Welcome to another morning which saw weak news out of Asia (Chinese Services PMI declining to lowest level since January), weak news out of the UK (Services PMI down to 53.3 from 55.3 previously), and weak news out of Europe where a Spanish auction once again paid well into the unsustainable levels to give the market the illusion that it is well funded. Completing the picture is the ECB which announced that yesterday banks deposited for the first time since early March a total over €800 billion (primarily as Northern European banks see their holdings of Southern paper mature and not get rolled over), or €803 billion to be precise, a €14 billion increase overnight, as one can make the argument that liquidity is once again starting to freeze up. However, despite all the ugly news, US futures are of course up, with the only question the headline scanning algos care about is whether initial claims will once again miss the consensus of 380K solidly (thus making sure tomorrow's NFP print is QE enabling). Our guess it that last week's print of 388K is revised as usual upward, into the low 390K region, with the number missing Wall Street forecast but posting a "decline" from last week's revised number. After all this scheme has worked for so long, why end now?
Mixed Results As Spain Sells More Bonds Than Expected, But Pays Up As Yields Again Spike - Analyst ViewSubmitted by Tyler Durden on 05/03/2012 - 05:38
Traders were watching Spain cautiously this morning which at around 4 am Eastern sold €2.52 billion of three- and five-year government bonds, in its first bond auction since Standard & Poor's cut its sovereign rating by two notches last week. The results were mixed because while more than the maximum range of €2.5 billion was sold (on solid total demand of €8.07 billion) or €2.52 billion, Spain paid up for the privilege, with yields rising across the board, reaching just why of 5% for the 2017 bonds and more importantly pricing with tails to secondary market prices, confirming that the trend in rising yields at primary issuance is very much unsustainable. This in turn caused the EURUSD to get spooked and slide to overnight lows, a move not mimicked by broader equity futures which this morning are again in a world of their own, and now simply await to see if the Initial Claims number later will be far worse than expected in order to soar.
Depending on how one views the current state of the union, this infographic from TakePart.com offers insight into who is to be thanked or which cohort of our illustrious population didn't do enough to exercise their right for democratic central-planning by-fiat. Our favorite - top reasons for not voting: Too Busy or Not Interested; we can only assume American Idol or X-Factor was on that day. The rich voted at higher rates than the poor and the corollary perhaps that higher levels of education led to higher levels of voting leaves the big question - will even fewer of our unemployed turn out to vote this time that the 54.7% that turned out last time?
Anybody watching the EUR/CHF exchange rate this year was wondering why the volatility the pair saw last year had completely left. The pair slowly fell from 1.2156 over 1.2040 at the end of Q1 to 1.2014 today. FX traders hoped on a hike of the floor from 1.20 to 1.25, as many Swiss politicians and companies requested. Banks sold masses of Long EUR/CHF certificates and options. The retail market measured in SSI (Speculative Sentiment Index) was 96% long EUR/CHF. We saw the typical Forex web sites telling regularly their masses of followers that the protagonists of these web sites were going long EUR/CHF in the hope that the SNB is going to act. This happened at multiple critical levels, at 1.2070, 1.2050, at 1.2030 and finally at 1.2010. The small FX trader was begging for months that the SNB would finally intervene. When all these people were long EUR/CHF, who was actually short, when the exchange rate continued to fall ? We speculated that some big accounts wanted their clients to be knocked out with their EUR/CHF longs, we thought that Swiss pension funds and big investors continued to repatriate their foreign funds. What did the SNB ? Did they support the hopes of the masses, of all these SNB rooters ? But on the back-door of all this rhetoric they did the complete opposite: The central bank was happy to get rid of their Euros at a higher price than the floor they had set in September 2011 !
If Munch's Scream was a public company, its stock would be limit up now, because contrary to expectations of it selling at a just concluded auction in Sotheby's for $80 million, the painting just slammed all expectations (except LaVorgna's we are told), selling at a record $119,922,500 (that's $119.9 million... for a made in 1895, 36" x 28.9" painting). This makes it the highest amount of money ever spent for an artwork, with only Picasso's "Boy With a Pipe" and Giacometti's "Walking Man I" selling for more than $100 million in the past. That said, in real terms and assuming 2% annual inflation, the Picasso painting which sold for $104 million in 2004, would now be worth over $120 Million in nominal terms so once again we get into the whole nominal, real debate. It is unknown if some high freak algo went berserk and kept lifting the offer, confused that this is the travesty formerly known as the stock market (although certainly keep an eye out for strange screaming artwork in the GETCO offices) nor is the buyer, but one thing that is certain: it would take the average American 4,548.9 years, earning the 2010 Median Salary of $26,363.55 to be able to purchase the painting. And some wonder why there is a bit of a social divide in the world... As to whether a painting will be considered money by the Charmin' Chairman, well, we will have to wait and see.
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).