Tuesday, August 30, 2011

[Video] Kudlow Interviews PIMCO's Bill Gross

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Quite a good interview tonight with Bill Gross on CNBC; I'd say I agree with much more of what Gross says in this interview than many of his other interviews.  Bill says some things here that probably many do not want to hear....

12 minute clip - email readers will need to come to site to view.




Indian Economy Begins to Slow - Q2 GDP 7.7%

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It's been a very rough year for Indian stocks, and indeed much of the emerging market space as central banks are fighting the easy money coming from the West (and Japan), by raising rates.  Inflationary pressures are still a concern in many of these countries, but it does appear the brakes are starting to work.  Of course the issue is not to break too hard.



India just reported a 7.7% GDP - while rip roaring in relation to Western developed economies, its significantly lower than we've seen the past few years.  (Last year I believe there was a print in the mid 9%s)  Looks like the construction sector has been hit the hardest from higher rates.

Via BBC:

  • India's economy grew 7.7% in the three months from April to June, compared with the same period of 2010.  It was India's weakest growth for six quarters, but still better than had been expected.
  • The slowdown is expected to continue as India's central bank continues to raise interest rates to control inflation. "The latest growth number reinforces the view that although growth is slowing down, it is not collapsing as feared by some," said Ashutosh Datar, economist at IIFL in Mumbai.
  • Indian Finance Minister Pranab Mukherjee said he had been expecting a higher growth rate, but that given the muted recovery in the US and Europe, the figures were "not that much disappointing".
  • The Reserve Bank of India (RBI) has raised interest rates 11 times since March 2010. The next rate-setting meeting is on 16 September, when many economists expect rates will rise again, to 8.25%.
  • Inflation in July was 9.22%, which was well above the RBI's target rate of 4% to 4.5%. "India has raised rates much faster than any other major country, but inflation is also a bigger problem than in any other major economy," said DK Joshi, chief economist at Indian ratings agency Crisil. Construction problems 
  • The sector breakdown showed that the construction sector had been one of the worst-performing parts of the economyConstruction grew at an annual rate of 1.2% in the second quarter, down from 8.2% in the previous quarter, as rising interest rates and delays in planning approvals held up building projects.
  • The manufacturing sector grew 7.2%, an improvement from the previous quarter, but well below the 10.6% in the second quarter of 2010.
  • While 7% is extraordinarily high by the standards of European countries that are struggling to achieve 2%, there have been warnings from economists that it would be inadequate to fund the government's attempts to deal with India's endemic poverty.
  • On Monday, a survey by the Indian Chambers of Commerce found that business confidence was at a two-year low.  It found that businesses had "growing apprehensions about the world economy entering into another recession", while also worrying about how rising interest rates were hitting domestic demand.

PIMCO's Bill Gross Admits He was Wrong on U.S. Treasuries - and by Definition Jeffrey Gundlach was Correct

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Two of the most well known bond gurus - PIMCO's Bill Gross and Doubeline's Jeffrey Gundlach had polar opposite opinions on what U.S. debt would do once QE2 ended.  [Apr 14, 2011: [Video] Bond Guru Bets Against PIMCO's Bill Gross (and Conventional Wisdom) on What Happens After QE2 Ends]  Gross was with the consensus (yields would rise) while Gundlach was with the minority - Gundlach was proven correct.

Now to give credit where credit is due, Gross is out today admitting his views were incorrect - which is a rarity in the investment community.

Via FT.com:

  • Bill Gross, manager of the world’s largest bond fund for Pimco, has admitted that it was a mistake to bet so heavily against the price of US government debt.  Mr Gross emptied his $244 billion Total Return Fund of US government-related securities earlier this year in a high-profile call that has backfired as the bond market has rallied. As of Monday, Pimco’s flagship fund ranked 501th out of 589 bond funds in its category.
  • “Do I wish I had more Treasurys? Yeah, that’s pretty obvious,” Mr Gross told the Financial Times last week, adding: “I get that it was my/our mistake in thinking that the US economy can chug along at 2 percent real growth rates. It doesn’t look like it can.”
  • When the yield on the 10-year Treasury was 3.5 percent in January, Mr Gross warned that the risk of rising inflation made government debt a poor investment. Bond prices move in the opposite direction to bond yields, which he forecast would rise as Ben Bernanke, chairman of the Federal Reserve , brought the second program of bond buying, known as quantitative easing, to an end in June.
  • Mr Gross, one of the most influential voices in the bond market, reiterated his warning to avoid treasurys in June, and in the July dispatch of his widely read Investment Outlook, warned that promises to America’s ageing population made them “debt men walking”. 
  • However, this month, as turmoil in equity markets caused investors to rush to the safety of government bonds, the 10-year Treasury yield  dipped below 2 per cent, a 61-year low.
  • The move has forced Mr Gross to reassess his bearish position on US debt in recent weeks. “We’ve moderated based on the outlook for the US economy, based on what Bernanke has done at the Fed in the last month. Freezing rates for two years, that was a pretty significant statement in terms of the vulnerability of Treasurys to go down in price and up in yield,” he said.  “It’s not necessarily a flip flop, as we don’t own tons of Treasurys, but its a recognition that the US and developed economies are near the recessionary dividing point,” he said.
  • Mr Gross still argues that on a long-term basis, governments are likely to use financial repression, where the rate of inflation is higher than bond yields, to erode the value of sovereign debt over time.
  • But he also suggested that the “new normal” — Pimco’s view of the global economic outlook in which growth rates for developed countries are slower than in the past — may have to be revised downwards to a “new normal minus”.
  • Mr Gross started to buy government debt, as well as related securities and derivatives, in recent months. However, he faces a challenge to catch up to the benchmark, which has returned 4.55 percent for the year so far, versus the Total Return Fund’s 3.29 percent, according to Lipper, a research group. “When you’re underperforming the index, you go home at night and cry in your beer,” he said, adding: “It’s not fun, but who said this business should be fun. We’re too well paid to hang our heads and say boo hoo.”




[Video] And Here We Go with the Laying of Groundwork of More Easing - Fed's Charles Evans Favors More Aggressive Accomodation

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Well if nothing else, the playbook is very consistent.  First Ben sends out his minions to lay the groundwork for more easing in the public eye, and then as we get closer to the Fed meeting, leaks to very specific members of the press occur.  It only took two workdays after the Jackson Hole speech for the minions to begin their chanting of easier money.

Via Reuters:

  • Chicago Federal Reserve Bank President Charles Evans said on Tuesday he favored strong central bank accommodation for a substantial period of time, as the U.S. economy looks to be moving "sideways."
  • Evans told CNBC he favored some of the most aggressive policy actions on the table now being considered to boost the economic recovery, and said that the U.S. Federal Reserve needed to clarify its policy intentions.
  • "It's difficult to characterize the labor market as anything other than consistent with being in a recession," said Evans, adding the economy is "really going sideways more than anything else.
  • "I'm in favor of some of the most aggressive policy actions of anyone on the Committee," added Evans, a noted policy dove who votes on the Fed's policy-setting Federal Open Market Committee this year.
  • In his view, QE needs to stay in place until unemployment plunges to 7 percent or if inflation gets past 3 percent.
Here is the video from CNBC





We have Fed minutes released later today - this was the meeting where Ben said ultra easy money for at least 2 more years (mid 2013) but even from that meeting the framework for easing has changed.

Gold is of course reacting as more fiat currency debasement awaits - this despite the margin requirement hikes.



Let's continue to watch the market - and oil, to see if the playbook of 2010 is repeating.  Good news = good news, and bad news = more Fed, etc.  The ISM figures later this week and early next week, along with the employment data should give us a big hint of how this market will react thru Sept 20.  The changing for more steroids from Wall Street should be a chorus by then.  Let's see if oil punishes Main Street as we repeat 2010....

August Consumer Confidence Drops to 44.5 from 52.0 Consensus

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As I posted a month ago I usually don't take much stake in consumer confidence, but the readings have been SO horrid, they are worth mentioning.  We just had a reading of 44.5 versus 52.0 consensus.  (July was 59.2)  Keep in mind a reading below 70 is considering recessionary.  On the plus side it's only the worst reading since the dark days of 2009 ;)
  • The expectations barometer tumbled to 51.9 in August - the lowest since April 2009 -- from 74.9 in July, while the present-situation gauge fell to 33.3 from 35.7.

Main Street and Wall Street continue to live 2 separate lives.  I was gasping at last month's figures... this one is simply amazing.... considering we're in the 'recovery' period of the economic cycle.

As for the market, the 20 day moving average is now a (light) support.  So if bulls can hold 1192ish and the mantra of 'bad news = more Fed heroes arriving to save us' takes root things should be ok.  We're at that weird point where the 'market' may actually like bad news, since it means more steroid injections.

We've just seen a huge run off the lows the past week so some consolidation is healthy.  That said, I'm quite neutral until I see how things play out - there are a ton of news events at the end of this week, and seeing how the market reacts to the news will be an important tell.





Record Amounts of Cash on Corporate Balance Sheets? Yes. But Record Amounts of Debt as Well

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Brett Arends at Marketwatch has an interesting story titled 'The Biggest Lie About U.S. Companies'.  While it is often touted (accurately) that U.S. corporations have record amounts of cash on their balance sheets ($2 trillion-ish), people are not looking at the liability side of the balance sheet, which apparently has also surged.  Now on the plus side with the Bernank punishing savers and driving down government rates, a flood of money seeking any yield has gone into the corporate market; this has helped companies refinance that debt at very low rates - even the junk market has seen a boom the past few years.  Hence that debt is quite low in yield - but it is still there.  Keep this in mind each time we hear about the record amount of cash on corporate balance sheets.

  • You may have heard recently that U.S. companies have emerged from the financial crisis in robust health, that they've paid down their debts, rebuilt their balance sheets and are sitting on growing piles of cash they are ready to invest in the economy.
  • ....top companies "have accumulated an astonishing $1.8 trillion of cash," leaving them in the best shape, by some measures, "in almost half a century."
  • It all sounds wonderful for investors and the U.S. economy. There's just one problem: It's a crock.  American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression.
  • You'd think someone might have noticed something amiss. After all, we were simultaneously being told that companies (a) had more money than they know what to do with; (b) had even more money coming in due to a surge in profits; yet (c) they have been out in the bond market borrowing as fast as they can.  Does that sound a little odd to you?
  • A look at the facts shows that companies only have "record amounts of cash" in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don't look at the liabilities, the picture looks great. Hey, why not buy a Jacuzzi?
  • According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That's up by $1.1 trillion since the first quarter of 2007; it's twice the level seen in the late 1990s.

  • The debt repayments made during the financial crisis were brief and minimal: tiny amounts, totaling about $100 billion, in the second and fourth quarters of 2009.
  • Remember that these are the debts for the nonfinancials — the part of the economy that's supposed to be in better shape. The banks? Everybody knows half of them are the walking dead.
  • Central bank and Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP. That's a postwar record. In 1945, it was just 20%. Even at the credit-bubble peaks in the late 1980s and 2005-06, it was only around 45%.
  • The Fed data "underline the poor state of the U.S. private sector's balance sheets," reports financial analyst Andrew Smithers, who's also the author of "Wall Street Revalued: Imperfect Markets and Inept Central Bankers," and chairman of Smithers & Co. in London.  "While this is generally recognized for households," he said, "it is often denied with regard to corporations. These denials are without merit and depend on looking at cash assets and ignoring liabilities. Cash assets have risen recently, in response to the fall in inventories, but nonfinancials' corporate debt, whether measured gross or after netting off bank deposits and other interest-bearing assets, is at peak levels."  By Smithers' analysis, net leverage is nearly 50% of corporate net worth, a modern record.
  • There is one caveat to this, he noted: It focuses on assets and liabilities of companies within the United States. Some U.S. companies are holding net cash overseas. That may brighten the picture a little, but the overall effect is not enormous, and mostly just affects the biggest companies.
  • But why is this line being spun about healthy balance sheets? For the same reason we're told other lies, myths and half-truths: Too many people have a vested interest in spinning, and too few have an interest in the actual picture.
  • Journalists, for example, seek safety in numbers; there's a herd mentality. Once a line starts to get repeated, others just assume it's correct and join in. Wall Street? It's a hustle. This healthy balance-sheet myth helps sell stocks and bonds. How many bonuses do you think get paid for telling customers the stark facts, and how many get paid for making the sale?


Monday, August 29, 2011

First Break Over 20 Day Moving Average in a Month... And a Return to Highs of 2 Weeks Ago on the S&P 500

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With today's gap up and run, the S&P 500 is now over the 20 day moving average for the first time in just over a month.  It is also right at those highs from 2 weeks ago.  Thus far the Bernanke is sipping some wine and saying 'I love it when a plan comes together'.





[Video] ECRI Updates its Thought on Potential Recession

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The ECRI has been nailing the larger macro moves quite well the past few years, so I continue to monitor whatever they say.   There longer leading indicators started to take a quite neutral to bearish view this spring, which at the time was clearly out of the consensus.  At that time the herd said whatever slowdown we might have, would be temporary and many were still looking for 3-4% GDP growth for the second half. 

Some earlier videos here:
[Jun 14, 2011: Video - ECRI's Achuthan - Prolonged U.S. Slowdown Underway]
[Jul 7, 2011: Video - ECRI's Achuthan Sticking to Script that Slowdown is not Transitory]

The latest update would show no imminent change to that outlook per Yahoo Daily Ticker.  However they do not yet think we are in recession, nor are ready to declare we will be headed into one.




  • Last spring, when most economists were talking about a second-half recovery, Economic Cycle Research Institute co-founder Lakshman Achuthan came on The Daily Ticker and declared a global summer slowdown was coming.
  • Now that Wall Street consensus has turned extremely bearish on the economy, we figured it was time to check back with Achuthan to get his current view.  "We've got more weakness in front of us," he says. "We don't see any upturn yet."
  • Still, ECRI is not ready to declare a new recession is imminent, much less already started as many others contend. "The jury is still out," Achuthan says. "Our indicators have not gone to the point where we can definitely say 'boom it's a recession.' Problem is they haven't turned up either, it's a very persistent decline in these indicators."
  • As for the myriad other economists now putting odds on a recession, Achuthan believes they are playing a "dangerous" game. "It's the illusion of precision," he says. "If you take a look at whoever's making those calls [and] look at their track record of calling recessions I think you'll be unimpressed."



All of this Morning's 'Growth' in Incomes Came from Transfer Payments

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Personal incomes rose 0.3% in this morning's income and spending data.  The savings rate drop 0.5%, but there is quite a nugget that Dan Greenhaus of BTIG found in the spending data.  If not for government transfers there would be no income growth at all.  This is really no surprise for FMMF readers as we noted long ago that 1 in 6 dollars of U.S. income on average was coming from the government (back in 2009) [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929]  and it's only gotten worse.  [May 25, 2010: 1 in 5.5 Dollars of Income Now Via Government; All Time High]

Per Greenhaus:

Dan Greenhaus of BTIG notes that personal income, excluding transfer payments, was flat in July. A big part of “transfer payments” is government assistance — unemployment benefits and the like.

here has been a disturbing upward stickiness of the amount of government support to the economy. … the percentage of incomes provided by government transfer payments has remained elevated.  What this implies is that for a large segment of the economy, the government is subsidizing consumption levels.  To some degree, that is to be expected in recessions and difficult economic environments but over time, this runs the risk of become entrenched.  Ultimately, that would be a negative for job growth, income growth, productivity and the economy more generally.

----------------------------

Like Dan said, if this was a 1-2 year situation to deal with the Great Recession it would be one thing, but this has now become an entrenched way of life for many Americans.  And there is no turnaround in sight. 

And it's not just individuals becoming dependent on the federal dole.  [May 5, 2009: Federal Aid Surpasses Sales Taxes as Top Revenue Generator for States]


[Jun 3, 2009: A Country that Cannot Function Without Easy Money]
[May 19, 2009: Paper Printing Prosperity Defined]
[Nov 29, 2009: 1 in 4 Children, and 1 in 8 Americans Now on Food Stamps]


Guess I Should be Working at Goldman - Note on Correlation Almost Identical to My Article Last Week

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Last week in [Aug 25, 2011: Student Body Left, Student Body Right Trading Returns as Correlations Surpass that of Even 2009, 2010] I wrote

The past few years has not been a fun time for 'stock pickers'.  Correlations have risen to record levels, as everything has turned into a 'macro' trade much of the time. 

Combined with the dominance of computerized trading (now accounting from anywhere from 50-70% of all volume) and EFT trading (where the individual components are all treated as one in a buy and sell decision), and we have both structural and cyclical changes happening in the market.

then I plucked a chart out of Business Insider.

I've actually been citing this trend (bemoaning it actually) for a few years, and pointing to EFT + HFT.

 ----------

Goldman Sachs was out with a note Friday which is almost identical in nature to what I wrote last week.

  • The correlation of moves in individual stocks and the S&P 500 index is at a record, making the job of long-only mutual fund managers to differentiate from the benchmark virtually impossible, according to a report from Goldman Sachs.  (My note: I'd argue not all mutual funds, just those focusing on large caps and perhaps mid caps)
  • The correlation for the S&P 500 and its members is at 0.73, according to Goldman, meaning that the majority of stocks move in lockstep with the index on a daily basis. This is at least the highest in 20 years and therefore likely a record.
  • "Record high S&P 500 and sector correlation poses a challenge for fundamental investors," said David Kostin, chief U.S. investment strategist at Goldman Sachs, in the Friday note.  "Elevated correlation is generally considered a poor environment for long-only fundamental investors. In highly correlated sell-offs the market does not discriminate based on company fundamentals, reducing the value of stock picking," Kostin said.
  • With their ability to go short during the most recent stock market selloff, hedge funds  have cut their losses on the year to just 1 percent on average, according to Goldman. Meanwhile, the average large-cap core mutual fund is down 11 percent in 2011. No wonder, considering the pressure on mutual fund managers to stay fully invested so as not to miss any rally in the benchmark. The cash-to-assets ratio for mutual funds is at a record low of 3.4 percent, according to the Crosscurrents market newsletter.
  • Kostin and other traders believe this lemming behavior among individual stocks could be attributed to the popularity of exchange-traded funds, which allow investors to trade whole indexes and sectors as easily as individual stocks, and the surge in lighting fast high-frequency trading, the buying and selling of millions of stocks in milliseconds based on algorithmic models
  • Assets in ETFs  have topped $1 trillion this year. Some market analysts estimate computer trading has accounted for 70 percent or more of the market volume as of late.

Busy But Light Volume Week Ahead

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Traditionally this is a relatively light volume week as people head out for the last grasp of summer ahead of Labor Day, but we do have a lot of important reports coming out.   While there is some housing data out today and tomorrow, the fireworks are Thursday and Friday as we have Chinese manufacturing data (official vs prelim) overnight Wednesday, then U.S. ISM Manufacturing Thursday.  The monthly jobs report is out Friday - expectations are all the way down to 67,000 which is very poor.  But a low bar to clear.  Interestingly the ISM Manufacturing expectation is for contraction at 48.5? That's down from 50.9 in July.  Speaking of low bars.

In terms of the stock market we are up to our normal gap up Mondays - prevalent through 2009 and 2010.  What is interesting now is the psychology as Bernanke has opened the door to more easing in the Sept Fed meeting.  With 3 dissents at the last meeting it would seem a strange about face if it happens but in the end it's a 1 man show as Greenspan displayed.  We saw last week the first time in a long time bad news was being embraced - i.e. good news is good news but bad news means more interventions.  The market rallied long and hard on that theory in 2009 and 2010, so we want to see if bad news is ignored and good news is embraced.  If so, we are back to the David Tepper market of 2010 once QE2 was hinted at, in Jackson Hole, Wy.  [Sep 24, 2010: [Video] Appaloosa David Tepper - Ben Bernanke Will Make Everything Go Up in the Can't Lose Environment]   That said, we have to expect low volume this week and based on what economists expect the economic figures this week are really quite putrid, so even halfway decent data will create 'better than expected' rallies.

Looks like we will gap up and to the 20 day moving average on the S&P 500, and from there low 1200s from 2 weeks ago is the next area to run past.  Then the 50 day moving average which is in the upper 1230s but falling fast.



Europe again is bemusing.  One week its the center of the world causing havoc, the next week no one thinks about it.  Looks like to start the week Europe does not exist (major markets there are rallying after being thumped all month)

Gold is back to rallying despite the big increase in margin requirements - people continue to flee fiat currencies as central bankers, namely bearded ones, love their helicopters.

Friday, August 26, 2011

Aruba Networks (ARUN) Continues to Execute

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I was taking a look at the charts in the broader 'networking' space last night and its a complete bloodbath out there.  50%-ish losses in many names.  We saw similar action in 2008 before the broader market really was crushed, as there is a cyclical component within the secular growth story.  And when momentum turns, the stocks do tend to get crushed.  On the flip side, these companies appreciate dramatically when the market puts this group back in favor.

Aruba Networks (ARUN) reported last night, and came in flat with estimates, on 47% revenue growth (revenue slightly above analysts estimates).  The stock is jumping today but from very oversold levels - like many in the broader group, this stock had been cut in half from early July highs ($32 to $16)



Main wart in this report was a huge surge in operating expenses - don't mind the increase in R&D, but the large increase in sales and marketing could be more of an issue.  We shall see.
  • ....total operating expenses rose to $78.1 million, from $51.6 million a year ago. That increase was primarily the result of higher research and development and sales and marketing costs.
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  • “Demand for our wireless LAN solutions continued to be strong throughout our fiscal fourth quarter, as revenue increased by 47 percent year-over-year and 8 percent sequentially,” said Dominic Orr, President and Chief Executive Officer of Aruba. “Mobile device adoption continues to accelerate resulting in proliferating demand for Enterprise mobility solutions. Revenue from the existing customer base remains strong and we are especially encouraged by our rapid new customer acquisitions adding over 4,500 customers in the last twelve months.

Aruba Networks is a leading provider of next-generation network access solutions for the mobile enterprise. The company’s Mobile Virtual Enterprise (MOVE) architecture unifies wired and wireless network infrastructures into one seamless access solution for corporate headquarters, mobile business professionals, remote workers and guests.

[May 20, 2011: Aruba Networks with Another Excellent Quarter]
[Feb 18, 2011: Aruba Networks Scorches Upward, Despite CFO Departure]

No position

Goldman - Likely Easing by Early 2012

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Yes... indeed the message is being heard loud and clear across the Street.  You shall get your steroids my little pretties.... we've rallied 3%! in the SPY since 10:15 AMish.  If the Pavlov dogs are trained well, we'll all do a David Tepper 2.0 for the next 7-8 months.

Goldman weighs in:  We're getting Operation Twist and/or QE3 soon enough.   Remember, we're currently in a QE2.5 environment as it is due to the huge balance sheet of the Fed! [Jun 27, 2011: Reinvestments of Bonds aka QE2.5 Will Still Yield $300B in Annual Fed Purchases]

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BOTTOM LINE: Bernanke offers little guidance on near-term policy outlook, but extension of September meeting makes easing at this meeting a bit more likely than before.  We continue to think that further easing via manipulation of the Fed’s balance sheet —either through expansion or restructuring of the average duration of holdings—is likely by early 2012.

MAIN POINTS:

1.    In light of the market attention preceding it, Fed Chairman Bernanke’s Jackson Hole speech was clearly anticlimactic. He decided not to explicitly discuss the prospect for asset purchases, or indeed outline easing options at all. While the speech does not change our overall view that additional monetary easing is more likely than not, it adds uncertainty about the near-term course of communication and the timing of easing steps. On the margin, it also raises the importance of the FOMC minutes released on Tuesday, and of the September FOMC meeting.
2.    Bernanke’s remarks contained a short passage on the prospect for additional monetary stimulus. He reiterated that the committee “has a range of tools”, and that it discussed the costs and benefits of those options at the August FOMC meeting. He added that the September FOMC meeting has been expanded to two days to allow a fuller discussion of easing options as well as “other pertinent issues, including of course economic and financial developments”. Interestingly, past experience suggests that the probability of easing is higher at two-day FOMC meetings, all else equal.


You can read the rest at ZeroHedge

Tiffany & Co (TIF) - Still Shining with Substantial Earnings Beat and Guidance Increase

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Believe it or not, there is more in the world than the whispers of Ben Bernanke - indeed there is a whole global economy out there.  By watching CNBC you'd forget that.

While macro news has dominated the past six weeks, there are still individual companies executing business as usual.  One which has thrived through the 'rebound' as the country (and indeed the globe) bifurcates further into have and have nots is Tiffany & Co (TIF).  After Apple (AAPL) this is the U.S. retailer with the second best sales per square foot - for obvious reasons (high end merchandise).  From what the company has indicated the past few months, they have been able to pass along price increases as silver, and especially gold, have jumped in value.  Earnings this morning were once again impressive with a 17 cent beat, and 30.5% year over year revenue growth.  Guidance for the year likewise increased from $3.45-$3.55 to $3.65-$3.75.  Impressively, gross margins have actually expanded even in the face of rising input costs.
  • Gross margin (gross profit as a percentage of net sales) was 59.0% in the second quarter and 58.7% in the first half, compared with 57.8% in both of the respective periods last year. 
  • Tiffany "has been able to absorb precious metal and gemstone cost increases while improving our gross and operating margins," said CEO Michael Kowalski in a statement. 
Every region showed strength, with Asia-Pacific the obvious high growth area:
  • Comparable store sales rose 22% for the quarter. Segment sales: Americas $438M (+25% Y/Y), Asia-Pacific $173M (+55% Y/Y), Japan $143M (+21% Y/Y), Europe $101M (+32% Y/Y).  

Like many of the better performing companies in the U.S., sales to this country are shrinking as a % of revenue; this quarter sales in the Americas were 50.2%.  The New York flagship store boomed with a 41% sales gain as foreign tourists flocked due to the cheap dollar - so even that 50.2% figure is misleading.  

Full report here






[May 26, 2011: Tiffany Continues to be in a Sweet Spot]
[Nov 24, 2010:  Tiffany - All that Glitters is the High End US Consumer, and Foreign Buyers]

No position

I Think the Market Got Ben's Hint...

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I was surprised the market didn't react to the expansion of the next FOMC meeting from 1 day to 2 days to reflect "something's coming".  It seems it is now getting the 'wink wink' as the S&P 500 has put on a huge reversal... after falling as low as the 1140s we are now mid 1160s.  Still a bunch of white noise until we get out of this range, but some opportunities there for very nimble traders.

Here is a tweet from PIMCO just out which says as much...

PIMCO





Bernanke Says....

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...nothing much.

Not that much was expected except for in a few corners of speculator land.  Essentially we kick the can until Sep 20th when the FOMC meets.  The big news today was the next Fed meeting will now be 2 days instead of 1... I assume so they can discuss in full, all options.

The market dropped about 7-8 S&P points on the news as Pavlov dogs did not get what they wanted, but essentially now the bulls can wave "QE3" or "Operation Twist" for another 3 weeks.  As I said earlier this week, the higher the market goes, the more open we are to disappointment come Friday.

Link for full speech here.  Main points is he expects inflation to remain at 2% or below (which is a key for more easing), and he wants the federal government to act with more stimuli.  I believe this is the 4th year in a row of stimuli... but please give us more.

Continue to look for Jon Hilsenrath (of the WSJ) leaks in the coming weeks.  If they decide to move in September, they will leak to him.  My long held call for QE by winter still holds firm. (but maybe Operation Twist first)

Prepare to have all the same conversation we've just had the past two weeks repeat a few weeks from now. (yawn)

As for the market, it's all white noise until we exit this range of 1120ish to 1175 (stretch goal 1190).

Q2 GDP Revised Down to 1.0%

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I don't take much stock in these figures, because measuring a $14T economy with any accuracy is difficult enough, and with the 'sunshine up' approach (i.e. understating inflation to overstate GDP) to many U.S. government reports, what they spit out is more for the mainstream press to gaggle over, but for what it is worth Q2 GDP was revised down 0.3% from 1.3% to 1.0%.

I do find it bemusing how almost every U.S. government report is reported first as "A" and then the revision is almost always a worse number.  It's almost never the other way around. ;)

Full report here.

If you take this data from the government with any amount of salt, that is a 0.4% Q1 followed by a 1.0% Q2.  If you believe inflation is higher than what the government reports (which almost everyone does) than you would reduce these figures even lower.

Again, this was during the heart of QE2.... showing how little benefit (if not punishment) there has been on Main Street ex the top 5%, who got a short term 'wealth effect' (which has since disappeared).  [Nov 10, 2010: Who Will Any Form of Intermediate Term Wealth Effect Really Help? Not the Masses] Why people want QE3 is beyond me, other than for a short term steroid injection.

------

Meanwhile, Europe is weak again this morning with Germany down over 2% ....

Thursday, August 25, 2011

Easy Come, Easy Go

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Gain a billion (in a few minutes), lose much of that billion back (during the rest of the day).  All in a day's work for Buffet. :)



No position





White House Considering Plan for Country Wide Refinance of Government Backed Mortgages

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More proposals leaking from the White House, and this one may have teeth if for nothing else than "smart money" is acting in the bond market for Fannie and Freddie mortgage bonds.  (by smart money, I of course mean people with inside information and who apparently can freely trade on it - ahem).  Aside from the previously mentioned national landlord proposal [Jul 22, 2011: Washington D.C. as Nation's Landlord?] it looks like the powers that be are considering throwing (nearly?) everyone who has a government backed loan the opportunity to refinance at current rates.  That would work wonders, especially if 'Operation Twist' can drive those 30 year rates to sub 4%.  Of course those who do not have government backed loans miss out, but fairness is not really something considered during the past 4 years as 'solution' after 'solution' is thrown against the wall to see what sticks.

While many households have refinanced the past few years - creating a lot of extra free cash flow - this would definitely be a stimulus.  People who are underwater and delinquent obviously cannot refinance - unless Uncle Sam says so.  (HARP already allows those who have 125% Loan to Value to refinance, so next we can capture those at 140-160-200% I suppose) At current rates, this story estimates a savings of $85B to Americans annually, which would be less than the 2% payroll tax holiday - but that's going to be extended as well (if not expanded).



  • The Obama administration is considering further actions to strengthen the housing market, but the bar is high: plans must help a broad swath of homeowners, stimulate the economy and cost next to nothing.
  • One proposal would allow millions of homeowners with government-backed mortgages to refinance them at today’s lower interest rates, about 4 percent, according to two people briefed on the administration’s discussions who asked not to be identified because they were not allowed to talk about the information.
  • A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers’ mortgage bills right away and allow them to spend elsewhere. But such a sweeping change could face opposition from the regulator who oversees Fannie Mae and Freddie Mac, and from investors in government-backed mortgage bonds.
  • They are also working on a home rental program that would try to shore up housing prices by preventing hundreds of thousands of foreclosed homes from flooding the market. That program is further alongthe administration requested ideas for execution from the private sector earlier this month.
  • But refinancing could have far greater breadth, saving homeowners, by one estimate, $85 billion a year. Despite record low interest rates, many homeowners have been unable to refinance their loans either because they owe more than their houses are now worth or because their credit is tarnished.  More than one in five homeowners with mortgages owe more than their homes are worth.
  • As of July, an estimated $2.4 trillion in mortgages backed by Fannie and Freddie carried interest rates of 4.5 percent or higher.
  • Exactly how a refinancing plan might work is still under discussion. It is unclear, for example, whether people who are delinquent on their mortgages would be eligible or whether lenders would administer it.
  • The idea is appealing because it would not necessarily require Congressional action.

Here is why this appears to be more fire than smoke:

  • Investors may suspect a plan is in the works. Fannie and Freddie mortgage bonds had been trading well above their face value because so few people were refinancing, keeping returns on the bonds high. But those bond prices dropped sharply this week.

And... in an oligarchy it is important that the oligarchs support the plan.  Our banks do!
  • .... banks prefer the refinancing plan.


Looks Like Some Sort of 'Flash Crash' in Germany

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As HFT slithers into more of the world markets, it will be interesting to see if regulators overseas take a far more strict tact than those in the U.S.  Today in Germany we appear to have had a mini flash crash.   The DAX fell some 250 points in a matter of minutes, to trade down 4% on the day, before recovering late in the session to post a 1.7% loss.  That's similar to what happened in the U.S. in May 2010 but in a smaller scale.



Here is the action intraday [click to enlarge]



In 2008 I was writing here that everything is so hair trigger and computerized eventually we're going to see a 1987 type event but one that happens in minutes or an hour - May 2010 was a preview, and while we have more circuit breakers in place, the technology is still way ahead of the regulators.  And when things go bad, liquidity just disappear.  It's not all 'quants' fault, but the market structure has simply changed dynamically. 

Doug Kass has his latest rant against the quants - Kill the Quants, before they Kill Us



Student Body Left, Student Body Right Trading Returns as Correlations Surpass Even That of 2009, and 2010

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The past few years has not been a fun time for 'stock pickers'.  Correlations have risen to record levels, as everything has turned into a 'macro' trade much of the time.  I have called this 'student body left' trading, where the herd all moves in one direction en masse.  And then often times move in the exact opposite direction (of course en masse) a few weeks later.

Government policy, and federal or central bank interventions mean more than individual metrics much of the time.... the 'free market' has been lost long ago.  Combined with the dominance of computerized trading (now accounting from anywhere from 50-70% of all volume) and EFT trading (where the individual components are all treated as one in a buy and sell decision), and we have both structural and cyclical changes happening in the market.

I thought 2009 and 2010 were bad, but it appears according to this chart at Business Insider, we have actually surpassed those levels of late on a 50 day moving average basis.  Not surprising as we've seen the macro (Europe, hopes for interventions) dominate.

[click to enlarge]




[Jun 30, 2009: Bloomberg - Correlation Among Asset Classes Highest Ever]
[July 8, 2010: Hedge Funds "Frozen in Headlights" as BiPolar Market with 1:1 Correlation in All Things Not Named U.S. Treasuries Causes Confusion]
[Jul 15, 2010: WSJ - Correlation Soars on S&P 500 Shares]
 [Jun 29, 2010: Correlations Among Asset Classes Reach Ever Higher Extremes as HAL9000 Algos Dominate Life] 
 [Sep 2, 2010: Why Bother with Individual Stocks in the Perfectly Correlated Market?] 

Oversold Condition Worked Off

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As I wrote yesterday, the higher we go ahead of this Jackson Hole nonsense the more risk in the market.  Futures were a bit lower this morning until the Buffet noise, and then we rocketed up some 10 SPY, and opened gap up.  Late in the day I wrote

With 1175ish cleared, I'd be looking for a move to the 20 day moving average for tomorrow if all of Pavlov dogs who buy anytime Bernanke offers gifts arrive with bells on.

Now my reason was wrong (Buffet instead of Bernanke) but we essentially went to the 20 day moving average or within sniffing distance (2 pts) on this morning's gap. 



Germany seems to be weakening quite dramatically today (-2.5%), so unless Buffet wants to start buying stakes in German banks we will eventually once more focus on Europe - which has been ignored completely this week.

This still remains bear market action - the most vicious of rallies usually occur within downtrends.  Let's also keep an eye on gold early next week - the gold ETF still has not breached the 50 day moving average for all the hoopla around the current action.


Warren Buffet Swoops Down to Invest in Bank of America (BAC)

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Bank of America (BAC) is flying up nearly 25% as it is being reported that Berkshire Hathaway is dropping $5B into the hole.  Ironically, Buffet has been talking to Prez Obama the past few days (on 'job creation') - I am sure no coincidence. :)  This is similar to the investment in Goldman Sachs (GS) back in the dark days of 2008.

  • Bank of America Corporation announced today that it reached an agreement to sell 50,000 shares of Cumulative Perpetual Preferred Stock with a liquidation value of $100,000 per share to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 6 percent per annum, payable in equal quarterly installments, and is redeemable by the company at any time at a 5 percent premium. 
  • In conjunction with this agreement, Berkshire Hathaway will also receive warrants to purchase 700,000,000 shares of Bank of America common stock at an exercise price of $7.142857 per share. The warrants may be exercised in whole or in part at any time, and from time to time, during the 10-year period following the closing date of the transaction. The aggregate purchase price to be received by Bank of America for the preferred stock and warrants is $5 billion in cash

The stock is indicating high $8s in premarket.  At current pricing, I believe Buffet just made $1 billion.



No position

Apple's (AAPL) Jobs Resigns and CME Hikes Margins on Gold for 2nd Time in a Week

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For those living under a rock Steve Jobs has resigned his post as CEO, as widely reported last night, for obvious health reasons.  While it is not a surprise this would eventually happen, the timing was not something widely known.  The stock reacted poorly immediately, falling some 5% in after hours but is recovering some this morning.  I do not think this will cause any major issue in the next 1-2 years due to product life cycle, but is more problematic longer term.  But in a market where long term is 'next week', it's an over reaction to see any material change today.

To the Apple Board of Directors and the Apple Community:


I have always said if there ever came a day when I could no longer meet my duties and expectations as Apple''s CEO, I would be the first to let you know. Unfortunately, that day has come.


I hereby resign as CEO of Apple. I would like to serve, if the Board sees fit, as Chairman of the Board, director and Apple employee.


As far as my successor goes, I strongly recommend that we execute our succession plan and name Tim Cook as CEO of Apple.


I believe Apple''s brightest and most innovative days are ahead of it. And I look forward to watching and contributing to its success in a new role.


I have made some of the best friends of my life at Apple, and I thank you all for the many years of being able to work alongside you.


Steve

As for gold, we are seeing the same situation as silver in April - multiple margin hikes in a short period of time, and a heavy reversal.  Gold is down 1% again today already after a big 5%+ loss yesterday.  Yesterday after the close CME announced margin hikes of close to 30%.  It is a bit bemusing on a few fronts ... first, when oil was rampaging up in 2008 I don't recall the margin hikes coming left and right like they have done with precious metals this year.  With oil affecting everything in the food chain, you'd think speculation in that commodity was far more important.  Second, one wonders who 'knew' of the margin hikes ahead of time.  We'll never find out...

As for the market, I don't expect much to happen today as we await Moses to bring down the tablets from Mount Jackson Hole and bless us tomorrow.  Weekly claims were over 400K again, but at this point all news is good news - as bad news = more easing, and good news = good news.  Funny how psychology changes on a dime.

No positions

Wednesday, August 24, 2011

Higher We Go, the More Chance for a Friday Disappointment

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With 1 session to go before the Miracle at Jackson Hole 2.0, the market has climbed to the top of its range. We're some 55 S&P points over the low yesterday, and there now carries more risk of downside if The Bernank does not do what Wall Street demands of him.  With 1175ish cleared, I'd be looking for a move to the 20 day moving average for tomorrow if all of Pavlov dogs who buy anytime Bernanke offers gifts arrive with bells on.  If nothing else the moral hazard created by Bernanke targeting stock indexes is beyond belief.



Foreign Policy: Nouriel Roubini & Ian Bremmer Debate the Double Dip Recession and if China Could End Up Like Europe's PIIGS

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This piece is a few weeks old, but comes from an unlikely source - Foreign Policy Magazine.  While Nouriel Roubini is well known by now in investing circles, Ian Bremmer - of the Eurasia Group - is also one of the more interesting guests that CNBC occasionally brings on, who provides a very broad global view to his comments.

Full article link here.

With global markets in a tailspin and the Dow Jones industrial average down more than 9 percent in the past month, jittery investors are wondering whether this is a second coming of the Great Recession and whether an increasingly insolvent United States and Europe's weak periphery will be able to weather the storm. Are we seeing the first slide into a double-dip recession? Is the euro doomed? And can China stay above the fray? Foreign Policy asked two of the world's most prescient market watchers, Nouriel Roubini and Ian Bremmer, for their views about what they see in the months and years ahead. 

Perhaps it's not surprising that Roubini, better known as Dr. Doom, sees the outlook as being "more scary" than it was two or three years ago -- but it's less systemic failures that concern him than the total inability of buffoonish politicians and weak governments to do anything about it. They're "out of policy bullets," says Roubini. 


Bremmer is a bit more sanguine. "I don't believe that we're heading for a second recession," he says. "But I think that it's going to feel like a recession for an awful lot of people." What really worries him is China: While Europe and the United States try to muddle through the mess, "the Chinese are kicking a bigger can farther down the road than anyone else." In short, the global economy might get a whole lot worse before it gets better.


Sina (SINA) Receives Warning on Weibo from Chinese Government Official

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It appears Sina (SINA) is down this morning on an issue we've discussed a few times in the past, but the company has assured it has a handle on - the potential for their microblogging service (Weibo) to ruffle feathers in the highest reaches of government.  Youku (YOKU) was also visited but does not seem to be affected as much via stock price.

Per AP:

  • Sina received a veiled warning from a Communist Party leader over its popular microblogging service, Weibo. 
  • Beijing has been cracking down more aggressively on dissent in the wake of the Middle East uprisings, prompting web portals such as Sina to tread delicately. According to state-run broadcasts Tuesday, Liu Qi, secretary of the Beijing Municipal Party Committee and a member of the Party's powerful Politburo, had toured Sina offices on Monday and told executives that Internet companies should "step up the application and management of new technology, and absolutely put an end to fake and misleading information."
  • Liu, the party secretary, also visited the headquarters of Youku.com Inc., a video portal, and talked with CEO Victor Koo, the report said.
In the short term, if this is isolated, no big deal - the larger issue is as Weibo grows in power, does the Chinese government take steps to curtail it in some form.





No position

Gold ETF (GLD) Down to 10 Day Moving Average

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As mentioned yesterday, gold has had support since early July along the 10 day moving average.  (Technically, I am using the gold ETF in lieu of "gold").  Following yesterday's 3%+ drop, we are seeing 1% thus far this morning, and the SPDR Gold Trust (GLD) is now sitting right at that support.



At this moment, aside from worshiping at the alter of Ben Bernanke (I heard the first trader, repeat the David Tepper mantra this morning - either the market will go up due to a better economy, or Bernanke will make it go up), the market seems to be an inverse trade of gold the past week.

Now if a new round of monetary easing were to be unleashed, we should expect gold (and silver) to rally, not falter just ahead of the speech Friday.  But this market was so overbought (and over owned) going into the meeting it throws some dust into that theory.

Unfortunately, we are simply hostage to the words of one man as we were through much of 2008 and 2009.  Individual fundamentals and metrics mean little right now.

This morning we saw a better than expected durable goods order and much like in 2009 and 2010 we have the best of both worlds the past 2 days - when economic data is bad that is good because it means The Bernank will show up, and when economic data is good that is good because it means the economy is not as bad as we thought.  It's the "have our cake and eat it too" market.

As an aside ZeroHedge reports that hedge funds are the most net short S&P 500 that they have been since 2008 - if you are a contrarian trader, that would be net bullish.

The S&P 500 quickly approaches that 1175 level oft mentioned of late...





Der Spiegel: Out of Control - The Destructive Power of the Financial Markets

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There are a lot of interesting longer form stories out lately - wish I had time to fully read all of them, but I am trying to pass along some that might be of interest to FMMF readers.  Der Spiegel has quite an interesting expose & "opinion piece" on how financial markets have reached the stage they are dominating economies, rather than vice versa like it should (used to) be.  Certain people such as Paul Volcker (who thinks the only major positive innovation of the financial industry the past few decades is the ATM machine) would agree.  [Jun 26 2009:  Bloomberg - Volcker Marginalized: Our Life of Financial Oligarchy Does not Change] [Sep 10, 2009: Goldman Sachs CEO - "Ok I Admit It, Some of our Financial Innovations are Socially Useless"]  Obviously the banking class of the U.S. and U.K. would disagree - and if you disagree with them you believe in class warfare.   The truth lies in the middle but the contention here is many parts of the 'financial market' have now become a leach on the economy, rather than a support.  Middlemen who extract an increasingly heavy tax ... and burden, for their 'service'.  Especially true since the massive deregulation brought on by the Robert Rubin's and Lawrence Summers of the world.  Further, many of the best and brightest minds have been drawn to this arena due to the financial rewards - potentially retarding other parts of the economy.

The view by Der Spiegel takes it to a more extreme view than I have.

Speculators are betting against the euro, banks are taking incalculable risks and the markets are in turmoil. Three years after the Lehman Brothers bankruptcy, the financial industry has become a threat to the global economy again. Governments missed the chance to regulate the industry, and another crash is just a matter of time.

[Apr 12, 2011: NYMag - The Revolving Door Between Washington and Wall Street]
[Jun 18, 2010: Gambling With Other People's Money]

U.S. Mortgage Purchases at 15 Year Low Despite Record Low Mortgage Rates

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Quite amazing data - despite thirty year mortgages in the low 4's%, purchase applications are at a 15 year low!  Almost all the action remains in the refinance market.

With many Americans unable to amass savings (and Bernanke punishing those who try), and most seeing that the chance of their purchase immediately falling underwater, it's quite a conundrum as Mr. Greenspan would say.  This is also a consequence of what would have been the current crop of home buyers who got 'pulled ahead' by the first time home buyer credit.  (recall many of those folks resided in states who allowed the tax credit to be used in lieu of a down payment, hence put little to nothing down on their homes as well!)

But if Operation Twist comes to fruition, the first sub 4% thirty year mortgage rates in our lifetimes look to be the next game plan.

  • U.S. home mortgage applications for purchases fell to a nearly 15-year low last week as resurgent worries about the strength of the economy kept buyers at bay, an industry group said on Wednesday.
  • The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 2.4 percent in the week ended Aug.19.  The seasonally adjusted gauge of loan requests for home purchases tumbled 5.7 percent to its lowest level since December 1996, the MBA said.
  • "Another week of volatile markets and rampant uncertainty regarding the economy kept prospective homebuyers on the sidelines, with purchase applications falling to a 15-year low," Mike Fratantoni, MBA's vice president of research and economics, said in a statement. "This decline impacted borrowers across the board, with purchase applications for jumbo loans falling by more than 15 percent and purchase applications for the government housing programs falling by 8.2 percent." 
  • The refinance share of mortgage activity increased to 79.8 percent of total applications from 78.8 percent the week before.


It appears another factor wrecking havoc are appraisals
  • Many housing experts say low appraisals are yet another headwind for a housing market already suffering from a plunge in prices, high unemployment and tight credit. Lenders are forced to cap their mortgage loans at the value set by appraisers and buyers and sellers often can't agree on how to make up the difference with an original deal price.

    Tuesday, August 23, 2011

    Apparently Gold (GLD) Can Go Down

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    Gold is down for the first time in 7 sessions (I'm using the ETF for charting purposes).  Lots of attention yesterday and this morning on non financial news networks I was skimming.  As mentioned yesterday the gold ETF was incredibly overbought and since early July, GLD has always bottomed at or above the 10 day moving average.  At this point, this is nothing but a much needed back and fill... frankly this can get all the way back down to the 50 day moving average without doing a lick of long term technical damage.  I'd expect whatever is said Friday to be the next catalyst - up or down.




    As for the S&P 500, we remain in that 1120-1175 range.  1120ish has been a very strong floor the past few weeks.

    No position

    Earthquake Hits Virginia - Felt All the Way to NYC

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    The market has sold off here a bit on this earthquake (5.9ish) in VA.  While it may be a knee jerk reaction anytime you feel a tremor around D.C. or NYC (where many people on twitter said it was felt as well) very bad thoughts immediately come to mind.

    A 5.9-magnitude earthquake shook Washington, D.C. and Virginia on Tuesday afternoon, according to the U.S. Geological Survey. The quake, which was centered 83 miles southwest of the nation's capital and 41 miles northwest of Richmond, Va., occurred at 1:51 p.m. Eastern. Parts of the White House, U.S. Capitol building and the Pentagon were reportedly evacuated. Originating at a depth of less than a mile, the tremor was widely felt in the D.C. metro area and as far away as New York City.

    Vanity Fair - It's the Economy, Dummkopf! (Michael Lewis)

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    Michael Lewis has been one of the best authors on all things financial (even though he is not specifically a financial writer) the past decade.  Lately he has been concentrating on Europe - first Greece, then Ireland, and now it appears Germany.  A reader pointed out to me a very lengthy article in Vanity Fair which should be interesting for some of FMMF's readers:  It’s the Economy, Dummkopf! (full link here)

    With Greece and Ireland in economic shreds, while Portugal, Spain, and perhaps even Italy head south, only one nation can save Europe from financial Armageddon: a highly reluctant Germany. The ironies—like the fact that bankers from Düsseldorf were the ultimate patsies in Wall Street’s con game—pile up quickly as Michael Lewis investigates German attitudes toward money, excrement, and the country’s Nazi past, all of which help explain its peculiar new status.


    Some older Lewis here...

    Social Security Disability on Heads Towards Eventual Insolvency as Benefit Program Flooded with New Applicants

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    One of the great mysteries of the past few years is where have the jobless gone?  The U.S. employment participation rate has dramatically dropped, to the point that if we had a 'normal' participation rate, the unemployment rate would be about 2% higher.  Some of these folks probably are back in school, while others have 'retired early', but it cannot explain the majority of the drop off.

    [click to enlarge]


    Back in April, we found part of our answer - the U.S. disability program has been flooded with new applicants. [Apr 7, 2011: Nearly 1 in 20 Working Age Americans are on Disability]  One in twenty working age Americans are now on disability, a doubling versus 1990.  I wrote then:

    In 2010 alone, the number of people enrolled jumped by half a million which can help us explain part of the huge drop in workforce labor participation in the U.S. (some 2M Americans have simply dropped off the map)  If a somewhat similar number was seen in 2009 (which looking at the 45 degree angle of growth in the chart below would appear very likely) that would explain away half of the 2M Americans who have disappeared from the workforce.

    Of course as the % enrolled has doubled, the cost has actually tripled since 1990 - from $40B a year to $120B annually.   That would place the cost above food stamps + welfare combined.



    That's all fine and dandy, if that's how you want to run an economy and stuff millions 'off balance sheet;... but we seem to have hit an issue.  This program was not designed for 5% of the American working age population to partake in.  Costs are exploding higher.



    Per new Congressional estimates we're headed for another insolvency (and coming bailout).  It's more Ponzi scheme economics.

    • Laid-off workers and aging baby boomers are flooding Social Security's disability program with benefit claims, pushing the financially strapped system toward the brink of insolvency. Applications are up nearly 50 percent over a decade ago.
    • The stampede for benefits is adding to a growing backlog of applicants -- many wait two years or more before their cases are resolved -- and worsening the financial problems of a program that's been running in the red for years.
    • New congressional estimates say the trust fund that supports Social Security disability will run out of money by 2017, leaving the program unable to pay full benefits, unless Congress acts. About two decades later, Social Security's much larger retirement fund is projected to run dry as well.
    • Much of the focus in Washington has been on fixing Social Security's retirement system. Proposals range from raising the retirement age to means-testing benefits for wealthy retirees. But the disability system is in much worse shape and its problems defy easy solutions.
    • This year, about 3.3 million people are expected to apply for federal disability benefits. That's 700,000 more than in 2008 and 1 million more than a decade ago.
    • "It's primarily economic desperation," Social Security Commissioner Michael Astrue said in an interview. "People on the margins who get bad news in terms of a layoff and have no other place to go and they take a shot at disability,"
    • The disability program is also being hit by an aging population -- disability rates rise as people get older -- as well as a system that encourages people to apply for more generous disability benefits rather than waiting until they qualify for retirement.  Retirees can get full Social Security benefits at age 66, a threshold gradually rising to 67. Early retirees can get reduced benefits at 62. However, if you qualify for disability, you can get full benefits, based on your work history, even before 62.
    • Also, people who qualify for Social Security disability automatically get Medicare after two years, even if they are younger than 65, the age when other retirees qualify for the government-run health insurance program.
    • As policymakers work to improve the disability system, they are faced with two major issues: Legitimate applicants often have to wait years to get benefits while many others get payments they don't deserve.
    • Last year, Social Security detected $1.4 billion in overpayments to disability beneficiaries, mostly to people who got jobs and no longer qualified, according to a recent report by the Government Accountability Office, the investigative arm of Congress.


    Psychology Returns to 2009, 2010 when Bad News = Good News Because it Means Intervention

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    This morning we have seen another two very poor economic reports - new home sales (no surprise there), and the Richmond Fed.  However the market is rallying.  Why?  Well for one, we are extremely oversold - but we've been oversold many days the past month and not seen a rally.  More importantly, we appear to have returned to the psychology of 2009 and 2010 - that is, bad news = good news because it means intervention of the central bank or federal government kind.  Hence, the worse the news, the more said news forces someone's hand, however reluctantly.

    It's perverse but it worked wonders in 2009 and 2010.

    In terms of news, like the Philly Fed, the Richmond Fed reading disappointed at -10 (vs -5 expectation and -1 July), the worse reading since June 2009.  Usually this Fed gauges are not that well followed, but right now every little piece of data is being analyzed to decipher where the U.S. economy stands.

    New home sales are a disaster at under 300K but not even worth talking about.  Existing home sales are >90% of the market, and came in horrid last week and until they rebound, new home sales are an afterthought.

    ------------------------

    The Fed's Bullard is out this morning with comments that the speculators also like; however please note there is an inflation indicator in there, so one would think the Fed needs at least 1-2 weaker readings on the inflation front before it moves onto the next step of desperation:

    • The Federal Reserve will take action if the economy weakens substantially and deflation reappears, a senior Fed official said in an interview with Japan's Nikkei business daily published on Tuesday.  St. Louis Fed President James Bullard said he would support action if that occurred.
    • "If the economy weakens substantially, and especially if the inflation picture starts to deteriorate so that deflation becomes a risk again, then I think the committee would definitely take action," Bullard told the Nikkei.
    • Bullard also said the Fed has already implemented a very easy monetary policy and the inflation risk has increased in the United States.
    • The head of the St. Louis branch does not have a vote on the policy-setting FOMC this year.

    [Video] Marc Faber Phone Interview with CNBC

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    I promise this is the last Marc Faber mention for a while - it's been a Faberpalooza lately.  But whenever we can get some Faber in audio format it's generally a good time.  This morning's talk with CNBC was quite tame versus the usual acerbic tone, but Marc does go into some detail on how to position a portfolio if you have multiple girlfriends.  On a serious note - without the usual pans of the government and Fed, there is a lot of economic and market oriented conversation.  Probably because Joe Kernen was not there to turn it into a political discussion.

    10 minute video - email readers will need to come to the site.




    Chinese Preliminary Manufacturing Index Rebounds a Bit, While European Mfg PMI Contracts

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    While today's economic data from overseas is not very good, the bar has been lowered significantly the past month or two so 'ok' data is good enough for the market.  '

    First, in China we receive a preliminary HSBC manufacturing number a week or so ahead of the actual data which comes in at the turn of the month.   The prelim number has come in at 49.8 versus 49.3 in July.  While still contractionary - and a number that would have created a massive fuss a few months ago - it's an improvement from the previous month and near the 50 reading which is the line in the sand between contraction and expansion.

    • A preliminary reading of 49.8 for a manufacturing index released by HSBC Holdings Plc and Markit Economics today compares with a final reading of 49.3 for July. The final August number is due Sept. 1. A reading below 50 indicates a contraction.
    • The data suggests that growth in China is moderating rather than collapsing and the slide in the index in July may have been a one-off “blip,” HSBC said. “This should help lower fears of a hard landing akin to 2008 autumn’s sharp slowdown,” said Qu Hongbin, a Hong Kong- based economist for HSBC. “Inflation, not growth, remains the top near-term macro risk.”
    • China’s commerce ministry cautioned today that exporters face weak demand and rising costs.
    • HSBC’s preliminary index, known as the Flash PMI, is based on 85 percent to 90 percent of responses to a survey of executives in more than 400 companies.
    • The final reading fell below 50 in July for the first time in a year. The official manufacturing index released by the statistics bureau and the China Federation of Logistics and Purchasing had a reading of 50.7 in July.
    • Morgan Stanley and Deutsche Bank AG last week cut estimates for China’s expansion as the debt burdens and elevated unemployment of developed nations threaten demand for exports. 

    Second, European data was not very good but generally came 'in line', which again - with a lowered market expectation - is 'good enough' for now.  German manufacturing PMI was flat with July but ahead of expectations.  I am not sure why we are getting this data today rather than the turn of the month as usual, perhaps the European holidays in August.

    • Manufacturing activity in the eurozone shrank in August for the first time in two years, a survey has indicated.  The Markit Manufacturing PMI measure for the eurozone fell to 49.7 from 50.4 in July. A reading below 50 indicates contraction in the sector.
    • Markit also said that the service sector in the eurozone grew only modestly.  Its service sector PMI measure fell to a 23-month low of 51.5 in August from 51.6 in July.
    • In Germany, Europe's biggest economy, output grew across both manufacturing and services but showed the weakest rate of expansion for almost two years.
    • The French service sector saw growth pick up in August but manufacturing output fell for the first time since June 2009.
    • Outside the eurozone's two largest economies, output fell for the third month in a row.
    • "The eurozone economy grew only marginally again in August, suggesting that recent months have seen the weakest expansion for two years," said Chris Williamson, Markit's chief economist. "The data raise the prospect that economic growth in the third quarter could be even slower than the disappointing 0.2% rise seen in the three months to June. Most worrying is the near-stagnation in Germany, which suggests that the region's main engine of growth has stalled."



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