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The (European) Show Must Go On

It looked like S&P had gone off script. They slapped a negative watch on any euro country that didn’t have it already. They even came out with details about which countries faced 1 notch and which faced 2 notches. I’m glad I didn’t have this information on Friday as I wouldn’t have bet we would be up 1.5% on the week given that move. Now, it looks like this move has been incorporated into the plot. It puts added pressure on the countries to come to a “resolution” this weekend. It is being viewed as increasing the likelihood of a deal since the countries all want to avoid the downgrade. If they do reach a deal, then taking them off watch could add to the post photo-op rally.



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One Third Of Americans Already Done With All Holiday Shopping

While everyone was celebrating "record" black Friday sales, we noted that the bulk of this was due to sales channels taking on negative margins, and due to a "cash for clunkers" like effect in which future sales were pulled forward. Sure enough, we now learn that this is precisely the case, after Reuters reports that "more than a third of U.S. shoppers are already done with most of their holiday shopping, a survey showed on Monday, signaling that retailers need to offer bigger incentives to win sales in the few weeks before Christmas... About 32 percent of people surveyed by America's Research Group said they finished a majority of their Christmas shopping in November. Last month included Black Friday, the day after Thanksgiving when stores pulled out all the stops on discounts to woo shoppers during their biggest season of the year. More than 6 percent completed most of their holiday shopping in the first weekend of December." In other words so much for holiday shopping as a driver of stocks, as there is no way that the remaining two thirds of shoppers can carry the entire season regardless of what massive discounts retailers provide. This is also quite disturbing for US GDP which relies primarily on PCE as a driver to growth (although when that fails retailers can pretend they are stocking up on inventory), and will likely mean that banks which most recently (as of a week ago), had an upgrade round to Q4 GDP will be forced to promptly cut it back down. Lastly, as Rosenberg noted yesterday, once the bills come in January, that's when the wheels will really come off, just in time for the non-extension in the payroll tax.



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‘Gold For Bonds’ in Japan as Bond Buyers Get Gold Coins - May Enhance Returns 5.9 Times

Japan will reward investors who buy reconstruction bonds with half an ounce of gold, an added incentive that could boost the return by nearly six times according to Japanese Finance Minister Jun Azumi. Individual investors who purchase more than 10 million yen ($129,000) in the debt with a 0.05 percent return and keep it for three years will receive a gold commemorative coin weighing 15.6 grams (0.55 ounces), the Finance Ministry said in Tokyo today, worth about $948 based on current prices for the precious metal. The offer suggests the return could be boosted to 89,000 yen should gold prices remain at current levels, more than the approximate 15,000 yen one would receive from the bond. The coupon on conventional three-year retail government debt to be sold on Jan. 16 is 0.18 percent. 10 year debt remains near multi record lows of 1%. Silver coins weighing 31.1 grams issued as 1,000 yen currency will be distributed to those who own more than 1 million yen of the bonds, the government said. The coins will be offered for debt going on sale in March. All investors receive a thank-you note from the minister, who showed his to reporters in Tokyo today as proof of his purchase.  Chief Cabinet Secretary Osamu Fujimura also bought the bonds, Azumi said, without saying how much.  This is a sign that the Japanese government like governments internationally is very concerned that they will not be able to sell their government debt.



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ECB Succeeds With Latest Weekly Sterilization Of €207 Billion In PIIGS Bond Purchases

Following yesterday's announcement that the ECB had purchased a new record total of €207 billion in peripheral bonds, many were focused on today's ECB sterilization announcement to see if, like last week, there would be a failure in the repo market, and less than the full amount of bonds to be sterilized, would be bid. As it happens today the ECB lucked out, after 113 bidders submitted bids for €236 billion in bonds, at a rate of 0.65%, with the threshold €207 billion amount being covered comfortable at 1.19x. Yet one wonders what is it that caused the €50 billion swing in available capital for European banks (last week the tendered for amount was €194 billion). What is ironic is that earlier today, the ECB provided €252 billion in a liquidity providing operation (MRO) to 197 banks at a fixed rate of 1.00%. In other words, banks borrowed €252 billion at 1% from the ECB to lend €207 billion back at 0.65% to the ECB. And that is called a "successful" sterilization.



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Frontrunning: December 6

  • Merkel, Sarkozy Unite as S&P Issues Warning (Bloomberg)
  • Austerity package key to Italy averting collapse (FT)
  • GOP Rejects Democrats' New Payroll-Tax Bill (WSJ)
  • Europe can get out of crisis (China Daily)
  • Belgium, at Last, Forms Government (WSJ)
  • Geithner to Add US Weight to Euro Zone Talks (CNBC)
  • Asia Faces ‘Much Greater’ Global Risks: ADB Says (Bloomberg)
  • Understanding sectoral balances for the UK (FT)


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What Keeps BofA Up At Night?

The onslaught of 2012-Outlooks continues to unmercilessly suggest bullish biases in most risk assets, particularly higher quality equities and credit, and while almost as ubiquitously noting the binary nature of outcomes in the medium-term and significant downside potential. Most of the upside/downside biases reflect heavily on Europe's outcome which in turn seems to have the majority forecasting recessionary contraction being 'stabilized' by a round of quantitative easing by the ECB. BofA's Global Asset Allocation group notes, however, as the Fed has recently discovered, QE alone may be enough to stabilize a situation but a credible plan for growth is harder to achieve. Furthermore, in a topsy-turvy potentially chaotic manner, they point out that the market's expectation of QE has been enough to calm waters (or more aptly levitate markets) leaving policy makers with little choice now for fear of the instability created by not delivering what Mr.Market (as we have been noting for weeks - pressure for a 'crash' from the likes of Deutsche Bank) demands or expects. But away from European disunity, if that is possible, BofA's key global risks include a worse-than-feared-EU-recession, Mid-East unrest, US fiscal tightening, and a China hard landing but given their perspective on the extreme levels of bearishness, they prefer to hedge upside risk from their correctly cautious view.



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The Chart That Proves The Fed's Policies Have Been A Failure

A few days ago we presented an analysis by ConvergEx showing that due to the very close historical correlation between home prices and employment, it is the Fed's view that the only way to stimulate employment (aside from such BLS shennanigans as pretending that despite the natural growth of the labor force by 90k a month to keep up with population, those willing to work are in fact declining) is to raise home prices. Raising home prices be definition means either reducing supply - an event which is proving impossible with shadow inventory in the millions and rising, even as thousands of new delinquent mortgages appear each day while homebuilders keep on chugging out new homes that remain vacant for years, or increasing demand. It is the latter that the Fed targets, by attempting to make mortgage rates ever cheaper via LSAP, Operation Twist or other Treasury curve interventions that attempt to push down long-dated yields ever lower. This works in theory. In practice, however, as the chart below demonstrates, the Fed's entire ZIRP-targeting policy over the past several years has been one abysmal failure (for everyone expect those with immediate access to the Fed's zero interest rate capital - i.e., the Primary Dealers). As proof of this we present the following chart, which maps the SAAR in New Home Sales against the 30 Year Fannie Cash Mortgage. What appears very clearly on this chart is that despite ever declining mortgage rates, there is simply no interest in home turnover, and sales are at record low levels due to lack of demand, and lack of desire to sell into a bidless market, in essence causing the entire housing market to halt.



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Is The Fate Of Mitt Romney's Presidential Campaign In The Hands Of A Reuters FOIA Request?

It appears the GOP candidates are dropping like flies: first that one crazy guy, then Cain, and now... Mitt Romney? According to a Boston Globe article, paraphrased by Reuters, the GOP frontrunner (or is that second after Gingrich now: nobody really knows any more), spent $100,000, not of his own money but state funds, to "replace computers in his office at the end of his term as governor of Massachusetts in 2007 as part of an unprecedented effort to keep his records secret. When Romney left the governorship of Massachusetts, 11 of his aides bought the hard drives of their state-issued computers to keep for themselves. Also before he left office, the governor's staff had emails and other electronic communications by Romney's administration wiped from state servers, state officials say. Those actions erased much of the internal documentation of Romney's four-year tenure as governor, which ended in January 2007. Precisely what information was erased is unclear." Odd: almost as if he had something to hide... Yet something tells us the other side of those emailed correspondences will still be there: alive and kicking, somewhere on the archived servers of Bain Capital, and a few prominent health insurance companies (and of course Goldman Sachs, because Goldman Sachs is everywhere). Naturally, one would need a subpoena to get those. And for that one would need a reason to assume something is illegal. Luckily, wiping your hard disks while a servant of the people is perfectly normal in a banana republic. Now just who does Ron Paul have to murder in broad daylight while having sex with Snooki before the general media finally decides he is worthy of a shot at this whole farce?



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Guest Post: The US Education Bubble

In the world of finance, there is always talk of bubbles – mortgage bubbles, tech stock bubbles, junk bond bubbles. But bubbles don’t develop only in financial markets. In recent years, there's been another one quietly inflating, not capturing the attention of most observers. It's an education bubble – just not the one of student debt that has graced the pages of the New York Times and so many other publications in recent months. The problem is not that we are overeducating ourselves as many would have you believe. Rather, it’s that we are spending a fortune to undereducate ourselves. The United States has always been a very educated country. But it is becoming less and less so, especially in the areas that matter to our individual and collective economic futures. Our undereducation begins with a stubbornly high dropout rate among secondary education students. About a quarter of those who begin high school don't finish. In an educational system where graduation from high school at a minimum level often means no grasp of mathematics beyond basic arithmetic, no training in basic personal finance, and no marketable professional skills, this is an obvious problem We can and should do more to prepare high school graduates for the world they now live in. The big problems aren't rooted in high school education, however, but with the decisions we as a nation are making in the education we get beyond the compulsory level.



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What Is The Fair Price Of A Postage Stamp?

Now that the USPS is teetering on the verge of bankruptcy every day, there are those who say the post office is simply not charging enough for its services. On the other hand, there are those who say no matter what the USPS charges it would always, being a government institution, immediately drown out any revenue increase with a more than commensurate surge in headcount (i.e., expenses) that offset any increase in postage stamp prices, and drown out any possibility for it to stay cash neutral (being non-profit), forget turning a profit. So at the end of the day the age old question arises: should the USPS merely keep hiking prices, or should it do what the US government should have done long ago and cut overhead across the board. Because as the chart below shows, while the nominal surge in stamp prices is more than obvious, it has managed quite successfully to stay indexed with inflation. In which case the question becomes: what would Americans be willing to pay for a stamp?



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Gallup Finds Recent Job Boost Due To "Temp And Part-Time" Hiring; Underemployment Greater Than Prior Year

While the BLS unemployment number, fudged strategically to lower the denominator, or the total labor force, may have come well better than expected (as somehow miraculously ever more people find the shadow economy a more hospitable place where to make their money and drop off the BLS roll forever) we once again go to that trusty fallback, the monthly Gallup poll of underemployment. What we find here is rather different from what the BLS, and the administration would like us to believe, namely that "underemployment, a measure that combines the percentage of workers who are unemployed with the percentage working part time but wanting full-time work, is 18.1% in November, as measured by Gallup without seasonal adjustment. That is up from 17.8% a month ago and 17.2% a year ago." Said simply, "many employers appear to have chosen to hire part-time rather than full-time employees for this holiday season." Naturally, this should come as no surprise: it was first discussed here in May, when we said: "As the attached chart shows, since the start of the depression, America has lost 9.1 million full time jobs, offsetting this by a gain of 2.3 million part time jobs. No need to outsource to Asia any more: America now outsources jobs to temp agencies. And so the transition of America into a part-time worker society, first discussed in December of 2010 continues." (the attached chart can be seen here). As for the Gallup chart which comes from the real economy, not from some seasonally fudged, birth/death adjusted grotesque model deep in the bowels of 2 Massachusetts Ave NE Washington, here it is.



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Solyndra Schadenfreude As Goldman Sachs Played Key Role

While we are not completely shy of saying we-told-you-so, in the case of the players in Solyndra's fantastic rise and fall, we are more than happy to. Back in September we highlighted Goldman Sachs' key role in the financing rounds of the now bankrupt solar company and this evening MarketWatch (and DowJones VentureWire) delves deeper and highlights how the squid has largely stayed out of the headlines (what's the opposite of lime-light?) in this case despite its seemingly critical assistance and support from inception to pre-destruction. Goldman's involvement in Solyndra, and its lofty valuation projections, lent credibility to the company and helped rouse investor interest and it was this private interest that was cited by DoE officials as a considerable factor in its loan guarantee program. As we said before, anywhere you look, Goldman has been there and left its mark...



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Guest Post: It's Time To Give Up On Mainstream Economics

Prior to 2008 it was generally understood that the profession hardly merited its claims of its own predictive utility. So the failure to assign enough risk to such a crisis as befell the developed world in 2008 was, frankly, no surprise. But in the aftermath of the crisis, economics, in its professional form, has revealed itself to be damagingly disconnected from observable reality. A glaring example of this is how it cannot come to any agreement as to how the debt crisis occurred, and accordingly remains quite confused in its proffered solutions. Mostly the profession remains curiously naive about the nature of debt, an understanding of which is more critical than ever as the developed world enters a 'slow' to 'no-growth' phase of its history. Indeed, many of the papers, interviews, and op-eds from central bankers and economists in the face of our present-day sovereign debt crisis are little more than an eerie restatement of the discussions which took place about private-sector debt from 2006-2008.



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The Black Friday Shopping Hangover Is Coming: David Rosenberg Explains

Last week, while the market was soaring as news of the upcoming Fed's FX swap lines was being leaked, the general media's narrative goalseeked to the stock spike was that it was a function of "record" Black Friday sales. Alas, as often the case, there is some unpleasant fine print to go alongside this seemingly bullish proclamation. David Rosenberg explains why the shopping bonanza hangover is coming, and why, just like in the cash for clunkers case, it means that a late November shopping record means an imminent plunge in retail traffic...as soon as the bills come in.



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