now it should be clear to everyone that the current fiat system is good only for bankers, brokers, politicians, war mongers, and the already wealthy. Everyone else loses as inflation eventually eats away at what's left of the rapidly shrinking 'middle class'. All fiat currencies including the US dollar are doomed. The only debate is the path it takes to get there.”