Done Deal: Reuters Reports New Greek 3 Year "Adjustment Plan" Has Been Agreed On, Can Kicked For Another 3 YearsSubmitted by Tyler Durden on 06/02/2011 - 11:49
Just out from Reuters:
- According to a source, programme will involve new international funding to mid-2014, apportionment yet to be agreed
- According to a source senior Eurozone officials agree in principle on new 3-year adjustment plan for Greece
- According to a source, private sector involvement will be limited to avoid a credit event
Congratulations Europe: you just screwed your taxpayers, but at least bought your insolvent banks 3 more years of bizarro world existence.
As I travel frequently and spend time in so many different countries, it’s becoming clear to me that there are essentially two categories in the world– police states that are running towards George Orwell’s view of the world in 1984, and countries where you can still feel like a free human being. Unfortunately, the police states are doing their best to corrupt the rest of the world. Homeland Security chief Janet Napolitano recently toured India and met with senior security officials there, undoubtedly trying to influence them to toughen security measures and join the Orwellian order. Back in the US, DHS recently announced its ever-expanding “If you see something, say something…” program, this time at the 2011 Indianapolis 500 race. If you’re not familiar, this is the program that encourages people across the country to become unpaid spies for the federal government and rat out friends and neighbors for anything ‘suspicious’. In eerie Big Brother fashion, Napolitano delivers this message from monitors perched throughout WalMart stores nationwide. The stated DHS purpose for the Indy 500 message this past weekend was to “help ensure the safety and security of fans, employees, and race crews by identifying and reporting suspicious activity” at the venue. Realistically, though, it’s just a precursor to having Homeland Security involved in public sporting events… in addition to airports, train stations, subway stations, bus stations, and eventually shopping malls.
Interested in a long-only stock index investment strategy that captures 65% of the upside when the index goes up and limits losses to 21% of the downside when the index goes down? $100 invested in the strategy back in May 1997 would be worth over $800 by early May 2011 compared to less than $300 if you bought and held the index (chart at right). Most investors would agree that $800 sounds a wee bit better than $268. We created a tactical asset allocation (TAA) strategy that outperforms a buy-and-hold policy in a back-test when standard performance metrics are considered . The chart on the left plots monthly Russell 2000 returns (x-axis) against strategy returns (y-axis). In our back-test of the strategy, we were able to capture 65% of upside equity moves on a monthly basis while only taking 21% of the downside. Additionally, the strategy can be extended for use with other equity alpha strategies and to achieve complementary portfolio goals like capital preservation.
As ES Realized Vol Continues Spike, It Is Time For The CME To Hike ES Margins To "Protect Investors"Submitted by Tyler Durden on 06/02/2011 - 11:07
The CME's decision to lower ES margins two days ago may enter trader folklore as the most incompetent decision ever made (and we won't get all tinfoily on them: after all we know the CME doesn't see to manipulate markets with margin moves: they told us so themselves). Which is why in order to keep up with the exchange's primary prerogative of "intense focus on risk management" it is now time to not only undo that decision but to actually hike ES margins. Because as the chart below shows, since the margin cut on May 31, realized vols have surged!
Not at all surprising, the entire commodity complex just swooned, supposedly on the latest DOE inventories data, which saw a surge to 2878K versus expectations of -1600K, up from 616K previously (same surge in gasoline inventories, which surged to 2553K on expectations of 900K). We say not surprising, because crude, and thus all the other uber-correlated commodities, needs to drop at least $10-15 from here before the Fed can then proceed to triple its price once the money from QE 3 start sloshing around. We expect significant more downside weakness in Crude as the realization that QE 3 is inevitable finally dawns on Wall Street. Remember the Catch 22: everything (commodities, stocks, etc) has to go far lower, before everything surges yet again post the next monetary easing episode.
As usual, FX Concept's John Taylor (not the guy with the inflation rule, or the guy with the bass guitar) does not sugarcoat his views, and as disclosed by his latest outlook on the world, things, especially if there is no QE3, are about to get much worse: "Next year is going to be pretty miserable." The reason: the same one that caused us to predict, correctly, late in 2010 when we mocked Goldman's call for a US economic renaissance, namely that with the Fed blowing its wad on QE2 at a time when fiscal "consolidation" was about to become the norm in Washington, that the impact of monetary policy would have an increasingly less pronounced impact. We are surprised by how few people still get it: that cutting deficits at the same time as monetary easing is ending, will be an unmitigated disaster for the economy, and, yes, eventually the markets: "I'm afraid that the cutting the deficit means cutting final demand. It means the economy is going to slow. It might not be a bad thing to cut the deficit, but unfortunately, when you cut the deficit, you're going to get a slowdown. The more you cut the deficit, the worse it's going to be." As a reminder, DC hopes to cut up to $4 trillion in future deficits. And this is happening as the president is entering the fight for his second term. Basically, his only reelection chance, now that Europe is fully austere and China is tightening is some miracle out of Japan (which will not happen), or, cue surprise, the Fed, and QE 3. Ironically, the only hope left for the administration is that "this time it is different" and the Fed can get it right. Which it can't. But it won't stop it from trying. Taylor agrees: "QE 3 will start or not? No. No more? Well, eventually it will start I would argue. I think the fed has to really see the economy printing minus numbers first." So there's the benchmark: contraction, or at least collapsing growth. Which is precisely where we are now. Yes, QE3 is a certainty, and when it is announced, to borrow a phrase, hide your kids, hide your wife, and certainly hide your gold.
The Federal government borrowed and spent $5.1 trillion over the past four years to generate a cumulative $700 billion increase in the nation's GDP. That means we've borrowed and spent $7.28 for every $1 of nominal "growth" in GDP. In constant dollars, GDP is flat: we got no growth at all for our $5.1 trillion: zip, zero, nada. In constant dollars, the GDP in 2011 might return to the 2007 level, if the economy continues "growing" at the same pace reached in the first three months of 2011. If not, then the GDP will actually be lower than pre-recession levels. If you borrowed $7 to get $1 in your pocket, would that strike you as a good deal? How long do you reckon you could borrow $7 to get $1 of "growth" in your finances? Let's say you need $3,000 a month to pay all the household bills. No problem, just go borrow $21,000 and your household economy will "grow" by $3,000. If this isn't the height of fiscal nonsense, then what is?
Factory Orders Join Parade Of Economic Misses; Inventories Of Manufactured Durable Goods At Highest EverSubmitted by Tyler Durden on 06/02/2011 - 09:12
And another miss. Factory orders dropped 1.2% in April, down two of the last three months, to $40.4 billion, following a material March revision from 3.0% to 3.8%. The drop was greater than expected, missing consensus of -1.0%, and indicative that the transition from Q1 GDP strength to Q2 GDP weakness is, as expected, going to be acute. Elsewhere, inventories of manufactured durable goods in April, up sixteen consecutive months, increased $3.3 billion or 0.9 percent to $350.6 billion, unchanged from the previously published increase. This was at the highest level since the series was first published on a NAICS basis and followed a 1.7 percent March increase. Look for inventories to be the swing factor once again in Q2 GDP. Inventories rose 1.3% in April, shipments down 0.2% higher, and unfilled orders were up 0.3%. The inventory-to-shipments ratio was up to 1.32 in April from 1.30 in March.
Moody's Puts BofA, Wells Fargo And Citi On Downgrade Review: Cites Risk Of No Government Support, Mortgage Exposure As RisksSubmitted by Tyler Durden on 06/02/2011 - 08:49
Moody's Investors Service has placed the deposit, senior debt, and senior subordinated debt ratings of Bank of America Corporation (A2 senior), Citigroup Inc. (A3 senior), Wells Fargo & Company (A1 senior), and their subsidiaries on review for possible downgrade. Each of these ratings currently incorporates an unusual amount of "uplift" from Moody's systemic support assumptions that were increased during the financial crisis. The review will focus on whether these ratings should be adjusted to remove this unusual uplift and include only pre-crisis levels of government support. At the same time, Moody's said that it will assess improvements in Bank of America's and Citigroup's standalone financial strength, and that this may temper the extent of any ratings downgrades that could result from its review of these firms' unusual level of systemic support...Despite this progress, these banks still have sizable residential mortgage exposures; their credit costs could therefore spike if the US economy were to contract again. Further, they continue to face litigation costs related to faulty foreclosure practices.
Readers of Zero Hedge know that we put precisely zero weight and/or credibility in yesterday's ADP number: month after month it has proven to have no predictive ability when it comes to forecasting the Nonfarm Payroll Number. On the other hand, we have also been very skeptical of the BLS data, if for no other reason, than due to the traditional Birth/Death adjustment fudge factor. Yet Wall Street needs economic data to which it will respond in a kneejerk, or otherwise, format. Therefore both numbers are important from a trading, if not investing, perspective. This morning, Art Cashin picks up on these two key points and resolves the ADP conundrum, or rather, tells his readers to wait until tomorrow's data to discover if ADP may have finally redeemed itself from the compost heap of economic indicators.
Following last week's outlier of only 60x more insider selling than buying, the latest Bloomberg S&P500 insider selling (and occasional) buying update shows that corporate insiders are once again reverting to the mean of dumping as much of everything as they can with both hands. The last week saw nearly 150x more insider selling to buying, with just $2.3 million in purchases (nearly half of which was accounted for by the $1MM purchase in Medtronic), offset by $333 million in selling. The biggest sales were Hershey, Autozone, Abercrombie and Fitch, Agilent and Chipotle, better known as some of the biggest bubbles in the current market.
Another day, another disappointment in the economic front, where over the past week there has not been one consensus beat. Either tomorrow's NFP number will be the biggest headfake, and the Birth Death adjustment will blow the hinges off the market, or the number will be a total disaster, as needed for QE3. For the week ended May 28, initial claims were 422,000, higher than expectations of 417,000, down from an upwardly (naturally) revised 428,000 (previously 424,000). The 4-week moving average was 425,500, a decrease of 14,000 from the previous week's revised average of 439,500, now that the outlier whopper from a month ago drops out of the moving average. The states with the biggest increase in claims was California, with +7,053 layoffs in the service industry. Continuing claims were also higher than expectations of 3,675K, printing at 3,711K, but, you guessed it, it is a drop from the prevoius number which was revised from 3,690 to, wait for it, 3,712K. Those rolling off benefits and hitting the 99 week cliff naturally gets bigger and bigger as the depression progresses, with 5k less under EUCs and Extended Benefits programs. Elsewhere, US Nonfarm Productivity Q/Q was 1.8% vs. expectations of 1.7% (Prev. 1.6%), while Unit Labor Costs missed expectations of 0.8%, coming at 0.7%, and down from 1.0% previously. Altogether another set of weak data as everyone now focuses on tomorrow's critical NFP number: as a reminder it was the horrible August 2, 2010 NFP data which set off QE2.
Third point, which was down 0.4% in May, yet up 9.7% YTD, has ignored the noise of what other asset managers did as of March 31, and as per its most recently released monthly holdings report, has kept gold its top position (no three month delay here: this is as of May 31). We wonder how many other hedge funds took advantage of the herd of 13F chasers who offloaded precious metals in imitation of what Soros did some time in February and March, only to load up at lower prices.
- Fed mouthpiece Hilsenrath speaks: No QE3 for now - Fed Holds Steady as Economy Slows (WSJ)
- Fed May Signal Balance Sheet Will Stay at Record (Bloomberg)
- Fed Owes U.S. Stakeholders Accounting on Loans as People’s Bank (Bloomberg)
- China will have to tackle local govt debt (Reuters)
- Biggest HFT firm in the world to sell HFT counter-measures: Getco Expands Client Business, Offers Algorithm to Funds (Bloomberg)
- Greece Is in Line For a New Loan (WSJ)
- E.coli outbreak in Europe caused by new toxic strain (Reuters)
- The Chanos thesis is delayed: Banking regulator plans to shift 2-3 trillion yuan ($300-$470 billion) in debt off the books of local governments (Shanghai Daily)
- Kan: Ready to Step Down After Finishing Quake Work (WSJ)