Thursday, May 13, 2010

Morning Update/ Market Thread 5/13

Good Morning,

Equity futures are roughly flat this morning prior to the open. The dollar is up significantly and the Euro has broken down below the 1.26 level, now at 1.257. Bonds are slightly higher, oil has broken down further, and gold is slightly higher.

Any further deterioration in the Euro represents a hazard to equities. I would like to point out the recent change in market character regarding the relationship of currencies to gold and equities. Typically a stronger dollar has meant lower equities and lower gold. Since the crash last week and the subsequent intervention, stocks have been higher and gold has also risen despite no change in direction for the movement of currencies. The truth is that the $trillion bailout should not have strengthened the Euro, it should have crashed it (further), and that could still play out. This is exactly what gold is saying. It is a potential setup to the nightmare scenario where gold is the only thing left rising. We’ll see, but the fact that the Euro has failed to even make a half-hearted attempt to rally to the top of its channel is a screaming warning.

Know what else is a screaming warning? According to Jonathan Weil in his current Bloomberg article, Rigged-Market Theory Scores a Perfect Quarter, “It turns out Morgan Stanley posted net trading gains every day during the second quarter of 2007, right before the credit crisis began to hit full-steam.”

My, that’s interesting… is there a lesson there? I’m sure there is, although I think it won’t be clear until viewed through the lens of history.

What’s pretty clear to me right now is that the markets are completely controlled by very few entities – they have been captured. And let’s think about the implications of this, because to me it plays like some James Bond (ridiculous) or Austin Powers (funny) movie, you know there’s always the evil villain in the background whose mission is to RULE THE WORLD, ba, ha, ha! Let’s just say it’s not a coincidence they called him “Goldfinger.”

Well guess what? It’s happened – only sadly this is no movie, it’s for real.

And just think about this. Those four banks that had perfect records are so powerful that should any of the managers of those companies simply turn off their trading computers, the removal of that liquidity would set off a chain of events that could literally collapse the markets of the entire world – just like the taste we got last Thursday but was quickly reversed.

Is this not nearly the power the President of the United States has? We have allowed the power to concentrate into so few hands that we have in effect given them the power to devastate the globe in nearly an instance. The people running these firms did not go through a public vetting process and they do not work on behalf of the people. Think about that – it never should have been allowed to happen and now that it has, we absolutely need to take action.

And PIMCO’s El-Erian reiterated the “new normal” in another Bloomberg interview, ‘“What is happening in Europe is a vivid illustration of an underlying theme of the new normal,” Mohamed El-Erian, the chief executive officer of Pimco, said in an interview. There are “structural forces overwhelming traditional cyclical ones.”’

In other words, the world is saturated with debt and while the cyclical pattern tries to exert itself, the anchor of debt precludes growth from resuming. That is exactly what is depicted on the diminishing productivity of debt chart.

But that still has not sunk into the very closed brains of people like Larry Summers who in response to El-Erian’s new normal comments says he would be, “very reluctant to accept the idea” of an extended period of slow growth for the U.S. economy.

No kidding, he’s very reluctant to accept anything based in reality, and boy has he made reality a mess.

How ugly has he helped to make reality? This ugly:

U.S. posts 19th straight monthly budget deficit

(Reuters) - The United States posted an $82.69 billion deficit in April, nearly four times the $20.91 billion shortfall registered in April 2009 and the largest on record for that month, the Treasury Department said on Wednesday.

It was more than twice the $40-billion deficit that Wall Street economists surveyed by Reuters had forecast and was striking since April marks the filing deadline for individual income taxes that are the main source of government revenue.

Department officials said that in prior years, there was a surplus during April in 43 out of the past 56 years.

The government has now posted 19 consecutive monthly budget deficits, the longest string of shortfalls on record.

For the first seven months of fiscal 2010, which ends September 30, the cumulative budget deficit totals $799.68 billion, down slightly from $802.3 billion in the comparable period of fiscal 2009.

Outlays during April rose to $327.96 billion from $218.75 billion in March and were up from $287.11 billion in April 2009. It was a record level of outlays for an April.

Department officials noted there were five Fridays in April this year, which helped account for higher outlays since most tax refunds are issued on that day.

But for the first seven months of the fiscal year, outlays fell to $1.99 trillion from $2.06 trillion in the comparable period of fiscal 2009, partly because of repayments by banks of bailout funds they received during the financial crisis.

Receipts in April -- mostly from income taxes -- were $245.27 billion, up from $153.36 billion in March but lower than the $266.21 billion taken in during April 2009.

Receipts from individuals, who faced an April 15 filing deadline for paying 2009 taxes, fell to $107.31 billion from $137.67 billion in April 2009.

The U.S. full-year deficit this year is projected at $1.5 trillion on top of a $1.4 trillion shortfall last year.

White House budget director Peter Orszag told Reuters Insider in an interview on Wednesday that the United States must tackle its deficits quickly to avoid the kind of debt crisis that hit Greece.

Too late to avoid looking like Greece… the truth is that we are in much WORSE shape than Greece. How can I say that? Because we are hiding massive amounts of debt, both as a government and in our financial system. Just look at the debt we are responsible for in the GSEs but is kept off balance sheet.

And talk about destroying confidence, this monthly budget report is simply more lies and more false accounting. The true monthly deficit is twice the reported $82.69 billion, it’s actually $175.6 billion! All you have to do to see this is to take a look at the debt numbers reported each month by the Treasury. In the month of April our debts grew by $175.6 billion, that’s an annualized rate of $2.1 Trillion!

So far this calendar year we have run up $637.4 billion in debt, that’s in just 4 months! Annualized, that number is $1.91 Trillion! Talk about exponential growth, wow. Again, compared to what our government takes in, $2.4 trillion (and falling), we are now spending nearly TWICE what we take in. To those who think that’s okay and that because we are the “reserve” currency that we can get away with it indefinitely, I say that you are simply delusional. That’s the polite version.

By the way, did you note personal tax receipts? Down 21%!!

Weekly jobless claims came in at 444,000 on the week, the consensus was expecting 440,000. These numbers are still waaaaay above historic norms – here’s Econoday:
Initial jobless claims show improvement but only mild improvement for the labor market. Initial claims in the May 8 week slipped 4,000 to 444,000, a dip offset by a 4,000 upward revision to the prior week. But the four-week average is improving, down 9,000 to 450,500 for the lowest level since late March and the second healthiest level of the recovery.

Continuing claims for the May 1 week rose slightly to 4.627 million while the four-week average also rose slightly to 4.640 million. The jobless rate for insured workers is unchanged at 3.6 percent.

Though claims at these levels have been consistent with sizable payroll growth in recent months, the lack of significant improvement will limit confidence that payroll growth in May will also prove sizable.

Whatever – the monthly reports are still net negative growth despite throwing so many trillions at the financial system that we have now bankrupted ourselves. Completely delusional, and completely controlled.

Now let’s look at import and export prices which were just released. Import prices up 11.1% year over year? Export prices up 5.7% year over year? Wow. True, these are over a very low period of time, but wow!
Import prices for industrial inputs are on the rise as are export prices for finished goods. Import prices jumped a very steep 0.9 percent in April, inflated by a 3.3 percent rise in petroleum prices. But import prices are up even excluding petroleum, up 0.3 percent and reflecting a 1.1 percent jump in non-petroleum industrial supplies. But a bigger key is that domestic buyers aren't paying more for finished goods with prices of imported consumer goods unchanged and prices of imported capital goods up only 0.1 percent following two months of declines.

The lack of foreign pricing power for finished goods reflects in part the strength in the dollar which gives domestic buyers more purchasing power. The dollar's strength conversely makes domestic goods more expensive to foreign buyers, reflected in this report by sizable gains for finished goods prices: up 0.4 percent for capital goods and up 0.9 percent of consumer goods. Export prices overall jumped 1.2 percent despite a 0.7 percent price decline for agricultural exports. April's overall gain is the largest in nearly two years.

The strengthening dollar should help keep import prices down and will likely increase demand for lower priced foreign goods. Today's data point to pressure for next week's producer price report but, given the benign readings for imported finished goods, no pressure for the key consumer price report.

Large moves in currencies absolutely will affect the flow of capital and goods around the globe. It’s a volatile environment, one that is volatile because of debt saturation.

I haven't updated the Baltic Dry Index in a while, here's the latest chart that puts global shipping into perspective:

Meanwhile oil continues to spew unabated into the gulf, here are the first pictures of the leak itself:

If that makes you feel good, try this:

The government paying down your loan if you are underwater or unemployed? Wow. Anything to keep the game going for the banks – including bankrupting our nation. Moral hazard? The real moral hazard isn’t just how unfair it is to homeowners and people who have done the right thing, the fact that it is squarely to the benefit of the banks makes it a nation ending type of hazard – all to protect those people who have the power to crash the planet at the flick of an HFT switch.

Sadly, there’s more than just one hole in the world…

Eagles – Hole in the World: