Archive - 2011 - Story

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 05/01/11

After Muddy Waters came out with research two months ago that singlehandedly destroyed recent Chinese NYSE IPO, RINO, we predicted that there would soon develop a cottage industry of micro investment firms who do diligence on various Chinese frauds (and there are many of them), establish a short base, and subsequently release a research report in the name. Today we get the latest such possible casualty: meet China Green Agriculture, a Xian, China firm founded in 2000, which "engages in the research, development, manufacture, and distribution of humic acid based compound fertilizers in China... The company also engages in the development, production, and distribution of agricultural products, including fruits, vegetables, flowers, and colored seedlings." Sure enough the company IPOed on the NYSE in mid-2008, and if the just released research report by J Capital Research is correct, the firm is about to join such other disgraces as RINO in the NYSE IPO dunce corner. To wit: "In this report, we present compelling evidence that China Green Agriculture (NYSE:CGA) has significantly over-stated its true revenues and earnings. We estimate that CGA’s value is no more than $2.85 per share, as opposed to its current market price of $9."

David Rosenberg, who has very patiently taken the peanut gallery's swipes at him for the past month during the latest bear market rally bout (of which Japan had roughly 25 as the broader secular one took its market about 75% lower over two decades), finally lashes out at all those who still fail to see that there is nothing organic about the US economic recovery, and the only reason the numbers are "better" is due to the $4+ trillion in fiscal and monetary stimuli: "What we have on our hands has been an economic revival and market bounce back premised on unprecedented monetary and fiscal stimulus. How the Fed and the federal government in the future manage to redress their pregnant balance sheets without creating a major disturbance for the overall economy is a legitimate question and, sorry, does not deserve a double-digit market multiple, in our view." That is about all that needs to be said on the matter of the economic recovery. But we will immediately grant that there is an organic economic boom if the Fed removes QE right now, and the economic data points over the next quarter continue trending higher. Somehow we don't think this will (ever) happen...

The biggest spin master in the Obama administration, Press secretary Robert Gibbs, who obstinately had refused to answer Zero Hedge questions about the economic "recovery" in his daily tweetersessions , has joined pretty much everybody else in dumping the titanic that is the Obama administration. There is one thing we can be sure of, however, Tim Geithner, the only man who is officially on economic retainer (yet gets about 1% the use of Goldman's Jan Hatzius when it comes to monetary and fiscal policy) will be forever by Obama's side.

Following the too good to be true ADP number, the December Services ISM number came at 57.1 on a 55.7 consensus and an improvement from November's 55- a multi-year high. Yet the usual casual glance behind the scenes confirms once again that disparate economic data series are in complete contradiction with each other: the employment index declined from 52.7 to 50.5, which makes absolutely no sense in light of the alleged surge on ADP service-related jobs. Even Goldman has nothing good to say: "The decline in the employment index, however, suggests that the
strong ADP employment number has considerable statistical distortion
and should therefore be interpreted with care." But such is life when one runs a ministry of truth with far too many controllable variables. Furthermore, the economic growth through inventory accumulation is continuing, as inventories increased from 51.5 to 52.5. And most importantly for EPS numbers, kiss those margins good bye: prices paid increased from 63.2 to 70.0. 

The following two takes on this morning's ADP number are from two opposites: Goldman, with its transition to a permabull, and Knight Capital, with its far more balanced outlook on the economy.

The last time food prices hit ridiculous levels, the immediate outcome was global food riots in places such as Haiti and Bangladesh. Which is why distributors of riot equipment in the world's poorest countries may be in for a bumper crop as the Food and Agriculture Organization has just announced that world food prices have just surpassed the previous record last seen in 2007-2008. But it's ok: according to the centrally planning Chairman it's all good, and the inflation is really just in our heads. After all, courtesy of the recent spike in mortgage rates, home prices now have about 10% to drop, meaning even less equity will be extracted from already substantially depressed food prices.

• American politicians and citizens alike have no clear vision of the
  costs of a seemingly perpetual trillion-dollar annual deficit.
• Policy stimulus is focused on maintaining current consumption as
  opposed to making the United States more competitive in the global
  marketplace.
• Dollar depreciation will sap the purchasing power of U.S. consumers,
  as well as the global valuation of dollar denominated assets.

By Bill Gross

ADP, whose November better than expected data of 92,000 jobs diverged dramatically with the weaker than expected NFP report (which just happened to come at a time when political ammo was required to pass the Unemployment Insurance extension, and which we predicted would surge in December), has just come at 297,000, on expectations of 100,000. How this number is even remotely possible is beyond any reasonable attempt at reconciling NFP data with initial claims. Then again, this is the loudest telegraphing that the dollar should be far, far higher.

• Fed May Keep Easing at `Full Throttle' Until Jobless Rate Falls (Bloomberg)
• Goldman Employees Blocked From Facebook Get Tutorial (Bloomberg)
• U.S. Shopping Center Vacancies Rise as Unemployment Rate Climbs (Bloomberg)
• Oil falls below $89 on dollar strength (Reuters)
• China's 2010 GDP Likely to Grow 10%: PBOC Chief (China Daily)
• U.S. stresses need to reduce China trade imbalance (Reuters)
• The Smart Money Girds for a Drop in Stocks  (Barrons)
• Rogoff Says Greece May Yet Face Default on Its Debts (Bloomberg)
• China to invest $106b in railways in 2011 (China Daily)
• U.S. Economy Overheating? We Should Be So Lucky (Bloomberg)
• Australian Central Bank to Weigh Floods in Next Rate Move (WSJ)

Lots of news to be digested from all around the world, most notably the news that news actually matters once again, as futures are depressed for the first time in well over a month.

After the MBA’s report on mortgage applications, we have some labor-market data and the ISM’s non-manufacturing survey…At 11 am the Fed will complete its purchase of just $1.5-$2.5 billion in 17-30 year treasury.

The Mortgage Banker's Association has released its Weekly Mortgage Applications
Survey for the weeks ending December 24, 2010 and December 31, 2010. On a seasonally adjusted basis for the week ending December 24, 2010, the Market Composite
Index, a measure of mortgage loan application volume, decreased 3.9 percent on a seasonally adjusted basis from the prior
week. For the week ending December 31, 2010, this index increased 2.3%. The kicker is when on looks at the unadjusted numbers which exclude Christmas and New Year's Day adjustments: "on an unadjusted basis, the Index
decreased 23.7 percent the week before Christmas and 10.0 percent
the week after." Hopefully the seasonal adjustment isn't accounting for more than the snowfall across the country. Considering the ongoing spike in mortgage rates, it would not surprise us if this unadjusted data point next week will confirm that any interest in refinancing mortgages at current (still very low) rates has gone the way of the dodo. But at least the Fed thinks that higher interest rates are an indication that lower interest rates are working, or some such tortured FOMC logic.

Yesterday's drop of the BDIY to a one year low, coupled with stocks' (brief) jump to a one year high had quite a few technicians on edge: it isn't every day that we get such a major divergence between the two data series. But does this actually mean anything, and does it predict much in terms of future market performance? For the answer we go to one of the best technical analysts out there, Sentiment Trader, who shares the following piece of advice to those who are curious how stocks have traded in past occurrences of such notable divergences: "Overall, the S&P's median return over the next month or so was certainly below average, and I would consider this to be a minor negative, but not a major or terribly consistent sell signal." That said, there is also the threat that China is merely continuing to add additional supply in terms of Cape and other sized tankers, and we are confident that to some the plunge in shipping rates will be actually seen as a positive as it means less money has to be spent on chartering trans-Pacific transport. Which is good - a difference in opinions is, after all, what makes market.

The Chinese rhetoric on US Treasury holdings is once again heating up. After a year ago former PBOC advisor Yu Yongding called for a reduction in China's holdings of US Treasurys, popular magazine Caijing published another call to arms by the disgruntled ex-central banker. In apparent disagreement with traditional monetary policy and the Yuan peg, Yu said that moving towards a more market-driven exchange rate would mean reduced intervention in the foreign currency markets, giving China the option of winding down its holdings of U.S. debt. "China should strive to reduce instead of further increasing (its holdings of) dollar assets," he said. "Specifically, China should reduce the growth of its foreign exchange reserves as soon as possible. Furthermore, with the Fed now firmly holding far more US debt than China, the world's fastest growing economy is realizing that is negotiating power when it comes to US leverage via bond holdings is getting smaller with every day. Perhaps the country is finally realizing that it would be best to sell to the Fed now when it can, rather than some time in the future, when it has to, and do so on Bernanke's terms.