Archive - Aug 18, 2011 - Story

For the last several months we have been posting our Economic Output Composite Index and warning that it was heading to levels that typically denote that the economy is in a recession or about to be in one.   With today's read of the Philadelphia Fed Regional Manufacturing Survey coming in a not just contraction levels but a massive collapse to the downside, as we have been saying was a possibility, the EOCI index is now at levels signaling recessionary warnings..The safe play in the current environment is hedged investments, cash and fixed income for the current time.   This has not been, nor will it be any time soon, a "buy and hold" investing market.   The management of risk, the conservation of investment capital and the generation of total returns from portfolios is paramount for investors to survive the cycles that we will face in the coming years. 

Will BAC be at $4 by November? We don't know. But someone just made a $2 million bet that this is precisely what will happen. Minutes ago, 54k $4 BAC November Puts were purchased at $0.37. The total price: $2 million. Will this event occur? Like we said, we don't know, but it sure looks far more realistic than Paulson's bet that BAC will trade at $30 by the end of the year.

One of the biggest stories this morning is that European cohesion and solidarity is about to crumble after it was disclosed that Greece was pursuing a private deal with Finland in which Greece promised to collateralize Finnish contributions, in essence eliminating Finland's contribution to the Greek Bailout round 2. As Kathimerini reported, "Greece and Finland agreed on Tuesday to virtually cancel the latter’s participation in the former’s second bailout package, following three days of negotiations between Finance Minister Evangelos Venizelos and his Finnish counterpart Jutta Urpilainen. Finland’s share in the 109-billion-euro package amounts to about 1 billion, which Helsinki will pay to Greece but Athens will repay it through a new loan contract to be signed for this purpose and which will be valid for the next 25 years (likely to be the maturing period of the new loans, too). This means in practice that Finland’s contribution to the new package will be returned in full and deposited in a special account to be created by the Finnish government." End result is that everyone else has immediately come demanding the same treatment: first the Austrians, next the Dutch, and last the Slovenians. And what happens if Finland backtracks on its collateral demand: will it back out of the Greek bailout as well? Or, if Finland digs in, and all the non-German countries follow suit, will Germany say Enough and tell Europe (and China) to fix its own problems?

And so, on a day when the market is plunging, and any piece of good news is desperately needed, Hewlett Packard shows all the amateur PR hacks how it's done. With less than 5 hours until the company's official earnings release, Hewlett Packard just leaked to by Bloomberg that it would spin off its PC business and purchase British software developer Autonomy PLC. This is the oldest trick in the book to get a stock to drop from a higher level in the hopes that staggered releases of news, first good, then bad offsets each other, instead of having the good news be overwhelmed by the bad. Either way, stock surged following the mandatory robotic response and after triggering circuit breakers was halted, only to resume trading 7% higher. We very much doubt this surge will sustain itself for more than a few minutes after the scam is understood. We also very much doubt that today's earnings release will have anything good to say about the future.

Yesterday, we speculated that the perfect storm for CMBX, long overdue, is finally coming. Sure enough, it appears to have arrived as the sell off across AAA/AM and AJ 1-5 CMBX vintages has seen one of the most agreesive dumps on the day, focusing particularly on the lowest in the stack.

Feels like people are waiting for Europe to go home so that we can rally? That has worked in the past, but I don't think it will this time. This was not just European selling. It is not just the problems in Europe. In fact, the news seems to be getting worse out of there. Merkel and Sarkozy announce they have a candidate for the new head of something or other and that is somehow useful and positive? Finland, and potentially others demanding collateral from Greece to provide more funding is far more important in my opinion. At the same time, our data was awful. Brutal, yet most people seem to want to trade in anticipation of the next rally. That conviction that we will bounce doesn't seem to have disappeared. The Europe gone home rally is just another example of that. Yet how many times have rallies failed to materialize because everyone is anticipating them?

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

Speaking of gold, have a quick read of the article about Hugo Chavez nationalizing Venezuela’s gold industry and more importantly, repatriating his physical gold from storage sites abroad back to Caracas. The worry here is two-fold: 1) that his demands for physical delivery could stress the market given the estimates of somewhere between 30 and 45 paper ounces of gold issued for every 1 ounce of physical. 2) that this action starts a trend amongst countries that aren’t particularly US-friendly to repatriate and even potentially price sensitive commodities in gold. How much longer will Chavez continue to sell his extremely useful, much needed petroleum products and in exchange accept increasingly worthless pieces of paper, ie USD? Some might respond that if he did that, the US would instantly label him a terrorist and take him out. Perhaps. But what if Russia did it? What if Iran did it? If the commodity rich enemies of the US want to cause problems in this country they don’t need to fire a single shot, all they have to do is start selling their products priced in gold. The end of the reign of the USD as reserve currency will follow quickly.

Last Thursday, Donald Trump appeared on CNBC, and in an attempt to generate PR publicity almost as bad as A&F's idiotic campaign to pay The Situation money not to wear their clothing, sad the following: '"You wouldn't believe it. I bought Bank of America, I bought Citi, I bought, you know, two troubled companies that I think have an upside, lets see what happens. Caterpillar, Intel, Johnson and Johnson, Proctor and Gamble." We were curious to see how Trump's latest foray into picking securities (as opposed to bankruptcy advisors - he truly excels there) turned out. Here is the result of what listening to the former (and/or future) presidential candidate has yielded in a few short days.

Sorry to interrupt the panic, but this may be important:

• FURTHER DISCUSSION ON COLLATERAL WOULD CANCEL SECOND GREEK BAILOUT- GOVT SOURCE - RTRS

This follows on the heels of news overnight that Finland, Holland and now Slovenia are all pushing to get collateral (aka a DIP out of Greece). And naturally, no Greek bailout means game over for a united Europe, and its disjointed banks.

-700K NFP print coming?

The market is now at a very simple crossroads: bonds are pricing in the hyperdeflation that the resumption of the global depression brings in, while gold is pricing in the central planning policy response to that hyperdeflation, which is nothing but print, print, print. Anyone who feels like arbing the spread on the trade (which has a very unpleasant end in either case), should go ahead and do it now.

QE3 is being dragged, kicking and screaming, into the arena. As for the Philly Fed number below, there is no comment necessary.The 10 Year just took out 2.00% and is at 1.99%.

Panic mode is fully back with stock plunging to Friday lows, while both gold and bonds are at records, 10 Year touching a record low 2.03%, the S&P plunging to Friday's lows and gold as is well known, back at all time highs. The catalyst: the same thing Zero Hedge reported yesterday, namely that one bank in Europe has a dire dollar squeeze (note not EUR) to the tune of $500 MM. The real market is thus now pricing in both hyperinflation and hyperdeflation at the same time, while the Fed's policy instrument, stocks, is now pricing in Lehman part deux (but don't nobody mention SocGen or the black choppers will come after you). As for those who followed Doug Kass' advice and bought XLF yesterday, we have four words: iShares Inverse Kass ETF.

The market, sleeves rolled up high, prepares to follow the president on vacation.