The First Casualty Of An "Improving" Economy: The Fast Food Dollar Menu, As McDonalds Considers Hiking PricesSubmitted by Tyler Durden on 12/22/2010 - 16:11
As the fallacy that an economy is improving if the stock market is higher percolates, accompanied by the all too real surge in input costs (yes, oil really is on the verge of breaking $91 first, and then $100), the margin contraction we have been discussing for over 2 months is becoming increasingly acute: for a good recent example nowhere is it more evident than in the latest Philly Fed reading. Yet what is true for manufactured products, is far more applicable for food products, whose input costs are determined by the daily vagaries of millions of speculators. Which means that as the catch 22 of an "improvement" for some courtesy of 3 year highs in the Nasdaq is perceived by the speculators as an actual improvement for all (which would be the case if stocks were owned uniformly by every layer of society, which is certainly not the case), prices will eventually hit the tipping point where retailers will be forced to start passing on cost increases to consumers. Enter McDonalds whos executives according to AGWeb, were quoted as saying that "menu prices could rise if the economy improves." And since after listening to the endless barrage of brainwashing from the mainstream media, one can't not be left with the impression that the economy is doing anything but improving, conveniently ignoring the fact that the Fed is stimulating it coincidentally via QE2, the next step for the broad part of the US population for whom there is no improvement in anything, which would be the majority of America, is about to get its next whopper (pun intended) of a Bernanke side effect, namely inflation in the most affordable of food product categories: fast food. But since this is not caught by the core CPI, all shall be well, and the Fed will be able to proclaim, without losing any sleep, that inflation is truly contained, when the only thing that is contained is lending to those who most need it.
About a month ago we observed some rather unpleasant disclosures in the public vehicle of Phil Falcone's publicly traded entity, Harbinger Group, f/k/a the infamous Zapata Corp of George H.W. Bush fame. Back then we observed that "Harbinger Group., Inc appears to be a shell for an investment company with $141 million of cash and short-term investments on the books, and no operations, and is currently being assimilated by Falcone in an elaborate scheme for his Spectrum Brands shares, which would bring his total holding in Zapata from 51.6% to 94%." It is this same company that has now gotten the increasingly more troubled satellite mogul-cum-hedge fund manager in court. Reuters reports that a lawsuit has been filed against Philip Falcone which charges that the investor took advantage of his position in engineering a stock swap between his hedge fund and a small publicly traded company that he also controls.
The report making the rounds today comes from CitiFX' Technical group which goes against the Wall Street conventional wisdom and instead of a 1,550 on the S&P forecasted by discredited permabull David Bianco, expects to see the market drop 16% by the end of next year. The punchline is that "the peak may be posted as early as the opening days of January 2011 (possibly even 3rd January as per the other 3 examples) with a down month in the region of 5%." And if a down 5% January is not enough, the firm believes that based on historical precedent, we will also see a 20% intrayear drop, and close the year 16% down. The catalysts: i) The bond market falling sharply as it did in 1977 sending yields higher and fueling inflation or supply fears or both, and ii) Europe imploding. While this could stress our view on the dollar fixed income and commodities, this dynamic still supports our bearish equity view. The report's conclusion may prove to be very prescient: "Happy holidays, get some rest. You may need it." On the other hand, with the Fed now practically solely responsible for risk asset pricing, we would not be surprised to see the Dow end 2011 at 36,000.... of course as gas hits $36/gallon, but that's irrelevant. Wealth effect forever!
We have already discussed at length European sovereign spreads, the cost of keeping the PIIGS in the eurozone, the inevitable break-up down the road of the EMU, and how EURCHF is ratting out major stress in the system at a time when everybody is trying their best to look the other way. Today adding to our arsenal of charts highlighting the build of massive distortions in the system, I look at EURCHF against Eurostoxx. A friend of mine sent a chart that got me thinking about quantifying the distortion between the two. In order to compare apples to apples, I compared the 1-month % change of both EURCHF and Eurostoxx normalized using their respective volatility. Basically I divide the 1M % change in Eurostoxx by the VDAX index (equivalent of VIX for the Dax) and multiply it by 100. For EURCHF I use the annualized volatility implied by 1M options.
With the Federal Reserve now openly endorsing the ponzi scheme nature of the US stock market, it would be expected that any releases out of the Fed or its regional offices would be strictly within the limits of preapproved propaganda. Which is why we were stunned when we read the following research piece released from the Dallas Fad, titled: "The Fallacy of a Pain-Free Path to a Healthy Housing Market" in which we read unpleasant facts that traditionally are relegated only to the dark and murky world of the blogosphere. Among these are the following pearls: "Prices, in fact, have begun to slide again
in recent weeks. In short, pulling demand forward has not produced a
sustainable stabilization in home prices, which cannot escape the
pressure exerted by oversupply", "About 3.6 million housing units,
representing 2.7 percent of the total housing stock, are vacant and
being held off the market....Presumably, many are among the 6 million distressed
properties that are listed as at least 60 days delinquent, in
foreclosure or foreclosed in banks’ inventories." (the bulk of which are still populated by squatters who pay no mortgage, yet who are not booted by the lender banks, and who instead can redirect the money to uses such as iPad purchases), and this stunner: "With nearly half of total bank assets backed by residential real estate, both homeowners on the cusp of negative equity and the banking system as a whole remain concerned amid the resumption of home price declines.....The latest price declines will undoubtedly cause more economic dislocation. As the crisis enters its fifth year, uncertainty is as prevalent as ever and continues to hinder a more robust economic recovery. Given that time has not proven beneficial in rendering pricing clarity, allowing the market to clear may be the path of least distress." This is a stunning admission: in essence the Fed itself is advocating for mark-to-market, and the ensuing bloodbath that would ensue with bank book, and market, capitalization. Will this proposal by authors Danielle DiMartino Booth and David Luttrell see more traction at the Fed or promptly disappear in someone's inbox? Our money is on the latter.
And people thought the onion's reality is applicable only to the stock market and economy. For today's WTF moment we head to the CIA where we find the latest Frankenstein monster, titled, literally, WTF. Meet the WikiLeaks Task Force. Per The Guardian: "The group will be charged with scouring the released documents to survey
damage caused by the disclosures." One can just imagine the DOJ's WTF hearings that will likely involve an extradited Assange responding to WTF charges. And with the line between reality and editorial sarcasm blurred beyond recognition, we expect the imminent announcement of a Fed directive titled Preventing Peasant Tensions (acronymed appropriately) whose sole function will be the creation of an imaginary wealth effect for the peasant population, and an all too real escalation in cocaine habit formations among the country's financial "elite."
Confused by how what's left of the stock market is levitating with the reckless abandon of a manic-depressive teenager high on ecstasy and shrooms, even as it hits a fresh record bullish sentiment levels? Don't be: after all it happened, virtually tick by tick, at precisely the same time last year. David Rosenberg reminds us of everything that happened, together with the end of 2009 resurgent economic optimism, which proved being hollow and a re-recession (now that the ECRI made the word double dip no longer fashionable) was certain, only to be prevented by the last course monetary stimulus intervention in the form of QE Lite and QE 2. He also goes on to show what the key challenges for Brian Sack's trading desk will be in the coming year.
We traditionally enjoy the periodic letters by Guggenheim's CIO Scott Minderd. His latest piece, "The Opening Act to the Broader Crisis" is no exception. In it, the strategist dissects the European crisis, compares it to the subprime debacle and sees it as the precursor to the eventual downfall of the euro, a surge in the dollar, the "federalization" of Europe and the adoption of QE by the ECB. The key must read item in the current report is Minerd thought experiment of what a wholesale bank run, first in Ireland, and then everywhere else in Europe, would look like. This is especially important as one could, as Scott claims, start at any moment. What does this mean for investments? "If we are on the brink of crisis in Europe, which I believe we are, then there are several expectations we can draw about the investment landscape. First and foremost, the dollar will strengthen rapidly against the euro; U.S. Treasuries will rally; equity prices in Europe will fall; and credit spreads will widen, at least temporarily. In general, risk assets will experience choppier waters, especially as the crisis intensifies." Yet somehow this is a disconnect with the Guggenheimer's recent Barron's round table bullish statements on stocks and high yield bonds: "Let me be clear, I am not changing my mind on any of these investment theses, but a crisis in Europe will likely interrupt, but not derail, certain bullish trends at some point in 2011." It is ironic that Minerd brings up subprime as an analogy to Europe: after all his response is precisely the same that everyone else who appreciated the gravity of the subprime contagtion used at the time, starting with The Chairman. To wit "it is contained." All else equal, and it never is, we fail to see how a surge in the world's funding currency, the USD, will not generate an all our rout in every single risk asset, The Chairman's gushing liquidity notwithdtanding, due to trillions in short dollar funding positions.
Perhaps this year Goldman's Thomas Stolper will get one finally right: "After some large moves in EUR/CHF to new record lows in recent days, we revisit our analysis published earlier this year. Overall it appears there is still no end in sight to the unwinding of legacy EUR/CHF carry trades, but maybe the start of a new fiscal year may offer some respite from January onward." And as we have said, the Swiss economy is about to be whacked as a result: "The wild card however is the extent to which the exchange rate starts to hurt the Swiss economy. In that respect the recent November trade numbers are quite interesting as they indicate a notable volume decline. Export volume growth has declined to only 3% yoy in November from as much as 14% yoy last May. Not all of this is necessarily due to the exchange rate impact as the global inventory cycle also slowed over that period, but the 14% trade weighted appreciation of the CHF has certainly not helped." Alas, for now there really is no respite: the EURCHF just hit another all time record low: 1.2475. Time for the next "parity" meme?
After WTI passed the $90 barrier with firm determination, as we highlighted earlier, the most recent DOE Crude Oil Inventories number confirms that the far larger than expected draw down is accelerating. As readers will recall, after last week's massive drawdown of 9.854 million barrels which was the largest in 9 years, today's number was another stunner, coming in at 5.333 MM on expectations of 3.4 MM. The result: WTI spikes and is last seen at $90.64. And as a reminder every $1 rise in oil decreases U.S. GDP by $100 billion per year and every 1 cent increase in gasoline decreases U.S. consumer disposable income by about $600 million per year. The move in oil in the past week alone has almost entirely wiped out the most recent stimulus. Furthermore, as we suggest earlier, now that $90 is in the history books, $100 is coming, and may be here within a few weeks. At that point Bernanke may have some problems explaining how he is "100% confident" that the surge in gasoline prices is completely and totally not as a result of his deranged genocidal tendencies.Don't worry though, hedge fund managers around the world will be more than happy to afford the surging prices. Remember: wealth effect!
Existing Home Sales Come At 4.68 Million, Miss Estimates Of 4.75 Million, Home Inventory At 9.5 Months SupplySubmitted by Tyler Durden on 12/22/2010 - 10:16
Stocks are up which means another fundamental data indicator must have missed expectations (following the earlier GDP miss). Sure enough, the NAR just reported November existing home sales, which came at 4.68 million units, a slight improvement to the almost all time lowest number posted in October (4.43 million), a miss to expectations of 4.75 million, and 27.9% off the cyclical peak of 6.49 million from November 2009, when the first-time buyer tax credit expired, and was shockingly not extended. The data follows this morning atrocious MBA numbers which showed a plunge of 18.6% in mortgage applications, and 24.6% drop in refinancings. But if you listen to Goldman, the recent surge in mortgage rates is actually beneficial for everyone involved and just buy the f#&$ing dips! Sure enough, the ever cheerful Larry Yun had this to say: "Continuing gains in home sales are encouraging, and the positive impact of steady job creation will more than trump some negative impact from a modest rise in mortgage interest rates, which remain historically favorable." Um, continuing gains from all time record low levels? Also, the part-time job creation which is the only thing that is being created on steady basis is sure to be the ground for a fertile surge in home prices. And with that the sarcasm is off.
Last week, we pointed out when the BDIY dipped below 2000 for the first time since August. In the next three days, the index slide has accelerated and after dropping 3% just overnight, is back to 1830, just 130 points away from the 2010 lows printed in July. And while the index topped in early September following a brief and uninspired climb, it has since been a one way downward pointing slope. Whether the BDIY is a leading indicator to anything is debatable: some believe it is a completely irrelevant indicator. Others disagree. A rather strong case for the former camp was made last week by Nordea which demonstrated, in its chart of the week, the average speed of its vessel fleet. One thing is certain: for whatever reason, demand for trans-Pacific cargo shipments is once again plunging.
We find few things quite as entertaining these days as watching Jan Hatzius, and the entire Goldman economic team, squirm, as he is forced to admit (repeatedly) that economic data does not support his suddenly ridiculous outlook on the economy. And following numerous mea culpas after the November NFP report, here is his latest admission that not all is quite as rosy as he hopes it should be. 'The Great God Offset strikes again as weaker growth in consumption of
services offsets most of the expected increase in inventory
accumulation. So we end up with a GDP picture for Q3 that undoes most of
last month's upward revision to domestic final sales.. Because the inventory accumulation rate now looks even more rapid
than before, this will likely be a bigger drag in this quarter or the
As West Texas Intermediate is now holding steady over the psychological barrier of $90, more speculators will shift their attention to this latest commodities market, which rumor has it has not been cornered by JP Morgan just yet. As Bernanke's liquidity gushes with no sign of stoppage, expect to see a prompt move into triple digit territory here. For those seeking a good overview of what is happening in he crude space, we provide the following summary note from FMX connect...
Q3 GDP Final Revision Of 2.6%, Lower Than 2.8% Consensus, Inventories Climb Again As Personal Consumption Revision PlungesSubmitted by Tyler Durden on 12/22/2010 - 08:46
Disappointing Goldman which had expected a far higher number, the third Q3 GDP revision came at 2.6%, 0.1% higher than the second, but lower than the 2.8% consensus. In other words, the PCE surge which drove stocks higher on the second GDP revision has now been eliminated post re-revision, yet its impact of spiking stocks back then naturally lingers: surely our ministry of truth has learned from the best. And, as we expected the inventory artificial growth push continues to accelerate, after there was a substantial drop in the far more important Personal Consumption component which misses not only consensus of 2.9%, but the second revision of 2.8%, coming at 2.4%. From the BEA: "The "third" estimate of the third-quarter increase in real GDP is 0.1 percentage point, or $1.1 billion, higher than the "second" estimate issued last month, primarily reflecting an upward revision to private inventory investment that was largely offset by a downward revision to personal consumption expenditures." And even uglier: corporate profits were up a meager 0.2%, compared to expectations of 1.3%, compared to a previous revision estimate of 1.0%. We are confident Jan Hatzius will spin this favorably shortly, and will bring you his "analysis" asap.