Archive - Jun 6, 2012 - Story

While LeBeau et. al. have sung the praises of a renaissance in Auto companies and their manufacturing recovery supporting what woeful growth we have seen, we have mournfully noted the ever-increasing builds of inventory (or 'channel stuffing') at auto-dealerships and most recently pointed to China's 'debilitating price cuts to come' three weeks ago here. Bloomberg this evening is reporting that the situation is getting worse, much worse, as Chinese dealership inventory levels have exploded from under 45 days to over 60 days supply as "dealers can't shoulder the burden anymore... Their backs are broken". This should come as no surprise to ZeroHedge readers but this is forcing dealers to deepen discounts and sell cars at a loss to meet mandatory sales targets. As GM just this week crowed of its 21% rise YoY in 'sales' in China, local analyst channel checks show two-month levels of inventory for foreign brands and even worse 60-80 days worth of inventory for domestic brands adding that this much inventory "is pretty dangerous for the industry". China's largest distributors of autos are canceling debt issues and their views are scarily summed up (by them not us): "The picture we have is very different from what the automakers are painting. The sales increases they’re reporting are achieved by loading dealers with stock."

"Crowds Cheer Queen On Last Day of Jubilee" So ran the headline from Time.  Yesterday marked the end of the “Diamond Jubilee” of Queen Elizabeth II of the British monarchy.  The four day celebration was is honor of her ascendancy to the throne sixty years ago. Monarchies are supposed to be antithetical to freedom.  Under feudalistic monarchism, the notion of personal liberty took a backseat to loyalty to the king.  Those who weren’t part of or close to the nobility were referred to as subjects.  These peasants were to serve without question. Today, the only difference between the systematic malfeasance and plunder that existed under the rule of monarchs and that which defines the state is the ballot box.  Voters in a sense get to choose a small portion of their rulers.  This gives them the mirage of freedom when the nation-state they inhabit is no less than a contemporary field of serfdom lorded over by kings.  Too much of the public still behaves with the mindset of servants.  They are pathetically docile to those who hold the keys of their shackles.   What the celebration of Queen Elizabeth’s sixty year rule showed is that the people of Great Britain never really escaped from monarchy.

A month and a half after the SEC took a much-deserved break from watching taxpayer-funded pornography, and stumbled on the scene with its latest pathetic attempt to scapegoat someone, anyone, for its years of gross incompetence, corruption, and inability to prosecute any of the true perpetrators for an event that wiped out tens of trillions in US wealth, by suing Egan-Jones for "improperly" filing their NRSRO application in what was a glaring attempt to shut them up, the only rating agency with any credibility has done what nobody else in the history of modern crony capitalist-cum-socialist America has dared to do: fight back. We have only three words for Sean Egan: For. The. Win.

Remember when the retail investor was the butt of all jokes, abused by the "smart money" hedge funds and prop desks to soak up hot potatoes and even hotter grenades? Well, to quote Matthew, those who are last now will be first then, and those who are first will be last: because the dumb money just got very smart. As the latest update from ICI shows, in the last week of May, when all the "smart" money was selling hand over fist, it was the retail investor who bottom-timed the market perfectly.

That former San Fran Fed chairman Janet Yellen would demand more easing is no surprise: she used to do it all the time. That Fed Vice Chairman, and Bernanke's second in command, Janet Yellen just hinted that she is "convinced that scope remains for the FOMC to provide further policy accommodation either through its forward guidance or through additional balance-sheet actions", and that "while my modal outlook calls for only a gradual reduction in labor market slack and a stable pace of inflation near the FOMC's longer-run objective of 2 percent, I see substantial risks to this outlook, particularly to the downside" is certainly very notable, and confirms everyone's worst dream (or greatest hope assuming they have a Schwab trading platform or Bloomberg terminal) - more cue-EEE is coming to town.

Now that stocks are back to reflecting nothing more than expectations of how many times the Chairsatan dilutes the existing monetary base in a carbon copy replica of not only 2011 but also 2010... and 2009 (because contrary to what purists may believe, the only way to inflate away unsustainable debt in a growth-free economy is by destroying the currency), and manic pattern chasers have crawled out of their holes proclaiming the death of the bear market after a two day bounce, what is happening in the actual economy, no longer reflected by the market, has once again been pulled back to the backburner. Which is sad, because while ever fewer people reap the benefits of artificial, centrally-planned S&P rallies, the rest of the population suffers, and what is worse: hope for a quiet, middle-class life is now an endangered species. Nowhere is this more evident than in the following list from David Rosenberg which summarizes how, quietly, the US labor force slipped back into a full-blown depression.

It may feel like I'm out of touch with the precious metals markets to broach the subject of a mania today, but I think the table is being set now for a huge move into gold and silver. There are, however, very valid reasons to reasonably expect a mania in our sector. For one thing, manias have occurred many times before, but the main issue is that a mania in gold and gold stocks is the likely result of the absolute balloon in government debt, deficit spending, and money printing. Saying all that profligacy will go away without inflationary consequences seems naïve or foolish. Inflation may not attract investors to gold and silver as much as force them to it. Now, one could make the argument that any rush into gold and silver will be muted if no one has any savings, especially given that demographers say a quarter of the developed world will soon be retired. But even if individuals are wiped out, the world's money supply isn't getting any smaller, and all that cash has to go somewhere. I wanted to look at cash levels among various investor groups to get a feel for what's out there, as well as how money supply compares to our industry. Data from some institutional investors are hard to come by, but below is a sliver of information about available cash levels. I compared the cash and short-term investments of S&P 500 corporations, along with M1, to gold and silver ETFs, coins, and equities. While the picture might be what you'd expect, the contrast is still rather striking.

Despite the failure of the generous offer of Spiderman towels from the recently 'stress-test'-proof-but-now-busted Bankia, today's market suggests there is still hope. The public estimate of loan losses for Spanish banks stands around EUR225 billion (EUR 125bn known and an additional EUR100bn estimated) which, as Charles Biderman of TrimTabs notes "is so big as to be practically unsolvable" as he details the total and utter lack of trust of Spain and Spanish banks that is spreading not just across Europe but around the world. The installation of six of the largest global consulting firms (and the IMF) to begin audits of the Spanish banks, as Reuters reports today, should tell everyone (especially those who bid them up 7-10% today) just how terrible the situation is. Biderman begins to go ultrasonic as he expects real losses for Spain to be in excess of EUR300 billion and this is just Spain! Who knows how big the losses are for the rest of Europe? He does not believe Germany, or anyone else, will put up the EUR300 billion for Spain (or a trillion for the rest of Europe) and sees at best a 50% chance that the entire Euro banking system will go down leaving a much smaller Euro-zone behind (and a 25% chance of a non-panic mode restructuring).

Today, short-term interest rates are set by the diktats of the central bank. And long-term interest rates are set in a “market” in which the central bank is obliged to keep coming back to buy ever more bonds, and speculators front-run the central banks to buy ahead of them. The result has been that, for 30 years and counting, the bond price has been rising, which is the same as to say that the rate of interest has been spiraling into the black hole of zero. When it gets there (and probably sooner) the entire monetary system will collapse. This is the terminal stage of the disease of irredeemable paper currency. They have banished money (gold) from the monetary system, and the result is a positive-feedback-loop that destabilizes the rate of interest. The rate of interest has a propensity to fall, just like the value of the paper currency itself. This leads to the question of how interest rates are set by a free market under a gold standard. This is a non-trivial question, and the answer is profoundly important as we debate what sort of role gold ought to play and evaluate the various gold standards being proposed.

Three days after posting its biggest single-day loss in seven months, it makes perfect sense in this nonsensical market for the S&P 500 e-mini futures to post their best gain in six months (a 4-sigma drop to a 3-sigma gain). Volume was heavy (and we note came in size at the end). Financials went berserk with MS and BofA ripping around 8% higher along with Energy and Industrials all up near 3% today. The biggest jumps was pre-European close, but the very late day surge which just seemed ridonculous (and did disconnect stocks from other asset classes) dragged everything to close at the highs (with ES +2.25% and Dow +280pts). Just remind us why again? No meat from Draghi, but more pavlovian-bell-based hope for tomorrow's Bernanke speech? If that's the case, then why did the Beige Book's much-more positive tone than expected drive gold (QE-hope-fading) significantly lower and leave stocks and treasury yields, at their highs and the USD at its lows. Bonds are 18-22bps higher in yield this week now (with 5Y outperforming only 10bps wider as maybe the 5Y is now the new cash). Gold underperformed its commodity peers as Silver outperformed and Oil and Copper leaked higher with the weaker USD (now down 0.74% on the week). IG and HY credit underperformed as stocks (and HYG) took off into the close and CONTEXT (a proxy for broad risk assets) disconnected lower from equity's ebullience at the end of the day after being dragged higher for much of the day.

We have quite vehemently reminded readers of the dismal drop in US (and global) macro data over the past few months. These disappointing economic surprises and the ensuing global growth weakness will, Morgan Stanley believes, lead to a global policy response (rate cuts where rates can be cut and QE where they can't) and while they expect this monetary policy to work in many important emerging economies, they are doubtful as to whether it will make a material difference to growth in developed economies. Certainly, there are obvious risks to growth (Euro rupture and US fiscal cliff) that could counteract any QE effect but they rather critically note that unconventional policy is effective when the issue is systemic stress; it is less so when growth is the concern. The QE2 rally was largely due to better macro data, which coincidentally started right after Bernanke hinted at QE2. If macro data stays weak, they expect any 'Pavlovian' QE3 rally to last hours or days, not weeks or months. The bull case for a tradable rally is one of simple observation that prior central bank action has coincided with important market turning points but the more skeptical MS strategists suspect this more correlation than causation as they point to the muted effect monetary policy has in an extended deleveraging to stimulate activity.

As noted earlier, Europe has been so obviously crippled by years of brutal austerity (which, as we pointed out before never actually happened), that it has had to experience the supreme indignity - a miserable two years of plunging flat GDP growth. Because under the old normal, it appears that unless one is issuing massive debt, pardon "growing", society grinds to a halt. Well, it appears that France has finally had enough, and as of today, "the French government approved a measure Wednesday that will lower the retirement age to 60 from 62 for a narrow group of workers, partly reversing unpopular pension reforms made by former President Nicolas Sarkozy as he sought to improve France's public finances." Obviously, this means that more welfare funding will have to be sourced as all else equal, this means less money will be produced by the country's workforce, and more money will be consumed by its retirees. Who will do it? Why German of course. Because after Merkel caved first on Greece, and then on Spain, it is now game over for German "prudence" and everyone will line up at the trough. Congrats Berlin: we can only hope you have discovered those magical money-growing trees. You will need them.

Everyone will be scouring for apocalyptic suggestions (need.moar.NEW Kew - EEE) in the following...

• FED SAYS `HIRING WAS STEADY OR SHOWED A MODEST INCREASE'
• FED SAYS ECONOMY EXPANDED AT `MODERATE PACE' LAST MONTH
• FED SAYS `AUTOMOBILE SALES GENERALLY REMAINED STRONG'
• FED: `CONTACTS WERE SLIGHTLY MORE GUARDED IN THEIR OPTIMISM'
• FED SAYS `INFLATION REMAINED MODEST ACROSS DISTRICTS'
• FED SAYS MANUFACTURING EXPANDED, CONSUMER SPENDING WAS STEADY
• FED ECONOMIC SURVEY COVERS PERIOD FROM LATE APRIL UNTIL MAY 25
• FED SAYS DEMAND WAS STRONGEST IN AUTO AND STEEL MANUFACTURING

...And won't find them. So: just what basis will the Fed have to do more QE again? Paging Jon Hilsenrath: Jon? Jon?

From early October of last year (Grand Plan and Global CB intervention) until the start of the LTRO program in Europe, Gold and Stocks (and Treasuries and the USD) all traded in sync with one another. Since the LTRO program, the equity market has generally been on its own in terms of belief. While growth hope, Europe's recovery, and the Bernanke Put (as well as a short-squeeze of epic proportions) were at play, it seems to us that the Fed's Twist program has been ignored by the money-printing crowd (since Twist was sterilized and did not expand the monetary base (excess reserves) - which gold reacts to; but did provide flow - helping stocks - as the Fed's DV01 increased; implicitly devaluing the currency even though Fed's efforts to dissuade have worked) while the ECB's LTRO provided a liquidity overhang that at-first-glance removed one short-term structural risk from US markets (the Europe contagion). Since we made clear that LTRO is in fact an encumbrance and not 'clean' debt monetization (which fits with gold not moving as much), equity markets in Europe have retraced all of those gains - leaving US still elevated. The last few days, gold and stocks have surged together as hope for LTRO3 (seemingly gone now) and Fed QE3/4 (not sterilized; with ES -7.75% from its highs?) has become imminent. However, Gold and stocks remain very far apart in the medium-term and Rick Bensignor sees trendline support and DeMark TD Setups providing an excellent risk-reward for a Short Stocks, Long Gold trade from here.