And once again Goldman takes the lead (well technically the far more credible Stone McCarthy was first) in being the first bulge sellside economic team to acknowledge that following a very weak economic performance in Q1, with consensus GDP now just barely above 1.5%, Q2 GDP will have to contend with a Japanese supply shock, which contrary to expectations will actually subtract from the current quarter's GDP. How much? As much as 1% according to Goldman's Andrew Tilton. To wit: "Reasonable parameters suggest a potential impact on Q2 annualized
real GDP growth from one-quarter point to as much as a full point.
Although there could be some additional impact in other sectors of the
economy, this seems likely to be quite small." And when all is said and done we expect this number to double. Recall that none of this factors for what appears to be an oil price fixed well north of $110 (and $120 for everyone not in the US). Remove another 1% from Q2 consensus GDP for that, and what do you get? 1% at best... if very lucky. And some more bad news for US automakers (that's right Government Motors, we are looking at you and you "no impact from Japan" BS): "We think a reasonable “optimistic” scenario is only a 5% cut in US
vehicle production, whereas a reasonable worst-case scenario would be
something like a 20% cut in Q2." Time to retain GETCO for another "no sub $30 print in GM" assignment. Oh yes, and for those looking for deflation under rock and tree, more bad news: "As a hypothetical example of how this would affect consumer prices, a
3% increase in new vehicle prices that carried through to the used car
market as well would be worth 19 basis points on the headline Consumer
Price Index (where vehicles have a weight of slightly over 6%) and 25
basis points on the core."
- Obama Fights Back Against S&P Move (FT)
- China Speeds Yuan Push (WSJ)
- BOE Voted 6-3 to Hold Rate as Majority Noted ‘Downside.’ (Bloomberg)
- Apple to ship new iPhone in September (Reuters)
- Singapore Aims To Be Renminbi Hub (FT)
- GM Defying China Slowdown May Reclaim Sales Lead from Toyota (Bloomberg)... or not
- Cameron Dismisses Idea of Brown at IMF (FT)
- Banks Lag S&P as Slower Loan Growth Outweighs Higher Dividends (Bloomberg)
- Syria Government Approves Lifting State of Emergency (Reuters)
- USA: That ratings agency downgrade meeting (BBC)
- Debt Ceiling Increase Is Expected, Geithner Says (NYT)
- Zhou Pledges More Tightening as China Raises Reserve Ratios (Bloomberg)
- Fed to Signal End of Monetary Easing (FT)
- Finnish Populist Party Surge Clouds EU Bailout (Reuters)
- Glencore worth up to $69 billion (Reuters)
- Libyan Rebels Gain Ground in Fierce Fight (WSJ)
- Capitalism is failing the middle class (Reuters)
- Inflation in China Poses Big Threat to Global Trade (NYT)
Stone McCarthy Sees Severe Economic Deterioration In April, And Q2, As A Result Of Japanese Supply Chain DestructionSubmitted by Tyler Durden on 04/15/2011 13:43 -0500
Lately we have heard of occasional documented cases of ear canal bleeding exhibited by people who have been listening too long to morons on TV (and in print) saying that the Japanese economic slow down and supply chain collapse won't have an impact on the US Economy, and will, in fact, be beneficial (it's not pronounced Döuche Bengk). To our immense satisfaction we have confirmed this latest outbreak of bacillus idioticus is localized (to below Canal street), is so far not airborne, and is merely contained to the water supply on Wall Street. In a note just released by a far more credible source of analytic information than anything coming out from Wall Street in the past 3 years: Stone McCarthy, we discover just why the cut to Q1 GDP is about to be magnified for Q2 (and quite possibly for the rest of the year). From SMRA: "According to Automotive News, Japan's big seven automakers have lost more than half a million units of domestic production. The most affected automaker is Toyota, which lost 260,000 units since the March 11 earthquake. How about the U.S.? Will U.S. economic output be affected by the supply disruptions to the Japanese auto manufacturers? The answer is unequivocally yes and the economic impact will be quite severe in April and for Q2 as a whole." There, it wasn't that difficult to admit the truth now, was it.
- Wheels Turning to Create New Silk Road (China Daily)
- Banks, SEC in talks to settle mortgage charges (Reuters)
- Qaddafi Taunts West as NATO Seeks More Attack Planes (Bloomberg)
- Fears Grow Over Greek Debt Default Despite Bail-out (Telegraph)
- Broke U.S. States’ $48 Billion Debt Drives Unemployment Aid Cuts (Bloomberg)
- Moody’s Cuts Ireland Rating Two Levels, Outlook Negative (Bloomberg)
- Irish Warning to EU of ‘Spoke in Wheel’ of Growth (FT)
- G-20 Faces Need to Heed Criticism as Stronger IMF Voice Sought (Bloomberg)
- G-20's Efforts on Growth Stall (WSJ)
- Losing 84 Cents on Dollar Reveals Runaway U.S. Public Pensions (Bloomberg)
Reuters Poll Indicates Up To 60% Of Japanese Companies Impacted By Production, Supply Chain DisruptionsSubmitted by Tyler Durden on 04/13/2011 20:23 -0500
Even though US companies have yet to step up and indicate just how badly they have been affected by the Japanese quake (which could take a while: one of the benefits of massive inventory stockpiling), Japan is not that lucky. According to a Reuters poll the March 11 catastrophe has negatively affected nearly 60 percent of Japanese companies, disrupting production and supply chains."The special survey of 400 large firms was taken between March 25 and April 11 in tandem with the monthly Reuters Tankan, a poll of corporate sentiment... While Japanese companies are likely to be squeezed by production disruptions in northern Japan, as well as power shortages and supply woes, they may not feel the same pain as after the collapse of Lehman Brothers, when lending markets froze. "The impact of this earthquake will not be on the same scale as the Lehman crisis," said Soichiro Monji, chief strategist at Daiwa SB Investments, a Japanese asset management firm." Considering money markets froze up, stock plunged 40% and the world virtually ended in the months following Lehman, that's probably good news. As for the bad news: "Nearly 70 percent of respondents said difficulty in acquiring materials or parts was the single biggest problem in righting their businesses, a sign that supply chains remained hampered." And considering the bulk of Japanese production is export oriented, it is only a matter of time before these disruptions spread globally.
Contextually, today was interesting bottom-up with only 53% of names agreeing in terms of direction for credit and equity risk (dominated by 50% agreement that conditions deteriorated). 27% saw credit widen as equity rallied while 20% saw credit compress as equities sold off but at the sector level the picture was much more stable with most agreeing systemically worse today. Leisure, healthcare, and Consumer Cyclicals were the only divergent sectors with credit underperformance as equity managed gains (only just in the latter we note). While we saw a clear up-in-quality shift in single-name credit today ( a theme we have been suggesting recently), that was not the story in equities where higher quality names (BBB and above) actually underperformed on average those in the spec grade cohorts. Vol movements were in line with CDS once again with vol rising less for the better quality names and rising dramatically more for the lower quality names (with a particular emphasis on the crossover names in fact).
Nixon had his commerce secretary, Peter G. Peterson (he of enormous wealth these days), promise far reaching and revolutionary “initiatives” to tame our thirst for oil. But Nixon was out of office before these palliatives were revealed. Gerald Ford, caught up in vicious inflation, partly linked to the cost of oil, launched the Energy Research and Development Administration (ERDA), combining the Atomic Energy Commission, the Office of Coal Research and other energy entities in the federal government. ERDA initiated many programs, while politicians invoked the Manhattan Project and the Apollo 11 moon landing. But the search for the Fountain of Eternal Energy failed. Jimmy Carter wanted not only to solve the energy challenge, but to be seen to be solving it. Ergo, he expanded ERDA into the Department of Energy (DOE) and created a separate Synthetic Fuels Corporation. The latter failed after a short and unhappy life. No oil reached the pumps. When the price of oil collapsed in the 1980s, so did hopes for many of the alternative energy sources, including ocean thermal gradients and flywheel energy storage. To its credit, though at great cost, DOE, through its chain of national laboratories, kept searching. The result has been evolutionary improvements in many fields, and some really revolutionary ones in how we find oil and drill for it; these include seismic mapping, new drill bits and horizontal drilling. These evolutionary developments brought more oil to market and have contributed to the recent improvement in domestic production that Obama likes to point out. It has enabled us to cut our imports slightly, so they now stand at 11 million barrels per day out of consumption of 20million barrels per day.Obama wants us to cut those imports by a third. To do this, he has no magic bullet.
- Japan Sees Greater Hit to Economy as Its Nuclear Crisis Deepens (Bloomberg)
- President Open to Deal on Debt Cap (WSJ)
- Democrats Allow Trims to Favored Programs (NYT)
- Libya Rebels and West Dismiss Peace Plan (FT)
- France and Britain say NATO must step up Libya bombing (Reuters)
- Toyota Tells U.S. Dealers to Brace for Reduced Car Supplies (Bloomberg)
- U.S. Lawmakers Reach Agreement on $38 Billion in Budget Cuts (Bloomberg)
- Yemen's Saleh Exit Plan Held up by Opposition Dispute (FT)
- U.S. probes A380 taxiway collision in New York (Reuters)
Who can forget the frenzied all out bashing of Toyota on all government propaganda stations after the brake pedal got stuck just at a time when GM was emerging from bankruptcy, and before it was forced to engage in stuffing dealers with its bloated inventory. Yet very little if anything has been said about the curious case of the Chevy Cruze... and the falling steering wheel. The WSJ writes: "Imagine turning your car’s steering wheel, or giving it a gentle tug, and having it break away from the steering column. Now you’re speeding along holding the suddenly useless wheel. It sounds like a vision from a cartoon, or every driver’s nightmare. And it happened to at least one driver of a 2011 Chevrolet Cruze compact car last month, and General Motors Corp. is recalling 2,100 of the cars as a result." Because in Soviet Amerika, working steering wheel is an accessory. Phil Lebeau: insert Chuck Norris joke here.... Phil... Phil?
As destructive as the Japanese tsunami has been, it may have left some investment pearls in its wake. It has suddenly made available some of the country’s best of breed, world beating companies available at throw away prices. But this is going to be an investment for longer term money, not a trade, as some patients may be required for a payday.
Time is running out for a decision on Q/E but there is simply not enough evidence to make an informed judgement on the state of the economy and how it would react to a withdrawal of liquidity. Most analysts just look at the ISM and other supply data but Bernanke has got to make sure the economy can survive without his daily liquidity gift. In addition, if as some suggest, Q/E2 has done its job by ramping up equity markets, it still falls far short of his mandates. Unemployment is still massive (the real level is nearer 12-13%) and the participation rate continues to fall. Today there are 44.2 million Americans on food stamps, or 14.3% of the US population! Analysts also seem to forget the massive mountain of issuance coming from the Treasury this year and next. Consumer debt and confidence also matter more to Bernanke than it does to main stream analysts and housing is not helping at all and looks set fall further causing havoc at the banks again.
Remember the massive surge to world GDP courtesy of the Japanese disaster spouted by every idiot on CNBC? Well, here we go:
- TOYOTA SAYS WILL HAVE TO SHUT DOWN N. AMERICAN FACTORIES
- TOYOTA SAYS SHUTDOWNS MAY AFFECT 25,000 WORKERS
This is massively bullish for horse buggies and Flintstonemobiles.
By now the only homo sapiens in the world who don't realize that the Japanese earthquake/tsunami/nuclear disaster will have profound implications on supply chains, inventory levels, profit margins, corporate bottom lines and broad economic output are Wall Street sell side analysts, who remain convinced that the Lemming view is the right one, at least until management teams start coming out, most likely in the upcoming week, and issuing profit warnings, conveniently blaming their declining profitability on Japan, the weather and other "one time items." In fact, in the old tried and true mentality of "he who defects first, loses the least" and the even trieder and truer mentality of "never let a crisis go to waste" we may suddenly see a scramble of management teams taking advantage of the economic adversity posed by Japan to buffer their own declining margins, therefore buying them at least a quarter before the market realizes that the entire QE2 inspired "golden age" is now over. After all, one would be stupid not to blame an event which most will perceive as non-recurring, thereby eliminating its follow through to the top and the bottom line in future quarters and minimizing the impact on the stock price. So while corporate treasurers and CFOs are wording their press releases appropriately, which we expect will start hitting the tape as soon as tomorrow, here is the most recent recap of known auto and electronic-maker disruptions as reported by Reuters.
I still remember when there was a certain cachet to Japanese made products. They were technologically advanced and better built than anything else available. Sonyo, Toshiba, Toyota, Honda, Kawasaki, Yamaha, etc. were all dominating brands. You could find products in Electric City in Tokyo that were generations ahead of what you could purchase in New York City. That gap has narrowed and in many cases reversed over time, but now we might be hitting a stage where 'Made in Japan' is a big negative...I was long Japan post quake as the market seemed to have over reacted to the earthquake. The bounce, though, has been large and profitable, so I'm out, and as the situation in Fukushima continues to deteriorate, the market looks expensive as its not pricing in the potential consequences of this being a nuclear event rather than an earthquake event.