Market Conditions

The Case Shillers are shilling that the market is still weakening. But that's just not the Case.

As we hinted earlier, and contrary to 100% wrong whisper numbers, the January ISM not only did not land in the 55+ ball park, but missed consensus estimates of 54.5, printing at 54.1, yet up from December's 53.1. However, just like in China, the goalseeked number was neither good nor bad, although leaning toward the weaker side to keep with the Chicago PM's miss. After all the Chairman needs an exit door for more QE.The internals were not very notable with the exception of Prices Paid, which came at 55.5 compared to expectations of 50.0 and up from 47.5 in December, the highest since September 2011. Oops margins and oops Inflation? And what is just as bad, the traditionally leading "New Orders less Inventories" index turned down once again, with Invs rising by +4.0, and New Orders up just 2.8%.

Following today's sizable miss and significant revision to the ADP data it is perhaps worth taking a step back and looking at some independent research on the adjustments and seasonality issues in forecasting jobs around this time of year and furthermore, why one of the pillars of this extended rally and US decoupling story (a substantially improving jobs market) could be made of salt. Bloomberg's consensus for Friday's NFP at +145k (from +200k prior) and a 30k standard deviation, there is plenty of uncertainty among the economic elite (with 125k to 150k the sweet spot for their guesses) and our favorite outlier Joe LaVorgna near the top at +210k. So while the trend is supposedly improving (though expectations are slightly off December's exuberance), Stone & McCarthy (SMRA) point out a disturbing trend of sizable forecasting errors for the January payroll print with 7 straight years of estimates overshooting by an average of 64k - strangely consistent post the BLS switch to a probability-based sample. But its not just forecasting error, TrimTabs takes a deep dive into the actual daily income tax deposits from all salaried employees (which are historically more accurate than BLS initial estimates) sees the US economy added only 45,000 jobs in January, nearly unchanged from the 38,000 in December. Noting similar forecasting errors as SMRA, TrimTabs points out that the decline in seasonal adjustment factors and the reality of the underlying tax data suggest "It appears that the economy has hit stall speed due to lackluster demand and a deleveraging consumer who would rather save than spend." as wage and salary growth (net of inflation) weakened further to -2.1% YoY in January from -0.5% YoY in December. "The weak job market has us concerned" seems like a truer reality than the establishment trying to keep the dream alive.

The highly irrelevant economic noise that is the ADP private payrolls indicator has come in form the month of January, and printed at nearly half of the December number  of 325K, which was revised lower to 292K, at 170K, on expectations of 182K. We should be the last to tell readers that anything this unbearably noisy series says is beyond meaningless, but since someone follows it, it bears noting that this was the weakest number since October 2011. Furthermore, with the NFP virtually guaranteed to be a miss for a variety of reasons, this is merely the latest confirmation that economist expectations of the economic recovery ramping up, were short sighted - after all the Chairman has an agenda. Yet what makes this report a total mockery is that in the month in which banks, and the FIRE industry in general, was firing left and right, ADP saw 9K people in financial services added to private payrolls. Ironically the financial jobs "added" were almost as many as the manufacturing jobs, at +10K in January. Who says America is not a manufacturing juggernaut and only exports weapons of financial mass destruction?

• Greek Debt Wrangle May Pull Default Trigger (Bloomberg)
• Italy Sells Maximum EU11 Billion of Bills (Bloomberg)
• Romney Demands Gingrich Apology on Immigration (Bloomberg)
• China’s Residential Prices Need to Decline 30%, Lawmaker Says (Bloomberg)
• EU Red-Flags 'Volcker' (WSJ)
• EU Official Sees Bailout-Fund Boost (WSJ)
• EU Delays Bank Bond Writedown Plans Until Fiscal Crisis Abates (Bloomberg)
• Germany Poised to Woo U.K. With Transaction Tax Alternative (Bloomberg)
• Ahmadinejad: Iran Ready to Renew Nuclear Talks (Bloomberg)
• Monti Takes On Italian Bureaucracy in Latest Policy Push to Revamp Economy (Bloomberg)

The latest IMF Global Financial Stability Report is out and it is not pretty. The IMF now sees:

• 2012 world growth outlook cut to 3.3% from 4.0%, 2013 growth revised lower to 3.9% from 4.5%
• 2012 US growth of 1.8%, 2013 at 2.2%
• 2012 UK growth of 0.6%, down from 1.6%
• 2012 China growth of 8.2%, down from 9.0%
• Eurozone to enter "mild" recession, whatever that is, with -0.5% economic growth, to grow again in 2013 by 0.8%. Unclear just how with all the deleveraging...

IMF also adds that without action, the debt crisis may force a 4% Euro-area contraction, in line with what the World Bank, controlled by a former Goldmanite, said. Lastly, the IMF says that Europe needs a larger firewall and bank deleveraging limits. Well there is always that €X trillion February 29 LTRO.

While it is early to determine if the ongoing breakout is finally in anticipation of upcoming episodes of direct and indirect monetization by the Fed, ECB, or any of the many other pathological currency diluters in circulation, it is obvious that precious metals have found a new bid in recent days. Is this then, the beginning of the next surge in gold and silver to record highs? It remains to be seen, but one entity, the Duet Commodities Fund which was one of last year's best performers, has already made up its mind. 'Our central forecast in gold remains constructive as our long term view targets $2,500 in 2012. Our core view is that gold will head higher to the $2,500 range driven by consequential USD weakness once the EU crisis dissipates and the US steps into the limelight. A weaker USD is not undesirable in the world order as everyone (especially China) understands that the US consumer is the driver for global consumer confidence and consequential consumption led demand." Wow - someone in this market can actually think one step ahead of the inevitable ECB LTRO/monetization, and realize that the Fed will in turn have to escalate to that escalation. Gold, er golf clap.

Instead of opting for a publicly transparent BWIC in the disposition of its Maiden Lane II assets, the Fed has once again gone opaque - long a critique of the Fed's practices which have required repeated FOIAs in the past to get some clarity on its secret bailouts and transactions - and proceeded with a private sale, without any clarity on the deal terms, in which it sold $7 billion in face amount of Maiden Lane II assets direct to Credit Suisse. The alternative of course would be the same snarling of the MBS and broadly fixed income market that we saw in June of last year. In other words, the Fed looked at the options: transparency and risk of grinding credit demand to a halt, or doing what it does best, which is to transact in the shadows, and avoid capital markets risk. It opted for the latter. As to why the Fed decided to go ahead with a deal shrouded in secrecy? "The New York Fed decided to move forward with the transaction only after determining that the winning bid represented good value for the public." "I am pleased with the strength of the bids and the level of market interest in these assets," said William C. Dudley, President of the New York Fed. Because if there is one thing Bill Dudley and the Fed knows is gauging what is in the best interest of the public... and the callorie content of the iPad of course.

All your questions about the historic European downgrade should be answered after reading the following FAQ. Or so S&P believes. Ironically, it does an admirable job, because the following presentation successfully manages to negate years of endless lies and propaganda by Europe's incompetent and corrupt klepocrarts, and lays out the true terrifying perspective currently splayed out before the eurozone better than most analyses we have seen to date. Namely that the failed experiment is coming to an end. And since the Eurozone's idiotic foundation was laid out by the same breed of central planning academic wizards who thought that Keynesianism was a great idea (and continue to determine the fate of the world out of their small corner office in the Marriner Eccles building), the imminent downfall of Europe will only precipitate the final unraveling of the shaman "economic" religion that has taken the world to the brink of utter financial collapse and, gradually, world war.

The EU, in its current form, is most certainly in its final chapter as both the political environment and market conditions have rendered all proposed “solutions” to the crisis moot.

Today's key events in the US, as opposed to Europe, where in a few minutes the ECB is expected to do nothing.

Alcoa was expected to generate $(0.03) in EPS in Q4 and so it did. However, it took it 5.99 billion in top line revenue just to not miss traditionally lowered Wall Street estimates. This compares to the $5.7 billion it was expected to make: so there goes your margin. And when one looks at EPS on a purely operational basis, the Company had a loss from operations of $193 million or $(0.18) EPS which included a $74 million benefit from taxes. But of course who cares: after all Alcoa reported "restructuring and other charges" of a whopping $232 million for the quarter, just to make sure everything is apples to oranges. Otherwise the reported $445 million in EBITDA (on $449 million in consensus) would have been more like $200 million. Even so: EBITDA margin dropped from 13.8% in Q4 2010, and 12.8% in Q3 2011, to a measly 7.4% in Q4 2011. Other notable items: CapEx jumped from $325 million in Q3 to $486 million in Q4, meaning that based on the traditional Free Cash Flow definition of EBITDA-CapEx, that used for bond indenture purposes, Alcoa actually burned cash in Q4. Finally, the company forecasts global aluminum demand and supply deficit (probably does not explain why it has been shuttering smelter capacity all around the world) of 7% in 2012- a big drop from recent years. All in all - not quite the right way to start the new year.

Poor, poor Federal Reserve.

Overall, there are both internal structural factors and external global factors, which contribute to the making of an epic hard landing in China. China will be really vulnerable when the US and Europe both unleash the quantitative easing. These are things China has no control of. Nevertheless, the best China can do to avoid the worst is to continue the painful structural adjustment: marketize the “big four”-dominated banking industry to allow for more efficient monetary allocation; Transform the labor intensive low value-added economy to the high value-added knowledge economy; reform the wealth redistribution system to empower the broad consumer base and honor its promise of a consumption-led economy.

While the US enjoys the luxury provided by the dollar’s world currency status and diplomatic alliance with many major trade partners to export its liquidity and inflation, China enjoys none of that. They should look at the dollars in their hands with fear and doubt. So called Beijing consensus makes little sense, because the world is fast changing, pegging a country’s growth to a certain set of policy tools or a certain reserve currency (the US dollar) is equally dangerous. The battle between Keynes and Friedman has long proven the only consensus is to adapt and change. Right now China needs to adapt and change fast. Or this will be the best time in history to short China.

If only we had known that the EFSF was nothing but the latest Chinese reverse merger IPO gimmick, dependent entirely on market conditions for its success, we probably would have sold even more euros to Thomas Stolper. Alas, despite all the pomp and circumstance of last month's European summit announcement when the 50% Greek debt haircut (which has a snowball's chance in hell of passing) was accompanied by vague promises of a 4-5x leveraging of the EFSF's €440 billion, it now appears that our original skepticism was well-founded. Because according to the latest news out of the FT, the EFSF won't get 4-5x leverage. Nope. It will, in fact be lucky if it can be doubled, which however kills the whole point as it needs to be well over €1 trillion to even exist. From the FT: "A plan to boost the firepower of the eurozone’s €440bn rescue fund could deliver as little as half what the bloc’s leaders had hoped for because of a sharp deterioration in market conditions over the past month, according to several senior eurozone government officials." Well what do you know. Next we will learn that when the EFSF denied it was an outright pyramid scheme, and was buying its own bonds, it was actually kidding. Either way, as it currently stands, there is no bailout in place for Europe whatsoever, as the ECB's demands for a fallback to the ECB are now moot. Furthermore, once the market realizes there is no even implicit backstop to the trillions in debt rollover over the next several years, it will dump sovereign bonds with even more gusto, pushing Europe into an even deeper funding crisis, which in turn will make bond repayment even more impossible, which will send prices even lower, and so on. There is a reason they call it a toxic debt spiral.