When I was traveling a few month ago I gave a presentation called "As Good As It Gets" in which I outlined how I believed Q2 would mark the cycle high in the global economy as the inventory cycled peaked. I then showed a few charts relating to the National Federation of Independent Business survey, which outlining why I so was so concerned about the sustainability of the recovery in the US. Well the NFIB survey was out this morning so I thought I'd see if the outlook had changed? Unfortunately, the survey that covers 99% of all US firms and claims that its members have created 65% of all jobs since to 2000 still just looks crap.
The second of this week's coupon auctions closed, with the Treasury placing $21 billion of 10 year Bonds at 3.119% at a 3.09 Bid To Cover. It was 77.69% allotted at the high yield. The Average Bid To Cover on the 10 year has been 3.21, and the last one came in at 3.24. Indirect Bidders were roughly in line with historical, coming in at 41.7 compared to 40% previously and 36.35% on average. Direct Bidders and Primary Dealers came in at 9.8% and 48.6%, respectively; this compares to 13.5% and 46.4% previously. Due to technical problems we will not have the monthly chart breaking down the auctions until later in the day. Incidentally with the 10 Year still trading just north of 3%, the equity-bond disconnect continues to diverge, with the 10 Year continuing to impy materially lower equity levels.
No notable news yet except for a bit in the WSJ that a seismic run testing the integrity of the well is currently in progress, and if it is found that the pressure in the well is too low, then BP may have to change its well capping strategy. If anyone has heard any other material news, please chime in. The other news seen is this bit from Fox News stating that Senator Lautenberg is now questioning ties between a BP oil contract and the released Lockerbie bomber. Lastly, just crossing the wires, is confirmation from BP that its contract to supply Iran air with jet fuel at the Hamburg airport, has expired.
RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 13/07/10
Media and real estate tycoon Mort Zuckerman, who recently admitted he helped write Obama's speeches in the past, has come out blazing with easily the most damning missive of the president and his legacy to date. Mort joins such other distinguished and notable CEOs as Steve Wynn to openly blast the administration and its policies. In the meantime, the president has surely not made many new friends in the executive offices of the E&P space. Before all is said and done, look for letters such as the one attached to become a daily occurrence.
Another day, another accounting debauchery by Europe. In the latest development, Reuters reports that as per the recent JPM "suggestion" posted previously on Zero Hedge, Greek debt is now expected to be haircut by 23%, or to reflect current market prices. Allegedly this is yet another failed attempt to restore some confidence in the entire farcical process. There is, of course, one caveat: the haircut will only pertain to trading books. In other words this is Europe's equivalent of FASB 157: everything that banks hold "to maturity" will not see a major haircut, and very likely not see any haircut at all. Which simply means that all European banks that hold such debt will merely reclassify their Greek exposure from trading to a "held to bankruptcy at par" category. The surreality of European banking assets (which as we pointed out previously is a $100 trillion circle jerk where one bank's assets are another bank's liabilities) has now passed well into the twilight zone. But never fear, the ECB is here. Which begs the question: will JC Trichet's books also be exposed to some sort of stress test? After all Europe's central bank is on the hook for over $1 trillion in impaired debt now - does this mean the central bank will in no way be subject to any haircuts or other viability tests? Why of course, how else will flagrant lies about financial system's stability be perpetuated for at least one more year.
For what it's worth, here is the take of BofA's Kuni Chen on Alcoa, with a very surprising bearish read through: "We reduce 2010E EPS from $0.50/sh to $0.31/sh. Lower EPS outlook is driven by seq lower metal prices and seasonal demand. We are using avg 3Q aluminum price of $0.88/lb in our model. Our low-end estimate for 2011 is based on a $0.95/lb metal price. We lower our PO to $11/sh as lower 2H EPS impacts year end net debt position. The implications of Alcoa’s quarter may be a negative for Century Aluminum and Noranda Aluminum as the Street revises down estimates on lower metal prices." Not surprisingly, it is AA, KALU and NOR that are surging as the HFTs are once again being drawn to some Lorenz Attractor with the firm push of the PDs and the FED. Of course, BofA's most recent cut simply means that when AA posts 2010 EPS of $0.310000001, the stock will promptly hit infinity.
This morning we observe two very interesting resistances for risk. First AUDJPY tried yesterday and overnight to bypass its 50dma without success. Secondly we note on the S&P chart that the 50-dma for the continuous future is at 1,087 and we had the 61.8% retracement of the last sell off at 1,080. Similarly the Nasdaq is approaching the 61.8% retracement at 1,850. While I must admit the Dax does look bullish here, probably because the lower Euro provides some tailwind for German exporters, there is bearish divergence on the hourly there, and we can observe the same for the S&P here. We have retail sales tomorrow which I am told by my friend Julian Brigden of Calyon could well come in very weak. Similarly CPI could well disappoint and revive the deflation scares. On the flip side it's earnings season and the market loves to celebrates non sustainable earnings attained via cost cutting with weak consumer demand... - Nic Lenoir
If we see retail sales follow the same precipitous one month drop of NFP, the YoY rate should drop from last months 6.9% to ZERO. Last June the index of retail sales was 343.1 vs. last month's 362.52 so zero YoY would mean that the monthly rate, expected to print -0.3% on Wednesday would in fact print -5.4%. Now that frankly seems like an inconceivable no. as it would be the worst number we've seen since the series started in 93. However, I have to think that even if we make up the divergence over a couple of months something like -2% tomorrow would cause people to fundamentally question the recovery. Personally, I think all we are doing is remove a lot of the noise created in the data by the census jobs and we should see retail sales drop back to the levels suggested by claims and possibly even the ABC consumer buying climate question. Unfortunately, that should cause people to question the recovery!
The CSX earnings surge can be easily explained now that the rail company has cornered the China-US transportation corridor (what's that, it's an ocean? that's ok - the president will enact a law changing that). Because goods transit sure isn't using the dry bulk shipping sector, where the Baltic Dry has plumbed to a fresh 14 month low, continuing its longest drop in 9 years, down for a 33rd sequential day to 1,790 from 1,840. Don't look for any record numbers out of the China Customs agency or the US trade deficit in the next month.
- The spin is just hilarious: Alcoa profit surprise bodes well for economy, stocks (Bloomberg), Euro stocks gain on Alcoa earnings (Reuters) - so let's get this straight: a $30 million marginal "beat" in Alcoa Net Income is sufficient to push hundreds of billions in global market capitalization higher... brilliant
- The US Consumer is once again the driver of the world economy: the US May Trade deficit increased to $42.3 billion, far beyond expectations of $39 billion; also as reported, China trade deficit was worst since October (and ever, from the Chinese perspective) (Bloomberg)
- Abu Dhabi may make another "successful" investment, this time in BP (Bloomberg) - is this a precursor to another hang gliding incident?
- Extend and Pretend European edition - yet another confirmation that all European banks are insolvent, as they are all about to win a "reprieve" on Basel capital rules (Bloomberg)
- Satyajit Das: Debt shuffling will be a self-defeating exercise (FT)
- Goldman may seek another extension in SEC fraud case (Reuters)
In staying with the once again popular trend of beating much lowered expectations (see Alcoa), Greece, which had previously decided against auctioning off 1 Year Bills for fear of lack of interest, managed to place €1.625 in 6 month bills in which local institutions purchased the bulk of the auction as foreign interest was muted. According to the PDMA who apparently still tracks the charade of ECB bailed out Greek banks recycling ECB money to then buy sovereign debt, the auction produced a yield of 4.65 percent for 26-week T-bills, up from 4.55 percent in a previous April 13 auction. The bid-cover ratio was 3.64 versus 7.67 in the previous auction.
Scientific Proof That High Frequency Trading Induces Adverse Changes In Market Microstructure And Dynamics, And Puts Market Fairness Under QuestionSubmitted by Tyler Durden on 07/13/2010 00:46 -0400
Up until recently, any debate between proponents and opponents of High Frequency Trading would typically be represented by heated debates of high conviction on either side, with discussions rapidly deteriorating into ad hominem attacks and the producer screaming 'cut to commercial' to prevent fistfights. Luckily, all this is about to change. In a research paper by Reginald Smith of the Bouchet Franklin Institute in Rochester titled "Is high-frequency trading inducing changes in market microstructure and dynamics?" the author finds that he "can clearly demonstrate that HFT is having an increasingly large impact on the microstructure of equity trading dynamics. Traded value, and by extension trading volume, fluctuations are starting to show self-similarity at increasingly shorter timescales. Values which were once only present on the orders of several hours or days are now commonplace in the timescale of seconds or minutes. It is important that the trading algorithms of HFT traders, as well as those who seek to understand, improve, or regulate HFT realize that the overall structure of trading is influenced in a measurable manner by HFT and that Gaussian noise models of short term trading volume fluctuations likely are increasingly inapplicable." In other words, the author finds ample evidence that during the past decade (on the NASDAQ) and especially since the 2005 revision of Reg NMS (on the NYSE), stock trading increasingly demonstrates "self similar" fractal patterns, resulting in volatility surges, recursive feedback loops, and a market structure which is increasingly becoming a product of the actual trading mechanism. In the process, as demonstrated by a Hurst Exponent gravitating increasingly further away from 0.5 (i.e., Brown Noise territory), the Markov Process nature of stock trading is put under question, and thus the whole premise of an efficient market has to be reevaluated. Simply said: HFT has been shown to affect the fairness of trading.
- Asian shares mostly lower despite Alcoa's positive earnings report.
- Avg housing prices in China fell in June for the first time in 16 mos, as govt checks speculation.
- China reiterates policy-tightening bias on property sector.
- Euro drops down to $1.2550 in early European trading.
- European banks poised to win a reprieve in Basel as regulators shape new capital rules.
- France's Sarkozy rejects tax increase, retreat on raising retirement age.
- Japanese stocks rise on profit expectations; metals retreat on fears of slowing China demand.
- Moody's downgrades Portugal's bond ratings to A1, growth prospects to remain weak.
Just headlines for now. According to Reuters, Israeli troops have not boarded the Libyan aid ship yet. We will provide more as we get it.