July 15th, 2010
RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 15/07/10
How bad is it? We have no clue.
I have been calling Barrack Obama’s Presidency a failure for at least six months now and it seems that I now have considerable company in this assessment as it becomes obvious to most. It is not a failure because of the Republicans. It is not a failure because of events beyond his control. It is a failure because this was a man that filled a depressed and downtrodden nation with the audacity of hope. When I voted for the man I knew it was against my personal financial interests. It was clear what he would do with taxes. Nevertheless, I got to the polls and voted for this fifth avenue creation thinking maybe, just maybe he might do some of the things he said. Most important to me were two issues related to the military-industrial complex (see Eisenhower’s warning on this during his Farewell Address) and civil liberties. George W Bush was turning America into a depressed police state with perpetual war and consolidation of power between a corporate oligarchy and entrenched political class. A nation where the masses voluntarily gave up many of the liberties the founding fathers fought for merely to ease the fear that consumed them and which was propagated by the administration and the media. I and many others that voted for him even though they disagreed strongly with his economic policies thought he would at least reverse this trend. Why did we think this? Cause he said so. How foolish we were.
Barclays analyst Jeffrey Meli has issued a report "European bank stress tests: A preview" in which he estimates that if properly executed, the Stress Test, whose results are to be announced on July 23, will require an infusion of €85 billion to replenish capital levels. Specifically, quantifying the amount of capital needed would include €36 billion for Spanish cajas, a number far greater than expected to date, €34 billion for the German landesbanks, €8.6 billion for Greek banks and €6 billion for Portuguese banks. Meli concludes: "Spreads have rallied over the past two weeks, suggesting the bar is no longer set so low that any disclosure whatsoever will cause a rally." So all those who plan on buying the news - beware.
For all that talk about good news out of Europe, it would be great if there was any "good" news to actually report, instead of just ECB's ongoing monetization of ever more sovereign debt at higher and higher yields, and the Eurozone regulators pretending its insolvent banks are healthy. Case in point - every single overnight funding indicator is now at the worst levels of 2010, including Libor, Interbank Deposit Rates, Repos and Commercial Paper. Nobody is willing to drink the European stability Kool Aid - the entire continent continues to be locked out when it comes to the ever critical ST funding market. As all this debt accumulates and needs to roll, it means the ECB will soon be required to provide not only long-term but short-term funding. In the meantime, the market continues to buy euros from Goldman.
Remember how the market surged last week? One would think this may have been driven by something as fundamental as actual capital instead of HFT channel stuffing, frontrunning, and other no volume gimmicks, and that retail might actually be participating in a rally for once... One would be wrong. According to ICI even as the market was surging, once again - on no volume, it was merely an orchestrated means for mutual funds to sell out of stocks at slightly better prices to cover another week of massive outflows. In the week ended July 7, ICI reports that domestic equity mutual funds saw $4.1 billion in outflows, the largest outflow in the past 2 months, and the third biggest weekly redemption in 2010! This is also the tenth sequential outflow, amounts to $34 billion in total outflows YTD, and represents a losing streak even worse than that of the BDIY.... Yet stocks jumped. One day we hope congress will ask the Fed to explain this particular observation. And yes, in other lack of news, investors no longer trust stocks period: $6 billion in capital was allocated to taxable bond funds. Nobody cares about 10% returns with the possibility of a total wipe out. 4%, capital preservaton, and staying away from the corrupt and broken stock market is more than enough for most Americans nowadays.
Latest Economic Deterioration Confirmation: Philly Fed Plunges To 5.1, Consensus At 10.0, Previous At 8.0Submitted by Tyler Durden on 07/15/2010 10:03 -0400
Some very troubling language in the release: Results from the Business Outlook Survey suggest that regional manufacturing activity continues to expand in July but has slowed over the past two months. Surveyed firms reported a decline in new orders this month compared with June. Employment showed a slight improvement this month. The survey’s broad indicators of future activity continue to suggest that the region’s manufacturing executives expect growth in business over the next six months, but optimism has waned notably in recent months.The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a reading of 8 in June to 5.1 in July. The index, although still positive and suggesting growth, has fallen for two consecutive months (see Chart). Indexes for new orders and shipments also suggest a slowing this month: The new orders index fell 13 points, to its first negative reading in 12 months, and the shipments index decreased 10 points but remained positive. Indicating weakness, indexes for both delivery times and unfilled orders fell and were in negative territory this month.
When even Jan Hatzius tells you it is time to get out of dodge, you listen.
Something is rotten in the state of Rochdale. One of the most bullish banking analysts ever, Dick Bove, just crucified not only JP Morgan's earnings report, but also said Jamie Dimon "missed it completely on housing", and lastly, has turned extremely bearish on the overall economy, saying there is a 40-60% chance for a double dip, which at last check is probably more bearish than David Rosenberg. Bove throws up all over JPM "good" results, stating it is all a function of loan loss reductions, which the bank is in no way entitled to take at this point, when there is so much negative macro data piling up. As NPLs are likely to continue deteriorating in the future, should the economy weaken further, JPM would have to not only replenish existing accounting gimmicks such as boosting Net Income via balance sheet trickery, but to put even more cash to preserve a viable capitalization ratio. As Bove is the quintessential contrarian indicator, we are preparing for a month long sabbatical to a Buddhist monastery in Tibet to thoroughly reevaluate our perspectives on the universe.
A month ago, Goldman threw in the towel, revising its prior 1.35 estimate for the EURUSD down to 1.15, which prompted us to conclude that it is "Time To Go Long." A month later, following yet another massive P&L loss for all those who are still naive enough to listen to the Thomas Stolper led team, and Goldman has officially flip flopped yet again: "Weaker US growth, reasonably solid Euro-zone macro data and less political/fiscal disruptions than feared have been a feature of the past few weeks, and have motivated another forecast change to reflect more broad USD weakness than before. We now project EUR/$ at 1.35 and 1.38 in 6 and 12 months to reflect the fundamental outlook." And one wonders why GS' treatment of its clients is the butt of all jokes. In fact, Goldman has been kind enough to provide the performance of its 2010 Tactical FX performance, and at -5.3%, it is nothing for clients to write their LPs about.
Ugly Economic Data Continues Validating Double Dip: Deterioration In Empire Manufacturing, PPI And NSA Initial ClaimsSubmitted by Tyler Durden on 07/15/2010 08:47 -0400
The Empire Manufacturing Index plunged to 5.08 on expectations of 18, and previously at 19.57! The stunning drop was driven by a contraction in virtually all diffusion categories: New Orders (10.13 from 17.53), Shipments (6.31 from 19.67), Unfilled Orders (-15.87 from -1.23), Delivery Time (-7.94 from 9.88), Prices Paid (25.40 from 27.16), Prices Received (-1.59 from 4.94), and Average Employee Workweek (-9.52 from 8.64). Only inventories increased marginally (we may have seen this before), from -1.23 to 6.35. All in all a disaster. Elsewhere the PPI also plunged much more than expected, coming in at -0.5 on expectations of -0.1 as deflation is now pervasive. In all fairness, core PPI came in as expected at 0.1%. Lastly, the Initial Jobless Claims came in at 429,000 from 458,000 the week before, a number made irrelevant after various automakers announced they would continue summer production in autoplants that otherwise get shutdown for the period, thus skewing the seasonal adjustment. Indeed the Non Seasonally Adjusted number for the week surged from 468,492 to 513,347. Perhaps most relevantly for the economy, the collapse in those collecting EUC and extended benefits continues, with both categories coming in lower, at -236,162 and -18,580.
JP Morgan kicks the bank earnings season off with a disquieting thud, as we suspected.
Not even the Japanese want to buy their own stocks, with foreign institutions accounting for up to 60% of trading volume on a good day. Local investors would much rather buy emerging market funds, currency funds, bond funds, anything but their own equities. This explains the miserable 1.15% yield investors get on ten year JGB’s. A new kid has shown up in the neighborhood called China which has usurped its traditional role. A massive accumulation of debt and a thousand “bridges to nowhere.” Obama take note.
After a 0.5% decline overnight, the BDIY is now at exactly 1,700, marking the longest sequential decline since the launch of Windows 95. Little to add here. We anticipate that Tim Geithner will soon suggest stress tests to be conducted on dry bulk shipping vessels to the 5 or so Greek CEOs running the industry, with bailouts to come for those leaked to be in need for financing.
The just completed auction of Spanish 2025 Obligacions for just under €3 billion, came at a 5.116% yield, a substantially worse level than the last auction as of April 22, which was placed at 4.434%. The only redeeming feature was that the bid to cover increased from the prior 1.79 to 2.575, after €7.722 billion worth of bids noted an interest. Somehow we get the feeling the ECB has been busy this time around, as have been the Chinese, which were instrumental in last week's 10 Year auction. According to Market News, "Spain is "very confident" it will meet its forthcoming July redemption payments, given its cash position at the Bank of Spain." Furthermore, tax receipts are running in line with expectations, adding to the positive feeling. This is all wonderful, and occurs on the back of a just released Barclays report which (to be posted shortly), which notes that Spanish Cajas alone will likely require €36.2 billion euros to plug a capital shortfall. Luckily the ECB and China are more than happy to keep providing the funds necessary to plug this hole, which upon third, fourth and fifth reestimations will likely end up being one zero short of the true capital deficiency.