8.5%

Iran's oil exports have dropped in March as buyers prepare for sanctions, and shipments are likely to shrink further if Obama determines by Friday that markets can adjust to less Iranian oil and tightens sanctions even further. Sanctions could eventually leave half of Iran's oil output cut off from international markets, according to analysts and officials. Iran is also being excluded from global commerce and the global economy by being locked out of the international payment system – SWIFT. SWIFT, the Brussels based clearing house, announced last week it will cut services to Iranian banks on foot of European sanctions, in order to comply with the EU Council. The service denial includes Iran’s central bank, which processes Iran’s oil revenues. Some 30 Iranian banks will be blocked from doing international business. History suggests that the trade, economic and currency war with Iran may soon degenerate into an actual war. Increasingly, the regime in Iran has little to lose in engaging in a more aggressive foreign policy – including attempting to close the strategically important Straits of Hormuz.

For every semi-positive data point the bulls have emphasized since the market rally began, there's a counter-point that makes us question what all the fuss is about. The bulls will cite expanding US GDP in late 2011, while the bears can cite US food stamp participation reaching an all-time record of 46,514,238 in December 2011, up 227,922 participantsfrom the month before, and up 6% year-over-year. The bulls can praise February's 15.7% year-over-year increase in US auto sales, while the bears can cite Europe's 9.7% year-over-year decrease in auto sales, led by a 20.2% slump in France. The bulls can exclaim somewhat firmer housing starts in February (as if the US needs more new houses), while the bears can cite the unexpected 100bp drop in the March consumer confidence index five consecutive months of manufacturing contraction in China, and more recently, a 0.9% drop in US February existing home sales. Give us a half-baked bullish indicator and we can provide at least two bearish indicators of equal or greater significance. It has become fairly evident over the past several months that most new jobs created in the US tend to be low-paying, while the jobs lost are generally higher-paying. This seems to be confirmed by the monthly US Treasury Tax Receipts, which are lower so far this year despite the seeming improvement in unemployment. Take February 2012, for example, where the Treasury reported $103.4 billion in tax receipts, versus $110.6 billion in February 2011. BLS had unemployment running at 9% in February 2011, versus 8.3% in February 2012. Barring some major tax break we've missed, the only way these numbers balance out is if the new jobs created produce less income to tax, because they're lower paying, OR, if the unemployment numbers are wrong. The bulls won't dwell on these details, but they cannot be ignored.

Two days ago we posted a very damning analysis of why Japan is finally facing the dilemma of either a major Yen devaluation, or, far worse, a long-overdue pop in the Japanese Government Bond (JGB) market. As expected, the conventional wisdom was that there is no danger of a JGB collapse as local households just can't get enough of JGBs following 30 years of straight deflation. As even more expected, conventional wisdom always ends up wrong, and this may be the case now. Bloomberg reports that "Finance Minister Jun Azumi’s efforts to get Japan’s households to increase investment in the nation’s debt are failing as holdings of government bonds fall to a seven-year low." Combing through the Japanese quarterly flow of funds report shows something very disturbing - the last bastion of JGB ownership, Japan's households, have started to shift out of bonds, which are now yielding 0.27% for the retail 5 Year bond, and about 1.00% for the 10 year, and are now putting their money straight into mattresses. "Japanese households owned 3.09 percent of domestic bonds in the final quarter of 2011, a decrease from 3.2 percent in the third quarter and the lowest since 2005, Bank of Japan data released March 23 show." And the worst news for any domestically funded ponzi regime: "Mrs. Watanabe” as many are housewives, have instead increased foreign-currency deposits and cash, according to the BOJ data.  "It’s a case of retail JGBs not having enough yield,” said Naomi Fink, head of Japan strategy at Jefferies Japan Ltd."Households are accumulating cash and using financial investments to diversify into higher yields and JGBs don’t really provide this." ..."Individual investors are holding cash rather than bonds and other financial assets because they are wary of making risky investments, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo." Needless to say, when even Japanese households have given up, it's game over... for bubbles in both bonds and in "conventional wisdom."

All you need to read and some more.

Futures continue exhibiting a very surprising and ever brighter shade of ungreen as the morning session progresses, starting with the 5th consecutive contractionary Chinese PMI data, going through disappointing European Manufacturing and Services PMIs which came below expectations (47.7 vs Est. 49.5 for Mfg; 48.7 vs Est. 49.2 for Services), with an emphasis on French and German PMIs, both of which were bad (German Mfg PMI 48.1, Est 51, prior 50.2; Services PMI 51.8, Est. 53.1, Prior 52.8), and concluding with UK sales which printed at -0.8% on expectations of -0.5%. And just like that Europe is "unfixed", prompting economists such as IHS' Howard Archer to speculate that following "worrying and disappointing" Euro PMI data, the ECB may cut rates to 0.75%, as Europe is finding it hard to return to growth after the Q4 contraction. And with that the beneficial impact of the €1 trillion LTROs is now gone, as Spain spread over Bunds has just risen to the widest in over 5 weeks, and the beneficial market inflection point passes - prepare for LTRO 3 demands any minute now.

All you need to read.

Going into the US open, most major European bourses are trading in modest positive territory this follows the publication of a Goldman Sachs research note titled “The Long Good Buy” in which the bank outlines its thoughts that equities will embark on an upward trend over the next few years, recommending dropping fixed-income securities. We have also seen the publication of the Bank of England’s minutes from March’s rate-setting meeting in which board members voted unanimously to keep the base rate unchanged at 0.50%; however there was some indecision concerning the total QE, with members Miles and Posen voting for a further increase to GBP 350bln, however the other seven members voted against the increase. Following the release, GBP/USD spiked lower 35 pips but has regained in recent trade and is now in positive territory.  Looking elsewhere in the session, UK Chancellor Osborne will present his budget for this financial year at 1230GMT. We will also be looking out for US existing home sales and the weekly DOE inventories.

All you need to read.

While the recent employment report will most assuredly give the current Administration plenty to boast about the underlying trends are far more disturbing.   The ongoing structural realities, the fact that many of the jobs that have been destroyed will never return, combined with the demographic shift make the headline number much less important compared with the emerging trends.  Take a look at a recent Gallup Organization poll which polls weekly, rather than one week out of a month with BLS, in regards to the emerging trends of employment.  The most recent poll update shows the trend of the percentage of unemployed rising.   As you can see the Gallup survey tends to lead movements in the BLS poll by about 4 weeks or so.   Therefore, it is highly likely that in the coming month as the massive seasonal adjustments in January and February fade out we will see the unemployment rate rise back towards 8.5%. 

While hardly expecting anything quite as dramatic as the default of a Eurozone member, an epic collapse in world trade, or a central banker telling the world that "he has no Plan B as having a Plan B means admitting failure" in the next several days, there are quite a few events in the coming week. Here is Goldman's summary of what to expect in the next 168 hours.

When it comes to economic data, there is the BLS's seasonally-adjusted, Birth/Death-ed, Arima-factored, goal-seeked, election year propaganda, or there is real time polling such as that conducted every month by Gallup. And while there is no doubt tomorrow's NFP number will be just better than expected (after all it is an election year for the Derpartment of Truth), the reality is that in February unemployment, that measured by the impartial polling agency Gallup, soared by 0.5%, the most since late 2010, from 8.6% to 9.1%, and back to August 2011 levels. As for the U-6 BLS equivalent, Gallup's underemployment metric rose to 19.1% from 18.7% in January, and a 18% low in mid 2011. The good news, it is just modestly better than the 19.9% in February 2011. Gallup's conclusion, which should be pretty obvious: "Regardless of what the government reports, Gallup's unemployment and underemployment measures show a substantial deterioration since mid-January. In this context, the increase in unemployment as measured by Gallup may, at least partly, reflect growth in the workforce, as more Americans who had given up looking for work become slightly more optimistic and start looking for work again. So while there may be positive signs, the reality Gallup finds is that more Americans are looking for work now than were doing so just six weeks ago....In mid-February, Gallup reported that its U.S. unemployment rate had increased to 9.0% from 8.3% in mid-January. The mid-month reading normally provides a relatively good estimate of the government's unadjusted unemployment rate for the month." Ahh.. Unadjusted. As for tomorrow, expect the BLS to continue in treating seasonally-adjusted Americans like idiots, and pushing the disconnect between the economy as seen by DC bureaucrats and Joe Sixpack to record spreads.

Some of these 15 swans are blacker than others....

Having spent this money, your next concern becomes avoiding popular outrage as sooner or later folks will find out that this money was practically given away and that everyone else got a raw deal. Let’s say that you just spent a large sum, to the tune of several trillion Dollars, bailing out various businesses that were literally run into insolvency by shortsighted and greedy business practices. 

Citigroup have said that they believe that gold will rise to $2,400/oz in 2012 and by $3,400/oz in “the coming years”. However, Citi’s Tom Fitzpatrick warned of price weakness in the short term and said there is a “real danger” that there may be a correction to $1,600/oz which would provide an even better buying opportunity. Citi are also cautious near term on oil and silver. Production of gold in Australia slid again last year, despite gold fetching higher nominal prices than ever before. According to gold experts, Surbiton Associates, 264 tonnes of gold were produced last year, two tonnes less than in 2010. The 264 tonnes equated to about 8.5 million ounces and ensures that Australia remains a major player in gold, with only China producing more last year. The United States was the world's third-biggest producer with 240 tonnes. Australia's gold production was well below the nation's production peak in the late 1990s.  This further suggests the possibility of peak gold production. Of the world’s four biggest gold producers (China, Australia, the U.S. and South Africa), only China has managed to increase gold production in recent years and this Chinese gold is used in China to meet the rapidly growing demand for gold jewellery and coins and bars as stores of value in China.

That Tilson's fund was down 0.9% in February is no surprise. After all the company's Qualified fund has underperformed the S&P since inception in 2004 (more on that in a second). After posting a gain in January, T2 is back to its losing ways (as a reminder the fund was down 20% in 2011, which means it has to post a well bigger than 20% return in 2012 to get above the high water mark). Tilson's performance is summarized as follows: "On the long side, winners included Citigroup (8.5%) and SanDisk (7.8%), offset by Netflix (-7.9%), Grupo Prisa (B shares) (-7.4%), and J.C. Penney (-4.7%). On the short side, we profited from First Solar (-23.6%), which just reported dismal earnings and guidance, Interoil (-10.4%), and Boyd Gaming (-8.7%). These gains were offset by Salesforce.com (22.6%), which is growing rapidly but trades at 8.7x revenues and has a $19.6 billion market cap despite being unprofitable. In addition, Green Mountain Coffee Roasters, which we think is likely to be the next Krispy Kreme (for those of you with long memories), rose 21.8%" And also "Since Berkshire reported earnings, the stock is actually down a bit so we took advantage and, though it was already our largest position, we added to it." All that is fine and well, but we have two questions. What is Tilson's, a self-professed "value investor" Sharpe Ratio? Judging by the monstrous volatility swings in its marginal positions, the fund is as much a value investor (read slow, stable rise), as a momo investor is the Queen of England. How long until the CME opens a triple levered (forward and inverse) ETF to take advantage of the already ridiculous monthly vol in the Tilson portfolio, whose Sharpe, just by eyeballing it, must be negative give or take.