After hours last night, when all but the most dedicated of market savants (or late stumblers home from a night out checking the Bloomberg one more time) are sleeping, China released its Non-manufacturing PMI data and it was a howler. The series is very cyclical but we note that the November print fell dramatically to its lowest level since the middle of 2008's global economic meltdown. Dropping below the 50 (deteriorating) line for the first time since Feb2011 and combined with the dismal manufacturing PMI print from earlier in the week, we are reminded of David Rosenberg's critical insight 'Don't confuse resilience with lags' when we hear further chatter about the US apparent miracle decoupling. It seems that this 'lag' is already impacting US firms, as we noted earlier, and with EM nations increasingly starved of credit via European bank deleveraging, it seems a game-of-chicken between the Fed and the PBOC may begin on who prints/QEs first to save the world from reality once again.
Even with the growth in rest of the world slowly grinding to a halt and in many places contracting (more on the in an upcoming post), the US continues to be spared from what increasingly appears as a perfect worldwide economic storm due to one thing and one thing only: resilient US corporate revenues and earnings. So now that Q3 is officially in the books, and we are starting to look for Year End numbers, we decided to do the quarterly Capital IQ analysis looking at S&P 500 companies (ex financials), which amounts to the 420 companies supposed to keep America "decoupled" from the rest of the world, and look at trends in revenue and gross profit. We found something troubling: while topline numbers continue to grow, and rose 2.6% in Q3 over Q2 (a substantial slow down from the 4.3% rise in Q2 compared to Q1), profits as represented by gross margins, fared far less well as total Gross Profit margins declined by 1.9% from 42.6% in Q2, almost on par with the recent historic record high of 42.8% from December 2009, to a two year low of 41.8%: a number seen last in Q1 2011 when commodity input costs soared and crushed both margins and bottom lines. Aside from the 1.9% drop in March 2010, the next worst drop in margins was back in March 2009. This time however there was no surge in commodity prices: in fact in the three months between June and August, input costs on the margin were declining substantially, or so the US government would like us to believe. And while corporate EPS did not broadly surprise to the downside, this was a function of top line pull through still going strong. So how much longer until the revenue potential of these 420 workhorse companies plateaus and start dropping? What happens to record corporate EPS if margin pressures are coupled with top line weakness? We already have one of the components: how long until the stresses in Europe and now China materialize into top line misses? We will find out in just over a month when companies begin reporting their full year numbers. Or worse, look for disappointing revenue preannouncements: while so far avoided, this time around it will be far more difficult to kick the revenue can into the future with Europe now officially entering a recession.
No circuit breaker was triggered as yet another unborn political career was dumped on the trash heap of history. And this even without a Muddy Water Strong Sell report, or Whitney Tilson going activist Cain nomination odds.
Unlike the broad consensus of prognosticators who feel the road for the US is a decade or more, Bass sees a three-to-five year window for a credible solution to the debt saturation or else kicking the can will cease to have any impact. The reason for the proximity is the acceleration of what happens in Europe and Japan with that respective chronology his central view - which he sees as critical in understanding for every money manager. In this extended interview at AmeriCatalyst, he points to the optimistic self-deception biases that leave people unable to comprehend the scenarios as they either lead to a really bad outcome or a nominally bad outcome.
Using the Lehman moment as an example, Bass explains how we have been conditioned to believe there is always a backstop or savior...now those backstops at a corporate and sovereign level (central banks and the IMF for example) are being called into question in their roles (being seen for what they are - as just promises) and it is the chasm between what we want to believe and what does happen that is enormous and leaves the extreme volatility, risk-on/risk-off market the way it is. Reiterating how critical the psychology of today's situation, Bass goes on to debunk the optimism of globalization (at least for the Western world), destroy the myth of a 50% greek writedown solution, Japanese xenophobia and savings losses, structural versus cyclical implications for US equity deterioration, why you should never trust what government says, the US decifit and housing issues, increasing global debt saturation and how this tearing at the social fabric of the world will lead to - war.
Guest Post: Furious At Latest U.S. Attack, Pakistan Shuts Down Resupply Routes To Afghanistan "Permanently"Submitted by Tyler Durden on 12/03/2011 14:05 -0400
NATO recently literally shot itself in the foot, imperiling the resupply of International Assistance Forces (ISAF) in Afghanistan by shooting up two Pakistani border posts in a “hot pursuit’ raid. Given that roughly 100 fuel tanker trucks along with 200 other trucks loaded with NATO supplies cross into Afghanistan each day from Pakistan, Pakistan’s closure of the border has ominous long-term consequences for the logistical resupply of ISAF forces, even as Pentagon officials downplay the issue and scramble for alternative resupply routes. Pakistan, long angry about ISAF/NATO cross border raids, has apparently reached the end of its tether. Following the 26 November NATO aerial assault on two border posts in Mohmand Agency in Pakistan’s turbulent NorthWest Frontier Province, Islamabad promptly sealed its border with Afghanistan to NATO supplies after the allied strikes killed 24 Pakistani soldiers.
About a year ago, we discussed the very troubling moves by insolvent countries such as Ireland and Hungary to "raid" their pensions funds for various fungible purposes, a move which in virtually every way a was a progenitor to the MF Global capital commingling, if not outright bankruptcy, and was explained as reflecting "a willingness by governments to use long-term assets to fill short-term deficits, including Ireland’s announcement last week that it would use the country’s €24bn National Pensions Reserve Fund “to support the exchequer’s funding programme” and Hungary’s bid to claw $15bn of private pension funds back to the state system." While it was unclear precisely what the use of funds was, back then FN speculated that it pension funds were being tapped to boost sovereign debt bids. Which if true means that Europe's peripheral pensioners have seen about a 20% drop in the NPV of their retirement assets. Today we add Portugal to the list of countries committing an MF Global type crime on a global scale: the Telegraph writes: "Portugal has raided €5.6bn (£4.8bn) of pension fund assets in a controversial scramble to meet its deficit targets." And since the money is once again implicitly and explicitly used to patch broken fiscal models, it is as good as gone. Which in a paradoxical way is almost welcome, as the true Arab Spring will not come to Europe (and America) until the citizens don't read, in clear writing, that their welfare state entitlement benefits are gone.... They are all gone. And at that point there will be truly nothing left to lose.
The United States increasingly resembles a 3rd world country in terms of unemployment, lack of economic opportunity, falling wages, growing poverty and concentration of wealth, government debt, corporate influence over government and weakening rule of law. Federal Reserve monetary policies and federal government economic, regulatory and tax policies seem to favor the largest banks and corporations over the interests of small businesses or of the general population. The potential elimination of the middle class could reshape the socioeconomic strata of American society in the image of a 3rd world country. It seems only a matter of time before the devolution of the United States becomes more visible. As the U.S. economy continues to decline, public health, nutrition and education, as well as the country’s infrastructure, will visibly deteriorate. There is little evidence of political will or leadership for fundamental reforms. All other things being equal, the U.S. will become a post industrial neo-3rd-world country by 2032.
Following yesterday's announcement that the state of Massachusetts would sue 5 mortgage lenders among which the bailed out subprime failure formerly known as GMAC and now known by the much more idiot-friendly name "Ally", the latter has decided to take matters into its own crazy hands and escalate matters by confronting the entire state of Massachusetts in a move that will generate even greater anger among the broader population, aimed squarely and rightfully at the banks all over again. In an email sent out today, GMAC Bank said it would "no longer accept new locks for properties located in the Commonwealth of Massachusetts." The reason given: "This change is necessary due to the complexity of transacting business in an increasingly difficult legal environment in Massachusetts." By complexity GMAC of course means being confronted with Attorneys General who refuse to be pushed over or jump when the banking cartel says so. In essence, GMAC (with other lenders likely to follow suit) has decided to boycott states that dare to break away from the settlement talks and to pursue unilateral action. Alas, since pretty soon every state will be suing the banks now that the Nash Equilibrium of the settlement negotiations has collapsed and it is every state for itself, GMAC better figure out a way to make money doing something besides lending as very soon the "legal environment" in every state is about to get "increasingly difficult."
Barely has the USD/Renminbi (or RMB) contract started to trade on the CME and already the exchange decided to hike the margin by 18.5%. And not only: in a broad action across the board, the CME hiked margins in some key FX contracts, including Aussie Dollar, Yen, Canadian Dollar, Forint, Zloty, and the Koruna. In addition, CME hiked two Interest Rate products including EM and I3. So if anyone was wondering why the AUDXXX dropped after hours, now you know.
A 787 point gain on the Dow this week, second only ever in absolute points gained to w/e 10/31/08, ended on a disappointing note as equities gave back significant early gains around the NFP print to end the day practically unch (128pts off the highs). Equities underperformed credit on the day with another strangely impressive (given NAV and HY spread differentials) outperformance by HYG. On a medium-term basis, equities began to revert back to where broad risk assets are more supportive but on a short-term intraday basis, risk assets (most notably EURJPY, AUDJPY, and TSY levels and curves) were in a more aggressive derisking mode. ES definitely maintained strength for longer than many expected today before giving it all back into the close, but financials (especially the majors) were surprisingly positive today even after such a good week - quite a squeeze.
There has been more and more speculation that the Fed is getting ready to launch a new QE program, this one targeting residential mortgages. With the data coming in better than expected, stocks back up, and Plosser and Bullard both chiming in that improving data would make them hesitate or question the need for more QE, there is some fear that it is off the table. We don't think it is off the table, and if anything see growing signs that they are trying to create the political will to get it done. On a day with a somewhat unusually high number of housing-related negative nabobs on Bloomberg TV, Peter Tchir, of TF Market Advisors, thinks Bernanke is trying to lay the groundwork of why it is so important to buy mortgages.
So much for the short covering squeeze in the EUR. After eeking out some modest purchases in the EUR in the weeks leading up to November 8, with the interim peak in net sentiment hitting a transitory high of -54,257, the three weeks since then have seen yet another major spike in bearish EUR sentiment, and as of minutes ago the CFTC's COT report indicated that net non-commercial spec shorts surged to more than -100,000 for the first time since June 2010, or specifically -104,302. Granted this is as of November 29, so before the Fed's FX swap intervention. Yet considering that the EURUSD is rapidly filling the gap to Wednesday, we would not be surprised if all the Fed managed to do was to force a handful of specs to cover their short positions. Nonetheless, this does confirm that the EURUSD continues to act like a tightly wound coil, and any credible resolution to the European crisis will result in the biggest short covering squeeze in the EUR in years, sending both the currency and its S&P 500 derivative soaring. Now the question remains: does a credible resolution exist? The irony is that the only real solution is the ECB printing. Yet for the first time ever in monetary history that announcement of the the ECB's dilution of the European currency will actually send the currency surging, due to the technical unwind of the shorts overwhelming the fundamental weakness of the currency. Granted, it will be a transitory response, but who really can predict the long-run these days anyway?
Friday Humor: Allowing Women To Drive Leads To Rampant "Prostitution, Pornography, Homosexuality And Divorce"Submitted by Tyler Durden on 12/02/2011 15:59 -0400
And now for the Friday humor which instead of capital markets... we get enough fun there every time we look at the S&P or read any headline out of Europe... focuses on cultural perspectives. Specifically, those originating in Saudi Arabia. As QMI reports "allowing women to drive in Saudi Arabia would cause rampant sex, porn and homosexuality, according to some of the country's scholars." It gets better: "Academics at the country's highest religious council submitted a report to the legislative assembly warning of the dangers of letting women behind the wheel, reports the Daily Telegraph. If the only country in the world that still bans women from driving were to change its rules, there would be "a surge in prostitution, pornography, homosexuality and divorce." Within 10 years of the ban being lifted, the report claimed, there would be "no more virgins" in the country, according to the paper." One then wonders if Britney learned to drive when she was 17. That said, we urge feminists with a penchant for sports cars to stay out of Saudi Arabia, no matter how much they love extracting the viscous substance out of the oil-rich venues: "Currently, women caught driving in the kingdom may be lashed as punishment."