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POSTS: WEDNESDAY 07-07-10
GEO-POLITICAL TENSIONS - ISRAEL / KOREA / IRAN
IRAN
ISRAEL
KOREA
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SOVEREIGN DEBT & CREDIT CRISIS |
GREECE
ITALY
SPAIN / PORTUGAL
FRANCE
GERMANY
UK
UK ministers told to prepare to slash their budgets by 40%by Andy
McSmith Independent
JAPAN
CHINA
Fitch warns of hidden information risks in Chinese banks
Finance Asia
Land Prices Are Collapsing Across China
BI
Baltic Dry Index Dropping 4%, Posting Longest Consecutive Loss In
6 Years ZH
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Despite the optimism from the conflicted money printers, those
whose livelihood actually depends on a ceaseless influx of goods
into China and broader commodity trading in general, are not
nearly quite so happy, having seen a drop in their margins by
almost 50% in just over a month.
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DUBAI WORLD
USA
Fed's Fisher Warns of US Economic Slowdown
Reuters
Steel Industry Cuts Back as Prices Fall
WSJ
| Steel prices in the U.S. are tumbling after holding firm for
months, potentially a bad omen for the nation's economy as
manufacturing activity slows and consumers grow more cautious
about big-ticket purchases, such as cars and appliances. |
Roubini- Everything Signals A Slowdown In The US, Europe, Japan,
And China BI
Here are 15 signs that the economy is slowing down
BI
Goldman Sees "Disturbing Signs" If Government Does Not Bow Down To
Krugman, Reflate Monetary And Fiscal Bubbles ZH
European banks use gold reserves to raise cash
FT
After Repeated Facts Presented That Stress Tests Are Scam, Europe
Relents To Disclose Testing Methods, Even As Tests Still Remain A Scam
ZH
European Stress Tests- "All Is Not Well" - ECB Likely To Delay
Liquidity Unwinds Until Next Year Causing EUR Lift Off
ZH
Comparing Changes In Quarterly US Debt And Deficits
ZH
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Now that America is on record spending autopilot and nobody
cares or knows just what the 2010 deficit pattern of the
government will look like, and, more importantly, the debt
issuance, we have compiled historical quarterly data comparing the
change in US deficit and debt data. As the chart below
demonstrates, over the past 10 quarters, on average the US
had added $400 billion in debt each quarter, while increasing its
deficit by about $275 billion, with debt issuance surpassing any
given period's deficit by almost 50%. To be sure, the
data in the debt change is skewed by the outliers of Q3 and Q4,
which were not so much an increase in term debt, but a massive
issuance in short-term debt holdings, as the entire world
scrambled to place their money into ultra-secure 30 Day and other
Bill securities. As a result of these two debt outlier points, the
US is now stuck with rolling over half a trillion in
short-term debt on a monthly basis. Either way, it is
obvious that it will likely be impossible for the US to trim it
quarterly debt issuance materially below $400 billion per quarter,
and will likely see this number increasing as tax receipts
continue declining. Additionally as quarterly deficits are unable
to drop below $300 billion (note the Q2 '10 data excludes June
deficit data), once interest rates start climbing, look for these
numbers to surge once ever greater portions of the US deficit go
to simply pay the interest on the federal debt.
Bottom line, with the US expected to generate a deficit of
about $1.5 trillion in the next fiscal year, the napkin estimate
says that the US will likely incur between $2 and $2.5 trillion in
debt over the next year. And now you know even better why the
administration is now spending money with no blueprint whatsoever.
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STATE
& LOCAL GOVERNMENT/b> |
As
states slash budgets, business tax breaks survive
Stateline
California Banks Pitch `Budget-Impasse Loans' to State Workers
BL
Another View on the States’ Budget Plightby by Michael Powell NY
Times
HUNGARY
DODD FRANK ACT
U.S.
Financial Regulatory Overhaul: What a Mess
BMO
Hearings That Aren’t Just Theater
Nocera
RATING AGENCIES
Risk On Or Risk
Off ZH
| As I contended earlier in the year equity weakness in H1 2010
was driven by sovereign woes, which we are far from done dealing
with, but the real kicker for a risk aversion trade will be the
slowdown in the economy in H2. Last week's data has been very
weak, and when one looks at the Baltic dry index there is no doubt
we have a lot of still untapped capacity while the cycle appears
to be rolling over. Weaker growth is what will make the sovereign
story go from market jitters to actual defaults. The only antidote
the world's governments have is more debt monetization and a new
slew of stimulus programs but the G-20 echoes seem to prove what
we have been warning about: a waning political support for more
fiscal irresponsibility. Is the world about to bite the bullet?
World liquidity in monetary terms is currently at all time highs
so the central banks have not exactly pulled the rug but without a
strong new wave of printing we have all the signs of a clear
roll-over that are starting to appear. |
Office
Vacancy Rate Keeps Climbing
WSJ
RBS to offload £3bn of property loans FT
RBS sale signals big exit from property loans FT
U.S. Commercial Property Sales Trail Average as Supply Limited
BL
Shopping Centers Struggle WSJ
| Vacancies and lease rates at U.S. shopping centers continued
to worsen in the second quarter, but the slowing pace of the
deterioration hints at a recovery starting in the coming
quarters. |
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RRESIDENTIAL REAL ESTATE - PHASE II |
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EXPIRATION FINANCIAL CRISIS PROGRAM/b>
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PENSION & ENTITLEMENTS CRISIS
|
U.S. Jobs Picture Darkens WSJ
12 Charts That Show The Broken State Of The US Labor Market
BI
Wall Street's Answer to Unemploymentby Les Leopold Huffington Post
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GOVERNMENT BACKSTOP INSURANCE |
OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE/b>
FLASH CRASH - HFT - DARK POOLS
MARKET WARNINGS
A Market Forecast That Says ‘Take Cover’by Jeff Sommer - New York Times
NY Times
| Ralph J. Acampora, a market analyst with more than 40 years of
experience, said he moved entirely out of stocks and into cash
late last month. Now a partner at Alverita, a wealth management
firm in New York, he said recent setbacks suggested that the
market would drop another 10 or 15 percent, probably until
September or October, before resuming another "meaningful
rally." |
Guest Post- "So Much For The Market Being Cheap" Charting A 50-75%
Downside Case In The S&P ZH
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Submitted by Brandon Ferro, Managing Member of
Hevea Partners
Some Market
Thoughts worth Sharing
Historical market data that suggest our current situation
resembles very scary periods in times past (i.e., the 1929 crash
to be specific) is beginning to pile up.
Let's look at the
set up from the perspective of charts.
Here are historical
bear markets, indexed to 100% (100% = bull market peak).
It's quite easy to see that the current bear market that began
in late April has been more ferocious than the average bear market
through history at this juncture of its development.
In
fact, this bear market looks an awful lot like the way the 1929
crash shaped up. While other individual bear markets have
fallen faster and by a greater amount, they were all short-term
crashes, such as the 1987 crash and the 1998 Asian Financial
crisis crash.
As such, they ended very quickly.
The current one, however, seems to be more drawn out, again
looking very similar to the 1929 crash represented by the red
line.
What is worth noting is that despite the fact that we
witnessed a mini-crash in May and a $1T support package for Europe
thereafter, the current tape action is still as weak as it is and
is leading to the set up in these charts I'm discussing.
Despite the latter events, one of which was supposed to be
cathartic to an over-bought market and the other supportive to
global economic stability, we're still hanging on the edge of a
cliff it seems.
Now, let's specifically compare the 1929-1942 bear market,
which began with the 1929 crash and largely ended with US
engagement in WW2, to the 2000-2010 period, which has seen two
massive bear markets with two major rallies of 100% and 85% in
between.
It is amazing how closely these charts resemble themselves in
terms of price action and the timing of each cycle’s respective
moves. It seems to me that the only major difference is the
order in which events seem to be playing out.
For
instance, they had their crash quickly while we have avoided ours
for 10 years with profligate monetary policy and government
spending.
It seems to me that the market is now
recognizing that the game is up; no amount of additional money,
bailouts or otherwise can prevent the system from collapsing under
the weight of all the debt that has been allowed to build.
That's why it seems as if the far end of the black line is on the
cusp of doing what the red line did on the left side of this chart
in 1929.
Again, the same events, just reversed -
politicians unwittingly took austerity measures in 1929-1930 that
caused a depression and they're doing the same thing now, just 10
years later than expected.
If you look at the dotted black
line, it represents the absolute low of the 1929-1932 depression,
a roughly 85% decline in all on a monthly basis. For
context, this correlates to roughly 230 on the S&P500.
Question is, their bear market ended when we entered WW2; is Iran
and Israel the catalyst for a similar situation in 2012 when this
analytical work suggests our bear market could end? They
could theoretically pull the world into their mess given the
resources at stake and the emergence of a resource rich country in
China.
Which brings me to the S&P500 / Gold ratio chart.
Historically, the value of the S&P500 relative to the
price of gold reaches a bottom at roughly 28% (all-time low =
19%). The ratio is currently 94%.
Assuming a
gold price of $1,500 or $2,000 (reasonable given fundamental
backdrop) suggests an S&P500 value of 375-500.
Isn't it crazy to see how the market cycles vs. the price of
gold through history? This is the third major secular bear
market for stocks relative to gold over the past 110 years and it
shows up decisively in the chart.
If you believe
that everything reverts back to its mean and even overshoots
(i.e., when you stretch the rubber band too hard in one direction
it has to snap back even harder in the other), then the
unprecedented explosion in the market vs. the value of gold in
2000 (almost 6.0 on the chart) relative to other historical peaks
at the top of secular bull markets (1929 and 1966) suggests
greater upside than $1,500-$2,000 for gold and more downside than
375-500 for the S&P500.
Further, the SPX / Gold ratio chart
is where we form our timing thesis of 2012 being a potential
bottom for this secular bear.
Notice how troughs in
the S&P500 relative to the price of gold have typically taken
12-13 years to play out. The S&P500 put its peak in relative
to gold 10 long years ago in 2000. We sure are close.
Let's also look at the valuation on the market
(Price-to-Earnings ratio or P/E) when it has typically reached
major, major bottoms which have led to new periods of prosperity
and huge, secular bull markets.
Typically, the P/E on the S&P500 has reached b/t 6x-8x
earnings per share (rolling Shiller 10 year average), well below
the current ~19x.
Notice how the “generational low”
in February 2009 (dark black), which preceded the 85% rally over
the past year, was probably not the generational low everybody
thought it was - the P/E on the market never went below 14x.
Also note the P/E at the 2003 lows (white).
If we assume
$70 in S&P500 earnings per share in 2011 (mild recession in 2H10
and 2011) and use a 6x multiple you get an S&P500 value of 420.
To really nail the overall thesis for you here is a
comparison of the P/E ratio on the market during major,
long-lasting, secular bear markets.
I’ve indexed the P/E to 100%, the point at which it peaks
during the end of a secular bull market. As the lines move
right and lower it represents the amount by which the S&P500’s 10
year P/E has contracted relative to its peak in the past secular
bull move.
The black line represents the bear market we've
been in since 2000. The marker represents today's data
point.
As it stands, P/E ratios have contracted by
roughly 50% from their level in 2000 (45x, vs. only 35x at the
peak in 1929).
Notice how much further valuations have to
contract to reach the level of contraction they have reached in
other secular bear markets.
The chart indicates
valuations bottom when they have declined about 80%-90% from their
high. Using the 2000 P/E of 45x this yields ~5x-9x, in-line
with my chart above which says market bottoms are reached at P/Es
in that range.
Let’s play devil’s advocate and assume that
S&P500 earnings estimate of $95 (LOL) in 2011 is correct…
Even if it happens, this chart suggests it could be more than
offset by material P/E contraction that has yet to take place.
A 6x-8x P/E on that $95 number next year would yield 570-760 on
the S&P500, well below the current 1,030.
Therefore, even
if you want to make the bull case for earnings, the latter chart
suggests you’ve only figured out half the story; you also have to
make an entirely unlikely bet that the black line will diverge and
we will start to witness massive P/E expansion unlike any we have
ever seen before at this stage of a secular bear market.
I’m not saying it’s impossible, but it sure does seem implausible
given the way history looks in the chart hah?
So much for
the market being cheap.
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VIDEO TO WATCH
James Altucher Argues That The Fed Should Intervene Massively In The S&P
Futures Market BI
INTERESTING ARTICLES - GENERAL
Shared
sacrifice will be the new economic order
Rosenberg
QUOTE OF THE WEEK
Rick Santelli Uncut (And GE Turbofan Commercial Free)
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Having rapidly become the only person worth listening to on
CNBC, Rick Santelli's insights on the economy are now far more
valuable than any other guest's on the Jeff Immelt propaganda
station. Which is why we were very happy to find that
Eric King's latest interview was with none other than Mr.
Santelli. The topics discussed are numerous, varied and and very
critical to our economy, covering such concepts as deflation,
deficit spending, bailouts, government spending multipliers, Fed
transparency, spending cuts, austerity, the folly of Keynesianism,
strategic defaults, direct bidders and treasury auctions, and
lastly, tea party dynamics, making this a must hear interview for
anyone still on either side of the economic fence, and who enjoys
listening to Rick for longer than the 45 second segments the CNBC
producers will allow.
- Deflation: "deflation is the most
disingenuous argument especially in the current conditions.
[When the bubble process ends prices have to come down to
reality] the process really is deleveraging, but what happens
when prices go down you get the economists call it deflation.
Deflation is always the biggest bogeyman in a central banker's
closet. It also allows them to use the only tool in their
toolbox, which is to spend money, and usually money they
haven't collected yet, so it's usually a deficit form of
spending. Think about what economists are trying to do: we go
up too high in leverage, prices are too high, we try to
correct that process, it's called deflation, and they try to
put money in to prop it up at an artificial price-deleveraging
is the word we should stick to"
- Deficit spending: "the only thing that
works is across the board tax cuts because it fuels the type
of small business that does the bulk of the hiring"
- Bailouts: "the only regulation that will
ever work is failure. If you don't allow failure what you end
up with is regulators trying to serve when it's time to take
punch bowls away. Regulators never go against the grain. Back
in 03-04 many in the fixed income markets saw it coming but
nobody wants to pull that punch bowl away. Businesses should
fail, that's the way the system was designed"
- The Multiplier of Government spending:
"Larry Summers on many occasions has said that the multiplier
of government spending is greater than 1. If that was true,
we'd never have another recession ever again, and I would be
advocating to spend a trillion dollars every hour. It would be
like a perpetual motion machine and all physicists know those
are impossible. Every dollar the government spends comes from
somebody's pocket"
- Fed Transparency: "It seems to me we are
making some progress on the financial audit. I absolutely
agree that on all of the issues that take taxpayers' money and
end up being distributed or put on the balance sheet and in
any way used by the Fed, there should be an audit that should
be fully transparent. I am worried about the financial
accounting"
- On Spending Cuts: "Listeners, this is
going to be the most important thing I am going to say: we
need to maintain the focus on spending, the politicians in my
lifetime always spend. If we end up spending way more than we
can take in, in essence the deficit panel becomes a tax panel.
We must stop spending before we talk about VAT taxes or taxing
Americans more, we need to get spending under control. The
retings of congress are the lowest they have been in
history."
- On Austerity: "Nobody wants that. But
there is a silver lining - the UK have conditions in their
economy worse than the US, but they came up with an austerity
plan, and we see that their currency has been rewarded. The
GBP has risen about 10% in a very short period of time."
- On Keynesianism: "The Keynesians are both
right and wrong. I don't think Keynes advocated the kind of
helicopter-Ben spending that many say he promoted. He
promoted the kind of stimulus that created jobs, that's more
the medicine for a cyclical downturn, we have a structural
issue because of the bubble credit scenario."
- On the ECB's Debt Monetization: "I think
that the ECB has a huge issue and they are behind the ball.
They don't have a constitution in the eurozone, they have
cultural and monetary cultural issues to deal with. I think
that buying securities or monetizing or QE is always a bad
idea. Once there is a subsidy in the marketplace, it becomes
the normal pricing mechanism. For the Fed or the ECB to unload
these securities, becomes a destabilizing force and in the
long run does more harm than good."
- On Strategic Defaults: "I have feelings
on this that go both ways. I think morally I would have an
issue doing that, but people who did the mortgage, or the
second mortgage, or took a HELOC to pay for cars, pay for the
vacations, I think it is reprehensible that we end up
reshuffling wealth to pay some of that off. But I think the
dynamic is from the government side - I think contracts
between banks and homeowners - if it's unsecured, it's
unsecured, I don't have an issue with that."
- On Direct Bidders being a proxy for the Fed (a
much debated topic on Zero Hedge) and
Treasury Auctions in general: "That's the best
question anyone has asked me in a long time. I think there is
a recycling quid pro quo going on: the Fed is making banking
obsolete because a lot of the programs that they have is to
take the cheap end of the curve and invest it in Treasuries.
Well the Treasury needs as many buyers as it can get. I think
the financial institutions are recycling easy money that
should be going into John Q Public's pocket, to those that
deserve credit, all this money is ending up in the forms of
purchases of 10, 7, and 5-Year Notes, and I don't like that
way that's working. That's why I think that raising rates
would be a good thing. Why? Because it would take some of the
easy ways the banks recycle the Fed's cheap money and put it
back in the hands of the public and actually make banking a
relationship between banks and Americans that need it whether
it is for funding a mortgage or funding a small business."
- And on Tea Party dynamics: "I think
November 2 is going to be a watershed of Americans letting
Washington know they're the boss."
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ZHHstrong> - Zero Hedge, BI - Business Insider,
WSJ - Wall Street Journal, BL -
Bloomberg, FT - Financial Times |
