Japan holds $821B US Treasuries
China holds $867B US Treasuries
Federal Reserve Bank now owns approx $800B and is purchasing approx $10B per week.
Tyler Durden at Zero Hedge points out that, at this rate, the US FRB will soon be the largest holder of US Debt!
This morning, in an odd break from the past few weeks, NFLX, AAPL, AMZN, and BIDU are all in the red. Once the POMO results are released in approx 20 minutes it would not be altogether impossible to see each one of these names catch a bid from the primary dealers. Be careful out there!
UPDATE: Results are in...The Fed purchased just $2.2B of 2021-2040 bonds. No wonder the market is heading south...Dow down 50 odd points after being up almost 100 to start the day. This market will likely be very volatile for the rest of the day.
Thursday, September 30, 2010
Today's Economic Data
Today's Data
Q2 GDP third and final estimate: 1.7% vs. 1.6% prior.
Initial claims at 453K vs. exp'd 450K and 469K prior
Continuing claims at 4457k vs. 4450k exp'd and 4540K prior. This prior number being revised from the 4489K reported last week. Everyone was very 'bulled-up' by the continuing claims number last week. It should be no surprise that this number was revised higher. Because the focus of the average market watcher has been limited to the proceeding 11 minutes, the BLS can continue to provide rosy figures only to be revised higher at a later date.
Chicago PMI came in at 60.4 vs. 55 expected and 56.7 prior.
Q2 GDP third and final estimate: 1.7% vs. 1.6% prior.
Initial claims at 453K vs. exp'd 450K and 469K prior
Continuing claims at 4457k vs. 4450k exp'd and 4540K prior. This prior number being revised from the 4489K reported last week. Everyone was very 'bulled-up' by the continuing claims number last week. It should be no surprise that this number was revised higher. Because the focus of the average market watcher has been limited to the proceeding 11 minutes, the BLS can continue to provide rosy figures only to be revised higher at a later date.
Chicago PMI came in at 60.4 vs. 55 expected and 56.7 prior.
Ireland, Spain, & Portugal Update
Ireland announced this morning that the worst case scenario for bailing out its banks to be 50B Euros ($68B). The cost of Anglo Irish Bank will be approx 34B Euros. This is higher than the original estimate of 25B euros. The nation will also likely raise its stake to a majority in Allied Irish Banks which will need an additional 3B Euros this year.
The public debt in Ireland will now be approximately 99% of GDP and Dublin-based Davy Stockbrokers expects that figure to peak at 105% in 2012.
The support for the banking system will drive up the 2010 deficit to 32% of GDP, which as a reminder is 10x the EU's maximum allowable deficit. (Reuters).
Spain's credit rating was cut one notch by Moody's from AAA to Aa1. This was expected however as Moody's was the last rating agency to still maintain Spain at AAA.
Spain will release its 2011 budget today. Reuters, who obtained a copy of the budget ahead of its presentation to Parliament today showed that the government plans to cut net debt issuance in 2011 to 43.3B euros from the 76.2B that was originally planned for 2010. The budget includes much greater austerity measures with a 7.9% reduction in public spending with 16% average cuts for government departments.
In Portugal, PM Jose Socrates, announced that civil service pay would be cut by 5%, public sector pensions would be frozen, and the VAT will be raised to 23% from 21%.
While it's nice to see Ireland admit its woes (perhaps the rest of the world could learn something here...) the numbers are in fact horrendous, Spain was downgraded, and austerity measures in these three nations will make growth and economic health that much more difficult going forward. One might expect the Euro to be weak this morning on some of these disclosures, but afterall its the last day of the quarter and Brian Sack is on deck with a possible record amount of POMO. We are much more commmitted to destroying the value of the dollar than the Eurozone has been to destroy the Euro. When German exports begin to take a hit from the higher euro, we will likely see more aggressive action by the ECB.
Until then, keep your seatbelt securely fastened...To the moon Alice!
The public debt in Ireland will now be approximately 99% of GDP and Dublin-based Davy Stockbrokers expects that figure to peak at 105% in 2012.
The support for the banking system will drive up the 2010 deficit to 32% of GDP, which as a reminder is 10x the EU's maximum allowable deficit. (Reuters).
Spain's credit rating was cut one notch by Moody's from AAA to Aa1. This was expected however as Moody's was the last rating agency to still maintain Spain at AAA.
Spain will release its 2011 budget today. Reuters, who obtained a copy of the budget ahead of its presentation to Parliament today showed that the government plans to cut net debt issuance in 2011 to 43.3B euros from the 76.2B that was originally planned for 2010. The budget includes much greater austerity measures with a 7.9% reduction in public spending with 16% average cuts for government departments.
In Portugal, PM Jose Socrates, announced that civil service pay would be cut by 5%, public sector pensions would be frozen, and the VAT will be raised to 23% from 21%.
While it's nice to see Ireland admit its woes (perhaps the rest of the world could learn something here...) the numbers are in fact horrendous, Spain was downgraded, and austerity measures in these three nations will make growth and economic health that much more difficult going forward. One might expect the Euro to be weak this morning on some of these disclosures, but afterall its the last day of the quarter and Brian Sack is on deck with a possible record amount of POMO. We are much more commmitted to destroying the value of the dollar than the Eurozone has been to destroy the Euro. When German exports begin to take a hit from the higher euro, we will likely see more aggressive action by the ECB.
Until then, keep your seatbelt securely fastened...To the moon Alice!
Tuesday, September 28, 2010
Monthly Dow Return vs. Next Month Consumer Confidence: Correlation?
......Consumer Confidence..... Dow Monthly % Return
Dec 09..... 52.9..... 1%
Jan 10..... 55.9..... (3.48%)
Feb 10..... 46..... 2.55%
Mar 10..... 52.5..... 5.13%
Apr 10..... 57.9..... 1.4%
May 10..... 63.3..... (7.9%)
Jun 10..... 52.9..... (3.54%)
Jul 10..... 50.4..... 7%
Aug 10..... 53.5..... (4.3%)
Sep 10..... 48.5..... 7.95% (MTD)
Oct 10..... 55?...... (8%?)
What is interesting here is that Consumer Confidence has a simple observational correlation with prior month equity returns as measured by the monthly change of the DJIA.
So, today's 48.5 should probably be understood within the context of the August slide in equities rather than the current month's performance. The only thing that I find surprising is that the consensus expected a higher reading (at 54) than August's 53.5, despite the fact that the equity market was down in August.
There are of course thousands of intangibles re: consumer confidence, but as Bernanke seems to believe strongly in the wealth effect, I believe its worth reviewing just how closely Americans watch the equity market for cues about the current and future state of the economy. If correlation between these two figures showed no directional relationship, then one must conclude that the Fed is risking hyperinflation and a lower quality life for middle class Americans without any lasting (or even near month) return (in regards to increased consumer spending, slower household sector deleveraging, etc.. Thankfully, it at least seems that there is, at minimum, a casual next-month correlation.
Go POMO!
Dec 09..... 52.9..... 1%
Jan 10..... 55.9..... (3.48%)
Feb 10..... 46..... 2.55%
Mar 10..... 52.5..... 5.13%
Apr 10..... 57.9..... 1.4%
May 10..... 63.3..... (7.9%)
Jun 10..... 52.9..... (3.54%)
Jul 10..... 50.4..... 7%
Aug 10..... 53.5..... (4.3%)
Sep 10..... 48.5..... 7.95% (MTD)
Oct 10..... 55?...... (8%?)
What is interesting here is that Consumer Confidence has a simple observational correlation with prior month equity returns as measured by the monthly change of the DJIA.
So, today's 48.5 should probably be understood within the context of the August slide in equities rather than the current month's performance. The only thing that I find surprising is that the consensus expected a higher reading (at 54) than August's 53.5, despite the fact that the equity market was down in August.
There are of course thousands of intangibles re: consumer confidence, but as Bernanke seems to believe strongly in the wealth effect, I believe its worth reviewing just how closely Americans watch the equity market for cues about the current and future state of the economy. If correlation between these two figures showed no directional relationship, then one must conclude that the Fed is risking hyperinflation and a lower quality life for middle class Americans without any lasting (or even near month) return (in regards to increased consumer spending, slower household sector deleveraging, etc.. Thankfully, it at least seems that there is, at minimum, a casual next-month correlation.
Go POMO!
Anglo Irish Bank and POMO Thursday
Ireland is set to release official cost estimates for the bailout of Anglo Irish Bank on Thursday this week. It will also be a busy day in the US, as the 3rd and final 2Q GDP estimate is due (expected to be unchanged at 1.6%), along with Chicago PMI, and Jobless Claims data.
Earlier this week Moody's lowered their credit rating 3 notches on some of Anglo Irish's debt to one rating above junk status. There is no reason to believe that the cost of AI will be less than the original estimates.
Not to worry however, should there be any resulting weakness in the Euro/strength in the $, it will be offset by the FRBNY's Thursday POMO. Today's POMO managed to lift the Dow 40-odd points as we head into the close on a terrible Philly Fed #, a huge Consumer Sentiment miss, and an in-line but disappointing Case-Shiller home price index.
The total POMO today was a $550M TIPS purchase. This is the smallest POMO of September (possibly also b/c this was a TIPS purchase rather than a Coupon Purchase.) Last week's POMO came in at $11.15B, the prior week's at $8.669B, and the week of September 6th at $4.058B. The average weekly POMO in September has been $7.959B. Given that we've only seen $550M this week, and given the slew of potentially disruptive data on Thursday, which is not incidentally the last day of the quarter, should we expect a record $7B+ in POMO on Thursday???
Total POMO for the month of September (with one operation remaining): $25.327B
Earlier this week Moody's lowered their credit rating 3 notches on some of Anglo Irish's debt to one rating above junk status. There is no reason to believe that the cost of AI will be less than the original estimates.
Not to worry however, should there be any resulting weakness in the Euro/strength in the $, it will be offset by the FRBNY's Thursday POMO. Today's POMO managed to lift the Dow 40-odd points as we head into the close on a terrible Philly Fed #, a huge Consumer Sentiment miss, and an in-line but disappointing Case-Shiller home price index.
The total POMO today was a $550M TIPS purchase. This is the smallest POMO of September (possibly also b/c this was a TIPS purchase rather than a Coupon Purchase.) Last week's POMO came in at $11.15B, the prior week's at $8.669B, and the week of September 6th at $4.058B. The average weekly POMO in September has been $7.959B. Given that we've only seen $550M this week, and given the slew of potentially disruptive data on Thursday, which is not incidentally the last day of the quarter, should we expect a record $7B+ in POMO on Thursday???
Total POMO for the month of September (with one operation remaining): $25.327B
Brazil, Romania, Portugal, Ireland Tidbits
Brazil's finance minister, Guido Mantega, said, "We're in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness." (FT)
Romania's interior minister, Vasile Blaga, resigned after a protest by policemen over austerity measures. It seems troubled EU nations continue to have a more difficult time implementing austerity measures than many had hoped.
Portugal will soon see increased taxes according to a report by the OECD. The FT reports that the minority Socialist government has threatened to resign if the opposition Social Democrats refuse to support its 2011 budget proposals, which are expected to include tax hikes.
Ireland also faces higher taxes in the near future. Danny McCoy, the general secretary of the Irish Business and Employers Confederation said, "You have to be an ostrich not to realise there are taxes coming." (FT)
Romania's interior minister, Vasile Blaga, resigned after a protest by policemen over austerity measures. It seems troubled EU nations continue to have a more difficult time implementing austerity measures than many had hoped.
Portugal will soon see increased taxes according to a report by the OECD. The FT reports that the minority Socialist government has threatened to resign if the opposition Social Democrats refuse to support its 2011 budget proposals, which are expected to include tax hikes.
Ireland also faces higher taxes in the near future. Danny McCoy, the general secretary of the Irish Business and Employers Confederation said, "You have to be an ostrich not to realise there are taxes coming." (FT)
Japan & China - Update
An article in the FT this morning reports that Japan has said it may decide to demand compensation from China for the damage done to the two ships that were intentionally rammed by now-released captain, Zhan Qixiong.
China responded to Mr. Zhan's return by demanding an apology and compensation for the incident. This belligerent attack was a source of great embarrassement to Japanese officials who believed the release of Mr. Zhan would lead to a de-escalation of the trade issues that are picking up steam between Asia's two largest economies.
These updates serve as another reminder that the geopolitical/trade tensions that are roiling beneath the surface have not cooled off, despite the Dow holding the line at 10,800 (w/ many thanks to Brian Sack at the NY Fed!).
China responded to Mr. Zhan's return by demanding an apology and compensation for the incident. This belligerent attack was a source of great embarrassement to Japanese officials who believed the release of Mr. Zhan would lead to a de-escalation of the trade issues that are picking up steam between Asia's two largest economies.
These updates serve as another reminder that the geopolitical/trade tensions that are roiling beneath the surface have not cooled off, despite the Dow holding the line at 10,800 (w/ many thanks to Brian Sack at the NY Fed!).
Tuesday Outlook
Dow Futures are up 33 pts this morning ahead of Consumer Confidence and the Case/Shiller 20-city home price Index.
Consensus forecast for the 20-city Index for July is 3.1% vs. prior of 4.23%. The bar has been set fairly low and we could see a beat here given the 113 bps sequential drop expected from June to July.
UPDATE: Case-Shiller came in at 3.18% for a slight beat. Futures remain in solidly in positive territory (Dow +0.26%, S&P +0.21%).
Conference Board Consumer Confidence should also look ok as the forecast has nearly matched the result for the past few months. (July 51 vs. 51 exp'd, August 53.5 vs. 49.5 exp'd, September consensus of 54.)
The NY Fed will be launching the latest installment of POMO this morning buying back TIPS. Thursday will see Fed purchases of longer-dated bonds, due 2/15/2021-8/15/2040. This will be followed by back-to-back POMO days on Monday and Tuesday next week as we head into earnings.
With the expectation for QE2 still alive and well, and two more POMO operations by the Fed this week, I believe it is unlikely that we will see much downward pressure on the markets ahead of the end of Q3 on Thursday. Its been the best September in 70 years and with only three days to the finish line, with mutual fund managers fighting 21 weeks of consecutive outflows, I would expect the markets to stay buoyant.
Major news stories this morning have taken on a decidedly positive slant:
* Toys R Us to hire 45k workers for the holidays (temp, but helps) (Yahoo Finance)
* ADB raises Asia growth forecast to 8.2% (Yahoo Finance)
* Job optimism boosts German consumer confidence (Yahoo Finance)
The forward-looking indicator for October stood at 4.9 pts vs. 4.2 prior (Sept) which had been the brightest in 3 years.
* Walgreen 4Q profit rises 8% (Yahoo Finance)
* FedEx, Li & Fung Shipments Signal Improved U.S. Holiday Sales (a bit early?) (Bloomberg)
* U.K. Growth Fueled by Jump in Government Spending (Bloomberg)
* Apple May Unveil Next iPad by June 2011, Goldman Says (Bloomberg)
Not so positive headlines this morning:
* Ireland Leads Surge in Sovereign Default Swaps on Bailout Costs (Bloomberg)
* Man Group Expects 55% Drop in First-Half Profit as Fees Decline
* Anglo Irish Cost May Exceed 35B Euros, S&P Says
* Morgan Stanley Said to Freeze Investment-Bank Hiring for 2010
The possible look of QE2 is starting to be reported on. The WSJ ran a story yesterday suggesting that the Fed will likely do $100B of QE per month until it no longer sees the need to continue the program. This is not the all-in approach many expected to be announced at one of the coming Fed meetings. It seems that Bernanke is backing off somewhat following the slide in the US dollar and subsequent run-un in consumer staples since last Tuesday's FOMC statement suggested QE2 is becoming more likely.
ICSC Retail Store Sales number just announced: +0.4% W/W vs. -1.4% last week. +3.6% Y/Y vs. +3.3% last week. Monthly sales remains on target for +3% Y/Y. This is positive and bodes well for consumer confidence numbers today.
Consensus forecast for the 20-city Index for July is 3.1% vs. prior of 4.23%. The bar has been set fairly low and we could see a beat here given the 113 bps sequential drop expected from June to July.
UPDATE: Case-Shiller came in at 3.18% for a slight beat. Futures remain in solidly in positive territory (Dow +0.26%, S&P +0.21%).
Conference Board Consumer Confidence should also look ok as the forecast has nearly matched the result for the past few months. (July 51 vs. 51 exp'd, August 53.5 vs. 49.5 exp'd, September consensus of 54.)
The NY Fed will be launching the latest installment of POMO this morning buying back TIPS. Thursday will see Fed purchases of longer-dated bonds, due 2/15/2021-8/15/2040. This will be followed by back-to-back POMO days on Monday and Tuesday next week as we head into earnings.
With the expectation for QE2 still alive and well, and two more POMO operations by the Fed this week, I believe it is unlikely that we will see much downward pressure on the markets ahead of the end of Q3 on Thursday. Its been the best September in 70 years and with only three days to the finish line, with mutual fund managers fighting 21 weeks of consecutive outflows, I would expect the markets to stay buoyant.
Major news stories this morning have taken on a decidedly positive slant:
* Toys R Us to hire 45k workers for the holidays (temp, but helps) (Yahoo Finance)
* ADB raises Asia growth forecast to 8.2% (Yahoo Finance)
* Job optimism boosts German consumer confidence (Yahoo Finance)
The forward-looking indicator for October stood at 4.9 pts vs. 4.2 prior (Sept) which had been the brightest in 3 years.
* Walgreen 4Q profit rises 8% (Yahoo Finance)
* FedEx, Li & Fung Shipments Signal Improved U.S. Holiday Sales (a bit early?) (Bloomberg)
* U.K. Growth Fueled by Jump in Government Spending (Bloomberg)
* Apple May Unveil Next iPad by June 2011, Goldman Says (Bloomberg)
Not so positive headlines this morning:
* Ireland Leads Surge in Sovereign Default Swaps on Bailout Costs (Bloomberg)
* Man Group Expects 55% Drop in First-Half Profit as Fees Decline
* Anglo Irish Cost May Exceed 35B Euros, S&P Says
* Morgan Stanley Said to Freeze Investment-Bank Hiring for 2010
The possible look of QE2 is starting to be reported on. The WSJ ran a story yesterday suggesting that the Fed will likely do $100B of QE per month until it no longer sees the need to continue the program. This is not the all-in approach many expected to be announced at one of the coming Fed meetings. It seems that Bernanke is backing off somewhat following the slide in the US dollar and subsequent run-un in consumer staples since last Tuesday's FOMC statement suggested QE2 is becoming more likely.
ICSC Retail Store Sales number just announced: +0.4% W/W vs. -1.4% last week. +3.6% Y/Y vs. +3.3% last week. Monthly sales remains on target for +3% Y/Y. This is positive and bodes well for consumer confidence numbers today.
Friday, September 24, 2010
Durable Goods, Housing, and POMO!
The Dow is currently up 186 points following the conclusion of the Fed's Permanent Open Market Operations (POMO).
The market surged at the open as Durable Goods orders in August came in at -1.3%. Stripping out transportation (because aircraft orders are never a factor in GDP, right??) changed the number to a positive 2% (biggest jump in 5 months.) So, ex-transportation we got a good number so the market should now assume that the Fed is less likely to launch QE2 in November, right? No matter, the Fed's POMO was unleashed this morning, with $3.89B in 2014-2016 treasuries immunized. The primary dealers are out buying up AAPL and AMZN with levered taxpayer dollars. Yippee!
For anyone interested, you can follow the Fed's POMO on the Fed NY site:
http://www.newyorkfed.org/markets/pomo/display/index.cfm
New home sales for August were also reported this morning. The number was a depressing 288,000 vs. the 295,000 expected. This is the 2nd lowest number in history. New home inventory now sits at 8.6 months, and the median home price of $204,000 is now the lowest it has been since December 2003.
Other 'bullish' news...
1. BBC reports that China has detained 4 Japanese officials due to illegal filming in 'violation of a Chinese law relating to protection of military facilities.'
2. Homeland Security Secretary Janet Napolitano on news reports yesterday that the US power grid would be susceptible to attack as the Chinese and Russians may have software on the system that could be used to shut down the grid in case of war, "..the vulnverability is something we have known about for years..."
3. HSBC CEO Mike Geoghegan resigned. This after Lloyd's Banking Group CEO Eric Daniels announced his retirement in one year from now. A lot of European banking CEOs leaving. Perhaps they believe the future will be less rosy?
4. Nicaraguan diplomat had his throat slit in his NY apartment ahead of the G20 meetings. Daniel Ortega, president of Nicaragua, has been criticizing the US and defending North Korea and Iran. Related? Who knows? (Other than the murderer that is...)
5. The Euro is flying this morning against an ever-weakening dollar. 1.3475 is the latest print. This doesn't bode well for the export growth/GDP of Germany, France, et al. How long they will allow the U.S. to win the campaign for devaluation is unknown. But this run-up cannot last forever...
The market surged at the open as Durable Goods orders in August came in at -1.3%. Stripping out transportation (because aircraft orders are never a factor in GDP, right??) changed the number to a positive 2% (biggest jump in 5 months.) So, ex-transportation we got a good number so the market should now assume that the Fed is less likely to launch QE2 in November, right? No matter, the Fed's POMO was unleashed this morning, with $3.89B in 2014-2016 treasuries immunized. The primary dealers are out buying up AAPL and AMZN with levered taxpayer dollars. Yippee!
For anyone interested, you can follow the Fed's POMO on the Fed NY site:
http://www.newyorkfed.org/markets/pomo/display/index.cfm
New home sales for August were also reported this morning. The number was a depressing 288,000 vs. the 295,000 expected. This is the 2nd lowest number in history. New home inventory now sits at 8.6 months, and the median home price of $204,000 is now the lowest it has been since December 2003.
Other 'bullish' news...
1. BBC reports that China has detained 4 Japanese officials due to illegal filming in 'violation of a Chinese law relating to protection of military facilities.'
2. Homeland Security Secretary Janet Napolitano on news reports yesterday that the US power grid would be susceptible to attack as the Chinese and Russians may have software on the system that could be used to shut down the grid in case of war, "..the vulnverability is something we have known about for years..."
3. HSBC CEO Mike Geoghegan resigned. This after Lloyd's Banking Group CEO Eric Daniels announced his retirement in one year from now. A lot of European banking CEOs leaving. Perhaps they believe the future will be less rosy?
4. Nicaraguan diplomat had his throat slit in his NY apartment ahead of the G20 meetings. Daniel Ortega, president of Nicaragua, has been criticizing the US and defending North Korea and Iran. Related? Who knows? (Other than the murderer that is...)
5. The Euro is flying this morning against an ever-weakening dollar. 1.3475 is the latest print. This doesn't bode well for the export growth/GDP of Germany, France, et al. How long they will allow the U.S. to win the campaign for devaluation is unknown. But this run-up cannot last forever...
Thursday, September 23, 2010
Wall Street vs. Main Street
Today Warren Buffett said, "We're still in a recession. And, and we're not gonna be out of it for awhile..." His opinion is based on "any common sense definition" of a recession. This is largely at the core of why I am bearish on equities in the medium-term. Allow me to explain.
For most Americans, the level of unemployment is a much more convincing measure of the health of the economy than is the level of the stock market. While the Fed, Treasury, and Federal Government view the stock market as the nation's economic thermometer, the average American citizen views his or her income, job security, future direction of inflation for food, energy and other basic , and quality of life as the most important indicators of present and future personal financial health.
This is why so many citizens are growing increasingly angry. The Tea Party may in fact have accidentally capitalized on the 'taxation without representation' theme of the original Tea Party in Boston Harbor. Though I take it that the Tea Party's focus is more on re-instituting Christian, Conservative government with a fetish for Libertarianism, their frustration should be understood from the perspective of class struggle. I believe Tea Party activists can sense that the economic stimulus programs, 'bailouts', and interventions were if not by design, then at least in effect, bailouts for the wealthy corporate elite using tax dollars collected from the average working class American.
The competitive global currency devaluation, aka the 'race to the bottom', may keep capital goods and real estate from ever facing legitimate price discovery, but these efforts by the Fed aimed at debt monetization (see POMO), are done using taxpayer dollars. The increase in the money supply will increase the cost of basic necessities such as food and energy, which of course will most significantly impact the lower classes.
It doesn't take a conspiracy theorist to see the bigger picture. The top 20% in this country (the voters, campaign contributors, focus group leaders, lobbyists, corporate chiefs, etc) are primarily concerned with protecting themselves against wealth destruction. This is understandable, and why should anyone expect otherwise? The trouble comes though, when a private entity, the Fed, is able to buy a recovery in stock prices with taxpayer dollars. Of course the voting class will cheer, and the system may continue to splurge on debt, driving liquidty into stocks, and providing exit opportunities for corporate insiders who were, as a reminder, net sellers of their own holdings by a ratio of 260-to-1 last week.
The amazing thing about those who make bullish arguments for corporate profit growth is that they still maintain the irrational belief that top-line revenue can grow without a healthy middle class. In no industry can you actively destroy your own customer base and at the same time increase revenues. It is nonsensical. When one considers that 2/3 of US GDP is domestic consumer spending, it becomes obvious that we are still in a recession with 16% underemployment. As noted in previous posts, households continue to deleverage, and are doing so at the fastest pace yet. Consumers have undergone a paradigm shift. The thought of increasing personal debt for irrelevant goods has almost become akin to a social taboo. Even those who have excess savings aren't spending because not only is the outlook uncertain, but we've become a society of low-ballers. Why buy a house now when rates aren't going anywhere and the Fed is considering using the final arrows in their quiver to try their best to protect against deflation? People understand that this is a high stakes game with a very uncertain outcome. If the Fed fails to be successful, people don't want to be left holding the bag. Common sense dictates that home prices are still over-valued. The average American citizen in in his late 20's/early 30's does not have the capital or the confidence in the future required to purchase a home. The housing bubble priced many people out of the market. The American Dream has gotten that much further away, and much like the experience in Japan over the last two decades, I would anticipate that the rites of passage into adulthood such as childbirth, purchasing a home, etc will be put off until such time that job security, clarity over inflation, and home prices all adjust to levels at which a reasonable optimist would begin to move forward.
The cover of the most recent issue of Newsweek features an article on rethinking masculinity with the message "Man Up!" The article goes on to discuss men losing identity due to the loss of manufacturing and manual labor jobs, how men into their late twenties still live with their parents, etc. I couldn't get through the whole article as these anthropological battle-of-the-sexes fluff pieces never fail to disappoint in their efforts at serious journalism and tend to be written by some gender obsessed person who inadvertantly clings to anecdotal cliches rather than a grasp of fact based cause-and-effect sociological developments. What the article was failing to address (and why I gave up reading it) is that in a nation where the aging baby boomers are leveraging their children's future and defending the price of their homes, level of their 401(k)s, and their jobs, they remarkably, but inadvertently ensure lives that are worse off for their children. I believe that all people are at least partially the product of their environment (which is not to say I don't believe people can, and should, pull themselves up by their bootstraps.) The current environment is one that keeps our youth under-employed, over-stimulated, under-educated, and increasingly cynical.
To allow price discovery in hard asset markets, would be to allow discovery in the power of our nation's youth to innovate, grow, produce, thrive. Why do we still lag behind certain developing nations in terms of green tech? Your views on the global warming debate aside, why not launch a massive all-out effort to be the world leader in the electric car revolution (as one example.) This would bring back jobs, re-inspire our students to pursue fields in math and the sciences, and allow for a shift in the character and magnitude of the aspirations of our nation's citizens. This however, has not happened because entrenched interests continue to protect the value of their acquired possessions at all costs.
Price discovery in commercial real estate (CRE) would likely have tremendous positive benefits for future industry and job growth in the United States. If CRE pricing came down to a more rational, market-clearing level, jobs could be added back without doing as much damage to corporate profit margins. This would also allow fledgling entrepreneures to undertake projects without worrying about possibly being faced with the need to hire under-the-table employees, etc., just to cover the costs of doing business.
Where are our leaders? Why have we failed to learn the lessons of history? When Krugman writes of his desire to see increased protectionism against China, is he avoiding the truth about the Depression-worsening impacts of Smoot-Hawley for the sake of making his point, or is the influential Keynsian simply forgetting the one of the central tenaments of macro economics and the history of WWII? Perhaps Wen Jiabao was correct today when he suggested that it was America's preference to outsource all of our manufacturing jobs over the past few decades that is to blame for our trade deficit, and not the also undervalued Remnimbi. But don't tell that to the House Ways and Means Committee, because they have their hearts set on joining the trade war that China started today when they stopped shipping rare earth metals to Japan.
Meanwhile, the official story we are supposed to believe is that the investment landscape is far more benign (and more attractive) than it was in September 2008 when the stock market started really falling off the cliff. Maybe in the near-term this is true considering the Fed's promise to monetize U.S. debt, but then our issues were in the sphere of governments bailing out business. Now we are faced with governments bailing out governments. Which of these seems more malignant to you?
For most Americans, the level of unemployment is a much more convincing measure of the health of the economy than is the level of the stock market. While the Fed, Treasury, and Federal Government view the stock market as the nation's economic thermometer, the average American citizen views his or her income, job security, future direction of inflation for food, energy and other basic , and quality of life as the most important indicators of present and future personal financial health.
This is why so many citizens are growing increasingly angry. The Tea Party may in fact have accidentally capitalized on the 'taxation without representation' theme of the original Tea Party in Boston Harbor. Though I take it that the Tea Party's focus is more on re-instituting Christian, Conservative government with a fetish for Libertarianism, their frustration should be understood from the perspective of class struggle. I believe Tea Party activists can sense that the economic stimulus programs, 'bailouts', and interventions were if not by design, then at least in effect, bailouts for the wealthy corporate elite using tax dollars collected from the average working class American.
The competitive global currency devaluation, aka the 'race to the bottom', may keep capital goods and real estate from ever facing legitimate price discovery, but these efforts by the Fed aimed at debt monetization (see POMO), are done using taxpayer dollars. The increase in the money supply will increase the cost of basic necessities such as food and energy, which of course will most significantly impact the lower classes.
It doesn't take a conspiracy theorist to see the bigger picture. The top 20% in this country (the voters, campaign contributors, focus group leaders, lobbyists, corporate chiefs, etc) are primarily concerned with protecting themselves against wealth destruction. This is understandable, and why should anyone expect otherwise? The trouble comes though, when a private entity, the Fed, is able to buy a recovery in stock prices with taxpayer dollars. Of course the voting class will cheer, and the system may continue to splurge on debt, driving liquidty into stocks, and providing exit opportunities for corporate insiders who were, as a reminder, net sellers of their own holdings by a ratio of 260-to-1 last week.
The amazing thing about those who make bullish arguments for corporate profit growth is that they still maintain the irrational belief that top-line revenue can grow without a healthy middle class. In no industry can you actively destroy your own customer base and at the same time increase revenues. It is nonsensical. When one considers that 2/3 of US GDP is domestic consumer spending, it becomes obvious that we are still in a recession with 16% underemployment. As noted in previous posts, households continue to deleverage, and are doing so at the fastest pace yet. Consumers have undergone a paradigm shift. The thought of increasing personal debt for irrelevant goods has almost become akin to a social taboo. Even those who have excess savings aren't spending because not only is the outlook uncertain, but we've become a society of low-ballers. Why buy a house now when rates aren't going anywhere and the Fed is considering using the final arrows in their quiver to try their best to protect against deflation? People understand that this is a high stakes game with a very uncertain outcome. If the Fed fails to be successful, people don't want to be left holding the bag. Common sense dictates that home prices are still over-valued. The average American citizen in in his late 20's/early 30's does not have the capital or the confidence in the future required to purchase a home. The housing bubble priced many people out of the market. The American Dream has gotten that much further away, and much like the experience in Japan over the last two decades, I would anticipate that the rites of passage into adulthood such as childbirth, purchasing a home, etc will be put off until such time that job security, clarity over inflation, and home prices all adjust to levels at which a reasonable optimist would begin to move forward.
The cover of the most recent issue of Newsweek features an article on rethinking masculinity with the message "Man Up!" The article goes on to discuss men losing identity due to the loss of manufacturing and manual labor jobs, how men into their late twenties still live with their parents, etc. I couldn't get through the whole article as these anthropological battle-of-the-sexes fluff pieces never fail to disappoint in their efforts at serious journalism and tend to be written by some gender obsessed person who inadvertantly clings to anecdotal cliches rather than a grasp of fact based cause-and-effect sociological developments. What the article was failing to address (and why I gave up reading it) is that in a nation where the aging baby boomers are leveraging their children's future and defending the price of their homes, level of their 401(k)s, and their jobs, they remarkably, but inadvertently ensure lives that are worse off for their children. I believe that all people are at least partially the product of their environment (which is not to say I don't believe people can, and should, pull themselves up by their bootstraps.) The current environment is one that keeps our youth under-employed, over-stimulated, under-educated, and increasingly cynical.
To allow price discovery in hard asset markets, would be to allow discovery in the power of our nation's youth to innovate, grow, produce, thrive. Why do we still lag behind certain developing nations in terms of green tech? Your views on the global warming debate aside, why not launch a massive all-out effort to be the world leader in the electric car revolution (as one example.) This would bring back jobs, re-inspire our students to pursue fields in math and the sciences, and allow for a shift in the character and magnitude of the aspirations of our nation's citizens. This however, has not happened because entrenched interests continue to protect the value of their acquired possessions at all costs.
Price discovery in commercial real estate (CRE) would likely have tremendous positive benefits for future industry and job growth in the United States. If CRE pricing came down to a more rational, market-clearing level, jobs could be added back without doing as much damage to corporate profit margins. This would also allow fledgling entrepreneures to undertake projects without worrying about possibly being faced with the need to hire under-the-table employees, etc., just to cover the costs of doing business.
Where are our leaders? Why have we failed to learn the lessons of history? When Krugman writes of his desire to see increased protectionism against China, is he avoiding the truth about the Depression-worsening impacts of Smoot-Hawley for the sake of making his point, or is the influential Keynsian simply forgetting the one of the central tenaments of macro economics and the history of WWII? Perhaps Wen Jiabao was correct today when he suggested that it was America's preference to outsource all of our manufacturing jobs over the past few decades that is to blame for our trade deficit, and not the also undervalued Remnimbi. But don't tell that to the House Ways and Means Committee, because they have their hearts set on joining the trade war that China started today when they stopped shipping rare earth metals to Japan.
Meanwhile, the official story we are supposed to believe is that the investment landscape is far more benign (and more attractive) than it was in September 2008 when the stock market started really falling off the cliff. Maybe in the near-term this is true considering the Fed's promise to monetize U.S. debt, but then our issues were in the sphere of governments bailing out business. Now we are faced with governments bailing out governments. Which of these seems more malignant to you?
Sovereign Default Probabilities
1. Venezuela 56.52 %
2. Greece 50.58%
3. Argentina 41.07%
4. Pakistan 35.04%
5. Ireland 34.12%
6. Ukraine 23.72%
7. Portugal 29.83%
8. Iraq 28.05%
9. Dubai 26.01%
10. Romania 22.53%
I was surprised to see that buyers of CDS believe the probability for a Greek default is greater than half.
Others..
Spain 18.11%, Italy 15.92%
2. Greece 50.58%
3. Argentina 41.07%
4. Pakistan 35.04%
5. Ireland 34.12%
6. Ukraine 23.72%
7. Portugal 29.83%
8. Iraq 28.05%
9. Dubai 26.01%
10. Romania 22.53%
I was surprised to see that buyers of CDS believe the probability for a Greek default is greater than half.
Others..
Spain 18.11%, Italy 15.92%
Markets Defy Gravity
Stocks have just turned positive this morning after a slew of terrible economic data and in the face of mounting geopolitical concerns.
Reasons to be bearish this morning include:
1. Bloomberg reports that China has blocked rare earth element shipments to Japan. The rare earth elements are used in hybrid cars, other green tech, and most importantly weapons systems. Let the trade wars begin.
2. Ireland GDP turned negative (-1.5%) vs. expectation of +0.05%. Welcome to the double dip.
3. Eurozone PMI Composite came in at 53.8 vs. 55.7 consensus and previous of 56.2
4. Germany PMI Manufacturing came in at 55.3 vs. consensus of 57.6 and previous of 58.2
5. U.S. Jobless Claims @ 465,000 vs. 440K consensus, 453K prior (revised from 450K)
6. Continuing claims 4489K vs. 4450K consensus, 4537K prior (huge revision higher from 4485K).
Since the BLS continues to revise higher ever single claims report, should we assume that jobless claims were actually something closer to 475,000 last week? What a joke.
7. Existing home sales were 4.13M in August, 19% less than the 5.10M pace in August 2009. This is the second lowest reading on record, but comes in line with the 4.1M consensus expectation. This is not bullish.
8. Wen Jiabao, in a sign that China will not be revaluing the Yuan stated that a 20% gain in the Remnimbi would lead to social upheaval. "We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs, and how many migrant workers will return to the countryside...China would suffer major social upheaval." Wen also pointed out that the issue was not China's weak currency, but rather the decisions over the last three decades by U.S. corporations to outsource all manufacturing jobs to China and other overseas locations. We will be net importers regardless of whether we source our goods from China or somewhere else. Brilliant job. Glad the rich were able to rake some extra profit on the margin for the destruction of the middle class, the American Dream, etc. Gotta also thank our political leaders for allowing a vast number of the U.S. population to become structurally unemployed. Articles abound on whether stock investors should even worry about unemployment as margins have never been higher. Great, no end market. No US consumer to drive their 2/3 portion of GDP. This situation cannot last forever.
Consumers continue to deleverage, with Z1 Flow of Funds reporting that the household sector has now deleveraged for 9 consecutive quarters, the most recent at the fastest pace yet. How much longer can the market rise on higher expected earnings while aggregate demand continues to fall at an accelerating pace???
9. Durable goods report tomorrow has a very slim chance of being positive.
10. New homes sales tomorrow are set to post a record low.
Reasons to be bearish this morning include:
1. Bloomberg reports that China has blocked rare earth element shipments to Japan. The rare earth elements are used in hybrid cars, other green tech, and most importantly weapons systems. Let the trade wars begin.
2. Ireland GDP turned negative (-1.5%) vs. expectation of +0.05%. Welcome to the double dip.
3. Eurozone PMI Composite came in at 53.8 vs. 55.7 consensus and previous of 56.2
4. Germany PMI Manufacturing came in at 55.3 vs. consensus of 57.6 and previous of 58.2
5. U.S. Jobless Claims @ 465,000 vs. 440K consensus, 453K prior (revised from 450K)
6. Continuing claims 4489K vs. 4450K consensus, 4537K prior (huge revision higher from 4485K).
Since the BLS continues to revise higher ever single claims report, should we assume that jobless claims were actually something closer to 475,000 last week? What a joke.
7. Existing home sales were 4.13M in August, 19% less than the 5.10M pace in August 2009. This is the second lowest reading on record, but comes in line with the 4.1M consensus expectation. This is not bullish.
8. Wen Jiabao, in a sign that China will not be revaluing the Yuan stated that a 20% gain in the Remnimbi would lead to social upheaval. "We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs, and how many migrant workers will return to the countryside...China would suffer major social upheaval." Wen also pointed out that the issue was not China's weak currency, but rather the decisions over the last three decades by U.S. corporations to outsource all manufacturing jobs to China and other overseas locations. We will be net importers regardless of whether we source our goods from China or somewhere else. Brilliant job. Glad the rich were able to rake some extra profit on the margin for the destruction of the middle class, the American Dream, etc. Gotta also thank our political leaders for allowing a vast number of the U.S. population to become structurally unemployed. Articles abound on whether stock investors should even worry about unemployment as margins have never been higher. Great, no end market. No US consumer to drive their 2/3 portion of GDP. This situation cannot last forever.
Consumers continue to deleverage, with Z1 Flow of Funds reporting that the household sector has now deleveraged for 9 consecutive quarters, the most recent at the fastest pace yet. How much longer can the market rise on higher expected earnings while aggregate demand continues to fall at an accelerating pace???
9. Durable goods report tomorrow has a very slim chance of being positive.
10. New homes sales tomorrow are set to post a record low.
Wednesday, September 22, 2010
Market Update
Markets are down this morning after yesterday's FOMC announcement failed to provide any significant changes to current monetary policy. Bernanke did suggest increasing concern over deflation, which suggests increased dovishness (hence the temporary pop in the markets yesterday following the statement).
Also driving the markets lower this morning was weak guidance from ADBE (Down ~20% this morning) yesterday after the close and a tremendously poor earnings report from Jefferies Group that showed principal trading revenues of $74.3M down from $338.6M in 3Q09. Trading volumes were terrible all summer, and it follows that the investment banks will post very weak revenue in 3Q. With GS still trading near $150, one must wonder if there is a case to be made for going short the banks into earnings season.
Portugal's bond offering this morning closely mimicked that of Ireland's yesterday in that risk premium increased 100 bps on both the 4 yr and 10 yr bonds.
0.45B Euro of 4 Year bonds at a 4.695% yield vs. previous at 3.621%
0.3B Euro of 10 Year bonds at a 6.242% yield vs. previous at 5.312%
Today's POMO had little effect on the markets. The Fed purchased $2.07B 3 year bonds.
Interestingly, some of the high beta tech names (AMZN, AAPL) are going up despite the Nasdaq being down approx 1%, lending some credence to the blogosphere belief that POMO is providing primary dealers with levered funds to purchase high-beta equities in the hope that tech can lead us higher.
The probability of a trade war in Asia increased this morning as China Premier Wen Jiabao threatened more retaliatory action unless Japan "immediately and unconditionally" releases the fishing captain detained by the Japanese two weeks ago. As Japan is China's #2 trading partner after the U.S., and China is Japan's #1 export market, it bears watching this development as increased trade sanctions could lead to a gigantic selloff in global markets. China has also been seen increasing its Naval presence in Myanmar ahead of elections there, and we don't have any resolution in the continuing conflict on the Korean Peninsula.
The Euro is flying this morning to 1.3368 vs. the dollar. This is the high end of its summer range. I don't believe that the Eurozone is recovering, and think a long position in the EUO should be built at these levels. (Zapatero's announcement that Spain's troubles are over doesn't impress me...). Youth unemployment in Spain still hovers around 40%. Social unrest is not altogether unlikely. Also this morning, Eurozone Industrial orders posted the sharpest montly drop in 19 months, led by a drop in orders for capital goods. German GDP will begin to drop off if the ECB doesn't intervene to stop the strengthening Euro. Action on this front is all but certain as the race to competitive devaluation continues.
On that front, Tyler Durden at Zero Hedge provides an excerpt from perma-bear Albert Edwards' latest report in which Edwards asks, "What do devaluation, high unemployment, inequality and food prices spell? C-H-A-O-S." Edwards also goes back to a speech given by Bernanke in November of 2002. This is truly terrifying in its implications for the future intentions of the Fed.
"...A striking example from U.S. history is Franklin Roosevelt's 40% devaluation of the dollar against gold in 1933-1934, enforced by a program of gold purchases and domestic money creation. The devaluation and rapid increase in the money supply it permitted ended the U.S. deflation remarkably quickly...and by the way, 1934 was one of the best years of the Century for the stock market." WOW. No wonder gold continues its march higher.
Another interesting observation this morning comes from Philip Davis. He notes that after the past two Fed meetings, the stock market proceeded to lose 5% in the 10 day following the announcement.
With bullish sentiment much too high and mutual funds holding just 3.4% cash (lowest level in the 60 year history of this measure) there isn't a lot of plain vanilla institutional firepower left to lead us higher. Lists of the most overvalued stocks are being sent around this morning, and it appears that the shorts will be able to finally get back to work. I personally think that names that gapped 25% higher on no news over the past two weeks provide a nice entry point on the short side (especially some consumer discretionary names such as ANN and BC, both of which I hold short positions in at these levels.)
Finally, we must look ahead to earnings. Consensus expectations are still much too high and we will likely begin to see downward revisions. Consensus for 2011 stands at $95 and consensus for 2012 is still $108 despite falling GDP estimates. As we see more guidance disappoint, expect these numbers to be revised lower, thus making the bull case that the market is historically cheap based on forward earnings a little less robust. Analysts tend to be overly optimistic at the top (and overly pessimistic at the bottom). A reversion to the mean (if rational/truthful estimates are possible in a world in which the banks and brokerages must fight to keep outflows and low volumes from destroying their business by being as bullish as possible ('Occupationally bullish') would quickly show that this market is overvalued.
Also driving the markets lower this morning was weak guidance from ADBE (Down ~20% this morning) yesterday after the close and a tremendously poor earnings report from Jefferies Group that showed principal trading revenues of $74.3M down from $338.6M in 3Q09. Trading volumes were terrible all summer, and it follows that the investment banks will post very weak revenue in 3Q. With GS still trading near $150, one must wonder if there is a case to be made for going short the banks into earnings season.
Portugal's bond offering this morning closely mimicked that of Ireland's yesterday in that risk premium increased 100 bps on both the 4 yr and 10 yr bonds.
0.45B Euro of 4 Year bonds at a 4.695% yield vs. previous at 3.621%
0.3B Euro of 10 Year bonds at a 6.242% yield vs. previous at 5.312%
Today's POMO had little effect on the markets. The Fed purchased $2.07B 3 year bonds.
Interestingly, some of the high beta tech names (AMZN, AAPL) are going up despite the Nasdaq being down approx 1%, lending some credence to the blogosphere belief that POMO is providing primary dealers with levered funds to purchase high-beta equities in the hope that tech can lead us higher.
The probability of a trade war in Asia increased this morning as China Premier Wen Jiabao threatened more retaliatory action unless Japan "immediately and unconditionally" releases the fishing captain detained by the Japanese two weeks ago. As Japan is China's #2 trading partner after the U.S., and China is Japan's #1 export market, it bears watching this development as increased trade sanctions could lead to a gigantic selloff in global markets. China has also been seen increasing its Naval presence in Myanmar ahead of elections there, and we don't have any resolution in the continuing conflict on the Korean Peninsula.
The Euro is flying this morning to 1.3368 vs. the dollar. This is the high end of its summer range. I don't believe that the Eurozone is recovering, and think a long position in the EUO should be built at these levels. (Zapatero's announcement that Spain's troubles are over doesn't impress me...). Youth unemployment in Spain still hovers around 40%. Social unrest is not altogether unlikely. Also this morning, Eurozone Industrial orders posted the sharpest montly drop in 19 months, led by a drop in orders for capital goods. German GDP will begin to drop off if the ECB doesn't intervene to stop the strengthening Euro. Action on this front is all but certain as the race to competitive devaluation continues.
On that front, Tyler Durden at Zero Hedge provides an excerpt from perma-bear Albert Edwards' latest report in which Edwards asks, "What do devaluation, high unemployment, inequality and food prices spell? C-H-A-O-S." Edwards also goes back to a speech given by Bernanke in November of 2002. This is truly terrifying in its implications for the future intentions of the Fed.
"...A striking example from U.S. history is Franklin Roosevelt's 40% devaluation of the dollar against gold in 1933-1934, enforced by a program of gold purchases and domestic money creation. The devaluation and rapid increase in the money supply it permitted ended the U.S. deflation remarkably quickly...and by the way, 1934 was one of the best years of the Century for the stock market." WOW. No wonder gold continues its march higher.
Another interesting observation this morning comes from Philip Davis. He notes that after the past two Fed meetings, the stock market proceeded to lose 5% in the 10 day following the announcement.
With bullish sentiment much too high and mutual funds holding just 3.4% cash (lowest level in the 60 year history of this measure) there isn't a lot of plain vanilla institutional firepower left to lead us higher. Lists of the most overvalued stocks are being sent around this morning, and it appears that the shorts will be able to finally get back to work. I personally think that names that gapped 25% higher on no news over the past two weeks provide a nice entry point on the short side (especially some consumer discretionary names such as ANN and BC, both of which I hold short positions in at these levels.)
Finally, we must look ahead to earnings. Consensus expectations are still much too high and we will likely begin to see downward revisions. Consensus for 2011 stands at $95 and consensus for 2012 is still $108 despite falling GDP estimates. As we see more guidance disappoint, expect these numbers to be revised lower, thus making the bull case that the market is historically cheap based on forward earnings a little less robust. Analysts tend to be overly optimistic at the top (and overly pessimistic at the bottom). A reversion to the mean (if rational/truthful estimates are possible in a world in which the banks and brokerages must fight to keep outflows and low volumes from destroying their business by being as bullish as possible ('Occupationally bullish') would quickly show that this market is overvalued.
POT Update - POT sues BHP in U.S. District Court
Potash has filed suit in U.S. Distrct Court in Northern Illinois against BHP this morning, alleging that BHP's offer violates U.S. securities law by making misleading statements including BHP's stated plans for POT should it be successful. The suit also alleges that BHP's hostile bid is 'unsually coercive' given that it is structured to only require 50% of shareholders to approve the deal rather than the 2/3 normally required by Canadian law. Further, POT argues that BHP's widely publicized entrance into the potash market by developing mines in Saskatchewan and suggesting that they would run the mines at full capacity was an attempt to drive down potash prices and thus the price of POT stock to a level where it would be an attractive acquisition target. These are some pretty serious allegations...
Full filing available below.
http://sec.gov/Archives/edgar/data/855931/000095012310087970/o65249exv99wxaywx18y.htm
Does anyone still believe this deal will get done???
Finally, an addendum to yesterday's trade idea...If more time is preferred b/c you believe the offer could be extended into 2011, you could wait until October to purchase 2011 puts, allowing some of the Theta to bleed off in the meantime...
Full filing available below.
http://sec.gov/Archives/edgar/data/855931/000095012310087970/o65249exv99wxaywx18y.htm
Does anyone still believe this deal will get done???
Finally, an addendum to yesterday's trade idea...If more time is preferred b/c you believe the offer could be extended into 2011, you could wait until October to purchase 2011 puts, allowing some of the Theta to bleed off in the meantime...
Tuesday, September 21, 2010
Potash - Trade Idea
BHP Billiton has extended its $130/share offer for POT by a month to November 18th.
Marius Kloppers, CEO of BHP, said, "We have no plans to change what is currently the only offer on the table. I've seen a lot of speculation and rumors but the reality is there is only one cash bid on the table and that's ours at the moment."
Brad Wall, Premier of Saskatchewan, said, "As of today, I don't see how Saskatchewan is better with this deal, or frankly a subsequent deal."
With Canada showing signs of protectionism re: a takeover by an Australian firm, I believe it will be even less likely that we will see a rival bid by a Chinese consortium. If Brad Wall is resisting Aussie encroachment, then he would certainly do the same (if not with stronger language) should a Chinese consortium bid for POT.
Meanwhile, Chinese trade officials have suggested that they would move to block BHP's takeover of POT based on competitive concerns. All-in-all, BHP's bid doesn't look like it will be successful in convincing shareholders, management, or the Canadian government to sell.
While the work of handicapping M&A situations is always fraught with peril, I've gone long December $135 puts below $5 (last trade at 4.90).
Should the $130 deal be accepted on or before 11/18/10, then the downside is zero.
If the $130 deal is not accepted, then POT trades based on fundamentals (no M&A premium) which suggest a level that is likely to be considerably below $130 (was approx $110 prior to deal announcement, although overall market was lower then than it is today.)
Only chance for a loss is if the offer is extended further in 2011 or a rival bidder emerges. I do not believe either of these will occur. If an extension is your concern, I'd look to longer dated options (although this increases your loss potential if the $130 bid is accepted.) Because there are several unknowns here, this is a speculative position and should not constitute more than a percentage point or two of your overall portfolio (in my humble opinion.)
This is not a recommendation to buy or sell any security. Just something that may be worth taking a long look at...
Quotes and update provided by Reuters. (http://www.reuters.com/article/idUSTRE68J4VG20100921)
Marius Kloppers, CEO of BHP, said, "We have no plans to change what is currently the only offer on the table. I've seen a lot of speculation and rumors but the reality is there is only one cash bid on the table and that's ours at the moment."
Brad Wall, Premier of Saskatchewan, said, "As of today, I don't see how Saskatchewan is better with this deal, or frankly a subsequent deal."
With Canada showing signs of protectionism re: a takeover by an Australian firm, I believe it will be even less likely that we will see a rival bid by a Chinese consortium. If Brad Wall is resisting Aussie encroachment, then he would certainly do the same (if not with stronger language) should a Chinese consortium bid for POT.
Meanwhile, Chinese trade officials have suggested that they would move to block BHP's takeover of POT based on competitive concerns. All-in-all, BHP's bid doesn't look like it will be successful in convincing shareholders, management, or the Canadian government to sell.
While the work of handicapping M&A situations is always fraught with peril, I've gone long December $135 puts below $5 (last trade at 4.90).
Should the $130 deal be accepted on or before 11/18/10, then the downside is zero.
If the $130 deal is not accepted, then POT trades based on fundamentals (no M&A premium) which suggest a level that is likely to be considerably below $130 (was approx $110 prior to deal announcement, although overall market was lower then than it is today.)
Only chance for a loss is if the offer is extended further in 2011 or a rival bidder emerges. I do not believe either of these will occur. If an extension is your concern, I'd look to longer dated options (although this increases your loss potential if the $130 bid is accepted.) Because there are several unknowns here, this is a speculative position and should not constitute more than a percentage point or two of your overall portfolio (in my humble opinion.)
This is not a recommendation to buy or sell any security. Just something that may be worth taking a long look at...
Quotes and update provided by Reuters. (http://www.reuters.com/article/idUSTRE68J4VG20100921)
Market Update - FOMC Meetings & Irish Debt Auction
As predicted, Ireland's debt auction went 'well' this morning.
Results:
1B Euros of 8 year bonds at 6.023% vs. prior of 5.089% (increase of almost 100 bps)
0.5B Euros of 4 year bonds at 4.767% vs. prior of 3.627% (increase of > 100 bps)
As a result, Irish CDS fell by 15 points and the Euro is up again this morning at approx 1.3128.
While Yahoo Finance touts this as a 'success', it goes without saying that an increase of 100 bps suggests further uncertainty. It must also be understood that the ECB has been backstopping much of these debt issuances. Since May in fact, the ECB has purchased 61.5B Euros worth of sovereign debt, including 323M Euros worth last week.
In re: to the FOMC meeting today, I would like to reiterate my view that the Fed will not announce any major new expansion of its balance sheet. The macro data, while suggestive of a considerable slowdown, does not seem to have been weak enough to prompt immediate action by the Fed, and I believe Bernanke will do his best to stay out of what could be construed as partisanship ahead of the November elections.
It also is not inconsequential that there is a massive amount of POMO planned for tomorrow and Friday. The market may sell-off following an FOMC announcement of non-action this afternoon, but not to fear, the Fed will be out buying like mad tomorrow morning to make sure the September rally doesn't fade.
It would seem that the goal of this rally is to halt the 5 straight months of equity outflows by finishing the third quarter on a high note.
Then we move into October, which has a strong history of bringing tail risk to the forefront. There is no FOMC meeting in October to keep the market up (ignoring POMO for the moment.) I also am concerned that when Ireland finally reports the cost of Allied Irish in early October, many may be shocked. The campaign rhetoric over taxes, stimulus, etc is bound to heat up, and the market could be in for a drubbing.
The Fed will meet again on Nov 2nd. I view any action by the Fed on election day as incredibly unlikely.
Which brings us to December 14th, at which point the Fed probably will unleash QEII.
If I am correct, then we could see this low volume, HFT and Fed driven rally come to a close, prompting a mass exodus from equities in October which may or may not be made worse by any number of tail risks (Sovereign debt crisis, report on Allied Irish, rising CDS rates, Japanese currency intervention, U.S.-China currency spat, Japan-China fight over Chinese sailors being held, Korean Peninsula troubles, strikes in Greece (next one planned for Oct. 7th), any surprise misses in Unemployment, 3Q GDP report on last day of October could actually come in negative, etc, etc, etc).
Then the bulls had better hope that a Republican win in November does not bring gridlock to Congress, as it is obvious to anyone breathing that additional fiscal stimulus will be necessary if we are to avoid a double dip. GDP is trending lower as stimulus fades (1Q10 = 3.7%; 2Q10 = 1.6%, 3Q10 = negative?). Without fiscal stimulus, it is very unlikely in my mind that the inventory rebalance can continue to drive the stock market in the face of falling aggregate demand.
The remaining arrows in the Fed's quiver may not be enough without something on the policy side. David Greenlaw at Morgan Stanley estimates that a $2T addition to the Fed's balance sheet would only result in:
10 Year down 50 bps to 2.2%
GDP growth increased by 0.3% in 2011 and 0.4% in 2012
Unemployment goes down by 0.3% in 2011 and 0.5% in 2012, or 9.6% goes to 9.1%
This hardly seems like enough of a return for the risks the Fed will take by increasing the balance sheet with never before tried programs, which supports my conclusion that without further fiscal stimulus, we are destined for a massive slowdown in the economy (and possibly the market).
Also of note, Bloomberg confirmed my suspision this morning that, "The U.S. has fallen behind emerging markets in Brazil, China, and India as the preferred place to invest." As long as the SEC allows HFTs to control/manipulate the market, and government intervention muddies the ability to properly assess risk based on fundamentals, foreign investors will seek to do business elsewhere. One of the greatest drivers of our relative economic success in the United States has been extremely efficient and liquid equity capital markets that allow companies to access capital for growth. With the sudden disdain for fairness and the rule of law, our policy makers and the Fed run the risk of permanently damaging investors' perspective that the U.S. markets provide equality for all participants under strictly enforced laws. With never ending POMO, currency interventions, rate manipulation, allowing HFTs to continue to steal from ordinary investors, and questionable economic reports that as a rule are always revised downward, its no wonder that people are leaving the 'casino' in droves...
Results:
1B Euros of 8 year bonds at 6.023% vs. prior of 5.089% (increase of almost 100 bps)
0.5B Euros of 4 year bonds at 4.767% vs. prior of 3.627% (increase of > 100 bps)
As a result, Irish CDS fell by 15 points and the Euro is up again this morning at approx 1.3128.
While Yahoo Finance touts this as a 'success', it goes without saying that an increase of 100 bps suggests further uncertainty. It must also be understood that the ECB has been backstopping much of these debt issuances. Since May in fact, the ECB has purchased 61.5B Euros worth of sovereign debt, including 323M Euros worth last week.
In re: to the FOMC meeting today, I would like to reiterate my view that the Fed will not announce any major new expansion of its balance sheet. The macro data, while suggestive of a considerable slowdown, does not seem to have been weak enough to prompt immediate action by the Fed, and I believe Bernanke will do his best to stay out of what could be construed as partisanship ahead of the November elections.
It also is not inconsequential that there is a massive amount of POMO planned for tomorrow and Friday. The market may sell-off following an FOMC announcement of non-action this afternoon, but not to fear, the Fed will be out buying like mad tomorrow morning to make sure the September rally doesn't fade.
It would seem that the goal of this rally is to halt the 5 straight months of equity outflows by finishing the third quarter on a high note.
Then we move into October, which has a strong history of bringing tail risk to the forefront. There is no FOMC meeting in October to keep the market up (ignoring POMO for the moment.) I also am concerned that when Ireland finally reports the cost of Allied Irish in early October, many may be shocked. The campaign rhetoric over taxes, stimulus, etc is bound to heat up, and the market could be in for a drubbing.
The Fed will meet again on Nov 2nd. I view any action by the Fed on election day as incredibly unlikely.
Which brings us to December 14th, at which point the Fed probably will unleash QEII.
If I am correct, then we could see this low volume, HFT and Fed driven rally come to a close, prompting a mass exodus from equities in October which may or may not be made worse by any number of tail risks (Sovereign debt crisis, report on Allied Irish, rising CDS rates, Japanese currency intervention, U.S.-China currency spat, Japan-China fight over Chinese sailors being held, Korean Peninsula troubles, strikes in Greece (next one planned for Oct. 7th), any surprise misses in Unemployment, 3Q GDP report on last day of October could actually come in negative, etc, etc, etc).
Then the bulls had better hope that a Republican win in November does not bring gridlock to Congress, as it is obvious to anyone breathing that additional fiscal stimulus will be necessary if we are to avoid a double dip. GDP is trending lower as stimulus fades (1Q10 = 3.7%; 2Q10 = 1.6%, 3Q10 = negative?). Without fiscal stimulus, it is very unlikely in my mind that the inventory rebalance can continue to drive the stock market in the face of falling aggregate demand.
The remaining arrows in the Fed's quiver may not be enough without something on the policy side. David Greenlaw at Morgan Stanley estimates that a $2T addition to the Fed's balance sheet would only result in:
10 Year down 50 bps to 2.2%
GDP growth increased by 0.3% in 2011 and 0.4% in 2012
Unemployment goes down by 0.3% in 2011 and 0.5% in 2012, or 9.6% goes to 9.1%
This hardly seems like enough of a return for the risks the Fed will take by increasing the balance sheet with never before tried programs, which supports my conclusion that without further fiscal stimulus, we are destined for a massive slowdown in the economy (and possibly the market).
Also of note, Bloomberg confirmed my suspision this morning that, "The U.S. has fallen behind emerging markets in Brazil, China, and India as the preferred place to invest." As long as the SEC allows HFTs to control/manipulate the market, and government intervention muddies the ability to properly assess risk based on fundamentals, foreign investors will seek to do business elsewhere. One of the greatest drivers of our relative economic success in the United States has been extremely efficient and liquid equity capital markets that allow companies to access capital for growth. With the sudden disdain for fairness and the rule of law, our policy makers and the Fed run the risk of permanently damaging investors' perspective that the U.S. markets provide equality for all participants under strictly enforced laws. With never ending POMO, currency interventions, rate manipulation, allowing HFTs to continue to steal from ordinary investors, and questionable economic reports that as a rule are always revised downward, its no wonder that people are leaving the 'casino' in droves...
Monday, September 20, 2010
Sept 20th Market Recap and Looking Ahead to Fed Tuesday
U.S. markets finished higher today with the Dow gaining 145.77 points to close at 10,753.62 and the S&P 500 closed at 1,142.71, up 17.12.
The market worked higher ahead of tomorrow's FOMC announcement. Many traders who have gotten overly extended on the long side may be in for a surprise should the Fed fail to announce the start of more quantitative easing. The NBER today announced that the official end of the Recession was June 2009. Kind of makes it difficult for the Fed to launch additional measures, right?
But I digress. Homebuilder sentiment came in at 13 for September, tied with last month for the lowest reading since May '09. Below 50 means sentiment is negative. At the same time, Miami based homebuilder, Lennar (LEN) posted an earnings beat today on lower costs and more completed home sales. The catch though was that new home orders fell 15% from the same quarter last year as tax credits have expired.
The biggest mover of the market today was likely the record $5.2B of POMO injected into the market this morning. Whether the Fed openly admits it or not, QE2 is already essentially underway. POMO and HFT seem to be the only buyers in the market (aside from some short covering) as retail equity outflows have continued unabated for the past 19 consecutive weeks and in the week ended September 17th, insiders sold $441M worth of stock in 98 companies vs. purchases of $1.4M in 7 companies. (Sourced from Bloomberg).
In other news, Bank of America is expected to lay off 5% of its capital markets staff (400 employees globally) due to light trading volumes, according to CNBC's Charlie Gasparino. I would expect that this will be a theme this fall and that we'll be hearing from other brokerage houses re: layoffs during 3Q earnings releases in October. I've also heard of some second tier shops going from commission to salary plus bonus. It also bears repeating the rumor/(idea?) that BAC is cutting its employees at the end of this year to avoid paying them their year-end bonuses...Nice, huh?
With the Daily Sentiment Index at 80% bullish and AAII at 50% bullish, one must wonder if tomorrow could be the day that the sharp start-of-September rally will come to an end. I would imagine the algo traders will be in sell-mode baring any QE announcement from the Fed. But given the planned POMO operations for the rest of the week, the Fed's official dispatches may prove to be nothing more than a distraction from the seldom covered generational theft experiment (or should I say debt monetization) currently being carried out by the Fed.
The end of the week brings additional data regarding durable goods and housing. Given the data we've seen from the past few weeks, I'd expect this data to continue its slide for the worse. Should no QE be announced tomorrow, I'd advise taking the gains from any short term longs, and begin to build positions on the short side. The failure of the Fed to act in August resulted in a disappointed herd that left the market in droves for several weeks afterwards. Tomorrow's announcement could bring about a similar correction.
The market worked higher ahead of tomorrow's FOMC announcement. Many traders who have gotten overly extended on the long side may be in for a surprise should the Fed fail to announce the start of more quantitative easing. The NBER today announced that the official end of the Recession was June 2009. Kind of makes it difficult for the Fed to launch additional measures, right?
But I digress. Homebuilder sentiment came in at 13 for September, tied with last month for the lowest reading since May '09. Below 50 means sentiment is negative. At the same time, Miami based homebuilder, Lennar (LEN) posted an earnings beat today on lower costs and more completed home sales. The catch though was that new home orders fell 15% from the same quarter last year as tax credits have expired.
The biggest mover of the market today was likely the record $5.2B of POMO injected into the market this morning. Whether the Fed openly admits it or not, QE2 is already essentially underway. POMO and HFT seem to be the only buyers in the market (aside from some short covering) as retail equity outflows have continued unabated for the past 19 consecutive weeks and in the week ended September 17th, insiders sold $441M worth of stock in 98 companies vs. purchases of $1.4M in 7 companies. (Sourced from Bloomberg).
In other news, Bank of America is expected to lay off 5% of its capital markets staff (400 employees globally) due to light trading volumes, according to CNBC's Charlie Gasparino. I would expect that this will be a theme this fall and that we'll be hearing from other brokerage houses re: layoffs during 3Q earnings releases in October. I've also heard of some second tier shops going from commission to salary plus bonus. It also bears repeating the rumor/(idea?) that BAC is cutting its employees at the end of this year to avoid paying them their year-end bonuses...Nice, huh?
With the Daily Sentiment Index at 80% bullish and AAII at 50% bullish, one must wonder if tomorrow could be the day that the sharp start-of-September rally will come to an end. I would imagine the algo traders will be in sell-mode baring any QE announcement from the Fed. But given the planned POMO operations for the rest of the week, the Fed's official dispatches may prove to be nothing more than a distraction from the seldom covered generational theft experiment (or should I say debt monetization) currently being carried out by the Fed.
The end of the week brings additional data regarding durable goods and housing. Given the data we've seen from the past few weeks, I'd expect this data to continue its slide for the worse. Should no QE be announced tomorrow, I'd advise taking the gains from any short term longs, and begin to build positions on the short side. The failure of the Fed to act in August resulted in a disappointed herd that left the market in droves for several weeks afterwards. Tomorrow's announcement could bring about a similar correction.
Ireland Update and El-Erian writes,"...bailout is not working."
Mohamed El-Erian wrote today, "The failure to reduce risk spreads means that the public sector bailout is not working. Rather tahn provide assurances of better times ahead and, thus, encourage new investments, ECB/EU/IMF support funding is being used by existing investors to exit their exposures to the most vulnerable peripheral European countries. This situation cannot be sustained forever. It undermines any chance that the most vulnerable countries (e.g., Greece) have of limiting the collapse in their GDP and maintaining social cohesion; it contaminates the balance sheet of the ECB; it exposes the revolving nature of IMF resources to considerable risk; and it raises the risk of renewed contagion."
Irish government debt CDS climbed to 444.5 bps from 420.5 bps on Friday.
Portugal government debt CDS climbed to 374.3 bps from 365.3 bps on Friday.
Ireland will auction off 1.5B euros tomorrow. This auction will almost without a doubt go well, especially as it is so small.
Irish government debt CDS climbed to 444.5 bps from 420.5 bps on Friday.
Portugal government debt CDS climbed to 374.3 bps from 365.3 bps on Friday.
Ireland will auction off 1.5B euros tomorrow. This auction will almost without a doubt go well, especially as it is so small.
Friday, September 17, 2010
QE2
Michigan Consumer sentiment gave its weakest reading this morning since August 2009, coming in at 66.6 vs. expectations for 70 and prior of 68.9. The market is nonetheless in positive territory (including consumer discretionary stocks). This is nothing unusual however, as we've seen the market be mildly higher for the past 11 days or so on essentially discouraging economic reports. One can only assume that this is due to the expectation for the Fed to announce QE2 on Tuesday next week. Good data = market up ('recovery intact, yippee!'). Bad data = market up ('here comes the Fed, whoppeee!').
I do not think the Fed will announce QE2 next week. The POMO unleashed this week seemed to be sufficient to drive the market higher and was also able to do so with surprisingly little fanfare. To continue to appear apolitical (and to maintain some level of credibility), I would expect that QE2 will most likely be unleashed in Dec/Jan.
The question now remains: If the market has only been working higher on the expectation of QE2, will we sell off (as we did in August) without a favorable announcement on Tues?
Stay nimble!
I do not think the Fed will announce QE2 next week. The POMO unleashed this week seemed to be sufficient to drive the market higher and was also able to do so with surprisingly little fanfare. To continue to appear apolitical (and to maintain some level of credibility), I would expect that QE2 will most likely be unleashed in Dec/Jan.
The question now remains: If the market has only been working higher on the expectation of QE2, will we sell off (as we did in August) without a favorable announcement on Tues?
Stay nimble!
Portugal & Ireland
The Irish Independent newspaper warned that Ireland is close to calling in the IMF for a bailout. This report has been denied by Finance Minister Brian Lenihan who said last night, "The Government's strategy for dealing with the economic and financial challenges has been commended by the EU Commission, the ECB, and many other international experts."
Regardless of the official denials, Irish CDS hit a record high at 425 and the Irish/German 10-year spread ripped higher to 410 bps, leaving the Irish 10-year yield at around 6.5%.
Ireland is funded through 2Q11, which has eased some immediate concerns. However, Ireland is scheduled to auction 1.5B euros in bonds on Tuesday (same day that we likely disappoint a lot of folks here in the US when QE2 fails to arrive...). Demand and pricing of this auction ought to be quite telling re: investors risk appetite.
The largest concern however remains the unveiling of the cost of dealing with Anglo Irish bank which is supposed announced from Dublin sometime in early October. Estimates provided so far suggest approx 25B euros (15% of GDP).
Also of interest was PM Brian Cowen stating today that he would socialize more cautiously after appearing intoxicated on air following a party with colleagues at an annual conference. Good to know that the powers that be are maintaining clear heads!
Portugal CDS is also surging this morning as Diario de Noticias writes, "Portugal may be required to seek assistance from the IMF to address the problems of external financing."
It would seem that while nothing is imminent, the European Sovereign Debt Crisis is re-heating. Stay tuned. Euro holds above 1.30 EUR/USD.
I continue to hold various call options on the EUO (ultra short Euro).
Regardless of the official denials, Irish CDS hit a record high at 425 and the Irish/German 10-year spread ripped higher to 410 bps, leaving the Irish 10-year yield at around 6.5%.
Ireland is funded through 2Q11, which has eased some immediate concerns. However, Ireland is scheduled to auction 1.5B euros in bonds on Tuesday (same day that we likely disappoint a lot of folks here in the US when QE2 fails to arrive...). Demand and pricing of this auction ought to be quite telling re: investors risk appetite.
The largest concern however remains the unveiling of the cost of dealing with Anglo Irish bank which is supposed announced from Dublin sometime in early October. Estimates provided so far suggest approx 25B euros (15% of GDP).
Also of interest was PM Brian Cowen stating today that he would socialize more cautiously after appearing intoxicated on air following a party with colleagues at an annual conference. Good to know that the powers that be are maintaining clear heads!
Portugal CDS is also surging this morning as Diario de Noticias writes, "Portugal may be required to seek assistance from the IMF to address the problems of external financing."
It would seem that while nothing is imminent, the European Sovereign Debt Crisis is re-heating. Stay tuned. Euro holds above 1.30 EUR/USD.
I continue to hold various call options on the EUO (ultra short Euro).
Thursday, September 16, 2010
Investor Sentiment
The AAII reports that this week's sentiment survey showed 50.89% are bullish. This is the second highest reading in two years!
Bearish sentiment is only around 24%. And yet the VIX is at 22.62.
For all those who claim it is a contrarian indicator every time the majority is bearish - Take Heed.
Bearish sentiment is only around 24%. And yet the VIX is at 22.62.
For all those who claim it is a contrarian indicator every time the majority is bearish - Take Heed.
Philly Fed, HFT, Outflows
Wow! Philly Fed came in at -0.7, missed expectations of 0.5, prior at -7.7. Market sold off for about 30 seconds, and then bounced. That move seems to be perfect evidence that this low volume bs-rally we've had since late August is dominated by algo-traders and hedge funds who are chasing beta with the understanding that the Fed is 100% prepared to throw taxpayer dollars at the market should the top 10% face any haircuts. Market is again almost entirely dismissing bad economic reports and geopolitical events roiling just below the surface. The lack of correlation to reality and recurring flash crash type market irregularities have lead many people to leave the equity markets for the safety of negative real return bonds.
ICI's latest data reports that in the week of September 8th, domestic funds saw outflows of $2.2B, following the prior week's $7.7B. The tally now stands at $65B for the year. Amazing that the indexes could rally almost 7% in September while people rush for the exits. This is the 19th sequential outflow for stocks. I am becoming increasingly concerned that the HFT and quote-stuffing criminals are going to ruin one of the strongest things about the US Economy: Well functioning, liquid equity capital markets that attract both foreign and domestic interest in droves because of the rule of law and assurance of fairness and equality among participants regardless of size or pedigree. The market as we now it is being destroyed. Where are the lawmakers? The HFT lobby must be incredible (oh yeah, and wealthy...)
ICI's latest data reports that in the week of September 8th, domestic funds saw outflows of $2.2B, following the prior week's $7.7B. The tally now stands at $65B for the year. Amazing that the indexes could rally almost 7% in September while people rush for the exits. This is the 19th sequential outflow for stocks. I am becoming increasingly concerned that the HFT and quote-stuffing criminals are going to ruin one of the strongest things about the US Economy: Well functioning, liquid equity capital markets that attract both foreign and domestic interest in droves because of the rule of law and assurance of fairness and equality among participants regardless of size or pedigree. The market as we now it is being destroyed. Where are the lawmakers? The HFT lobby must be incredible (oh yeah, and wealthy...)
Market Update
Another busy day in the markets today.
FedEx is down 3% pre-market as it missed expectations and provided downside guidance. The bellwether also reported that it will be laying off 1,700 workers as it consolidates its trucking operations to cut costs.
Realty Trac announced that there were 95,364 foreclosures in August, which is a +3% increase from July, and a 25% increase from August 2009. This is the 9th month in a row that foreclosures have increased on an annual basis. 2.3M homes have been repossesed since the recession began in December 2007. Another 1M homes are expected to be foreclosed on this year. The top 10 states with the highest foreclosure rates in August were: NV, FL, AZ, CA, ID, UT, GA, MI, IL, HW.
On to the much more interesting developments in the Forex markets...
Yesterday, Japanese PM Naoto Kan intervened in the currency market to stop the Yen from appreciating against the dollar. In an ironic twist, Kan ran for re-election on the basis that he would not intervene in the currency market. Once elected, the Yen started to run higher, and he was forced to intervene (on his FIRST DAY back in office! So much for those campaign promises!)
Then the NY Fed purchased a single day record $3.9B of 2014-2015 range bonds in the open market yesterday morning. Blogger Tyler Durden of Zero Hedge fame speculated that these may have even been 5 Year bonds that were only auctioned a month or so earlier, implying that the Fed's promise to never monetize our debt has been broken.
Following these two episodes, the US decides to file WTO complaints against China yesterday afternoon. The first one relating to payment processing companies (Visa/Mastercard/etc), and the other regarding steel duties. (Interesting timing here as AK Steel (AKS) yesterday reversed their guidance for 3Q from a $15 per ton operating profit to a loss of approx $20 per ton. While much is this is due to an 11day maintenance outage, the Ohio steelmaker noted higher raw material and ops costs. Perhaps related to China...?)
The WTO filings followed Congressional demands that China accelerate their Yuan reform. Geithner will testify today on China's trade and currency, and is expected to say that the U.S. isn't satisfied with the pace of yuan gains. The Yuan was pegged at 6.83 since July 08, until China dropped the peg in June of this year to much fanfare here in the US. Not surprisingly however, Geithner has now said publicly that 'Heavy intervention' has kept the Yuan undervalued. The Yen has moved a mere 1% since the June announcement, and the growing trade deficit that China has with the US suggests the need for futher action (as do currency interventions in Japan and Singapore, and distrust/frustration from smaller Asian nations who are being boxed out by China as they compete for exports.) The China/US deficit was $119B in 1H10. The total deficit in 2009, was $227B, so we are well on pace to surpass last year's figure.
Paul Krugman has said that China's currency policy has been to blame for the Yen's rise to a 15-year high against the dollar this week. His op-ed in the NY Times this past weekend also was shocking in its suggestion that the U.S. impose trade restrictions on China even if this results in their selling some of the $843.7B of U.S. Treasuries they held as of June 2010. One would think that Krugman would undertand the ramifications of the Smoot-Hawley protectionism of the 1930s and its role in worsening the Great Depression (and helping create the geopolitical atmosphere that led to WWII), but I suppose he does not.
The co-sponser of legislation letting companies seek duties on Chinese imports, OHIO Democrat (see mention of AK Steel above...Also, note that its long been said that if a CEO doesn't know his Senators on a first name basis, then he's not looking out for shareholders...) Tim Ryan said in testimony to the House Ways and Means Committee, "It's now time for our country to have the guts to stand up and take a strong stand against China's currency manipulation."
Prior to the U.S. hearings, China fixed the yuan's reference rate at a record high which allowed the Yuan to rise to its highest level since 1993 yesterday.
The Japanese are also still holding a Chinese boat that collided with two Japanese coast guard ships in disupted seas last week.
The weakened dollar has made for a stronger EUR/USD at 1.3060 this morning, which should actually hamper Europe's growth in 3Q if these conditions prove sustainable.
Meanwhile gold continues its record run with the shiny metal at $1,272 an ounce, or +5.80. This should not be surprising to anyone, for while I do not consider gold to be a proper 'investment' as one cannot accurately determine 'fair value' based on any earnings stream, people do tend to want to own the physical when the world's leading economies are in a race to devalue their currencies.
FedEx is down 3% pre-market as it missed expectations and provided downside guidance. The bellwether also reported that it will be laying off 1,700 workers as it consolidates its trucking operations to cut costs.
Realty Trac announced that there were 95,364 foreclosures in August, which is a +3% increase from July, and a 25% increase from August 2009. This is the 9th month in a row that foreclosures have increased on an annual basis. 2.3M homes have been repossesed since the recession began in December 2007. Another 1M homes are expected to be foreclosed on this year. The top 10 states with the highest foreclosure rates in August were: NV, FL, AZ, CA, ID, UT, GA, MI, IL, HW.
On to the much more interesting developments in the Forex markets...
Yesterday, Japanese PM Naoto Kan intervened in the currency market to stop the Yen from appreciating against the dollar. In an ironic twist, Kan ran for re-election on the basis that he would not intervene in the currency market. Once elected, the Yen started to run higher, and he was forced to intervene (on his FIRST DAY back in office! So much for those campaign promises!)
Then the NY Fed purchased a single day record $3.9B of 2014-2015 range bonds in the open market yesterday morning. Blogger Tyler Durden of Zero Hedge fame speculated that these may have even been 5 Year bonds that were only auctioned a month or so earlier, implying that the Fed's promise to never monetize our debt has been broken.
Following these two episodes, the US decides to file WTO complaints against China yesterday afternoon. The first one relating to payment processing companies (Visa/Mastercard/etc), and the other regarding steel duties. (Interesting timing here as AK Steel (AKS) yesterday reversed their guidance for 3Q from a $15 per ton operating profit to a loss of approx $20 per ton. While much is this is due to an 11day maintenance outage, the Ohio steelmaker noted higher raw material and ops costs. Perhaps related to China...?)
The WTO filings followed Congressional demands that China accelerate their Yuan reform. Geithner will testify today on China's trade and currency, and is expected to say that the U.S. isn't satisfied with the pace of yuan gains. The Yuan was pegged at 6.83 since July 08, until China dropped the peg in June of this year to much fanfare here in the US. Not surprisingly however, Geithner has now said publicly that 'Heavy intervention' has kept the Yuan undervalued. The Yen has moved a mere 1% since the June announcement, and the growing trade deficit that China has with the US suggests the need for futher action (as do currency interventions in Japan and Singapore, and distrust/frustration from smaller Asian nations who are being boxed out by China as they compete for exports.) The China/US deficit was $119B in 1H10. The total deficit in 2009, was $227B, so we are well on pace to surpass last year's figure.
Paul Krugman has said that China's currency policy has been to blame for the Yen's rise to a 15-year high against the dollar this week. His op-ed in the NY Times this past weekend also was shocking in its suggestion that the U.S. impose trade restrictions on China even if this results in their selling some of the $843.7B of U.S. Treasuries they held as of June 2010. One would think that Krugman would undertand the ramifications of the Smoot-Hawley protectionism of the 1930s and its role in worsening the Great Depression (and helping create the geopolitical atmosphere that led to WWII), but I suppose he does not.
The co-sponser of legislation letting companies seek duties on Chinese imports, OHIO Democrat (see mention of AK Steel above...Also, note that its long been said that if a CEO doesn't know his Senators on a first name basis, then he's not looking out for shareholders...) Tim Ryan said in testimony to the House Ways and Means Committee, "It's now time for our country to have the guts to stand up and take a strong stand against China's currency manipulation."
Prior to the U.S. hearings, China fixed the yuan's reference rate at a record high which allowed the Yuan to rise to its highest level since 1993 yesterday.
The Japanese are also still holding a Chinese boat that collided with two Japanese coast guard ships in disupted seas last week.
The weakened dollar has made for a stronger EUR/USD at 1.3060 this morning, which should actually hamper Europe's growth in 3Q if these conditions prove sustainable.
Meanwhile gold continues its record run with the shiny metal at $1,272 an ounce, or +5.80. This should not be surprising to anyone, for while I do not consider gold to be a proper 'investment' as one cannot accurately determine 'fair value' based on any earnings stream, people do tend to want to own the physical when the world's leading economies are in a race to devalue their currencies.
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