Archive - Aug 3, 2011 - Story

Today we get the completely irrelevant and "nothing but noise" ADP and the somewhat more relevant non-manufacturing ISM. Speaking of ADP, we wonder how many of the private layoffs this month will originate at ADP following years after years of wrong, wrong and more wrong data.

I will continue to watch European credit closely. It seems like the politicians are starting to talk up the last bailout plan and how they could increase it. This is about par for the course, since 2 weeks after the latest deal was announced, most of the market gains, and almost all of the good feelings inspired by it, have been given back. It would take a material change in Europe for me to switch out of my negative bias. We are probably due for some positive surprises from the data, and although I don't think the weakness is fully reflected in the market, we could bounce a little more. If either Europe or the data really disappoint, I will rush to reload my shorts, otherwise I will likely gradually reset shorts into any rally. I am shifting my focus to short more HY than stocks.

Those looking for an optimistic early look of this Friday's NFP (nobody cares about the ADP any longer) should probably avoid the Challenger lay off data just released. As Bloomberg summarizes, U.S. planned firings up 59% Y/y in July to 66,414, led by pharma, retail; largest number in 16 months. The number includes Merck’s plan to cut ~13k jobs. This 3rd consecutive increase; “seems to provide additional evidence” recovery has stalled, according to CEO John A. Challenger. New Jersey (where MRK is based) led states, with 13,330 cuts, followed by Michigan. Employers also announced plans to hire 10,706 after prior month’s 15,498: this is just barely better than the lowest number this year printed in May when just 10,248 businesses announced intention to hire, and well off the 72,581 highs in February. Bottom line: subzero NFP print coming?

As had been rumored over the past few weeks, the WSJ reports that Bank of America is actively pursuing a deal in which it would get "broad release" from legal claims against the lender (which if provisioned properly and in their full amount will destroy the bank) in exchange for cutting the amounts owed by borrowers. The bank is "discussing the proposal with state and federal officials who are prodding the country's biggest banks toward a multibillion-dollar deal to atone for foreclosure errors…As the discussions dragged on past the mid-June target set by U.S. officials, Bank of America began pressing officials for a speedy resolution, and it put forward its principal reduction proposal in one-on-one talks with state and federal officials. Meanwhile, negotiations continue with the banks as a group…Bank of America has told officials it wants protection against future litigation relating to mortgage servicing, said people familiar with the situation. In exchange it is willing to agree to a program in which troubled borrowers would have to prove financial distress to qualify for a writedown of the principal owed on their mortgage…The principal amount would have to be $1 million or less in certain geographic areas, one of these people said, and a reduction would apply to the bank's own mortgages and those its services for private investors…The more modifications the bank agrees to, the less it will pay in cash as part of an eventual settlement, one of these people said." So in summary, in order to protect itself from being destroyed in the courts, Bank of America is happy to spread the Bernanke Put love on all of its deadbeat clients, in the process further exacerbating the class warfare that is emerging to be the most successful legacy of the Obama administration.

The European Commission will issue a statement on the “situation in the financial markets” later today, spokeswoman Karolina Kottova told reporters in Brussels. We, for one, can't wait to hear how the bureaucrats will convince the bond vigilantes that all is well. We really can't.

Two words: default risk. And one more word: record. Below is the equivalent of another 1000 words.

There is that famous line from the movie Die Hard: "You ask me for miracles, I give you the FBI." Well, to all the gold bulls out there, "I give you the SNB." The Swiss central bank "unexpectedly" intervened to curb the record appreciation of the Swiss Franc which is having Swiss exporters seeing black and blue, by saying it would cut rates and by increasing the supply of francs to money markets. Specifically it lowered its target 3 month Libor to "as close to zero as possible" from 0.25%. The central bank also expanded banks' sight deposits to 80 billion Swiss Francs from 30 billion and said it will repurchase outstanding SNB bills. So while it did not directly go ahead and buy dollars it made it all too clear the SNB's appreciation days are over. Which leaves those seeing a non-fiat based refuge from all the insanity in Europe (which is currently raging at unseen before levels, and as a result the EU announced it would issue a statement on the situation in the markets this afternoon - expect nothing but more lies and BS) and the rest of the world, with just one option. Gold.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.

At any point during the recent negotiations in Washington over the debt, did you seriously think for even a second that the U.S. was about to default? Of course, in time the U.S. government (along with many others) will default. However, they are highly unlikely to do so by decree or even through the sort of legislative inaction recently on display. Rather, it will come about through the time-honored tradition of screwing debtors via the slow-roasting method of monetary inflation. Yet most people still bought into the latest drama put on by the Congressional Players – a troupe of actors whose skills at pretense and artifice might very well qualify them for gilded trophies at awards banquets. Instead, rather than glittering statuettes, these masters of the thespian arts settle for undeserved honorifics and the pole position at the public trough. Followed by lifelong pensions. But to the heart of the current matter, do I think that the latest antics out of Washington will have any more lasting effect on the trajectory of the economy than what I had for breakfast this morning (raw oats with a dab of maple syrup, milk, a sprinkling of strawberries, and half of a banana, sliced)? Absolutely not. Sorry to say, but the trajectory of the economy at this point is well established, and closely resembles that of a meteor streaking through the night sky. What’s left of the solid matter of the nation’s accumulated private wealth is fast being burned off by an unstoppable inferno of government spending, inevitably leading to an earth-shaking crash.