Archive - Sep 2011 - Story

Earlier this month, some economic luminaries in the United States Congress introduced a new bill, H.R. 2835. The bill intends to “establish a joint select committee of Congress to report findings and propose legislation to restore the Nation’s workforce to full employment…” Great idea, fellas. After failing to ignore your way out of recession, spend your way out of recession, lie your way out of recession, and print your way out of recession, you now intend to legislate your way out of recession. This bill exemplifies how completely clueless the leadership is, and highlights the common demeanor of the political class.  By definition, people are in government because they believe that government is the solution, not the problem. Legislating your way to full employment is as fantastical as prancing unicorns and the Tooth Fairy. It’s impossible. The only employment created by legislation are government jobs to staff all those new agencies and bureaus. And naturally, those jobs must come with some task, some responsibility.

Shrugging off Italy's rating downgrade (somewhat expected but continued negative outlook), funding stress in Europe (Libor levitating and Swiss/French banks divergent), cuts in global growth expectations (IMF and World Bank), concerns over systemic risk contagion (ESRB and World Bank), and escalating rhetoric in Sino-US trade wars, US equities have managed to reach up to Friday's highs as rumors of AAPL being added to the Dow seemed enough for hapless traders. But, like a broken record, we note that the new highs in ES are being accompanied by new lows in 2s10s30s, near day's low yields in TSYs, day's highs in gold and silver, and multi-day lows in copper - all seems to make perfect sense...

As expected earlier, the next domino in the European contagion cascade, has just tumbled after the local government has collapsed following loss of parliamentary confidence vote.

• SLOVENIAN GOVT LOSES PARLIAMENTARY CONFIDENCE VOTE - BBG

This means that the pan-European EFSF vote, originally scheduled to be completed by the end of this month, will likely be delayed until 2012 which means at least 4 more months of SMP bond purchases and more anger at direct ECB monetization of Peripheral debt.

Uncertainty. That has become the key word of the day, the month, and of 2011 in general. And while broad uncertainty has manifested itself most notably in the capital markets, it has a far more practical representation in labor markets, where the main reason why employers are not hiring more people, arguably the primary scourge of the Obama administration's record low approval rating, is due to corporate uncertainty about the future: about taxes, about government demanding its pound of flesh when the time comes, and about the economy in general. Ironically, as PIMCO speculates in its daily note authored by Tony Crescenzi, probably the primary driver of global uncertainty is the increasingly uncoordinated response by monetary policy authorities (read Central Banks) in which where before all had cooperated in the global game theory, now increasingly it is every printer for himself, as the default response turns to one of defection. And as everyone who has studied Game Theory knows, it is only the first defection that provides the biggest return, with each subsequent act generating far less benefits to the uncooperative actor, forcing even more uncooperative irrationality, and so on in a toxic spiral until outright belligerent action develops. For now said belligerence has begun to manifest itself in plain vanilla trade wars, such as that pointed out last night with the Chinese response to Europe's lack of response to its "bailout" overtures, and following up with the just announced complaint filed by the US against China on chicken prices. Naturally this is just the beginning. The real concern is that where trade wars end (which in turn begin when FX wars end), real ones start. When a year ago we first branded the Chairsatan as "genocidal" we were mostly joking. Perhaps it is time to reevaluate our definition, as it is far less comical under the current environment. Here is what Pimco has to say on the issue.

On September 15, 2011, beginning at 12:48:54.600, there was a time warp in the trading of Yahoo! (YHOO) stock. HFT has reached speeds faster than time itself. Up to 190 milliseconds into the future, or 0.19 fantaseconds is the record so far. It all happened in just over one second of trading, the evidence buried under an avalanche of about 19,000 quotations and 3,000 individual trade executions. The facts of the matter are indisputable. Based on official exchange timestamps, there is unmistakable proof that YHOO trades were executed on quotes that didn't exist until 190 milliseconds later!

We have been pointing to the incessant rise in the risk of the Financial Stability Board's most systemically important entities for weeks now. It appears the European Systemic Risk Board has, according to Dow Jones, issued its first warning to governments, urging them to prepare capital injections for some European banks.

It looks like the Slovenian Government may collapse today. It is one of the smallest EU members, but an EU member nonetheless. Slovenia accounts for about 0.5% of EFSF and is Aa2/AA Looks like Greece won't default today, though it seems that more and more people think it is the likely outcome, and actually think it is the best outcome from Europe. Stocks continue to rally on every bit of good news related to Greece, but there is a growing consensus that Greece should default sooner than later, and that it would be easier for Europe to deal with that, than the eventual default. Still waiting for the "private sector initiative" results on Greece. I really am not sure how much of a benefit Greece gets, but the banks transfer about 40% of their Greek exposure to EFSF exposure. Not a bad deal for banks considering where Greek bonds trade.

That didn't take long. After touching a ridiculous price of $304.79 back on July 13, the collapse in the stock price of Netflix in the 2 short months since to fresh 52 week lows has been nothing short of breathtaking, and demonstrates just how effectively one can destroy their company (and also confirms that "value investors" with zero conviction in their calls are not even worth the entrance fee of their periodic soiree gatherings). Below we demonstrate who the biggest losers are in the past 10 weeks, based on the top 25 holders as disclosed in their 13F filings as of June 30. Our advice to Apple longs: take particular note of what happens when the hedge fund groupthink hotel decides to exit a burning theater stock in less than orderly fashion. And of particular insult to injury note, UBS Global Asset Management has lost $115 million in NFLX since the stock highs just over 2 months ago. Which Gamma 2 or Vega 666 trader will get blamed for that particular debacle?

Well, as expected, the Chinese news finally filtered through to the vacuum tubes. It took them a few hours... But it is finally there. BNP is down 7.3% at last check and tumbling. Comments from the IMF, which is always behind the curve, are not helping.

Some pure poetry from Art Cashin today which explains why future US generations may want to hold a referendum on being born...

With the expanded two-day FOMC meeting (which until 45 days ago was supposed to be just one day) set to start shortly, here is chief policy maker Goldman Sachs reiterating again how much futile loosening to expect from the Fed. Nothing new here: Goldman repeats its call that Twist will hit tomorrow (and in a following report MS reiterates its call for Torque), sees IOER being cut from 0.25% to 0.1%, (sending the money and repo markets into a tailspin), but stops short of demanding another major round of LSAP. Basically, anything short of this will crash the market; anything long of this (as Rosenberg predicts) including several hundred billion in outright bond purchases, sends risk and gold soaring, and the dollar plunging.

Flurry of headlines following an unscheduled IMF release:

• IMF CUTS GLOBAL GROWTH ESTIMATE, SAYS EUROPE MAY WORSEN OUTLOOK
• IMF SAYS DOWNSIDE RISKS ARE GROWING
• IMF SAYS ECB SHOULD CUT INTEREST RATES IF DEBT TENSIONS PERSIST
• IMF CUTS U.S. 2011 GROWTH ESTIMATE TO 1.5% VS 2.5% SEEN IN JUNE
• IMF CUTS U.S. 2012 GROWTH ESTIMATE TO 1.8% VS 2.7% SEEN IN JUNE
• IMF CUTS 2012 EURO-AREA GROWTH PREDICTION TO 1.1% VS 1.7%/JUNE
• IMF CUTS 2011 WORLD GROWTH FORECAST TO 4% FROM 4.3% IN JUNE
• IMF CUTS 2012 WORLD GROWTH FORECAST TO 4% FROM 4.5% IN JUNE
• IMF SAYS ECB MUST KEEP INTERVENING `STRONGLY' IN DEBT MARKETS
• IMF CUTS SPANISH GROWTH FORECAST FOR 2012 TO 1.1%

Judging by the futures one may be forgiven to assume that sovereign default risk in Europe has moderated today. One would also be 100% wrong. It's contract roll day and Italy downgrade day (first of many: Moody's on deck) not to mention algo ES futures ramp up ignore day, and as a result everything is wider across the board, and Italy 5 Year hit 520 earlier, a new all time record.

To anyone short the USD/EUR-CHF who just went to the bathroom a minute ago, our condolences. The rumor is that the SNB will expand its EURCHF peg to 1.25 tomorrow. Completely unfounded of course. It may just as easily be another forceful intervention round. Or just plain and simple central planner rumor mongering: as noted, Swiss August exports plunged and Hildebrand will take any help he can get.