RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 27/07/10
A few days ago FOFOA drew quite a bit of attention with his post "Red Alert: Gold Backwardation", in which the topic of the GOFO rate receives prominent attention (GOFO is basically the difference between a currency lease rate, in this case dollar Libor, and the GLR, or the Gold Lease Rate, as per the LBMA). FOFOA draws several correlation between the GOFO and an implied backwardation, and asks the question: “Is the dollar bidding for gold, or maybe gold is bidding for dollars?” Indeed, while one read of the underlying material does substantiate the presented hypothesis, another is merely that there has been too much turbulence in the currency market, with Libor, not just USD, but especially EUR, surging recently, on very valid liquidity concerns out of Europe. As a result of the massive squeeze first in the dollar and then in euros, a topic much discussed here previously, one could reach a point where the GOFO is in fact negative, merely due to vol in interbank and money market, which in turn is driven by ever faster liquidations in the shadow banking system, another topic much discussed on Zero Hedge. Certainly, when both of these are in flux, it would be expected that GLR would also do some very peculiar things. Either way, FOFOA has conceived an interesting theory, and gold fans will appreciate the thought experiment of gold being in backwardation. We present Professor Antal Fekete's response to FOFOA's analysis. Both are an interesting read. (The FOFOA post can be found here).
Last Friday we reported that the most important (and most underreported) story of the week was Bloomberg's disclosure that Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects, and that only 27 percent of the loans to the financing vehicles can be repaid in full by cash generated by the projects they funded. As this is a topic that deserves much more attention, we present the views of Goldman's Ning Ma on this critical issue, which when combined with Fitch's recent disclosure that the CDO market is ramping up in full force halfway across the world, and that China has 66 million vacant homes, should all come together in a nice and tidy confluent package of a combustible real estate-cum-credit explosion. Of course, this being Goldman, guess which way the spin is pointed: "We continue to believe systemic risks associated with such loans are limited. Key to watch: The results of restructuring and NPL recognition in 2H10 (mainly from unrecognized social projects and misused loans, but likely far less than 23% NPL ratios), and credit cost allocation among banks and local gov’ts." In other words, ignore the biased conclusion, but certainly focus on this most recent unravelling of the Chinese bubble.
Even as stocks continue pricing in QE2 (presumably some time in the next 2 years), bonds keep on laughing. The $38 billion in 2 Year Bonds just auctioned off at a 0.665% high yield, the lowest yield for a 2 Year primary issue. The bid to cover came in at 3.33, compared to 3.45 previously, and 3.15 average. Indirect participation plunged to 32.8%,compared to 41.41% previously. As the directs took down "just" 13.5%, the Primary Dealers ended up taking down a majority of the $38 billion bond auction, or 53.7%. The recycling of cheap Fed money has now fully arrived, and with an Discount Window to 2 year arb of 0.4% (0.66% - 0.25%), it shows just how bad things must be for the PDs.
Local Governments To Cut 500,000 People In 2010 And 2011, As $400 Billion Budget Shortfall Brings State Economies To A HaltSubmitted by Tyler Durden on 07/27/2010 12:41 -0400
Ever wonder why according to the latest economic poll published by Reuters earlier the general public's satisfaction with Obama's handling of the economy is deteriorating faster than any other issue? (not to mention that 46% of Americans believe Obama is not focused enough on job creation, and that 72% of republicans say they are certain to vote at the November congressional elections versus 49% of democrats). A part of the answer comes courtesy of a new study produced by National League of
Cities, the U.S. Conference of Mayors and the National
Association of Counties titled simply enough: "Local Governments Cutting Jobs and Services: Job losses projected to approach 500,000", showed local governments moved to cut
the equivalent of 8.6 percent of their workforces from 2009 to
2011. As a result of local government cutbacks, almost 500,000 people will lose their jobs, and the total will likely rise. The summary of the report attached below, is particularly grim: "Over the next two years, local tax bases will likely suffer from depressed property values, hard-hit household incomes and declining consumer spending. Further, reported state budget shortfalls for 2010 to 2012 exceeding $400 billion will pose a significant threat to funding for local government programs. In this current climate of fiscal distress, local governments are forced to eliminate both jobs and services." If Americans are dissatisfied with Obama's handling of the economy now, just until 2012.
RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 27/07/10
Luck Or Skill - What Is More Critical To An Exceptional Investor (Or Even A Completely Worthless One)?Submitted by Tyler Durden on 07/27/2010 12:10 -0400
The age old debate of whether luck or skill is more important for an investors'a success will likely never be resolved, although the attached presentation by Legg Mason's Michael Mauboussin provides some colorful anecdotes to validate the view of either side of the polemic. To be sure, working with someone like Bill Miller, Michael must be all too aware of just how prominent a role luck plays (or at least decade long leveraging into a cheap market bull run, only to see all your profits and reputation evaporate overnight when it all comes crashing down), which is precisely why his conclusion tends to veer on the side of skill. Obviously, when dealing with such concepts that have Gaussian distributions, as stocks increasingly demonstrate fractal features (courtesy of HFT), the whole debate is becoming increasingly moot. Yet Mauboussin does have an interesting discussion on reversion to the mean phenomena: something which in a world of near 1.000 implied correlation is of huge and often underestimated, significance: "We have mentioned already that reversion to the mean ensnares a lot of decision makers. This is
so important for investors, however, that it bears additional comment. The sad fact is that there is significant evidence that investors—both individual and institutional—fail to recognize and reflect reversion to the mean in their decisions. To illustrate, the S&P 500 Index generated returns of 8.2 percent in the twenty years ended 2009. The average mutual fund saw returns of about 7 percent, reflecting the performance drag of fees. But the average investor earned a return of less than 6 percent, about two-thirds of the market’s return. The reason investors did worse than the average fund is bad timing: they put money in when markets (or funds) were doing well and pulled money out when markets (or funds) were doing poorly. This is the opposite of the behavior you would expect from investors who understand reversion to the mean." Ironically, investors have learned their lessons: after a nearly 60% ramp from the all time lows, investors continue to refuse to buy when everyone else is buying, contrary to the pleading by Obama, and all the conflicted fly by night permabullish mutual fund managers which CNBC appears to have an infinite collection of to recycle and fill content inbetween all those incontinence ads 24/7.
For the few, the proud, the stuck in the 19th century, with an "originate to hold" business model (such an anachronism when originate to distribute by hedge funds, pardon, banks is all the rage), the latest data by Freddie Mac, in which the 30 Year Fixed just dropped to a new fresh all time low of 4.56%, down 1 bp from the last two weeks, is about the worst news possible. While the short end is still cheap (and in the case of 2 Year, near record), the ongoing flattening is a death knell for anyone who still relies on funding curves to a some profit. As the Bloomberg article pointed out earlier today, the 60 bp tightening in the 2s10s is a huge impact to P&Ls, which is now actively reverting profits afforded to financial companies in 2009 and early 2010. Soon enough, the Fed's active management of the yield curve will force banks to come up with new and improved ways to pinch pennies from US consumers now that the profitability margin on the curve has been cut by 25% in a couple of months. Alas, that would mean the risk of inflation would have to be taken seriously. In its absence, look for flattening to continue as all on the wrong side of the trade continue capitulating, and making the future for JPM, Wells and BofA uglier by the day.
Rosenberg: Fade The Volumeless Rally As "The Market Is Completely Unprepared For 500K Claims And Sub 50 ISM"Submitted by Tyler Durden on 07/27/2010 10:18 -0400
Rosie's market commentary from today is quite colorful, taking on both Barton Biggs (why bother) and Richard Russell as inflection point contrarians (we fully expect Barton Biggs who has now generated enough commissions for his broker to kill his entire P&L for the decade, to go bearish in about two weeks in keeping with his latest standing wave oscillation from one extreme to another). Rosie discusses a topic near and dear, namely that bonds continue to not buy the equity rally, and that the market is really not only stupid and inefficient, but wrong and overshooting most of the time. The only question is for how long can it remain wrong. And courtesy of the Fed, the answer is long, long, long. Not surprisingly David ridicules the constant lack of volume to the upside, and concludes that the rally should be faded, and that "this market is completely unprepared for 500k claims and sub-50 ISM." Obviously, he expects both to occur shortly (and just in time for Shiller to say he believe the chance of a double dip is more than 50%).
Major plunge in Consumer Confidence, which came at 50.4, below expectations of 51.0, and down almost 10% from an upward revised prior 54.3 reading, previously seen at 52.9: yes lower, but this BS revision was enough to make the jump in new home sales appear amazing post revision. Let's see if a real plunge in consumer confidence is enough to take the market lower by 100 DJIA points. Something tells us the gaps on revised data are only to the upside.
Even as Yale's Shiller says he still has no idea where prices are headed, and that he is still worried about the possibility of a double dip recession (no disclosure on how he feels about the ongoing depression), here is Goldman to continue the cold water spillage process, saying that "Case-Shiller home price index rises more than expected in May, due to continued boost from homebuyer tax credit." Don't tell that to the headline reading algos which are now programmed to not only ignore all bad news, but to not read between any lines.
- EUR Libor at Highest in 11 months, hits 0.8275% (Market News)
- Hussman: Betting on a bubble, bracing for a fall (Hussman Funds)
- BP Replaces Hayward, Quickens Asset Sales on Record Loss (Bloomberg)
- Gift From Fed Stops as Profits Shrink at Banks Led by JPMorgan (Bloomberg)
- Paul Farrell: Unless women take control of Wall Street and America, 'The End' is near (MarketWatch)
- Economists Dispute Effect of US Stimulus (FT)
- Chinese Banks Face State Loans Turmoil (FT)
- Forbes: Obama's soft-core socialism (Forbes)
- "Systemic risk" theory gains in stature (WaPo)
- IMF Sees Yuan as Undervalued (WSJ)
- Chinese banks face state loans turmoil; about Rmb1,550B in questionable loans.
- Euro-zone June M3 sees 0.2% rise, private loans up.
- German consumer confidence rose to 3.9 points from 3.6 points in July.
- IMF sees Yuan as undervalued.
- India raises lending rates by 0.25 points to 5.75%.
- Japan to cap spending and new bond issuance for next fiscal year.
- Plosser says weaker data don't yet justify more Fed stimulus.
- Acuity Brands acquires LED Luminaire Company, terms undisclosed.
- Alcon's Q2 profit rises 15% on sales and margin growth. Ups full-year earnings outlook.
Same Liquidity Contraction, Different Day: Euribor Higher, European Bank Liquidity Lower, Spin EndlessSubmitted by Tyler Durden on 07/27/2010 06:52 -0400
Euribor is again spiking by 0.4 bps overnight, from 0.889% yesterday to 0.893% today. In the context of the massive (and insolvent) European banking system, this is yet another indication that all is unwell with Europe's banks, even as the Goebbels brigade goes into overdrive.The interbank lending market does not lie, unlike every single European and American politician. And just to make things worse, the ECB withdrew another E11 billion in liquidity via a reduced 7 Day MRO. From Market News: "The European Central Bank on Tuesday allotted E189.9864 billion in its main seven-day refinancing operation at a fixed rate of 1.0%. The ECB satisfied all of the 151 bids received. Today's operation resulted in a net drain of E11.2996 billion after the ECB allotted E201.286 billion in its 7-day MRO last week."