Archive - Aug 3, 2011 - Story

As if we needed another confirmation that the US consumer is running on empty, here comes Bloomberg with valuable disclosure from an internal, and supposedly confidential, Wal-Mart memo on store traffic patterns which indicate that in US store locations open for at least a year have seen a 2.6% drop in traffic in the February to June period compared to a year earlier. While this may not sound huge, keep in mind the company is massively leveraged to even the smallest marginal moves in traffic, courtesy of already razor thin margins. Specificall, the Wal-Mart stores in question had "82.8 million fewer visits through the first five months of the company’s fiscal year." More than anything this is an indication of just how exhausted the US consumer is becoming if even the most beloved, widespread and cheapest option for purchases is now being shunned outright. Bloomberg continues: "Wal-Mart’s plan to recapture customers by returning thousands of products to U.S. store shelves has failed to reverse a decline in foot traffic at the world’s largest retailer, said Jeff Stinson, an analyst at Cleveland Research Co. That’s primarily because Wal-Mart’s core low-income customers are shopping less and going to other retailers more often, according to two recent shopper surveys." This should not come as a surprise to anyone, since frequent Zero Hedge readers will recall the post in which the CEO of Wal Mart America said that "shoppers are running out of money"; and there is no sign of a recovery." When it comes to marginal traffic, it appears shoppers have just run out of money. And that includes those who no longer pay their mortgage and pay for everything with their now well maxed out credit cards.

The case for "buying and holding" stocks boils down to four words: don't fight the Fed. Forget moral hazard and all the fancy stuff; the reason to load the truck with stocks is that the Fed is invincible, and its mighty machinery of manipulation can drive stocks higher no matter what else is happening. Put another way: when the Fed succeeds in driving the dollar to near-zero, the value of stocks will be near-infinite. The case to dump stocks now and not even look at the market for two years is based not on worship of the Federal Reserve's infinite wisdom and power but on the charts. The abject, pathetic, remarkably complete failure of QE2 has driven a stake through the heart of the Fed's political power and its reputation for wisdom; it has been revealed as a clueless cabal, basing policy on textbook models of what "should happen when we do this." Alas, real life doesn't follow moldy old PhD theses, and it doesn't worship the Fed or listen to the cargo-cult incantations of the Keynesians.

Those wishing to watch the guaranteed comedy that is Berlusconi address the lower house of Italy's parliament can do so here. As a reminder, the time of the original address was strategically rescheduled to after the Italian market close. Too bad the US market will be open for the duration of the entire address unless of course it is rescheduled to after 10 pm local time (oops, it may impact Asian trading then...)

Q. What is the last thing that panic driven market plunges need? A: The Truth, this time brough to you by the only credible rating agency: Egan-Jones.

• Banca Monte dei Paschi: EJR lowered BBB to BB+ (S&P: A-) (BMPS IM)
• Intesa Sanpaolo SpA: EJR lowered BBB- to BB+ (S&P: A+) (ISP IM)

Here we go again...

Norway's tragic episode from two weeks ago may be starting to spread. Next target: the heart of the Eurozone: Luxembourg. From Wort.lu: "There was great commotion in Luxembourg City between Place Guillaume II and the Grand Ducal Palace just before 3pm on Wednesday with police arriving en-mass. According to information obtained by wort.lu from the police, at 2:40pm bomb threats located at points were announced by an unknown caller on “Place Guillaume II with explosives hidden near the bank, at the post office building, at the main station and in the underground Aldringen Centre”.  The bomb threats sparked a major police operation. Wort.lu reporters and several readers at the scene state that many armed police in protective clothing are performing searches. A canine unit with dogs specialised in bomb detection were also at the scene. The traffic in the City which is particularly dense around the Place Guillaume II, has come almost to a complete standstill and many streets blocked. At the time of writing this update (4:30pm) the station area is still blocked off. If you are travelling through the City expect disruption for the next few hours." We will bring more as we see it.

If there is one thing the Italian Bourse needs to stop the relentless bleeding, it is the uber-credible Silvio Berlusconi addressing the country and the various vacuum tubes that trade on the MIB and putting an end to all this selling silliness. Lucky for them, this is precisely what is happening, although not at the originally scheduled time of 3 PM Italian Bailout Time, but only after the market closes, or 5:30 pm. We can't wait to see the limit down in everything tomorrow if indeed someone is pricing in any good news to come out from ole' Silvio whose days are now very much numbered. Reuters reports "Prime Minister Silvio Berlusconi will address parliament on Wednesday seeking to calm escalating market fears that Italy may be dragged into a Greek-style financial crisis that would threaten the euro zone. Italy's Economy Minister Giulio Tremonti met the chairman of euro zone finance ministers, Jean-Claude Juncker, for emergency talks as the yields on Italian and Spanish 10-year bonds flirted with new 14-year highs. Berlusconi, weakened by scandals and largely silent over the past weeks, delayed his address to the lower house, originally scheduled for 3.00 p.m. (1300 GMT), to 5.30 p.m. after the close of the Milan bourse." And the kicker: "It is not clear, however, whether he will have any major new structural reforms or one-off tax measures to announce." In other words this will be merely a Ponzi pep talk...and nothing else.

Joining the Manufacturing ISM in the disappointment column is the just released Non-Manufacturing ISM which printed at 52.7 below consensus of 53.5, down from 53.3 previously. This is the lowest reading since January 2010. The employment index dropped from 54.1 to 52.5, the New Orders index missed contractionary territory barely at 51.7 down from 53.6, and lastly, the Prices Paid was down from 60.9 to 56.6, potentially opening up the way for QE3, even more that is. Elsewhere, June factory orders dropped by 0.8% in line with expectations, down from 0.6%, meaning no dramatic revisions to the already abysmal Q2 GDP, and Durable Goods was revised from -2.1% to -1.9%. Altogether another ugly economic data set, with the bounce in stocks most likely dictated by even higher QE3 expectations.

Remember when way back at 3am EDT, the SNB "intervened" to keep the "massively overvalued" franc lower? Yeah, that lasted about 7 hours.

Claiming he wasn't afraid to let everyone in attendance know about "the real mess we're in," Federal Reserve chairman Ben Bernanke reportedly got drunk Tuesday and told everyone at Elwood's Corner Tavern about how absolutely fucked the U.S. economy actually is.

Italy and Spain, and now France, CDS hitting all time highs? Been a few hours since Unicredit was last halted? Europe looking like it is about to implode all over again (and nobody even remembers Greece any more)? Have no fear. President (he was elected?) Barroso is here, telling us all the imploding sovereign bond markets of Italy and Spain are "unwarranted." All this and many more jokes in the full just released statement which confirms that Europe is starting to freak out all over again.

For more than 3 years - since gold rose above its nominal high of $850/oz in February 2008 - there has been much talk about gold being a bubble. Nouriel Roubini, professor of economics at New York University's Stern School of Business, is one of the more prominent financial and economic experts who said gold was a bubble and many other experts internationally echoed his sentiments. On December 10th, 2009, with gold at $1,100 per ounce, Roubini, said, "all the gold bugs who say gold is going to go to $1,500, $2,000, they're just speaking nonsense". Roubini went on to say ,"I don't believe in gold." Gold has now risen 50% since then and Roubini has been silent on the gold price. We believe that he was wrong regarding gold as he, like many in the western world, is simply not aware of the facts and the fundamentals driving the gold market. He also is not aware of gold’s diversification benefits. The fundamental drivers of the gold market are not appreciated by most and rapidly get forgotten by many due to the daily barrage of noise and fear emanating from the markets. The facts and charts below strongly suggest gold is not a bubble. However, even if it were a bubble, those calling gold a bubble should acknowledge the diversification benefits of owning gold and urge diversification rather than vainly trying to predict the future and the future movement of asset prices.

"A host of countries are struggling with appreciating currencies. We don’t have to be too concerned about that here in the United States, unfortunately as our purchasing power is declining on a global basis in dollars. However, the upshot, as we see with Switzerland with a rate cut to weaken its franc this morning (down only 1.20% as of this writing reversing earlier weakness), is that other regimes are struggling to adjust with global inflows. In Brazil, for instance, taxes and other currency control type maneuvers are increasingly being imposed to deter global safe haven monies from being to HOT for their own respective economies. This also has an auxiliary affect on U.S. bond market as Swissy, JAPAN, Brazil, others etc. increasingly prospectively have dollars purchased vs. their currencies TO INVEST, finding its way to our rate structure. Further, we get the sense that increasingly TARRIFFS and other nationalistic schemes could ensue in the spirit of countries protecting their domestic production/consumption/isolationism/nationalistic tendencies, which also comes at the expense of global economic activity, another benefit for bonds."

For the 3 or so people and vacuum tubes who actually care about the ADP employment report, whose NFP predictive fault rate is about 100%, the July number was a wash, printing at 114K or above expectations of 100K, while the June number was revised from 157K to 145K, or in other words a complete wash relative to expectations. On the other hand, the NFP will do whatever the BLS decides it wants it to do, just like the BEA will make the GDP number indicate whatever the US Department of Truth wants it to indicate. From the report: "Employment in the service-providing sector rose by 121,000 in July, marking 19 consecutive months of employment gains. Employment in the goods-producing sector fell by 7,000 in July, the second decline in three months. Manufacturing employment decreased 1,000 in July, which has seen growth in seven of the past nine months. Employment in the service-providing sector rose by 121,000 in July, marking 19 consecutive months of employment gains. Employment in the goods-producing sector fell by 7,000 in July, the second decline in three months. Manufacturing employment decreased 1,000 in July, which has seen growth in seven of the past nine months." As for the two critical occupations of construction and financials: there was nothing good there: "Employment in the construction industry declined 11,000 in July, the third consecutive monthly decline, bringing the total decrease in construction employment since its peak in January 2007 to 2,135,000. Employment in the financial services sector decreased 1,000 in July, bringing the total employment decrease for that same period to 687,000."

China Joins Russia in Blasting U.S. Borrowing After Debt Ceiling Agreement (Bloomberg)
Eurozone Moves to Prop Up Rescue Fund (FT)
SNB Cuts Rate to Zero to Counter Franc Strength (WSJ)
US Retreats from Brink of Debt Default (FT)
Strains Ease on Short-Term Credit Markets (Hilsenrath)
China’s Non-Manufacturing Industries Expanded in July, PMI Surveys Show (Bloomberg)
Moody's, Fitch Maintain U.S. Triple-A Rating (Reuters)
Britain’s ‘Weak’ Economy May Need Tax Cuts to Boost Demand, Institute Says (Bloomberg)
Japan Keeps Up Warnings on Yen After U.S. Debt Deal (Reuters)
No Double-Dip Seen in GDP (Shanghai Daily)