Green Shoots

Those living in the dust bowl responded by doing more of what had failed rather than doing something different. Ours is a dust bowl economy.  In our economy, debt is the marginal field that has been plowed up for brief exploitation and profit. In response to the drought of income and collateral that supports debt, the Federal Reserve, Congress and the Obama administration have actively made the crisis worse by doing more of what failed spectacularly: encouraging more debt with zero-interest rate policy (ZIRP), massive "socialized" subsidies of housing and mortgages, and so on. When the present path cannot possibly lead to success, regardless of the labor and treasure poured into the effort, then risking the unknown by trying something different is the only way forward.

The U.S. trade balance in September improved, largely on petroleum, with a rebound in exports.  This was good news for a single economic data point and it sent mainstream economists to mistakenly begin boosting third quarter GDP estimates to 2.9% from the 1st estimate of 2.0% that we saw last month. The important point is that the trend of exports, and imports, has been negative as the recession in Europe, and slowdown in China, have reduced end demand. There are a numer of reasons that the recent positive boosts to the trade deficit data are more likely temporary in nature and will be revised away in the months ahead.  "Regardless of when the NBER officially announces the start date of the next recession - the damage will have already been done to investors."

European corporates continue to report considerably more negative surprises in production than expectations a mere three months ago - with the divide now at extreme levels. As Morgan Stanley notes though, there remains a 'hope' for green shoots in the euro area on the back of the ECB's OMT announcement and an apparently more robust China. Unfortunately, as these ywo simple charts indicate, the reality is that business surveys are pointing to a continued slide and that recent resilience is unlikely to last. In fact, in Morgan Stanley's view, incoming data and anecdotal evidence would suggest Q4 could be even worse than had been expected and the recessionary envionment will drag well into next year.

Bernanke has fired his infinite bazooka and yet markets have done nothing but slide since and macro-economic data are showing further signs of weakness (New Orders and Capex) with the reality under the headlines of a housing 'recovery' hardly green-shoots. Draghi remains sidelined with his conditionally infinite bazooka as his region of the world slides deeper and deeper into the abyss of recession/depression with IFO expectations and New Orders slumping and deleveraging continuing. So, it seems, the hope for moar-money from central-bankers remains squarely on the shoulders of the PBoC. However, a glimmer of green shoots as a gentle acceleration PMI (and New Export Orders? to Japan?) suggest (as Goldman's Jim O'Neill would have us believe) that the Chinese have manufactured a slow landing (for now - given 'their' data). Hardly the driver for the next major round of stimulus that is so required to fill deleveraging shoes (leaving aside the question of food inflation concerns). So a 'blip' of a green shoot in China is in fact nothing to be celebrated as the world remains a closed-loop (no martians yet) and two of the world's three largest economies are lagging badly. Look at these three charts and decide which way the world is heading!

Miracles of cosmetic surgery.

I am reminded that this is the 5-year anniversary of the emergency Fed Discount Rate cut in response to the collapse of Countrywide Financial (CFC) earlier that week.  

With US and European equities showing a strange (though small) taint of un-green this morning, we thought a quick top-down versus bottom-up look at what has been going on was worthwhile. Macro-wise, US economic data has been modestly supportive with Citi's Economic Surprise Model mean-reverting as data came slighlty better than economists had predicted - though notably a weakening trend (but second derivative green shoots are back in vogue it seems). This supportive macro picture is at total odds to the bottom-up earnings picture where upward-revisions as a percentage of total revisions has plunged - as stocks make new highs. With correlations rising as managers chase performance, it is worth reflecting on the very recent ramp in outlooks as stocks levitate (and analysts flip-flop one more time) - which came first, the market or the economy?

Leading all others “by the nose through the ring.”

Last week, looking at Third Point's best performing positions we noticed something odd: a big win in Portuguese sovereign bonds in the month of April. We further suggested: "We suspect the plan went something like this: Loeb had one of his hedge-fund-huddles; the cartel all bought into Portuguese bonds (or more likely the basis trade - lower risk, higher leverage if a 'guaranteed winner'); bonds soared and the basis was crushed; now that same cartel - facing pressure on its AAPL position (noted as one of Loeb's largest positions at the end of April) - has to liquidate (reduce leverage thanks to AAPL's collateral-value dropping) and is forced to unwind the Portuguese positions. A quick glance at the chart below tells the story of a Portuguese bond market very much in a world of its own relative to the rest of Europe this last month - and perhaps now we know who was pulling those strings?" Since the end of April, both AAPL and Portuguese bonds have tumbled, and Portugal CDS is +45 bps today alone, proving that circumstantially we have been quite correct. Today, we have the full Long Portugal thesis as explained by Loeb (it was a simple Portuguese bond long, which explains the odd rip-fest seen in the cash product in April). There is nothing too surprising in the thesis, with the pros and cons of the trade neatly laid out, however the core premise is that the Troika will simply not allow Portugal to fail, and that downside on the bonds is limited... A thesis we have heard repeatedly before, most recently last week by Greylock and various other hedge funds, which said a long-Greek bond was the "trade of the year", and a "no brainer." Sure, that works, until it doesn't: such as after this past weekend, in which Greece left the world stunned with the aftermath of what happens when the people's voice is for once heard over that of the kleptocrats, and the entire house of cards is poised to collapse.

Okay, the coast is clear. Everyone buy PIIGS debt to boost pensioon fund yield -or- Media assisted .gov dis(not "mis")information fails to stand up to arithmetic fact!

In an interview with Louis James, the inimitable Doug Casey throws cold water on those celebrating the economic recovery. "Get out your mower; it's time to cut down some green shoots again, and debunk a bit of the so-called recovery."

Last week the Economic Cycle Research Institute (ECRI) affirmed their call made last fall that the U.S. economy would soon be in recession.   The ECRI’s main business focus is to try and predict the ups and downs of the business cycle, and they have had an outstanding record over the years. Right now the absolute level of the index may suggest economic weakness, but the second differential has suggested an improving stock market is also in the cards. 

President Obama was in town, fundraising.

The man who once actually had some credibility, and has over the past two years become, very deservedly so, the biggest one-sided propaganda joke on Wall Street, Joe "Snow" LaVorgna, is out with yet another career reputation killer note. In his commentary on the BLS, the Deutsche Bank cheerleader dares to go where not even the Comcast-GE schizos fear to tread, namely in the most ridiculed never never land of Green Shoots. Because heaven forbid seasonal adjustments take account for snowfall in the deep of winter. Have no fear it is all good, and just like that other administration rag Mark Zandi, it is all back end loaded, and as a result we will see a 250k pick up in February payroll, February showers excluded... and in fact, should the weather dramatically vary by more than +/-0.01 degree from the median temperature, all bets are off. They don't call it the priced to perfection, Tungstenilock recovery for nothing. But here is the killer: while saying don't believe the bad news from the NFP report, the curly haired, CNBC sideshow Jow says: "However, the sizeable and unexpected drop in the unemployment rate was legitimate." In other words - let's pick and choose the data points he likes from any economic report going forward, blame the bad ones on ridiculous things, and pray that people are so dumb to not see the utter contempt for their intellgience that infuses the entire "analytic" process.

With the summer now upon us, the "Sell in May and Go Away" adage has proven itself true once again. The major market indexes are all turning downward, and while they haven’t dropped enough yet to warrant panic, we certainly want to be positioned properly if this trend continues into the fall. The market tea leaves are no longer sending mixed signals either – most of the new data is decidedly bearish. So what happened to all the ‘green shoots’? What happened to the strong recovery the market rally was promising? Economic data released over the past two weeks have decimated any remaining belief in a lasting economic recovery. Slowdowns are appearing in the US, Europe, Japan and even China. Auto sales, housing starts, employment, consumer confidence, factory orders, consumer purchase intentions - just about every aspect of the economy that can be measured, is showing decided weakness. - Sprott Asset Management