StockTouch Blog

Why we shouldnt be jumping for joy just yet about declining jobless claims

February 24, 2012 by Peter

So for the past few months the weekly number of initial jobless claims has been one of the most consistently bullish indicators, leading economists to believe that the U.S. economy might finally be turning around.

But Nomura analysts Lewis Alexander and Jeffrey Greenberg tend to disagree in a report published earlier this week. They make the case that these continual bullish numbers are based on inadequate seasonal adjustments by the department of labor.

It’s obvious initial claims are way below the highs they reached during and right after the financial crisis, but they do appear to be moving in a general patter on a year to year basis (as seen in the chart).

This leads Alexander and Greenberg to conclude:

“We expect the US economy to continue to grow at a modest pace in the coming months, but a lesson from the past few years of jobless claims data, as illustrated in Figure 1, is that the February decline should not be expected to persist. And, while our analysis indicates that February-March seasonally adjusted claims are understated, it also suggests overstating in early January. As such, the undistorted trend likely lies between the extremes, closer to 370-380k. However, should jobless claims stay near 350k into April and May, this would be indicative of a downtrend (that would exist without the seasonal bias). In the coming months, a 20-30k reversal should be interpreted as jobless claims neither improving nor worsening (although we highlight the reduced utility of using jobless claims to predict other labor market indicators in the current recovery.”

So Greece got the bailout, but whats up with the markets?

February 21, 2012 by Peter

So last night it finally happened and Europe announced a bailout for Greece, but today markets in Europe are selling off.

Is it just a sell the news kind of thing? Perhaps, although SocGen thinks there’s a little more:

The agreement consists of a number of changes – some examples include, private bond holders will take a greater loss (reported at 53.5%), the interest margin is reduced, and the ECB and central banks will not take profits on its holdings of Greek bonds.  Together, this is estimated to bring the debt to GDP figure to 120.5% by 2020.  It still has to be ratified by national governments and while this is expected to be passed it stretches out the uncertainty factor further. The front page of the FT “Greek nightmare laid bare”, however, has largely undermined the announcement effect, and we’d expect further consolidation today in asset classes.

SocGen isnt alone in its thinking. Dennis Gartman said in his latest investor newsletter (via CNBC) that officials have only managed to delay a Greek default by a few weeks or months at most. He expects Greece to default after the elections in April (via CNBC):

“A new government is going to come to power following elections that shall take place sometime this spring, and if anyone anywhere believes that the next Greek government shall do anything other than abrogate all the agreements made with the ‘troika,’ then we have a bridge we’d like to sell them at a very high price.”

Gartman said the 120 percent debt-to-GDP ratio target for 2020 is ‘comical’. He added that Greece will likely face a depression soon as Athens tries to grow its economy while tightening its fiscal policy at the same time. Gartman said Greeks will start to grow increasingly desperate and resent European nations forcing austerity on the country, especially Germany. He said, ““It  has come to this: Greece and Germany are effectively at war.”

So basically, the fact that the headlines are already saying that the bailout probably won’t work isn’t doing any wonders for confidence in the wake of the announcement. So yet again there seems to be no confidence from investors that Europe/Greece can work out their debt problem for the long haul.

Just the Tip of the Greek Iceberg?

February 20, 2012 by Peter

While the world is still freaking out about Europe, specially Greece currently UBS’s Art Cashin addressed what worries traders these days during this morning’s Cashin’s Comments,

Cashin addressed that a Greek default has been on every one’s minds lately.  But what traders think that this might just be the tip of the iceberg….a very big iceberg.

The bigger fear much like the one that triggered the “great recession” is what happens in the credit default swap (CDS) markets.  No one knows how big it is, who the counter parties are, and, worst of all, whether the CDS contracts will actually trigger in what many would consider a default.

Here’s an excerpt from Cashin’s note:

“Is There More At Risk Than Greece In A Greek Default – Recently, there has been a buzz building on trading desks and trading floors that there may be a lot more at stake in a potential Greek default than the media has been talking about.

As of now, most of the public discussion has centered on potential contagion among the banks as most of the Greek sovereign debit is held by the European banking community.

Traders, however, fear that the real risk is in the area of credit default swaps (CDS).  They are insurance policies, individually written, that basically say – if Greece defaults, we’ll pay you what they should have.

Credit default swaps have grown exponentially over the last decade.  Since they are individually written, there is no clear visible record of how many CDS contracts are outstanding.  Also unknown is who is involved.  The two parties obviously know who the counter-party is but there is no public record that would allow a regulator or a third party to find out who was involved.

No one knows how much CDS exposure there is on Greek debt but is assumed to be a lot.  Banks and others looked at the very high and attractive yields on Greek bonds and began salivating.  But, what about that risk  better buy some insurance.

Recall that, months ago, negotiators on the Greek debt bumped into part of the CDS problem.  If the holders agreed to take 50 cents on the dollar, would that trigger their CDS on that bond (paying them the conceded 50 cents and making them whole).

At that time, many contended that if the bondholder “accepted” the offer of 50 cents on the dollar, that made the event voluntary and it would not “trigger” the CDS payout.  That caused lots of folks to ask for a ruling from the ISDA (the ruling group on CDS contracts).  If you “accepted” an offer with a gun to your head, was it really voluntary?

But, traders fear a worse outcome might occur if the CDS contracts do not kick in.  What good is insurance that doesn’t pay off?  That could lead to the assumption that all CDS insurance was useless.  That would stratify debt around the globe.  Great credits could get all the money they wanted, but less than great credit would be shut out because it could not be insured.  That could make the future one in which “the haves” will have whatever they want and all others nothing.  Welcome back to the Middle Ages.”

A few simple facts on why QE3 is coming

February 16, 2012 by Peter

So like every other investor around the world we’ve been scratching our heads a little bit lately, trying to figure out what to anticipate from the Fed on the QE3 front.

Business insider noted they were surprised yesterday, when a new survey of from WSJ showed that the majority of economists did not expect to see QE3 happen this year. The reason this was so surprising, was since so many sell-side research shops do think QE3 is on the way.

For example, here’s SocGen making the case for QE3 at the April meeting.

Also complicating factors is that the economy seems to doing fine, and financial markets are clearly robust, so what’s the impetus?

Calculated Risk has posted this excerpt from a new speech from SF Fed President John Williams that spells it out quite nicely:

“What does this tell us about where monetary policy should be now? Inflation in 2012 and 2013 is likely to come in around 1½ percent, below the FOMC’s 2 percent target. And clearly, with unemployment at 8.3 percent, we are very far from maximum employment. At the San Francisco Fed, our forecast is that the unemployment rate will remain well over 7 percent for several more years. 

This is a situation in which there’s no conflict between maximum employment and price stability. With regard to both of the Fed’s mandates, it’s vital that we keep the monetary policy throttle wide open. This will help lower unemployment and raise inflation back toward levels consistent with our mandates. And we want to do so quickly to minimize total economic damage. The longer we miss our objectives, the larger the cumulative loss to the economy.”

That’s really the bottom line. Below-target inflation and below-target unemployment. Until the Fed can get a handle on those two data points the economy is going to continue to lose steam according to John Williams, and that means a larger QE3 to make up for it.

Mortgage rates in China

February 14, 2012 by Peter

Whats been on the minds of a lot of investors in the macro community for some time now is the trajectory of the China’s economy. Specifically, is China headed for a soft or hard landing?

Many point to the China’s slowing property market as a key concern on the matter.

However, many experts argue that China has sufficient policy tools to engineer a soft-landing in the economy by bolstering the property market.

Just last week, we learned China’s biggest banks had cut mortgage rates for first-time buyers.

JP Morgan was on the ground in China and noted that some first-time buyers were actually getting lower mortgage rates than advertised.  From JP Morgan’s Jing Ulrich:

We heard today from China Overseas Land (COLI) that Industrial and Commercial Bank of China (ICBC) and China Construction Bank (CCB) have just lowered mortgage rates for first-time homebuyers to 10% below the benchmark lending rate. Prior to Chinese New Year, the rate was at a 10% premium, and the premium was removed during Chinese New Year to stimulate sales. During a visit to a China Vanke housing project, we were told that a 15% discount to the benchmark lending rate is possible for first-time buyers. The lowering of mortgage rates in Ningbo serves as another example of a local government following the PBoC’s recent call to support mortgage lending. It has been reported that banks are lowering mortgage rates to first-time homebuyers in Beijing, Shanghai, Shenzhen and other cities.

Although this is positive for China’s property market, it is very anecdotal and represents only one slice of the market.  And there are definitely weaknesses in other areas of the market:

In the current climate, high-end developers are experiencing great difficulty and are unlikely to benefit from any degree of policy easing in the near term. In this sense, the downturn in the housing market stands to weigh on corporate earnings for a range of “local champions” in Chinese cities that have become involved in real estate.

A comeback in the Eurozone?

February 8, 2012 by Peter

So you likely already know that the ECB’s flood-the-zone liquidity strategy has helped alleviate bank/sovereign funding concerns, but there’s more to the good-news party in Europe than just easy money.

The main thing any investor, or even a 1st year econ major should be able to tell you is growth heals all economic woes, and Europe is getting some.

Well, actually it’s getting less negative growth, which is a start.

Goldman’s Huw Pill raised his 2012 Eurozone GDP outlook from -0.8% to -0.4%.

As we have recognised in recent European Weekly Analysts, we now have sufficient evidence of stronger momentum in Euro area activity at the beginning of this year to re-evaluate our macroeconomic projections. The latest PMIs point to modest positive GDP growth in

We have therefore decided to revise up our forecast for Euro area growth in 2012. We now foresee an area-wide contraction of 0.4%yoy, an upward revision of 0.4ppt from our previous projection of -0.8%yoy. The bulk of this improvement comes from Germany, where we now expect growth of 0.3% in 2012Q1 rather than the contraction of 0.5%qoq that we previously forecast. In the face of
ongoing bank deleveraging, peripheral economies still suffer significant recessions. Intra-Euro area divergence therefore increases. But, at the same time, the overall improvement in Euro area activity improves the outlook elsewhere in Europe, notably in Sweden and the UK.

Check out the data below for the full story.

Weekly Bull/Bear Recap: Jan. 30 – Feb. 3, 2012

February 6, 2012 by Peter


-The U.S. economy is now in a sustainable expansion:

-The global economic outlook is improving:

– In Eurozone political and financial news, European nations take one step closer to integration with 25 out of 27 nations signing the new fiscal compact treaty.  Moreover, leaders signal strong resolve to save the region, as talk of initiating a €1.5 Tn bailout fund is making the rounds.  Meanwhile, the Spanish 10-yr yield breaks under 5%, the Italian 10-yr yield breaks under 6%, the Belgian 10-yr yield breaks under 3.7%, and the French 10-yr yield breaks under 3%.  Markets signal that a strong firewall is in place for a Greek and/or Portuguese default. As a hefty insurance policy, the second LTRO on February 29th will likely be more than double the size of the first one (@ ≈ €1Tn), thus reinforcing the firewall for the banking system from a Greek or Portuguese default.  Besides, the Greek default has been on investors’ radars for so long, even martians on Pluto know that Greece is defaulting.  A climax would result in a rally as uncertainty is lifted.


– The end game is coming into view for the Eurozone:

  • Germany has demanded that Greece cede its budgetary sovereignty to the EU, a request Greece has declined.  Furthermore, stiff resistancefrom Greek political leaders to implement further austerity makes for another “Papandreaou referendum-like” showdown with the troika.  And for the trifecta, the Hellenic republic has warned that it may need even more bailout cash.
  • Portuguese bond yields are repeatedly hitting record highs; hard default #2 is rapidly approaching.
  • In Ireland, a solid majority demand a referendum (guaranteeing a defeat for the army of unelected technocrats in Brussels).  As Hollandeeloquently stated, “Where democracy retreats and politics pulls back, the markets advance.”
  • Hollande is creating daylight between himself and Sarkozy in the French presidential election (here’s a primer on what he wants to do).

– On the region’s economic front, austerity is biting, hard.  Italian business confidence slumps to the lowest in 2 years.  While Germany is benefiting from a weaker Euro, it’s coming at the expense of the rest of the Eurozone; the region’s unemployment rate remains near the highest since 1998.  French consumer spending dives 0.7% vs. expectations of a gain of +0.2%.  Even worse, German December retail sales tank 1.4% vs. expectations of a 0.5% gain (the 4th decline in last 5 prints); so much for a low unemployment rate.  Meanwhile, on the financial front, banks are using some of the LTRO money to buy sovereign bonds; but that’s about it.  They continue to de-leverage, cutting off credit to the Eurozone and undermining any recovery in the region.  Furthermore, post-crisis highs in FX swaps between the ECB and the Fed point to tight liquidity conditions, despite unprecedented worldwide coordinated monetary loosening.

– The throes of stagflation are in plain view; China “unexpectedly” holds off on reducing reserve requirements for banks, opting instead for reverse-repurchase contracts.  Simultaneously, here’s what a popping housing bubble looks like.  Protests are progressively more intense.

– On the U.S. economic front, the S&P Case-Schiller index flags a deepening double-dip for the 99%’s largest asset.  Lower home prices will anchor consumer confidence over the medium-term.  Over the short-term, rising gas prices are starting to damage confidence; the Conference Board’s survey disappoints,printing 61.1 vs. expectations of 68.0 (led by a decline in the present situation).

– Israel/Iran continues to bubble underneath the facade of bullish sentiment.  No groundbreaking announcements were made after the UN inspection.  Instead, it’s looking increasingly clear that the U.S. is no longer in control of the situation; an Israeli unilateral attack could come in as soon as 3 months.

US GDP miss, who’s fault?

February 2, 2012 by Peter

Last week the first estimate of fourth quarter US GDP came out just below what analyst were expecting, Headline GDP of 2.8% for Q4 was just a bit below expectations of 3%. Much of the chatter from analysts has been that this is mostly of the fault of the government.

Government spending fell 2.1% last quarter, the biggest drop since 1971 according to Bloomberg. In fact, other than imports, declines in state, local, and federal government spending were the primary factors working against GDP growth.

Goldman even noted:

“The GDP price index increased by just 0.4% (annualized) in Q4, far below consensus expectations for a 1.9% increase. Nominal GDP growth was therefore quite soft at just +3.2%. The core PCE price index rose by 1.1%, slightly above consensus forecasts.”

Continuing on this negative trend, the Bureau of Labor Statistics released the following in their report:

“The increase in real GDP in the fourth quarter reflected positive contributions from private inventory investment, personal consumption expenditures (PCE), exports, residential fixed investment, and nonresidential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.”

If you dig a little deeper into the numbers, the decline in federal government spending during the last quarter of the year was almost entirely comprised of the decline in defense spending, which fell 12.5%. Nondefense spending actually increased by 4.2% in the same period, meanwhile, state and local spending declined by 2.6%.

It appears that we’re beginning to see what Federal Reserve Chairman Ben Bernanke said in his testimony in front of Congress back in November; cutting spending will have a direct impact on growth as the recovery continues. The choice between spending cuts and GDP growth is going to be something the Obama Administration will have to ponder a little deeper ahead of the elections this fall, and should be something every astute investor keeps an eye on.

Weekly Bull/Bear Recap: January 23-27, 2012

January 31, 2012 by Peter


– The ECB’s Long-Term Refinancing Operation (LTRO) has clearly quelled fears of an imminent liquidity crisis; Spanish and Italian 10-yr yields have plunged.  The operation will provide time for policymakers to forge ahead with structural reforms.  Germany isopening the door for pro-growth policies in the periphery.  Furthermore, Greece is an isolated case.  A Greek default is already priced in and a climax would actually lift the air of uncertainty.  Says billionaire investor George Soros, “I think we are on the verge of putting the acute phase of the crisis behind us,” adding that he believed Italian sovereign bonds represent a “very attractive” speculative investment.  Finally, business confidence in Germany increases for the 3rd month in a row, while record low unemployment boosts consumer confidence.  The bloc’s largest economy will avert recession and support investor confidence in the Eurozone region.

– U.S. economic data continues to shine.  The Richmond Fed’s manufacturing survey increases from 3 to 12, lead by New Orders and expectations of improved business conditions (we have the same bullish result from the Kansas City Fed); note that all regional surveys have improved in January.  Moreover, the ATA Truck Tonnage Index spikes the most in over a decade in December.  Chief Economist Bob Costello hints that a wave of inventory restocking has begun.  Core Durable Goods Orders reestablish their bullish trend, which bodes well for Q1 manufacturing performance.  On the jobs front, state unemployment rates continue their trek lower.  Finally, consumer confidence improves to 75.0 and is the highest in almost a year

– The global economy has clearly stabilized after a brief air pocket in the prior quarter.  According to the Markit PMI, economic activity in the Eurozone unexpectedly grew in January, led by Germany and France.  Meanwhile, monetary easing; such as India’s unexpected decision to cut their Reserve RatioThailand’s interest rate cut, and Brazil’s upcoming rate cut, will further support economic growth.  Copper andcomments from Caterpillar support the global re-acceleration thesis.  Even Japan had some good news on the consumer front.  

– The Fed announces that interest rates will be held low throughout 2014 and state that they will step in with QE III should the global economy deteriorate further.  Risk assets spikeas investors are reassured that the Fed will maintain vigilance for any economic slowdown.  Criticism of the program won’t be nearly as intense as QE II due to slowing economic growth in Emerging Markets.  

– Obama clears the way for an economy that’s “built to last,” by explicitly stating in his State of the Union address that domestic companies will receive government assistance to create jobs.  Leaders understand the grand opportunities that lie ahead. The U.S.  manufacturing renaissance is in its infancy.     


– Global growth is slowing to a stall.  Japan’s central bank cuts its 2011 and 2012 economic growth forecasts, citing strains from balance-sheet repair in the U.S. and weaker growth due to the European debt crisis.  On a grander scale, the IMF slashes its global growth forecasts and expects the Eurozone to enter a recession.  Meanwhile, Australia and the UK are teetering on the brink of recession, while South Korea reports its slowest economic growth in 2 years.  In China, officials want to see a 30% decline in residential real estate to reach a “reasonable” level —(and in the process cause an uprising of the middle-class).  Meanwhile, protests in Tibet are spiraling out of control.  Finally, Obama ups the ante on protectionism with his State of the Union address.

–  The Eurozone crisis is worsening.  There is still no agreement on the Greek Private Sector Involvement (PSI) negotiations, raising the specter of a credit event and uncontrolled default (how many times have we heard that a deal is close?).  Making matters worse, EU leaders and banks are demanding further austerity on the depression-racked country due to missed targets.  How long before peripheral citizen’s say “The hell with this” or creditor governments say “This isn’t working”?   Meanwhile, Portugal is fast coming down the pipe with 10-yr bond yields hitting record highs, as Antonio Saraiva, the head of the country’s industry confederation, confesses that the nation will need a bailout.  In Spain, recession is knocking at the door, while unemployment is far worse than expectations.  In Italy, Monti’s government is set to face its first real test as truckershave blocked the flow of essential goods into Rome and other large cities.  In France, S&P downgrades 3 banks and the country’s president acknowledges that he’s likely to lose the presidency in 3 months, unleashing a wave of uncertainty in regards to Eurozone economic policy.  Finally, “Trade unions plan (a) pan-EU action against (the) fiscal compact.”     

– Despite all the hoopla in the past month, the U.S. remains vulnerable to an exogenous shock.  4th Quarter GDPdisappoints, growing 2.8% vs. expectations of 3.0%; note that the economy hasn’t grown over 3% since the Q2 2010.  Final demand registers a paltry 0.8% and Personal Consumption underperform expectations.  Meanwhile, Fed President Dudley sees “significant impediments” to economic growth this year.  Finally, weekly consumer metrics continue to flag a significant slowdown in January versus an already weak December.

– The probability of an oil price spike, likely upending the global recovery, grows.  The EU imposes an embargo of Iranian oil (to begin July 1st), despite Iranian threats of a blockade of the Straits of Hormuz or just cutting off supply immediately.  Meanwhile, oil producers are now content with $100 oil, saying that it won’t affect global growth; we’ve heard this before, but the threshold price keeps rising.  Azerbaijan police foil another Iran plot to assassinate the country’s Israeli ambassador.  

– Japan reports a trade deficit for the first time since 1980.  While sporting a debt to GDP ratio of over 200%, any consistent trade outflow from the country would conjure anxiousness towards itsreal paying ability (not printed Yen, which implies a loss of real value of interest payments).    

Resolving the Eurozone crisis, one man’s idea

January 26, 2012 by Peter

While many pundits and “economists” have laid claim that Europe is no hope, it was interesting to see a recent column by Geneva-based economist Charles Wyplosz  in the Wall Street Pit, claiming the ECB can actually solve the governance problems that got Europeans into this mess virtually immediately and without treaty change,

In fact, the whole idea that EU states will have to cede fiscal sovereignty through a new treaty is overrated and outright silly, Wyplosz argues, because the central bank could not only bypass this but do it better.

The proposal that some central EU authority would step in to usurp sovereignty from a nation when its finances get out of control is “extraordinarily intrusive,” and so “the treaty route [to address fiscal discipline] is unlikely to lead anywhere.”

Instead, Wyplosz’s scheme goes like this:

“A much better arrangement is possible without a new treaty. Currently, in its routine refinancing operation, the ECB accepts as collateral a wide range of assets. Most central banks accept only – or mainly – treasury bonds. The unusual arrangement of the Eurozone is an artifact of history – because practices differed considerably among future Eurozone countries, the ECB decided to accept every asset that was previously accepted. The ECB has the authority to decide what collateral it accepts and it could decide to only accept treasury bonds issued by governments that exercise fiscal discipline. It would work as follows.

The ECB would ask an independent body to examine the fiscal policy framework of each member country. The body, call it the Fiscal Discipline Board, would look for arrangements that adequately constrain member governments, for example the German debt brake or the Dutch coalition agreements. The ECB would bind itself to follow the Board’s judgment. A country that has not adopted arrangements deemed adequate, or that does not abide by its own arrangements, would face the consequences: high borrowing costs, possibly loss of market access. The presumption is that the situation would be promptly corrected.”

Interesting ideas, certainly feasible…but are they realistic?


Read his full column here.

Are investors underestimating the ECB?

by Peter

The main responsibility of the ECB, like any central bank, is to relieve economic pressure during crisis, by manipulating rates and using their power to boost liquidity in the markets. As per usual the ECB has been at the center of these efforts in Europe over the last couple of months. These actions have brought sovereign borrowing costs down a good deal, particularly for Italy, Spain, Austria, and France.

But in a note from Morgan Stanley last week, it was proposed that investors are still underestimating the true impact of the LTROs.

Morgan Stanley’s reasoning? “By taking bank funding risk off the table for a couple of years in Europe, the ECB has significantly reduced the risk of a systemic banking crisis, which we were highly concerned about in 2H 2011.”  Further, their predictions largely undercut expected participation in the deal.

“European banks remain the nexus of the European sovereign crisis as well as the major problem in themselves. We’ve regularly argued that European policy makers have repeatedly underestimated bank funding as a transmission mechanism of sovereign fears into the real economy and act as a negative feedback loop on the sovereign. With the massive ECB and central bank intervention we think we are entering a new chapter. With interest rates now profoundly low in the Western world with little room for further easing, as our economics colleagues have written, and banking systems impaired, policy intervention in the banks is becoming ever more important for monetary and credit transmission. That’s why we think understanding and anticipating policy and the health of banks will remain one of the most important aspects for investing across multiple asset classes.”

In particular, the LTRO allowed banks to pre-fund the majority of their debts in 2012 and even into 2013.

Before we start celebrating note this doesn’t necessarily speak for the health of these banks in the long term, it does however suggest that the ECB is taking some big steps at reviving the credit markets in Europe and lending capacity in the short term, particularly amid the strict new capital requirements the European Banking Authority is imposing.

What the world bank downgrades mean

January 24, 2012 by Peter

The World Bank downgraded its outlook for global growth last week, estimating that the global economy will grow by 2.5% and 3.1% in 2012 and 2013, respectively. Not terrible for our current state, but that’s down from estimates in June that the economy would grow by 3.6% in both years, so not great either.

World Bank economists also predicted that growth in the volume of global trade will slow from an estimated 6.6% this year to 4.7% in 2012, before recovering to 6.8% in 2013. In 2012, growth for developing countries will total 5.4% versus earlier estimates of 6.2%, and developed economies will see growth of 1.4% in comparison to June predictions of 2.7%.

But perhaps the most interesting take away from that report is an assessment of the transforming macro environment. While admitting that a global slowdown will pose challenges for emerging markets, it also appears to suggest that we’re witnessing a fundamental shift in focus away from developed markets.

“Whatever the actual outcomes for the world economy in 2012 and 2013 several factors are clear. First, growth in high-income countries is going to be weak as they struggle to repair damaged financial sectors and badly stretched fiscal balance sheets. Developing countries will have to search increasingly for growth within the developing world, a transition that has already begun but is likely to bring with it challenges of its own.”

But this won’t come without some negative short-term consequences, particularly if threats posed by the eurozone debt crisis materialize.

“Should conditions in high-income countries deteriorate and a second global crisis materializes, developing countries will find themselves operating in a much weaker global economy, with much less abundant capital, less vibrant trade opportunities and weaker financial support for both private and public activity. Under these conditions prospects and growth rates that seemed relatively easy to achieve during the first decade of this millennium may become much more difficult to attain in the second, and vulnerabilities that remained hidden during the boom period may become visible and require policy action.”

Bull Bear recap for Jan 16-20th

January 23, 2012 by Peter


– Jobless claims plunge 50K to their lowest level in almost 3 years and clearly demonstrate a strengthening labor market.  Increased confidence means increased credit use = strengthening recovery.  Banks and homebuilders have been leading the ongoing S&P 500 rally.

– Manufacturing shows more signs of stabilization, not an imminent recession.  The Empire Manufacturing Survey rises more than 5 points, while the 6-month outlook surges 10 points.  Last week’s ghastly rail traffic report (intermodal) was nothing more than an aberration.  This week’s report shows a sharp rebound, outperforming last year by 7.4%.  Industrial Production rebounds 0.4%, lead by manufacturing’s best performance since December 2010 (+0.9% vs. -0.4% in November).

– Inflation is cooling and will give the Fed leeway to initiate further monetary policy (it’s becoming a worldwide phenomenon: Goldilocks environment coming up?).  If economic conditions slow, the bears won’t be able to seize control of the market as the Fed will act as a bullish albatross over their machinations.

– Risk markets power higher for the week, while copper breaks out of its consolidating triangle to the upside, a sign that the global economy is poised to reaccelerate.  Chinese data strengthens the “further stimulus” and “soft-landing” thesis.  Furthermore, markets are sensing continued progress in the Eurozone crisis.  Confidence is making a comeback, as the German ZEW investor survey hints at a turning point for the Eurozone’s largest economy.

– The housing market continues its recovery.  Mortgage applications for purchase rise 10.3% after an 8.1% increase in the prior week; the result is higher home sales.  Furthermore, record low mortgage rates are spurring refinancing applications, surging 26.4% this past week to their best levels since August.  More refinancings = more disposable income for the consumer due to lower monthly mortgage payments.  Finally, the NAHB housing market index rises 4 points to its best reading in 4.5 years.


– Sentiment is nearing euphoric levels.  Retail investors and even financial advisorsare expecting stock prices to move higher.  The wall of worry that characterizes bull markets has crumbled.  Remember rule number 5 by Bob Farrell, “The public buys the most at the top and the least at the bottom.”

– Meanwhile, this earnings season has seen the lowest percentage of companies beating analysts estimates since the 3rd quarter in 2008; I don’t need to tell you what happened thereafter.  Furthermore,…

– … the EFSF is hit with a downgrade.  Authorities brush it off.  More downgradesare coming.  The political tide is turning against the Euro .  Marine La Pen of the anti-euro National Front party is making serious gains in the polls.  François Hollande is closer to winning the French presidency and will demand a renegotiation of the euro fiscal compact. On the Greek front, “Even members of the committee concede the process (Greek private sector involvement negotiations) is unlikely to succeed in time for the crunch date: a 14.5bn bond repayment falling due on March 20.”  Finally, if things were all hunky dory, why is the IMF asking for $500 billion?  —-The news trend keeps getting worse.

– ISCS and Redbook weekly consumer metrics are showing a serious slowdown, even after last month’s disappointing Retail Sales report.  Furthermore, national gas prices have risen roughly 3.6% and the consumer is already feeling it.  Bloomberg’s Consumer Comfort Index falls to -47.4.

– While China’s GDP numbers beat analyst expectations, they portray significant weakening in the country’s export and real estate sectors.  Furthermore,persistently high inflation will limit the amount of stimulus authorities can administer.

What’s making investors still more skeptical of Italy than Spain?

January 20, 2012 by Peter

It’s pretty common knowledge that the Eurozone is currently in a world of financial hurt. Investors have even created acronyms for the biggest losers of the bunch (PIIGS), But for the astute investor there’s always money to be made at the bottom of the barrel if you know which horse to bet on. For a while now Italy has been taking the heat from Spain as the worst big economy during the Eurozone fiasco, but is Spain really better off than Italy?

Italy’s government has been paying some of the highest yields on its debt to borrow, far higher than that of Spain’s government is paying, and market chatter continues to focus on the Italians and not the Spanish according to Bloomberg. Is this premium warranted?

Both countries stand to suffer in the ongoing crisis and the furor around Spain could heat up again if we see a renewed bout of cynicism according to BI. Fear not though Spaniards, there are lots of good reasons to bet that Spain will be better off than Italy, and the rest of the PIIGS:

  • Spain’s problems are much more like Ireland’s according to BI; both countries have been suffering from a banking crisis spurred by the bursting of a housing bubble. The sovereign debt problem in Ireland only set in after the government absorbed banks’ toxic loans, and Ireland has been the only country regularly lauded by EU officials for making progress towards solving its problems.
  • Italy looks a lot like Greece. If you hadn’t noticed, Greece’s financial outlook isn’t looking pretty these days, which we covered a few posts back.
  • Spain’s new Partido Popular-dominated government is (by all appearances) speedily stepping up to the plate to tackle Spain’s problems, enacting emergency measures to stay in line with deficit goals and allegedly even exploring more drastic measures to address the crisis. Not a cure-all, but it suggests real progress.
  • After the ousting of Silvio Berlusconi, new Italian PM Mario Monti has struggled to get approval for the austerity measures that will bring down the country’s sky high levels of sovereign debt according to Euro-news. Reuters also reports that 55% of Italians no longer have confidence in the euro.

So the very nature of these similarities implies some distinction between Italy and Spain’s response to the crisis, but it also highlights a few key differences why each country is in this mess in the first place.

To be more specific, differences in political willingness to respond to crisis challenges suggest that problems are cultural, not just economic. Italians have accustomed themselves to spending what they cannot pay for, which is a structural flaw within their economy. In the decade leading up to the financial crisis, Italian GDP growth topped 2% per year just TWICE.

Spain’s economy, on the other hand, was regularly growing at a rate of over 3.5% for the same period. Spain may have its own problems, particularly with unemployment and immigration, but by all appearances its economy remains healthier than Italy’s.

Even so, the fickleness in investor sentiment and renewed or relieving pressures on the European banking system could reverse these speculative preferences in one trading day. But as things stand now it looks like there is a reason Italy is paying more to borrow than Spain, at least for today.

Germany now has the upper hand

January 16, 2012 by Peter

A few weeks back we mentioned in a post we talked about why Germany didn’t want a Eurozone bailout, and we went over how the PIIGs loss (+France) is Germany’s gain. The fact that the former were downgraded while the latter wasn’t means that the two are no longer plausibly on the same level during Eurozone crisis negotiations. Merkel (Germany) has the upper hand now, as not only did Germany not lose its AAA, its outlook was revised upward to stable.

In a note posted at FT Alphaville, RBS’s Jacques Caillou expands on this idea.

“The market implications of the ratings review are worse than a whole downgrade of the region owing to the increased political wrangling, questions on the EFSF/ESM firewall and the fact that flight to quality still has somewhere to go. Germany comes out as a clear winner and will have its position at the negotiating table strengthened even further. The French downgrade will complicate future negotiations around fiscal integration and comes at a delicate time domestically. The loss of the AAA is likely to be politicised in the run up of the upcoming general elections and could lead to an increase in popular support for fringe parties.

Overall, the most notable outcome was the clear differentiation between Germany and all other AAAs countries. Germany comes out as a clear winner with a stable outlook. The French downgrade comes at a d time and will likely complicate domestic politics ahead of the critical general elections. Likewise, France’s position at the European negotiating table is likely to be weakened vis-à-vis Germany. This might render future negotiations surrounding fiscal integration even more difficult.”

The important idea to take away here is: Just because the impact was “political” doesn’t mean it’s not very problematic, especially since the whole thing is really just about coming up with a politically viable solution to the fiscal integration problem. As we’ve previously covered Germany has a completely different outlook on whats going on in the EU and how to fix it. So this “political” move could spell trouble for the Eurozone now that Germany has even more political clout to throw around.

Greek creditors jumping ship?

January 14, 2012 by Peter
So the S&P made big headlines with its Eurozone ratings downgrades making for some fun conversations, but in reality these downgrades really wont change much. If anything perhaps the downgrade of France will impinge on EFSF funding, but at this point, people have been bearish on the idea that the EFSF will really be what saves Europe.The real story that was overshadowed, was that negotiations between Greece and its creditors have completely broken down.

According to FT, the talks are due to resume on Wednesday, but the bottom line is that Greece is not close to a restructuring deal, and without a deal, a default is a good possibility.

The FT’s opening paragraphs lays it out starkly:

Talks over Greece’s debt restructuring broke down on Friday, an unexpected blow that makes it increasingly likely that Athens will become the first government of a developed country in more than 60 years to suffer a full-scale default on its debt.

The deadline is sometime in March, which means there’s still time to talk things out, but Europe could be looking at its first “event” of the whole crisis very soon.

Weekly Bull/Bear Recap: New Year’s ‘12 Edition

January 11, 2012 by Peter


-U.S. economic data continues to shine.  Let us count the ways:

-U.S. ISM manufacturing logs its best result since June; led by New Orders, Production, and Employment.  Auto demand remains strong and exports revert back above the 50 mark.

-Confidence is at its best level since June, according to Gallup Poll.  It’s at its best level since July, according to the Bloomberg Consumer Comfort Index.  Why?…

-The labor market is markedly improving as per both the ADP and BLS job reports, which turn in readings of +325K and +200K jobs created respectively; the unemployment rate falls to the lowest in almost 3 years at 8.5%.  Both results are better than expectations.  Jobless claims plunge 15K and the 4-week average falls to the lowest in over 3 years

-The Association of American Railroads reports that rail traffic picked up in December.  From the looks of the graph, it looks like the recovery is actually gaining steam.-The European Service PMI report turns in a better than expected result (indicating stabilization), while German Unemployment falls to a record low for unified Germany.  The bears state that a major recession will cause a flareup in the debt crisis.  These data points, as well as loosening monetary policy in the quarters ahead due to falling inflation, suggest that both recession and the debt crisis will be contained and will surprise many.

-Any synchronized global slowdown will be shallow, surprising investors to the upside.  China’s service PMI shows continued growth in its domestic economy, producing a reading of 52.5 and unchanged from November; while the country’s official manufacturing PMI rebounds to 50.3 in December from 49.0.  Whisper numbers for inflation are 4% in December = loosening monetary policy.  Meanwhile, UK manufacturing PMI data increases to 49.6 from 47.7 and is just a smidgen below the 50 mark, the demarcation between expansion vs. contraction; demand increased from Germany and China according to the report.  UK services PMI reports its strongest result in 5 months, rising to 54.0 in December from 52.1.


– Greece is in a depression and a debt trap.  Falling revenue, due to austerity measures, is complicating the slated EUR130 billion bailout.  It will have to be larger, which aggravates an already delicate political situation.   Spain’s government deficitmay be larger than 8%; to which the government responds, “the beatings will continue until moral improves.”  Good luck slashing the size of the government in a social welfare state without serious unrest.  Hungary is on the precipice and has requested help from the IMF, again.  Italian and Spanish 10-yr yields are marching higher again, while French 10-year OATs fall in value for 8 consecutive days.  Sovereign bond markets aren’t drinking the equity hopium.

– While the bulls focus on lagging indicators, such as the unemployment rate (btw, Eurozone’s unemployment rate stays stuck at a record 10.3%), let’s focus on some leading indicators shall we?  German factory orders plunge 4.8% MoM in November, while October’s result was revised down from +5.2% to +5.0%.  Factory orders in Germany have plunged more than 8% in the past 5 months.  This data point signals a sharp slowdown on tap in Q1.  Here’s a coincident indicator, “Confidence in Euro Region at Two-Year Low as German Orders Slide.”    Bullish news from the UK?  Ok, here’s an offset: “UK car sales fall to lowest since 1994.”

– The key risk to China’s slow-landing thesis continues to lurk.  Chinese home pricesfall for the 4th consecutive month in December.  Premier Wen Jiabao states the obvious, China’s in a stagflationary dilemma.  No substantial loosening is coming.  Furthermore, falling housing prices are morphing into a political crisis for the communist country.

– The ECRI’s leading indicator growth rate has broken through support of a narrow 7-week range, falling to -8.2 from -7.6.  Recession is knock knock knocking on heav…the U.S.’s door.

– America’s debt to GDP ratio surpasses 100%.  Increased interest expense on this debt smothers investment in real economic growth, falling potential GDP, and a loss of confidence.  Politicians will revert to money printing, which will lead to high long-term inflation and a lower standard of living for all.

– Iran and the U.S. are a rogue’s attack away from war.


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A hedge fund investing in farmland?

December 30, 2011 by Peter

When most investor’s think of hedge fund strategies they conjure up visions of extremely complicated algorithms and financial wizardry only understood by the academic elites. Stephen Diggle, a hedge fund manager who netted $2.7 billion in 2007 and 2008, thinks he’s got the trade that’s not only pretty easy to understand, but one that will net him even bigger profits than before.

His thesis is based on rising food prices in the medium- to long-term, as demand forecasts soar on the back of a growing global middle class. Pretty simple, more people, same amount of land growing food and same output equals higher prices as demand grows Economics 101.

It’s almost beyond conventional wisdom not to look for ways to profit off this inexorable trend.

The plan? Invest in farmland.

Diggle has announced plans to open up his private investment portfolio to outside investors, Bloomberg reportsThis is not unusual in the rapidly changing hedge fund industry, particularly as its presence grows in regulation-light Singapore.

The catch is the type of assets Diggle is transferring from his personal fund and where he wants to put potential investors’ capital to work:

“…After buying farms in Uruguay and Illinois, as well as a kiwi-and-avocado orchard in New Zealand, we will pour money into Africa and eastern Europe as global food prices soar…”

Agriculture would be the “single most interest opportunity over the next 10 to 20 years,” Diggle said.

Diggle’s not alone either, “Wheat futures are scraping $6.49 per bushel today, their highest price since early November, and nearing their highest prices since the collapse of derivatives broker MF Global.
Notes Simone Foxman of Business insider

While certainly, many other factors impact the price of the food commodities and not everyone should rush to buy farmland as an investment. We find Diggle’s thesis blatantly simple and perhaps it’s something every investor should be looking at in the future.

Weekly Bull Bear Re-cap Christmas edition…ho ho ho

December 27, 2011 by Peter


– U.S. data continues to show an economy that’s weathering a turbulent global economy much better than the bears could have ever anticipated:

  • The Dow Theory has flagged a buy signal.  Both the Dow and Trannie indices  notch new highs.  This price action corroborates underlying U.S. economic strength.  The equity bull market is set to continue.
  • The Conference Board’s Leading Indicator surpasses the consensus estimate of 0.3%, rising 0.5%.  “The LEI is pointing to continued growth this winter, possibly even gaining a little momentum by spring,” Conference Board economist Ken Goldstein said.
  • The downward trend in Jobless claims has driven a stake right through the heart of the “U.S. recession” thesis.  Jobless claims fall to the lowest since April 2008.
  • Michigan Consumer Sentiment surprises to the upside with a final reading of 69.9 from 64.1 in November and represents a 6-month high.  Consumer psyche is healing as the economy improves.
  • The housing market continues on its steady recovery with the NAHB Housing Index producing its best reading since 2008.   Housing Starts surge well ahead of expectations.  Even better, rising permits point to more building in the months ahead (i.e. jobs will be created).  Typically the housing market has led recoveries in times past.  Homebuilder stocks are near 5-month highs.
  • The Architectural Billings Index is back in positive territory.  Expectations are clearly displaying a bottoming construction sector (look at the divergence between current conditions and expectations).  It’s nowhere but up from here.  This important sector will finally contribute to economic growth.

–  European economic data points to stabilization. Even stabilizing data, along with renewed and unprecedented efforts to steady the banking system, will result in renewed confidence and rallying markets.


–  European economic data foretells more social and political pressures on the horizon.  Spanish Industrial Orders disappoint with a meager gain of 0.9% for December versus consensus expectations of 4.0%.  Italian 4th quarter GDP signals the start of the country’s 5th recession in the past 10 years (consumer confidenceplunges to 1996 levels).  France is likely in recession as well.  Greek bailout talks are about to collapse as Vega threatens to sue.

– The S&P 500 is nearing its late October highs, yet there are clear red flags in regards to the rally’s health.  The complacency is palpable.  The VIX has plunged to 20, a far cry from “blood on the streets” that sustains any significant rally.  Meanwhile, 10-yr U.S. Treasury yields are nowhere near challenging their late October highs.  Ditto for copper.  These stark differences are bearish divergences.  Italian 10-yr yields are back above the 7% level (yields for Greece and Portugal are hugging their respective high marks as well).  Banks are using their “newfound wealth” to stash more cash with the ECB, not buy crap government debt as the bulls had hoped.  Nothing fundamentally has changed in the Eurozone or China.

– Recent economic data exemplifies the pervasive weakness slowly infecting the global economy.  Unrest continues in China and is likely to grow amidst weakening export growth and a popping housing bubble.  November Japanese exports fall 4.5% YoY.

— The Bulls are getting carried away with the decoupling theory:
  • 3rd quarter U.S. GDP has now been revised lower by 25%, plunging from an initial reading of 2.46% to 1.81%.  This adjustment was largely due to a sharp downward revision in annualized consumer services consumption and cautious inventory management.  Real per-capita disposable income is imploding @ an -1.9% annualized rate and will seriously impede the longer-term prospects of any recovery…
  • November PCE: Personal Spending in November rose just 0.1%, while the all-important wage component fell 0.1%.  The Savings Rate fell 0.1% to 3.5%, the lowest since the onset of recession in 2007.  Consumption growth will not be sustainable without a significant improvement in the employment situation.
  • The Chicago Fed National Activity Index (CFNAI) disappoints with a reading of -0.37 from -0.11.  The decrease is led by a sharp decrease in production-related indicators (i.e. Industrial Production/Manufacturing).
  • The Aruoba-Diebold-Scotti Business Conditions Index doesn’t show a decoupling U.S. economy; instead it shows one that is simply muddling through and vulnerable to an exogenous shock, such as an Eurozone implosion or a Chinese hard-landing.

– Iran announces plans to conduct a 10-day naval exercise at the Straits of Hormuz, feasibly impeding oil freight traffic.  The game of cat-and-mouse has the potential to upend the global recovery if it spirals out of control.  Relations between Israel and Turkey take a turn for the worse after Israel cancels a large military contract.


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The retail numbers….might be better than they look

December 22, 2011 by Peter

The number is out, and it’s mediocre for retail sales. Growth of 0.2% was well behind the 0.6% that analysts had expected. That’s also weaker than the 0.5% seen last month. Excluding autos and gas, growth was also 0.2% vs. expectations of 0.4%. As you can see from the report, general merchandise sales were the big laggard.

Interestingly enough, Goldman’s Jan Hatzius has weighed in, saying it wasn’t that bad.

“Retail sales increased by 0.2% (month-over-month) in November, a slightly smaller gain than the consensus had expected. Non-auto retail sales and “core” retail sales (ex-autos, gasoline and building materials) also increased by 0.2%. Results were again supported by strong sales at electronic stores (+2.1%) and for non-store retailers, which includes on-line shopping (+1.5%). Growth and sales from non-store retailers accounted for 0.13 percentage points of the increase in total retail sales during the month. We had expected payback in these categories after strong October sales of Apple’s latest iPhone. The continued strength in these components either suggests that month-to-month changes in iPhone sales were not as important a factor in total retail sales as we had thought, or that any negative payback effect was overwhelmed by underlying momentum in these retail categories (perhaps because of strong Black Friday and Cyber Monday sales).”

Due to the results, Goldman is upping its Q4 GDP forecast to 3.5%. So things have potential to be looking up for retailers going into their most important month of the year for shopping. The true test of consumer spending thought will be the December report.

So the ECB did something

December 21, 2011 by Peter

So it happened, earlier today 523 banks requested an unprecedented €489 billion ($640 billion) in super-cheap funding from the European Central Bank. This massive lending operation hasn’t caused much of an change on the markets, with short-term government bond yields rising in Italy and Spain, and markets for the most part unchanged elsewhere.

So what the heck happened? In general, initial investor reaction suggests that this was not the back-door bailout some were hoping for, and expectations were too high.

A few quick thoughts:

  • The stigma from borrowing from the ECB is gone. The banks took advantage of access to much needed liquidity, which was the aim of this operation. So thumbs up here
  • The European banks gaining easy access to some liquidity should be good for the markets. The liquidity counteracts tightening credit conditions in the Euro zone, at least for now, and this will make meeting the 9% capital requirement the banks have set in place for 2012 a bit easier.

Overall Wall Street has been positive. Wall Street has come out and said that a similar 3-year LTRO operation in January could have a bigger impact. Citi’s Todd Elmer voices this attitude pretty well:

“The EUR 489bn was in the EUR400-500bn range that our economists were expecting but somewhat stronger than published consensus that was more in EUR300-400bn.  That said, the fat tail was clearly to the right and there were indications that many expected a much larger number than the consensus.

The next question is what is done with the money…Whether the money will be used to buy sovereign debt (the secret wish), or be lend out to businesses (the stated wish) is unclear. There is plenty of liquidity in the system not doing much of anything, so the auctions at the beginning of 2012 will be scrutinized carefully to see if the carry trade is being reignited. “

But Morgan Stanley outlined expectations that the move was probably would not be as impactful as the bulls had hoped for:

“With this in mind, we therefore welcome the first 3-year LTRO this week, as we see this as a necessary step to reduce risk in the system of “disorderly deleverage” and even possible bank failure…To be clear, we don’t think the LTRO and other bank funding support will stop banks from shrinking entirely and our concerns over 1.5-2.5tr bank delevering remain uppermost in our minds…This may not be the reduction of tail risk at the sovereign level that we might have hoped for, but we certainly welcome the tightening impact on sovereign spreads that it is causing, especially across 2/3 years’ maturities.”

So the ECB did exactly what everyone thought they would. They lowered sovereign bond yields in the short run and they’ve alleviated some pressure on European markets.

Let’s not forget these are all simply short term solutions to a much bigger problem. so, this “cheap credit” is not necessarily a good thing. We’ve seen lots of reforms by the Italian government recently as the country faces steepening sovereign borrowing costs. But analysts have stated that this moment of relief might actually reverse the trend and spur more ECB action. Again from Morgan Stanley:

“Whether the Governing Council will see a need for outright asset purchases next year will depend on the pace of deleveraging in the banking system and the repercussions on the availability of bank loans to private sector. In our view, the ECB is still too optimistic on growth next year and is likely to revise its estimates down meaningfully in the coming months.”

Overall, these liquidity measures were just as successful as any investor could hope. They give the banks some wiggle room in the short term, but really do nothing to stop the downward trend of worsening economic conditions in the Euro zone. “The problem in Europe seems not to be a credit crisis but a matter of solvency”, as pointed bout by Nick Pollari at Zero hedge a few weeks back. So for now we have some clearly positive immediate repercussions for the European banking sector to look forward to.

Weekly Bull/Bear Recap: December 12-16, 2011

December 19, 2011 by Peter

Weekly Bull/Bear Recap: December 12-16, 2011



++ The U.S. economy has clearly surprised to the upside.  Gloomy analysts have underestimated its strength, even in the face of global economic troubles.  These external issues will eventually resolve themselves in benign fashion.

  • U.S. manufacturing data this week demonstrates continued improvement.  Led by New Orders and Expectations, both the Philly Fed and Empire State manufacturing surveys show improvement in business conditions.  Ditto for Rail traffic.
  • Economic Bellwether FedEx reported better than expected earnings due to strong holiday sales and continued economic growth.
  • The NFIB Small Business survey shows that hiring plans in November are the most since mid 2008, meanwhile, jobless claims plunge to 366K from 390K, the lowest in 3.5 years.  Both these indicators clearly signal a strengthening job market and economy.
  • The Payroll Tax Extension is sure to pass and will mitigate fiscal contraction taking place next year.
  • Consumers are repairing their balance-sheets.  Household financial obligations as a share of disposable income have fallen to almost 20-year lows.  This alongside steadily growing demand.  Retail sales, while weak MoM, are actually at record highs (nominal) and the YoY growth rate remains above 6%.  Improved balance-sheets will help consumer confidence and boost spending over the longer-term.

+ Markets have had plenty of time to digest the effects of a Greek default.  They have already priced in a default for the country; yet the system has held together.  Even better, an effective bond auction in Spain points to a stabilization of demand = improved confidence.  Also, a successful Italian confidence vote shows continued solidarity behind austerity plans.  Monti is taking care of the situation.

+ The global restructuring is taking place as China reports stronger consumer demand (which will continue to boost our exports).  Furthermore, a high correlation between food prices and equity market performance points to outperformance of the asset class as lower inflation brings about easing in the months ahead.  Note that China now understands what needs to be done.  They are embarking on producing the solution, which will lead to secular and sustainable global economic growth.  The country also has plenty of resources to boost demand, counteracting slowing exports, thereby avoiding a hard landing.



– Top government leaders are becoming confrontational.  Citizens are becoming resentful and terrorism against the entrenched plutocracy is a clear budding negative trend.  In addition to warning on Spanish banks, Moody’s now joins S&P, in its comments last week, with a warning on the lack of immediate resolution to the Eurozone’s woes.  And for the trifecta, Fitch slaps credit-watch negatives on multiple countries (let’s just call it “everyone”).  A mass S&P downgrade may occur this very weekend.  The latest EFSF fact sheet is released.  The fund still relies on Spain and Italy contributing roughly 31% of the fund’s capital commitments.  How’s this going to happen if they are on the chopping block?  The crisis will yield recurring flare-ups in early 2012 (starting with the bull’s favorite country, Greece).  And with dwindling political will, implementation risk will rise even further if Francois Hollande takes the French helm.  Europe’s banking system is close to suffering a heart attack; ECB againrefuses to print.  Hungary/IMF talks collapse.

– The slowdown in Europe has spread throughout the globe.  Japan’s salient Tankan survey points to a deteriorating global economic outlook.  Indian industrial production fell for the first time in more than 2 years, falling 5.1% YoY in October.  Chinese exports are the lowest since the dark days of 2009, rising 13.8% in November, vs. 15.9% in October.  The country’s flash PMI indicates that a second month of contraction is in the cards.  The populace is becoming restless.  The property bubble (which exists in all its splendor) has popped.  Yet, officials aren’t loosening as expected by the bulls.  Last, but certainly not least, OECD leading indicators point to continued weakening in the months ahead.  The world is entering a synchronized global recession, and yet not only is the ECB not printing but neither is the Fed.  Stocks will need to fall further to induce action.

– Tech bellwethers Intel and Texas Instruments, cut Q4 sales forecasts.  Retail sales disappoint, as does Best Buy, despite all the hype in November.

– Geopolitics remains the bearish gorilla-sized joker in the whole bull/bear debate.  Tensions are at a boiling point after Iran proudly demonstrates the captured drone.  The U.S. has asked for its return.  So if the Iranians say no, then what?  Does the U.S. look like a weakling and mosey on?  Btw, another drone crashed this week.  Iran ‘practices‘ the closure of the Straits of Hormuz (oil would promptly rise over $120 and kill any global recovery).  Finally, we had some notable protectionist news this week from China.  How will Congress react when Yuan appreciation ceases as Chinese officials move to protect their export-reliant economy from a “very severe” trade situation in 2012?

– The wound to confidence that was the MF Global implosion is festering.  The Fractional Reserve System is slowly coming apart as “Hypothecation” (the re-pledging of excess collateral) connects all leveraged liabilities to a dwindling supply of hard cash-flow producing assets.  It is becoming clear that the whole system is built on the confidence —currently fickle and fragile — that a liability has its specific collateral to backstop it.  What happens if the collateral is indirectly pledged to multiple liabilities?  Who has a right to the collateral?  MF Global may only be the tip of the credit destruction iceberg.


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One Analyst’s take on the Zynga IPO

December 15, 2011 by Peter

Zynga, one of the biggest Tech IPOs of the year is upon us and has been garnering a great deal of interest among investors and the media. Zynga is one of the first companies to go public that derives most of its revenue from digital goods or in game purchases and not a tangible product. It’s impressive that Zynga has maintained this positive hype amidst concerns of its revenue growth and its CEO’s character. According to Rich Greenfield of BTIG, it’s still a safe bet when it makes its trading debut later this week.

Greenfield recommends that investors buy Zynga between $8.50 and $10 a share, which is the price range for its IPO later this week. Greenfield thinks Zynga’s ability to expand to new devices and cross-promote games on new platforms will serve as a huge area for growth.

The social gaming giant, which has more than 220 million players, is also planning on attacking other platforms such as television with the addition of its game Zynga Poker on GoogleTV. The company will expand to other platforms in order to attract a wider audience, Greenfield says. There are also rumors swirling that Zynga will open its own social network next year, or be involved with Myspace. While these are just rumors now, Greenfield and other analyst give them little credence as the vast majority of Zynga’s users and revenue still are attached to Facebook, and it would be revenue suicide to damper that relationship.

Greenfield summarizes Zynga:

“While it may be viewed as the next big Internet IPO with comparisons being made to other social-networking driven companies, such as LinkedIn or Groupon, Zynga is really a media company focused on taking a greater share of your time and money spent on entertainment.”

Greenfield has a lengthy list of strengths for Zynga a few key takeaways are below:

  • Launching more games across more platforms with a powerful network effect to introduce new content.
  • Continued expansion of social networking globally. While there are other meaningful players in the casual gaming space, Zynga is “light years” ahead in leveraging social networking into casual games.
  • Acceleration of global adoption of smartphones and tablets, with web-connected TV’s offering another venue for social games.
  • Zynga’s superior data analytics that leverage its vast network of games and users, multiple times larger than its nearest competitor.
  • Zynga still has a first mover advantage.
  • As Zynga grows, it will be more appealing to advertisers as an interactive promotional tool. Greenfield says he doesn’t believe display advertising will work in social gaming, but branded promotions integrated into games is a substantial long-term opportunity (like those seen with Rovio).

There have also been a growing number of concerns around Zynga’s CEO Mark Pincus and whether or not he is a “nice” CEO or not, which Greenfield finally writes off as “it doesn’t matter”, on the grounds that Zynga is growing quickly enough that his managerial style won’t have bearing on how successful the company is. Which seems like an interesting stance but Greenfield clarifies with:

“While we have no idea whether Mark really is or is not “nice” to his employees, it is worth bearing in mind that the company’s employee base has changed dramatically in the past four years since it was created with over 60% of its current employees having being hired just in the past year and that the bigger Zynga gets, the less the “niceness” of its leader will likely matter.”

So again Greenfield recommends that investors buy Zynga between $8.50 and $10 a share, which is the price range for its IPO later this week. Greenfield’s is an interesting analysis of Zynga, and finally one where someone has put a quantitative analysis on this company that has been subject to the rumor mills for so long. While we dont have a magic eight ball to tell us how this IPO will do Greenfield seems pretty bullish on this one, let us know what you think.

What to expect from today’s Fed Meeting

December 13, 2011 by Peter

Today the Federal Reserve’s Open Market Committee will announce a new decision on monetary policy at 2:15 PM.

All around, consensus is that the decision really won’t be a big deal.

The Economic stats coming out of Europe for the past month have consistently been better than expected, despite a revision of Q3 GDP down to 2%. Nonetheless, the Fed has been hard at work attempting to expand the policy tools it has at its disposal,  so we have our fingers crossed that today we might get a view into what the Fed is thinking about as a long-term growth policy which we need pretty bad worldwide.

Here’s a brief rundown of what most investors will be looking to hear:

  • Economic outlook: Despite positive data, predictions of “a moderate pace of economic growth” could be altered in light of new developments in Europe or positive numbers in the U.S. Any analysis of future risks or long term planning here would be great.
  • QE3: On the whole, analysts are predicting a new round of quantitative easing in the first half of next year, but announcement of that now would be a surprise. Minutes from the December meeting indicate that there is some support for taking stronger action on this front, so we cannot rule out such a development completely.
  • Communication: From Nomura, “We expect the FOMC “guidance” about the path of future policy to potentially include a change to make future commitments more contingent on how the outlook evolves in the context of meeting the FOMC’s dual mandate.”
  • Inflation: Rising commodity prices of late could alter inflation expectations from the “stable” levels the committee have been forecasting since September; The maker uncertainty in Europe could be the moderating trend here. In our opinion any change in the wording to something less supportive or more fearful will be an indication of rejection or support of future easing measures.
  • FUN FACT: Business insider pointed out that it’s also Ben Bernake’s 58th birthday today. So keep an eye out for a cake.

7 trends David Rosenberg is looking for in 2012

December 12, 2011 by Peter


David Rosenberg the Chief Economist and Strategist of Gluskin Sheff & Associates has just released his investment strategy for 2012 and he’s recommending that investors approach the potential deflationary environment with a SIRP approach safety and income at a reasonable price.  He offers 7 different ways to implement this strategy:

Many investors increasingly want preservation of cash flow as well as preservation of capital. We concur and have consistently recommended a focus on S.I.R.P. safety and income at a reasonable price, with a primary focus on stability and prudent risk-taking.

1. Focus on safe yield: High-quality corporates (non-cyclical, high cash reserves, minimal refinancing needs). Corporate balance sheets are in very good shape.

2. Equities: focus on reliable dividend growth/yield; preferred shares (“income” orientation).

3. Whether it be credit or equities, focus on companies with low debt/equity ratios and high liquid asset ratios – balance sheet quality is even more important than usual. Avoid highly leveraged companies.

4. Even hard assets that provide an income stream work well in a deflationary environment (ie, oil and gas royalties, REITs, etc…).

5. Focus on sectors or companies with these micro characteristics: low fixed costs, high variable cost, high barriers to entry/some sort of oligopolistic features, a relatively high level of demand inelasticity (utilities, staples, health care these sectors are also unloved and under owned by institutional portfolio managers).

6. Alternative assets: allocate significant portion of  asset mix to strategies that are not reliant on rising equity markets and where volatility can be used to advantage.

7. Precious metals: A hedge against the reflationary policies aimed at defusing deflationary risks money printing, rolling currency depreciations, heightened trade frictions, and government procurement policies.”