Archive - Jan 19, 2012 - Story

As retail investors continue to appear significantly pessimistic in their fund outflows ($7.1bn from US equity mutual funds in w/e January 4th - the largest since the meltdown in early August) or simply stuff their mattresses, David Santschi of TrimTabs asks the question, 'who is pumping up stock prices?' His answer is noteworthy as a large number of indicators suggest institutional investors are more optimistic than at any time since the 'waterfall' decline in the summer of 2011. Citing short interest declines, options-based gauges, hedge fund and global asset allocator sentiment surveys, and the huge variation between intraday 'cash' and overnight 'futures market' gains (the latter responsible for far more of the gains), the bespectacled Bay-Area believer strongly suggests the institutional bias is based on huge expectations that the Fed will announce another round of money printing (to stave off the panic possibilities in an election year). The ability to maintain the rampfest that risk assets in general have been on (and the cash-for-trash short squeeze that has been so evident) must be questioned given his concluding remarks.

While lately not much, if anything, has changed in our and the broader secular outlook on gold, which has been and continues to remain the only currency equivalent that isolates devaluation risk, and excludes counterparty risk while being an implicit bet on the stupidity of those in charge (the fact that various tenured "Ph.D. economists" hate what it represents for their tenure prospects of course only makes the bullish case far stronger). True, in the past month it has surged from $1520 to $1660 but only Ph.D. economists (indeed, that 200 DMA proved to be a complete non-event) could not have foreseen that year end liquidations in a desperate drive to shore up liquidity (as explained here) by institutions, always end, and the reversion to the above thesis sooner or later reappears. So while it won't say much new, below we present Nomura's just released Gold Sector Initiation, which is a must read for new entrants to the field of physical and paper representations of gold, as well as a timely reminder for everyone else that in the past 3 years nothing has changed with the fundamental thesis, and in fact recent actions have merely reinforced it (and if we indeed have a €1 or €10 trillion LTRO, then watch all resistance levels in the metal get blown off).

Bob "The Bear" Janjuah may appear a little greyer than his previous appearance on Bloomberg TV but his thoughts on the 'weaker-for-longer' recovery are as clarifying as ever as he sees Q2 as payback time for the misunderstanding of a mini US business cycle as a real sustainable recovery. Noting that the LTRO does not fix Europe, he sees the worst still ahead for the 'Eurozone mess'. Discussing expectations for Fed QE3 and moderating growth in Asia/EM, he believes that markets are likely to get ahead of themselves (or have done) even as he recognizes his potential underestimation of the market's perception of LTRO's impact on sentiment (pulling forward risk appetite from a QE-driven Q2 rally to the current Q1 ripfest). As we have argued, Bob notes that we are simply not addressing growth or solvency and Q2 will be the payback (looking for a 1000 print in the S&P 500 index by quarter-end) for the policy- and liquidity-driven rally we are undergoing.

To many walking the planet, fracking has a seriously bad reputation. Thanks to hyperbole and misinformation, fracking opponents have convinced a lot of people that the operators who drill and then hydraulically fracture underground rock layers thumb their noses at and even hate the environment. Anti-fracking claims may be twists on reality – for example, that a legislative loophole makes fracking exempt from the America's Safe Drinking Water Act, when really this federal legislation never regulated fracking because it is a state concern. Then there's the completely absurd, such as the idea that frac operators are allowed to and regularly do inject frac fluids directly into underground water supplies. We decided to set the record straight by using facts, not playing on emotion like many of the frac-tivists do. It's important because unconventional oil and gas constitute an increasingly pivotal part of the world's energy scene. In the United States, where shale gas abounds but imported energy rules the day, this is especially true.

ISDA, in which the I stands for Irrelevant or other even less flattering adjectives, has just released the following press release:

NEW YORK, January 19, 2012 – The International Swaps and Derivatives Association, Inc. (ISDA) today announced that its Americas Credit Derivatives Determinations Committee resolved that a Bankruptcy Credit Event occurred in respect of Eastman Kodak Company.

 

The Committee determined that an auction will be held in respect of outstanding CDS transactions. ISDA will publish further information regarding the auction on its website, www.isda.org/credit, in due course.

Which is great: apparently the default of Kodak will not lead to the end of the financial system as we know it. But we have a simple question: we would love if someone at ISDA would get back to us with the answer to the following rhetorical question: which of these two charts belongs to a benchmark Eastman Kodak 2 year bond, and which to  a 2 year Greek bonds, which apparently, ISDA will never find in default. And also, why is the one found to be in a credit event trading 6 cents higher than the non-credit event one.

GOOG, first on deck, swing, and a miss - Source

• GOOGLE 4Q ADJ. EPS $9.50, EST. $10.50
• GOOGLE 4Q REVENUE $10.58 BILLION, EST. $8.41
• GOOGLE 4Q COST-PER-CLICK DOWN ABOUT 8%

Beat on top line, miss on EPS - Margin Compression?

Next: MSFT - Source

• MICROSOFT 2Q REV. $20.89B, EST. $20.92B
• MICROSOFT 2Q EPS. $0.78, EST. $0.76
• MICROSOFT CORP BING U.S. MARKET SHARE, AT 15.1% UP 300 BPS Y/Y
• More layoffs: Microsoft is revising operating expense guidance downward to $28.5 billion to $28.9 billion for the full year ending June 30, 2012.

Beat on bottom, miss on top

Next: IBM - Source

• IBM 4Q REV. $29.49B, EST. $29.71B
• IBM 4Q OPER EPS: $4.71, EST. 4.62
• Full year 2012 Expectations: GAAP EPS of at least $14.16 and operating (non-GAAP) EPS of at least $14.85

Beat on bottom, miss on top

Next: INTC - Source

• INTEL 4Q REV. $13.89B, EST. $13.72B
• INTEL 4Q EPS 64C, EST. 61C
• INTEL SEES 1Q REV. $12.8B +/- $500M, EST. $12.76B

Beat on top and bottom.

While skimming the latest draft of the "TREATY ON STABILITY, COORDINATION AND GOVERNANCE IN THE ECONOMIC AND MONETARY UNION" or the EU fiscal draft in short, which is supposed to give Europe reason to rejoice as it says something about the ESM potentially being levered more than €500 billion (not absent additional funding of course, and we have seen how good the EFSF is in procuring capital), we have found the only two clauses worth noting. Which unfortunately show just what a farce this whole process truly is.

While European leaders would prefer to eschew concerns about individual sovereign nations' ability to pay, borrow, and spend in favor of an aggregate EU that they believe reflects better in the world comparisons (if any aliens are considering stimulus support we assume), Goldman's Hugo Scott-Gall is out today with his normal compendium of insightful charts. One specifically caught our eye on How Governments Spend as we makes the critical point (from a real money investor and not a talking-head perspective) that it is crucial to look at end-market exposures as well as geography. Investors exposed to consumers in countries facing significant ongoing household deleveraging (ring any bells?) face a demand picture that is likely to be challenging for some time. In his view this is more likely Southern Europe than Northern Europe and his critical point is that while many extrapolate trends in GDP multipliers for corporate earnings expectations, the need to reduce deficits relatively quickly for many European governments will reduce corporate revenue forecasts dramatically relative to empirical ponzi spending habits.

The reason I don’t write about markets so much anymore is because I don’t believe there are markets any longer. Sure there are flashing prices on the screens for various assets and those can be addicting to look at on a daily basis, but I think these “markets” are now merely a mechanism for government propaganda and a method to ultimately fleece more money from the uniformed masses that play in it by the casino operators and their puppets in government. It’s basically a hologram. I have alluded to this in recent interviews, but I myself feel extremely uncomfortable being involved at this point in a way I have never felt before. For now, I am still willing to play the game with some of my own capital but I fear I may regret this decision and that the smart thing would be to pull out completely and go entirely into hard assets as well as real estate abroad. This game is not safe. By definition, the longer the period of tension building the more explosive the release will be when it ultimately happens. This period has already been going on for almost five months with only minor releases so I think we are already staring down the barrel of something horrific. Should they actually succeed and delaying the release until after the election I expect the release scenario to be downright cataclysmic. Should they succeed to delay it that far I hope I am wise enough to pull the remainder of my assets out of this casino beforehand and get entirely physical.

For those following the latest naval developments in the general Arabian Sea area and the Straits of Hormuz in particular, the latest news is that the duo of Aircraft carriers on location, as was reported last week, the USS Stennis and USS Vinson, has became a trio, with the arrival of the USS Lincoln, however, if only briefly. According to the US Navy's website, CVN 74 Stennis has left the 5th Fleet, and is now back in the 7th fleet, on its way home. Yet this is somewhat contradictory with the following picture posted on the facebook profile of one CVN 72 Abraham Lincoln (yes, faceook), which quite vividly shows CVN 74 - the same Stennis - and CVN 72, Lincoln, side by side, at least as of this morning. As such, absent further photographic evidence to the contrary, it may be the case that while the Stennis is planned to be on its way back, but in reality is still in the vicinity. Which begs the question: why three aircraft carriers in the Arabian Sea, and for how long?

While we are sure Mitt Romney would not care to comment, private equity firm KKR's Henry McVey is strongly suggesting investors should avoid European sovereigns in his 2012 Outlook. While his reasoning is not unique, it does lay out a fundamental fact for real money investors as he still does not feel that Core or Periphery offer value. Specifically noting that "fiscal austerity among European nations is likely to lead to lower-than-expected growth, which would ultimately increase the debt-to-GDP ratios of several countries in the coming quarters", the head of KKR's asset allocation group sees a slowdown in Europe as core macro risk worth hedging. Expecting further multi-notch downgrades across both the core (more like BBB than AAA) and periphery, McVey also concludes in line with us) that Greece may need to restructure again in 2012 and will disappoint the Troika.

Instead of opting for a publicly transparent BWIC in the disposition of its Maiden Lane II assets, the Fed has once again gone opaque - long a critique of the Fed's practices which have required repeated FOIAs in the past to get some clarity on its secret bailouts and transactions - and proceeded with a private sale, without any clarity on the deal terms, in which it sold $7 billion in face amount of Maiden Lane II assets direct to Credit Suisse. The alternative of course would be the same snarling of the MBS and broadly fixed income market that we saw in June of last year. In other words, the Fed looked at the options: transparency and risk of grinding credit demand to a halt, or doing what it does best, which is to transact in the shadows, and avoid capital markets risk. It opted for the latter. As to why the Fed decided to go ahead with a deal shrouded in secrecy? "The New York Fed decided to move forward with the transaction only after determining that the winning bid represented good value for the public." "I am pleased with the strength of the bids and the level of market interest in these assets," said William C. Dudley, President of the New York Fed. Because if there is one thing Bill Dudley and the Fed knows is gauging what is in the best interest of the public... and the callorie content of the iPad of course.

America's loss is China's gain. In the aftermath of the Keystone XL fiasco, which will see not only a number of jobs "uncreated" but a natural source of crude lost, Canada is already planning next steps. Which will benefit Shanghai directly and immediately. As Bloomberg reports, "Prime Minister Stephen Harper, in a telephone call yesterday, told Obama “Canada will continue to work to diversify its energy exports,” according to details provided by Harper’s office. Canadian Natural Resource Minister Joe Oliver said relying less on the U.S. would help strengthen the country’s “financial security.” The “decision by the Obama administration underlines the importance of diversifying and expanding our markets, including the growing Asian market,” Oliver told reporters in Ottawa." Ironically, it is diversifying away from the US, with its ever soaring, politically-predicated uncertainty, that is a source of stability and diversification. But it is not only crude. Wonder why no jobs are being created? Wonder why despite record low mortgage rates there is no bottom in sight for housing? Simple - nobody can plan one month, let alone one year ahead for any US-based venture or business. The political risk is simply too great - whether it is contract law (see GM and Chrysler) or simple solvency (see record high levels of cash hoarded by companies), it is there, and as long as it is there, there will be no hiring, no capex spending, no growth, and no real improvement in the economy, the real economy, not that defined by where the Russell 2000 closes on any given day.