October 5th, 2011
A green day in Europe as last night's superfluous strength in US equities caused reracks in every major European risk class out of the gate. The early strength in Europe was faded quite quickly but the bias was up - even as no new news/plans/clarity was announced and in fact was modestly worse with a lack of capital injection for Dexia noted. Credit and stocks ratcheted higher in three lurches with covering clearly evident in credit as even Belgium and France sovereigns managed small compressions (which makes little sense) though the former remains notably wider on the week (rightly so). FX traded in a narrow range from the US close but the USD was at the stronger-end of the channel as Europe closed (IMF - ECB easing potential comments) but commodities were mixed with lackluster moves overnight though silver and copper sold off the most - not enjoying the excitement in equities - but since the pre-market, all PMs and commodities have pushed higher. TSY yields leaked higher but the curve flattened but we see HY net-selling against IG net-buying (but several major financial bonds being net-sold including MS, GS, and C). We also note that while credit indices do indeed look better on the week, underlying single-names are notably wider which coupled with US corporate bonds suggests many are using strength to cover longs in 'riskier' credits. ES has re-coupled with a longer-term context reducing some of the urgency in equity's bounce though equities remain rich to credit by quite a margin. All-in-all, it seems like we can bleed higher inch by inch as retail gets sucked into another 'recovery/bailout' but under the surface, the 'things' that should be benefiting are simply not as professionals use this strength to rotate hedges or more simply unwind at better marks.
In Latest Bout Of Class Warfare, Multi-Millionaire Harry Reid Seeks To Replace Buffett Tax Proposal With 5% Millionaire SurtaxSubmitted by Tyler Durden on 10/05/2011 12:06 -0400
Confirming that one has to be a billionaire or at least a multi-millionaire to be an applicant for the Tax Czar position under the Teleprompted Wealth Readjuster, is the latest sheer class warfare idiocy out of tax expert du jour Harry Reid, who has proposed an overhaul of the Obama tax bill with one in which millionaires end up paying a 5% surtax. National Journal reports: "Senate Democrats will replace tax increases proposed by President Obama to pay for his $445 billion jobs bill with a more politically popular tax increase on millionaires, Senate Majority Leader Harry Reid, D-Nev., said on Wednesday. “When Democrats bring this common-sense jobs legislation to the floor, we’ll ask Americans who make more than a million dollars a year to contribute a little more,” Reid said in a morning floor speech. He said he hopes to set up a vote on the revamped jobs bill "within the next few days." That means he will seek action after the Senate passes a China currency bill and before Senate action on three free trade bills. Reid and Democratic aides have said they planned to alter the pay-fors proposed by Obama to win support of Democrats wary of the tax increases. Reid and other Democrats noted that raising taxes on millionaires polls well, even among GOP voters." Why yes, Harry, please go ahead and create some more class hatred. You should even bring your agenda down to Wall Street and threaten to occupy Wall Street if your demands are not met. But before you do, please make sure you create a poster which highlights not only how much money you have raised from corporate interests during your career, but specifically how much has come from the "Securities and Interest" industry. We are sure you will fit right in with your sincere populist demands.
Today's news that Greek protesters were back and getting occasionally violent caught nobody by surprise. However what may be unexpected is that not only is the Arab Spring back (almost in time for Christmas) but it is in the bastion of "stability", not to menion crude oil, Saudi Arabia. As The Independent reports, "Pro-democracy protests which swept the Arab world earlier in the year have erupted in eastern Saudi Arabia over the past three days, with police opening fire with live rounds and many people injured, opposition activists say." What? Never heard of this before? Yes, amazing how efficient the media veil is when it has an agenda.
Goldman Denies CNBC Report It Raised Its Payroll Forecast: Squid Sees Only 50,000 Increase In NFP, And Expects Downside RiskSubmitted by Tyler Durden on 10/05/2011 10:55 -0400
Remember when some soon to be without any credibility media outlet (BLOOMBERG - GOLDMAN BOOSTS FORECAST FOR SEPT.PAYROLLS TO 91K:CNBC) reported less than an hour ago that Goldman hiked its NFP forecast? Well, said media "outlet" got it wrong. In fact Goldman's forecast is only for a 50,000 increase in NFP. Just out from Goldman: "The ISM non-manufacturing index was about unchanged in September at 53.0, and close to the consensus forecast (52.8). Encouragingly, the indexes for new orders and overall business activity both increased during the month (the new orders index rose by 3.7 points to 56.5). The new export orders deteriorated, suggesting the improvement in new orders reflected domestic demand. The uptick in orders and overall business activity sentiment are good signs for near-term growth momentum.In contrast, the employment component of the report fell by 2.9 points to 48.7. This indicator suggests downside risks to September payroll employment growth, at least partly offsetting the better-than-expected news from the ADP report this morning. Overall we see a bit of upside risk to our forecast for a 50,000 increase in nonfarm payrolls, but we have not made any changes to our estimate (an incorrect report that we changed our estimate was circulating this morning)." And as Zero Hedge already explained, "Interestingly detailed comments from survey participants suggest that confidence and uncertainty may be weighing on activity, and that firms are downbeat about the 2012 outlook." Sorry guys, Goldman hates this economy, and will not relent until Bernanke launches a $2 trillion LSAP. But feel free to sell your gold to Goldman which is buying up every ounce.
Art Cashin On Bernanke Quoting Shakespeare In Swahili, And Everything Else In Yesterday's Surreal Trading DaySubmitted by Tyler Durden on 10/05/2011 10:22 -0400
To some, yesterday's ridiculous 400 point move in the DJIA in just over 30 minutes on nothing but yet another denied FT rumor, is still mindboggling. Make that to most. Although making things far easier would be to finally accept that the market is completely broken. It is. But in the meantime, here is one way of enjoying it, courtesy of the perspective of the Fermentation Chairman who summarizes all that happened though his veteran eyes.
Slight Beat In Services ISM Ignored Due To Weakest Employment Index Since March 2010; Respondents Uniformly BearishSubmitted by Tyler Durden on 10/05/2011 10:13 -0400
With everyone focusing on the jobs number this Friday, following today's two contrasting data pieces from the abysmal Challenger layoffs report and the better than expected ADP report, one can see why the just released September Non-Manufacturing ISM, which came in modestly better than expected, in fact brings less than great news. While the overall NMI came at 53, a drop from 53.3, but better than expected 52.8, it is the Employment index that is attracting everyone's attention, printing at 48.7, down from 51.6: the lowest from March 2010, which has offset an improvement in both New Orders and Business Activity. And the kicker, all the responses in the survey were negative across the board with this one taking first prize: "It appears everyone is waiting to see what happens next. No trust in the economy or the federal government to do what is needed."Q.E.D.
There are only two ways for Apple to proceed (as) successfully in the medium term: 1) cut prices or 2) raise the technological bar. Either way, margins get hit. This is the first time Apple has released a smart product to boos from expectations set by the Android camp!!!
In the interests of sanity and reality, we thought it worthwhile to note the wild and whacky rumors and statements emanating from Europe this morning. These range from agreeing that banks need recaps (ut not in 'our' country), if there was a problem we'd help (but by 'us' we mean all 17 EU states agreeing), banks are not insolvent or illiquid (but we may need stress tests again), and while Greece is going well we may need more PSI...it is incredible that we actually expect anything from these disparate states, let alone rally on non-news.
From Goldman, October 5, 2011: "Our thesis was that, given time, Dexia’s legacy assets should run down, its unrealized loss pull to par (independently of credit spreads), in turn boosting equity growth and reducing funding requirements. The opposite took place: a deepening sovereign crisis increased the riskiness of these assets, resulting in a wider AFS negative reserve and forcing higher losses on disposal as well as higher than anticipated funding requirements. The headroom to progressively delever is therefore taken away and forced immediate action, as announced by the bank on October 4." From Zero Hedge, May 25, 2011: "Is Belgium's Dexia About To Be The First Greek Casualty?"
The start of the endgame? Soon we will know.
...but it is hardly necessary.
What do MS CDS and S&P Futures have in common? Everything AND Nothing. MS CDS and ES (E-mini S&P Futures) are clearly correlated. As MS CDS tightens, S&P futures rally, and vice versa. That is pretty clear. They are also the two most talked about things all day long lately. That is where the differences become blatantly obvious. I have to admit that I am sick of listening to talk about MS CDS when so much of the conversation addresses issues like volumes, liquidity, transparency, depth, counterparty risk, etc., when all of those issues could be, and should have been, addressed by regulators. The focus should be on whether or not there is value in MS credit at these prices/spreads not whether the prices/spreads are merely an illusion. I suspect that if we had all the same transparency that exists for stocks, MS CDS and bond spreads would be exactly the same as they are now, but at least we could be focused on the real problems and issues at MS.
And now it's time to look at the ADP September Private Employment Report which over the past year has had roughly a zero correlation with NFP. Apparently, despite all signs to the contrary, the private sector created 91,000 jobs in September: a month in which stocks and confidence plunged, up 2000 from August, and better than the 75,000 expected. The bulk of job creation supposedly was at the Small Business sector which added 60,000 jobs, 36,000 added to Medium, and Large business dropped 5,000. From the report: "“Like August, this month’s jobs report continues to show modest job creation,” said Gary C. Butler, Chief Executive Officer of ADP. “The number of jobs added to the private sector in August and September were virtually identical. Once again, the small business services-sector led the way, contributing almost two-thirds of all new jobs. Small businesses overall showed positive growth for the 22nd straight month and averaged 73,000 jobs a month for the past 12 months. Professional business services, education and healthcare, and leisure services led all other sectors in new jobs added.” According to Joel Prakken, Chairman of Macroeconomic Advisers, LLC, “Today’s ADP National Employment Report suggests that employment grew moderately in September. The recent trend in private employment, as indicated by the ADP National Employment Report, remains moderate, and probably is below a pace consistent with a stable unemployment rate. Moderate growth in employment is consistent with the recent deceleration of GDP.”
Sentiment in Europe has been supported by continued focus on the FT article from late last night regarding the informal discussions on bank recapitalisations which had reportedly taken place at yesterday’s EcoFin meeting, with the markets shaking off the Italian triple notch downgrade. Equity markets have traded in positive territory straight from open with banks in particular being supported. The French banks have outperformed with ECB’s Noyer stating that France’s ‘AAA’ rating is not threatened by the state guaranteeing Dexia. There was a brief period of risk aversion following the release of the Euro-area Services PMI’s which were weaker across the board, especially the German PMI which surprised by being lower than 50. Nevertheless markets have continued to follow a risk-on trend with Bund futures weighed by a successful Schatz auction which sold with a record low yield and continued reports of the SMP buying Eurozone secondary market debt with the Spanish and Italian spreads over Bunds tightening markedly. Moving into the US session focus will be on the ADP Employment Change data ahead of non-farm payrolls on Friday with the ISM Non-Manufacturing Composite to follow. Out of the Eurozone will be release of the consolidated financial statement of the Eurosystem.