Archive - May 2012 - Story

Concluding last night's post on the PBS Frontline "Money, Power, & Wall Street" mini-series, the remaining two episodes below take us from the market lows to the current euphoric highs. From Obama's decision for more of the same on his economic team to the Stress Tests, from Larry Summers cavorting arrogance to the Public's rising anger, these two 'post-crisis' episodes seem to have less revisionism than the first two and proceed beyond the US to Europe's 'hiding of the truth' and whether the system can ever be truly reformed - not a pretty picture (especially with the mutually assured destruction argument already being played by the banks in their discussions with the Fed on Dodd-Frank today). No Blythe Masters' pool-side this time but Larry Summers is always happy to please.

In his usual quiet manner, TrimTabs CEO Charles Biderman unloads his emotional baggage along with USAWatchdog's Greg Hunter in this 15-minute interview. The sad truth is that, just like his alter-ego Lewis Black, Biderman is right - again and again. Whether it is reflecting on the kick-the-can mentality of polticians or US investor's apparent willingness to accept the  pulling-the-printing-press-over-our-eyes-behavior, or the fact that Europe can only get worse and how that will spread contagiously to the rest of the world (directly via trade or indirectly via risk-aversion), his focus on the facts (especially with regard to the real state of the US economy as he describes it) makes it hard to disagree for even the most vehement long-only manager (is it any wonder we don't see him on CNBC that much anymore?). Biderman and Hunter discuss the signs of growing inflation, the need to get rid of the deadwood bankers, Europe's imminent demise, central banks' 'funny money' creation, and the need for Gold and TIPs in any portfolio, Charles is at his best as he makes friends (except with the bankers and politicians that he scoffs at) and hopefully influences people.

There is really no argument whether there will be a recession in our future — the only question is the timing and cause of it. The latter point is the most important. Recessions do not just happen — they need a push. In 2011 the economy was just a breath away from a recession due to the dual impact of the Japanese earthquake and tsunami and the European debt crisis. Had it not been for the combined efforts of the Fed through "Operation Twist" and the Long Term Refinancing Operations via the ECB, a drop in oil prices and a plunge in utility costs due to the warmest winter in 65 years, it is entirely likely that that we may have already been discussing a "recession." The ECRI launched a debate that was literally heard around the world with their recessionary call in 2011. The weight of evidence as shown by our composite economic output indicator index shows that the ECRI call was most likely correct. However, the restart of manufacturing, primarily automotive, after the crisis in Japan combined with an effective $90 billion tax credit due to lower oil and utility costs, turned the previously slowing growth rate of the economy around over the last couple of quarters. Sustainability is becoming the question now as weather patterns return to a more normal cycle and the effects of the lower energy costs began to dissipate. In a more normal post recessionary recovery the third year should be closer to a 6-8% economic growth rate versus 2%. While 2% growth is much better than zero — the current sub-par pace of growth leaves the economy standing on the edge of the pool with very little stability to offset any unexpected "push" into the cold waters of recession. The problem is identifying what that "push" could likely be.

Fidelity is happy to announce it has an opening for a new consumer discretionary analyst, because the current one, the one who recommended the firm's investment in Green Mountain, is now looking for a job. Fidelity's GMCR position , which as of 3:59 pm amounted to $1.13 billion, was minutes later trimmed by $445 million, after the company finally posted earnings (and we use the term loosely) which may have finally validated the David Einhorn (and every single skeptic's before) thesis on the name. Because while the earnings themselves came in line, it was the forecast that buried the company: specifically, its forecast of $885 million in Q2 revenue on expectations of $971.7 million, $3.92 -$4.05 billion in full year revenue on estimates of $4.32-$4.46 billion, as well as its 2012 EPS which were forecast to come at $2.40-$2.50 while the street was looking for 2.631 EPS. The result: the growth thesis is now over, and the growth premium has collapsed, with the stock plunging by 40% after hours.

For the third day in a row, the USD was bid from the Europe open to its close and drifted lower in the US afternoon. Today's limp lower in the USD this afternoon (with AUD and CAD strength while JPY was flat) provided, along with some leaking higher in Treasury yields, support for a modest risk-on levitation in stocks as the S&P 500 tried and failed to get back to unch after falling below yesterday's lows (well below the pre-ISM levels) early in the day. Credit, equity, and Treasury markets were remarkably in sync today - which is unusual given recent dislocations and correlation across asset classes in general picked up. Gold (and the rest of the commodity complex) traded pretty much in sync with the USD all day, leaving Silver down 2% on the week and WTI back under $106 but still +0.4% on the week - but Gold -0.5% (in sync with USD's 0.5% gain this week) was the best performer of a bad bunch today. VIX generally traded in sync with stocks aside from an odd gap lower right at the close. Treasuries ended the day 2-3bps lower in yield (a few bps off their best levels though) leaving the entire complex modestly lower in yield for week (aside from 2Y which is +0.4bps). Broad risk assets ebbed a little into the close even as stocks bounced off VWAP for one last push but volume leaked away as we rallied (as normal).

That this rhetorical question will not pose any difficulty is almost sad: the answer, of course, is America, which as we pointed out yesterday, just crossed 101.5% in total debt/GDP (excluding its tens od trillions in unfunded liabilities, that is a different story entirely). What however may surprise some is that the already curiously low average interest rate that America pays on its interest, which in calendar 2011 was 2.5% (or $240 billion on $9.5 trillion in debt) is in realty far lower. The reason is that, as has been indicated repeatedly over the past years, the Fed is now the proud owner of $1.7 trillion in US debt, and it continues to load up on ever more expensive debt courtesy of Twist. As a result, it pockets the interest expense paid out by the Treasury, which in 2011 amounted to $76.9 billion. Then, once a year Bernanke remits all of his "profits", which are essentially interest proceeds on its portfolio, back to the Treasury, which then lowers the effective cash outflow, to just $163.1 billion, or a tiny 1.7%.

With increasing chatter about extreme monetary policy, the chaps at Santiago Capital reprise their previous discussion with a look at why gold became money. With many calling for a return to a Gold-Standard, understanding why there was ever a gold standard to begin with, why has it been used as money dating back over 5000 years, and what makes gold so special (aside from its personality).

Europe's VIX broke back above 28% today, sending it to its highest level relative to US VIX since 2003 and almost three standard-deviations above its long-run norm. So what, we hear you cry - didn't you see European PMI and unemployment and the glorious ISM data in the US yesterday? To which we counter, US equities and European equities are not diverging dramatically, US investment grade credit and European investment grade credit are not diverging dramatically, and macro-economically the two regions have been trending down together in terms of negative surprises. We assume that VIX is holding relatively low to V2X (Europe's VIX) due to market expectations that The Fed will be first to flinch in the game of global thermonuclear money-printing war; however, until we see a significant drop in US equities (and therefore the implicit risk flare and rise in VIX), we suspect Bernanke is cornered. With VIX relatively 'cheap' to its realized vol (as we noted here), perhaps Europe-US Vol-compression trade (ahead of NFP at least) is worth a look - or more simply if you are bullish Europe, sell vol (as its the richest asset) or bearish US, buy vol (as its the most out of line).

Everyone's favorite perma-bullish stand-in for Cramer, Fast Money's Scott Wapner, seemed lost for words when Boston Properties CEO Mort Zuckerman laid down some basic truthiness on the state of the US economy "We have the most stimulative fiscal and monetary policy in the history of this country and here we are three years into the recession and it's not ended. I think we may be heading for an even weaker economy this year than people expect." The righteous REIT ruler went on to note that it is not just the US but Europe (ridiculously high unemployment rates) where he analogizes (rather picturesquely) that it reminds him of "the man who jumps off a 25-story building and as he's hurtling by the sixth floor he says 'don't worry, nothing has happened yet'." Wapner is silenced and changes the topic as we suspect he is stunned at the honest sentiment given the nominal three-year-highs in REIT indices. Truth is indeed stranger than fiat-fiction.

More troubles for the nat gas world, as flashing red headlines confirm the inexorable trend which started years ago with the departure of more and more hedge fund titans who no longer have an advantage in a world where only liquidity matters.

• NATURAL GAS HEDGE FUND MANAGER JOHN ARNOLD TELLS INVESTORS HE IS CLOSING CENTAURUS ENERGY MASTER FUND - RTRS

Why is this not a surprise? Simple. As the FT reported earlier, take virtually everything you know about the nuances, the complexities, the intricacies of commodity trading... and shove it. But don't forget to thank the Chairman first, because the last bastion of "veteran advantage" in what used to be a rational trading arena, is now gone.

The last two nights we have been bombarded with headline data on manufacturing in China - one good and getting better and one bad and consistently contracting. Credit Suisse digs into the reality underlying these indices and notes three reasons why they feel the positive PMI trend is unsustainable as cutting through the "baffle-'em-with-bullshit" macro data is critical in understanding the sad reality we face. Critically, as CS conculdes, the bifurcation implies the economy is not doing entirely badly and hence the hopes of a substantial stimulus should be tempered in the near future - as should the market's optimism of a quick rebound in Chinese demand.

Modern economics is obsessed with modelling. An overwhelming majority of academic papers on the subject work like so: they take data, and use data to construct formal mathematical models of economic processes. Models mostly describe a situation, and describe how that situation would be changed by a given set of events; a very simple example is that as the supply of a good diminishes, its price will increase. Another is that deficit spending increases the national income. A mathematical model is a predictive tool created to demonstrate the outcome of events in a massively simplified alternate universe. As someone who rather enjoys voyages of the imagination, the use of mathematical models in economics is intriguing. The pretension that through using formal mathematical techniques and process  we can not only accurately understand, but accurately predict the result of changes in the economy is highly seductive. After all, we can accurately predict the future, right?

Wrong.

After a peaceful relaxing public disturbance or two during yesterday's May-Day holidays in Europe, the overnight data was disastrous and European risk markets responded in kind. Spain's IBEX traded below the March 2009 closing lows (though shy of the intraday lows) as it is almost back to levels not seen since Q3 2003 (with an intraday low today of 6776.5 versus 3/9/09's low of 6702.6) with its biggest drop in 2 weeks. Spanish and Italian bond yields (and spreads) pushed notably higher - back near last week's worst levels as the whole of the sovereign complex leaked wider today and financials, in their entirely consumed and joined-at-the-hip manner fell the most in 2 weeks - also near recent lows which would take EU bank stock values back beyond March 2009 levels to mid 1998 lows incredibly. It would appear some profit-taking in the LTRO-Stigma trade is occurring, rightfully so after a more than double, but non-LTRO banks outperformed today as LTRO-encumbered banks leaked back wider. European credit markets were open yesterday (since UK was not on vacation where the bulk of CDS market-making occurs) and we note that today saw investment grade credit (along with stocks) underperform (below Monday's close) - as we suspect 'cheap' hedges were grabbed while crossover credit and financials remain modestly tighter than Monday's close (even as their stocks are worse). Whether this is an up-in-capital-structure rotation on the back of hopes for new capital or merely a reflection of liquidity this week is unclear but it is worth watching as subordinated financial spreads are the outperformer off the 4/23 lows now.