Archive - Jan 31, 2012 - Story

Solyndra, Ener1, and now Kaufman Bros - The current economy may not be very good at creating jobs, even minority-focused ones, but its track record in inverse job creation is rapidly becoming second to none. Bloomberg reports that "Kaufman Bros. LP, the minority-owned investment bank that helped unwind U.S. stakes in bailed-out financial companies, ceased operations as of yesterday, according to a notice posted on its website. Chief Executive Officer Benny Lorenzo told employees that New York-based Kaufman was closing immediately in a meeting yesterday after trading closed, according to two people with knowledge of the matter, who declined to be identified because they weren’t authorized to speak publicly. Neither Lorenzo nor Chief Financial Officer Gerard Durkin returned messages left on their office and mobile phones yesterday and today." More amusing is the following description: "The company, which also has offices in San Francisco, said it was sought out by institutional investors, hedge funds and government agencies to help meet diversity goals." No comment. The closure notice can be found on the company's website. And so another bank bites the dust. Many more coming.

Two days ago we learned that when MF Global goes bankrupt, billions in cash can just "vaporize" (no, really - see here, and of course, in the passive voice. can't say something like Jon Corzine vaporized $1.2+ billion in client money now can we). Next we have Art Cashin explain why it is that the US economy is about to see several hundred thousand jobs "vaporize" as well. Perhaps "vaporize" should be the motto of the current Administration: confidence "vaporized", hope "vaporized", and "evaporation" you can believe in, as it condenses on the teleprompter...

While so many were hoping for the siren-call of private-equity or perhaps a reverse-merger MBO with RadioShack, CIT has once again managed to pour well-risk-managed-credit-extension cold water on Sears short-squeeze. SHLD is down 6% following Reuters reports (via The Orlando Sentinel) that CIT will again stop providing loans to suppliers of Sears Holdings as the lender/factor awaits further information of the company's health. Volume picked up dramatically as the stock fell and we note that SRAC (the more active 5Y CDS contract) is leaking wider but has surged around 400bps (to 1800bps) in the last week (as the stock has been treading water off its spike squeeze highs on 1/23).

What do the NAR, Consumer Confidence and CBO forecasts have in common? If you said, "they are all completely worthless" you are absolutely correct. Alas, the market needs to "trade" off numbers, which is why the just released CBO numbers apparently are important... And the fact that the CBO predicted negative $2.5 trillion in net debt by 2011 back in 2011 is largely ignored. Anyway, here are some of the highlights, but here is the kicker: "Had that portion of the decline in the labor force participation rate since 2007 that is attributable to neither the aging of the baby boomers nor the downturn in the business cycle (on the basis of the experience in previous downturns) not occurred, the unemployment rate in the fourth quarter of 2011 would have been about 1¼ percentage points higher than the actual rate of 8.7 percent"- translation: CBO just admitted that the BLS numbers are bogus and real unemployment is 10%. Thank you.

Following three-in-a-row weak macro prints, the market broadly speaking is not happy. The S&P is 10 points off its pre-Case-Shiller highs, EURUSD is dropping rapidly back towards 1.31, Treasury yields are falling 3-5bps across the curve, and Commodities are giving back their spike gains from pre-US day session open. FX carry seems like a major driver for now with AUDJPY and EURJPY most notable while the drop in the curve and levels of the Treasury complex are adding to downward pressure on stocks. Credit and equity markets are dropping in lockstep for now (with HYG more volatile than its peers). The rally in European sovereigns has stalled here as longer-dated spreads are now widening off their intraday tights (10Y BTP back up to 6% yield) while PGBs give back some of their ECB-enthused rally (~20bps off tights now). US equities and CONTEXT (the broad risk proxy) are in line as they drop here.

Back on January 16, Zero Hedge, once again just a "little bit" ahead of the general press posted an article titled: "A Shocking €1 Trillion LTRO On Deck? CLSA Explains Why Massive Quanto-Easing By The ECB May Be Coming Next Month." Today, the market has finally awoken to this probability following an FT article which comes to precisely this conclusion (not to mention an FTD article which throws around a €1.5 trillion number, which at this rate will soon hit the CS whisper number of €10 trillion). Of course, better late than never. But what does that mean? Reverting back to our trusty key correlation of 2012, namely the comparison of the Fed and ECB balance sheet, it would mean that absent a propotional Fed response, the fair value of the EURUSD would collapse to a shocking 1.12 as the ECB's balance sheet following this LTRO would grow from €2.7 trillion to €3.7 trillion. This can be seen on the attached chart.

And so, the predicted gradual softening of the economy is starting to materialize in order to fit with the Chairman's world view (and to set the stage for QE X with a healthy helping of LSAPs). The January Chicago PMI just printed at 60.2, missing expectations of an increase to 63, and down from December's 62.2. And it gets worse: the employment index was the lowest since August at 54.7, while the order backlog number came at 48.2, the lowest since October 2009. This also means that the upcoming manufacturing ISM will also likely be a miss. What recovery again? Or is it China's turn to bail out the world all over again.

The so-called January-Effect is almost at an end and if the market closes near these levels, the S&P 500 will have managed a 4.4% gain or its 20th best January since 1928 (84 years) and best since 1997. The outperformance of banks and sovereigns (LTRO) and the worst-of-the-worst quality names (most-shorted Russell 3000 stocks +9% YTD vs Russell 3000 +5.2%), as Morgan Stanley noted recently, is not entirely surprising since the January effect is considerably larger in mid-cap and junk quality names than any other size or quality cohorts. We have pointed to the seasonal positives in high-yield credit and volatility and along with the obvious short squeeze in S&P futures (which has seen net spec shorts come back to balance recently), we, like MS, are concerned that the tailwinds of exuberance that virtuously reflect from seemingly pivotal securities (such as short-dated BTPs now or Greek Cash-CDS basis previously) very quickly revert to a sense of reality (earnings and outlook changes) and perhaps the slowing rally and rising volatility of the last few days is the start of that turbulence.

The November Case Shiller is out and while not surprising to most, some of those calling for a near-term housing bottom may be advised to reassess (for the 5th year in a row). According to the Top 20 City index composite, prices declined in 17 of 20 MSAs, with gains posted only in Phoenix, Denver and Minneapolis. At 137.52, the Seasonally Adjusted composite dropped to the lowest since February 2003, and is now a third lower than the housing peak in April 2006. Yet the worst news is that, even with a 2 month delay, the housing drop accelerated into the end of the year, and the sequential drop of 0.7% was the biggest decline since March 2011. Which means that except for that errant spike in home prices in April 2011, we have now seen 18 consecutive months of housing price declines since that "rebound" in late 2009. "Despite continued low interest rates and better real GDP growth in the fourth quarter, home prices continue to fall," David Blitzer, chairman of the index committee at Standard & Poor's, said in a statement. "The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand." Yet just like in Europe, the improvement is coming. Aaaaany minute now.

The market is back to being excited and bullish. Yesterday’s announcement out of Europe was underwhelming, but no one cares as a Greek PSI announcement is expected any moment.  It will be interesting to finally find out how many bonds sign on at the time of the agreement and who the potential holdouts are. More importantly, once again LTRO is the talk of the town.  Talk is that the demand will be €1 trillion or more (as ZeroHedge discussed here first over two weeks ago).  It will be interesting to see if the number approaches that or is far smaller.  We continue to believe that banks are using it to prefund redemptions and not as cheap financing to start a new round of asset gathering.  All the talk about the “carry” trade makes it sound like something new that the banks have just figured out, when it is the exact trade that got them in trouble in the first place.  Why did banks sell naked CDS on companies and countries (write protection)?  Because they got carry with no funding worries. Listening to the “chatter” you would think the market is on fire, yet S&P is barely up in almost 2 weeks (it closed 1308 on the 18th).  For the past couple of weeks, fading rallies has been working well, and we don’t see that changing as more and more people become convinced that “Europe is priced in” and ignore that strong earnings were priced in and aren’t really materializing.

With under 3 months left until the first round of the French presidential election on April 22, it maybe prudent to start paying attention to France, where socialist presidential candidate Francois Hollande has just widened his lead over President Nicolas Sarkozy despite a flurry of measures being advanced by the conservative leader to boost employment and competitiveness, a poll showed on Tuesday. This is quite relevant for Europe, as Hollande has made it very clear that none of the recent treaties and agreements would stand in their current version if elected, in the process overturning austerity and the position of the ECB in Europe's bailout org chart, and will gradually add an element of uncertainty to the second most important country in Europe's core, even if no longer AAA-rated. And for those who say there is no chance Hollande could take over, according to IFOP Hollande would trash Sarkozy in a runoff election by a whopping 58% to 42%, a result that even Romney and Diebold would be envious of.

Slowly but surely, ever more physical gold is being removed from circulation in conventional channels. Yesterday, it was Sprott who a week after doing a follow on offering in his PSLV ETF (i.e., adding more physical), reported that he was going to buy an as of yet undisclosed amount of gold for PHYS. This came just as Venezuela completed the rapatriation of its gold from European vaults, which means that it is substantially ahead of all of its other international peers who confidently continue to hold their gold stashed away in vaults situated primarily in London and NY. From Bloomberg: "Venezuela today received the last shipment of gold bars in an operation that repatriated 160 tons of the South American country’s reserves of the metal held abroad, said Nelson Merentes, president of the country’s central bank. Fourteen tons of gold arrived at the Caracas airport today on a flight from Europe, Merentes said. The gold bars were transported in a caravan, broadcast on state television, to vaults at the central bank where street banners proclaimed “Mission Complete.”" So now that the defections in the golden game theory equilibrium have commenced, the question is: who is next?

Busy day for headline chasers (which these days is everyone) with the ISM-leading Chicago PMI taking center stage at 9:45 am. At some point the economy will have to start 'confirming' the Bernanke Bear case or else one may get the impression that the Chairman was merely posturing with providing a perpetual LSAP open backstop to the Russell 2000. Also, the Case Shiller index which will report the 7th consecutive home price drop will likely not get a whole lot of attention.

Back on January 23 we first reported that Goldman had opened a new trade whereby it was shorting 10 Year bonds. To wit: As of a few hours ago, Goldman's Francesco Garzarelli has officially told the firm's clients to go ahead and short 10 Year Treasurys via March 2012 futures, with a 126-00 target. While Garzarelli is hardly Stolper, the fact that Goldman is now openly buying Treasurys two days ahead of this week's FOMC statement makes us wonder just how much of a rates positive statement will the Fed make on Wednesday at 2:15 pm. From Goldman: "Since the end of last August, we have argued that 10-yr US Treasury yields would not be able to sustain levels much below 2% in this cycle. Yields have traded in a tight range around an average 2% since September, including so far into 2012. We are now of the view that a break to the upside, to 2.25-2.50%, is likely and recommend going tactically short. Using Mar-12 futures contracts, which closed on Friday at 130-08, we would aim for a target of 126-00 and stops on a close above 132-00." As a reminder, don't do what Goldman says, do what it does, especially when one looks the firm's Top 6 trades for 2012, of which 5 are losing money, and 2 have been stopped out less than a month into the year." Sure enough, we just got this: "On January 23, we recommended going short 10-yr US Treasuries using Mar-12 futures, for a target of 126-00 (roughly corresponding to 2.5% on the 10-yr rate). At yesterday’s close, we hit our stop loss set at a close above 132-00. We reiterate our fundamental conviction in this directional stance, and would look for opportunities to re-engage. With a large structural deficit, rising trailing inflation and a central bank emphasizing job creation, longer-maturity US Treasury bonds do not rest on solid foundations."