Summer / 1040/ major injury to yours truely

Dear Friends 

I have been quiet for a reason! A managed to break my wrist playing
soccer and top get the other hand injured to! In other words severely
handicapped (i.e more than usual).

I will be at my primitive summer resident with the above view for most
of July, but.....

I remain short:

S&P - target if 1040 close - 980 onroute to 666 sub
Copper - my one theme these past weeks been slowing growth this is
the reflecton of it.
AUD - negative China
Crude ....too much oil.
Long 10 yr notes..

No US dollar overall view

Keeping things simple.

Have a nice July - I wil be back when my hands allows it.

M. Whitney talks str8 - v. informative 10 min interview - must see

http://classic.cnbc.com/id/37821204/

pointers:

2 mio jobs to go at federal level
obama coming up w. 50 bln program - fed states are down 200 bln.

90% of all loans last year carried by fnm + frd
45% of those were credit discount supported

banks not lending  - 2 trl usd cut from credit lines alone
the states w. biggest growth have high correlation to big housing
market  Cali/ariz/neveda

us bnks w. europe operations earned ZERO income in may
q2 vs q2 2009 will be weak as last year q2 incorp. major bones from
government plus capital raising for themselves

credit card lines cut by 2 trillion usd alone.....
people not paying their mortgages as they think they get better "deal"
later - hence 50% increase in deliqu.

really really worth 10 min of your time..

London notes - Macro update.

On route to Heathrow after two busy days in London.

Conclusions:

1. EU/ECB will violate every single principle/issue to secure
'orderly' markets for PIIGS.

Central banks not under mark-to-market scrutiny and they want to buy time.

2. Risk taking is very tough - market moves in big range and
resolution seen only coming via ECB action and/or by monitoring the
political situation in Germany.

3. 'Growth Recession' being accepted when brought to the table - no
one has been watching the weak weekly data which tells me market will
adjust their growth projection down and soon, we will see market
starting to discount easing in the US(also stronger us dollar has made
room for this move)

4. Overall frustration with hedge funds and managed money: why pay 2
and 20 pc for getting plus/minus zero on portfolio of active managers?

The excess return from 'alpha' no longer viable/possible as market
trades all risk as correlated - the symtomes of having policy rates at
zero - remember at zero pct all valutions are infinite! - incl
starting a hot dog stand next to ten others!!!!!

The allocation of capital is simply based on the ready access to
it(read: banks) and not on its utility.

This game could continue 'forever' while ECB and the EU tries to safe
the European banking system from disintegrating under the burden of
ill-timed excessive investments in Southern European bonds and banks
or we could see escalation of trouble bringing about the
'quick-and-good-recession' as opposed to the drawn out 5-7 year (the
lost decade?) Slow grinding....

The money, among the people I speak to, is on 'the slow boat to
recession' which implies more of the same: promises, lack of
transperency, crowding out of private capital and ultimately low
growth as tax and lack of investment outweights the productivity gains we
may see.

5. Themes?

Very few - there is some appetite for what I call 'small cap'
investments - I.e: unleveraged investment in companies with 'going
concern' but locked out of financing/refinancing due to the banks.

A friend of mine coined it perfectly: 'small cap is private equity
with transperency'! - voila!

Here is a market where you have enterprises needing capital meeting
investors who are too long cash.

A second theme was a general acceptance that owning a basket of high
dividend paying stocks would outperform short-term government bonds
and broad-based index composites.

The international names have plenty access to capital - they are
looking to do M and A (consolidate)

The preference would be Asia names as the growth cycle(even is
slow-down) mode would outperform rest of G20.

A third and more surprising theme was a tendency to overweight Japan.

This a theme which has been on the back of my mind as a thing to look
into for a while. Friend of mine in Singapore has been beating the
Japan drum for a while.

STRATEGY:

Unchanged but we need S&P to start rolling over and preferably today!
Risk is now firmly for 1175 test, but we will give it one or two more
days into this Friday.

Nice week-end

Winston

Well, well here we go...I am an Idiot!

I was, as expected, an idiot trying to proclaim Greece bankruptcy - on this morning, the day after the June 13th, the market is more in the mood for risk-on - must be the BP-story, the slowing economic data, the low yield, the blow-out - again in both Spanish and Portugese bonds.

Whatever it is: It works, so much we are at risk for having to go neutral and accept a summer on range-trading and drift upwards in stocks prices.

Our beta-model still very much short, but I will be observing the 200 ma today on the close and likewise the EUR - which despite political turmoil in Belgium is well bid. Sometimes the market reaction counter to normal tells more about the next trend than the underlying analysis. Clearly Belgium should have been a negative!

I neutralized all my positions, as P&L management dictates it, and I will pick up with the analysis again post our regular Weekly Meeting tomorrow.

Game plan: Still unchanged

Short update note: Chart show our game-plan for now...on the day I am watching the ECRI Weekly Indicator which is getting serious attention not least after Mr. Albert Edwards of Soc. Generale did this piece this week: http://ftalphaville.ft.com/blog/2010/06/08/254631/ecri-watching-with-edwards/ . Hearing todays data will turn negative: http://www.businesscycle.com/resources/

Happy Week-end

Winston

Wires report on Chinese Pension Chief moves EUR & S&P Futures

This story moved EURUSD from 1.1970 to 1.2040 and S&P Futures from 1056 offered to 1063 bid - Most amazing being the move itself - shows you we are cross road where either we take out 1040-00 and open for big loss' or the PPT steps in and we react to the 'divergence' in the charts.

SPX w. divergence (click for link) 

BULLET: EUROPE: Wires reporting comments from China pension..

EUROPE: Wires reporting comments from China pension fund chief, saying
the Euro can weather the current crisis, adding its normal for the euro
to see big swings amid debt crisis.

Provided by: Market News International

also worth noting:  Spain comes to the market today with auction:(Source: MNI)

EUROZONE ISSUANCE: Spain comes to the market Thursday with sale of
new 3-year benchmark 2.50% Oct 2013 Bono Thursday for between
E3.0-4.0bln size. 
--

The link between my "outragous call for Greek default" on Sunday and why it should/could happen

IF - and that's if German Constitutional Court decides to rule against EURO 750 Bln. package it will de-facto mean the deal falls & Greece is left to restructure its debt - also note this:

1. Spain alone needs to raise 40 bln EUR this and next month  (@ 460/70 effective rates in 10 Yrs)  - Ouch
2. European bank issuance came to a standstill last month - issuance lowest since late 1980s
3. European banks needs to finance 700 bln. EUR this and next in new debt....

The game could accelerate shortly....

Steen

================================

From Goldman Sachs Research today (Change in letter size my work)

Spiegel news magazine cited on Sunday from a letter the constitutional court had sent to the German government asking for more details about the €750 help package Euro-zone governments agreed upon beginning of May. The court specifically asked about an assessment of what the implications of an interim order against the help package would be. The German government, according to Spiegel, has meanwhile responded that such an interim order could trigger a "self-fulfilling expectations of a government default".

 

A ruling of the court against the rescue package would stop the participation of the German government immediately. The government could in principle try to re-negotiate the package and design it in such a way that it what be in accordance with the court's ruling. But it is unlikely that the government would get the necessary political support in the Bundestag once the court has ruled against a previous version.  

The court has now signalled that it will come up soon with a decision, which we expect to be made public either this or next week (the court is unlikely to give a date in advance). We expect that the court will not rule against the package. The court already rejected an injunction against the first EU help package for Greece and it seems to us that the first package was more questionable than the second package with respect to constitutional requirements. Needless to say that an interim order against the package would increase financial market tensions sharply, not least as there is no real plan B what to do in this case.

Source: Goldman Sach Research

June 13th the day of default for Greece

I will take the risk of looking utterly silly come June 14th, but there is better than 50/50 chance Greece will default before June is over - the favourite day being  June 13th!

At least that's the rumor in the market this morning - Rumors are just rumors, but this time I will call them credible rumors due to the nature of where it comes from.

What will happen IF - Greece did default?

• EURUSD will hit 1.1000 and then start to climb (we are very focused on the dramatic slow-down in US growth which means the cyclical help to stronger US Dollar is about to disappear)

• A controlled default - like Argentinas with hair-cut of 25-50%(Argentina default link) will hurt the major european banks and send the banking sector into tail-spin, but.........the new Euro SPV could probably be used in US/UK style to gloss over the biggest risk. Do not forget the European banks are now quasi-government owned- hence they will be bailed-out AGAIN.

• The spread contagion will continue - maybe it's just me but has people started to notice the big blow-out in Belgium and Italy? This is receipe for more trouble, especially in Belgium post this Sunday's election:

• But it would change the 'dynamics' as it is the RIGHT THING TO DO - so the market should down the line after readjustment find a better level from which Europe and risk will be trading better. My biggest macro theme remains: The SERIOUS SLOW-DOWN of US growth happening right now and into Q3 and Q4. I see US growth back to ZERO in Q4 - which is way below the consensus of 2-4% by the Ivory Tower economist' in the investment banks.

Strategy:

• Watch Belgium as the Canary in the coal-mine. Contagion and as friend of us pointed out: Every political change (UK, Hungary, Greece) has had MASSIVE IMPACT post on debt levels and reality checks. Watch Belgium and Holland next few weeks. Belgium election link
• Our Beta model is making money.....

Conclusion:

1. Stay out of stocks our ALERT WARNING is still in place. May 20th ALERT blog
2. Beta model is tranding - indicating less and less upmoves
3. Greece has 50/50 chance of default June 13th
4. ECB (and indirectly all of Europe) will move to QE inside next two month
5. EUR$ in 1.1000 / S&P in 1030/1000/Gold in 1300 before summer holiday in August

Be safe,

Winston

The game is pretty simple today...

It's all about whether we manage to close above 200 SMA in SPY(S&P) into the week-end and the G-20 Finance Minister meeting in Butan, South-Korea. Seems the main topic being the European Crisis.....

Otherwise we finally got some new issues on the table:

• JPY bearishness - main contender for Primeminister known as JPY WEAK spokesman......  Market is getting very long USD/JPY here - I remain somewhat sceptical, but... with RISK BEING ON.. fair chance
• China - increasing wages 33 pc - it shows how social tension is far more dominant in the Chinese decision making than external pressure - in this light I am of the opinion we will see further TIGHTER monetary policy to keep INFLATION under control.

Obama seems to have leaked the Non-farm data, but both of todays indicators was disappointing leads, but pinch me if the Government will not manipulate consensus up-and-down to make stellar number. Obama needs some success and now, and Non-farm easy way to go to the week-end.

Otherwise the positioning the same - been adding some NOK today otherwise - still net short with Beta and following the 128.10ish level in Bunds closely.....

Winston

故兵貴勝，不貴久。 What is essential in war is victory, not prolonged operations.

Europe

This is becoming one slow move into the summer period here in Europe. The politicians is even worker longer to secure some sort of movement on their national budgets. The joke being they are moving around 1-5% of the budget and none of it has to do with real structural reforms.

Europe will become a theme park shortly - The choice being one of Lego-Land or Disney?

The outlook is growing darker day-by-day as the ageing population and lack of productivity kills the ability to secure growth.

I had a long and super interesting lunch with one of the senior economist' involved in the early 1990s draft for the Euro-zone. The general take away:

We have to move towards economic union - the rules needs to be enforced and the survival of EU is 50/50.

Major macro theme

The major theme I am wrestling with right now is the fact that the leading model on growth I use is indicating Q3 GDP of MINUS 2% vs. a consensus call for 1.5% ish (Goldman)

Source: http://www.consumerindexes.com/
This index is leading by roughtly 90 days - which means the -2.0% reading is equivalent to Q3 this year.

Source: Goldman Research

Goldman, who is not super bullish on US growth(and which I rate the best on US economy) is looking for +1,5% growth - ergo: We got "gap" of 3.5% growth-points in the outlook for the US.

It should be added that GS and other have noted how the weak consumption in April seems to have continued in May - and now add the massive lay-offs announced by Citigroup & HP this week alone - and I am getting nervous!!!!!!

If the forecasting model is right - and I give it 60% odds - then we will be looking at major stimulus package into the Mid-term election in November and clearly Obama will be in even more political trouble as unemployment will be 10.0% plus and rising towards the 12%........

Also the "financial conditions are tight" according to GS:

The above issue is the main concern for me - and should be for you as well - as its totally undermines the whole: ".. Things are good and improving right now" -


I met with Treasurer of major European producer this week-end and EARNINGS/SALES are looking good for Q2 and partly for Q3 (although less so) - this particular producer has major exposure to EMG and their management wants to go FULL THROTTLE in hiring new labour.

I doubt they are right (but yes I am always sceptical) but for once I seem to have the statististic with me.

I should be noted that the slow-down is classic economic theory - as the stimulus has fast forwarded consumption and investment to 2009 and early 2010, there is now now major vacuum to fill as demand comes down, structural unemployment remains high, and the incoming austerity reduces volumes and increased tax, but hey....  logic has NO place in trading.

Strategy


Read interesting paper by David Rosenberg of Gluskin/Sheff:

This matches pretty well with out long-term target(eqilibrium  @ 850-00 ish)

Finally the most overrated investor


I have long argued that Warren Buffet strategy was "lucky" in the sense, he happened to be living at exactly the right time, as the world went on major debt binge financed by tax payers and easy monetary policy.

Now it's time for his value-investing to show it's strength and for now the results are pretty poor:

Berkshire sold of BEFORE the rest of the market

Most concerning being NET outflow in the stock

Do not get me wrong - Who am I to judge Buffet - but as a good analyst you need to able to seperate cause and effect.

Finally,

We remain in Doom-and-Gloom mode as that models outperforms, but recognize the risk for knee-jerk reactions up and serious manipulation.....but for now.. keep your powder dry.

Winston

Thomas Jeffersons

Hat-tip Yoshi


"I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."  – Thomas Jefferson
 
"The system of banking we have both equally and ever reprobated. I contemplate it as a blot left in all our constitutions, which, if not covered, will end in their destruction, which is already hit by the gamblers in corruption, and is sweeping away in its progress the fortunes and morals of our citizens." – Thomas Jefferson