The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

The following comes form a major US trading desk

Yesterday

From support to resistance…to support…to resistance… Yesterday was notable more for gold’s decline than anything else, really. The precious metal was crushed, spot prices falling below $1100 per ounce briefly after opening at $1138, and the gold mining stocks really got hammered. The financials were in play, with Meredith Whitney casting doubt on the level of trading activity at Goldman Sachs and Morgan Stanley (those stocks lost -2.5% and -4%, respectively) and Citigroup’s $17 billion secondary really looking like a disaster…although those participating in the offering made a nickel per share as the stock closed at $3.20. The transports were hit on FedEx’s lower guidance, but there was a sideshow in the space that involved YRC Worldwide’s attempts to stave off bankruptcy (Goldman Sachs allegedly encouraged clients to wager on the trucking company’s demise through CDS, an allegation that Goldman later denied). The other trucking names traded higher on speculation that YRC might capitulate. The strong dollar was a factor in the weakness, despite the fact that it was mainly (again) euro weakness masquerading as dollar strength. When all is said and done, though, movement between SPX 1110 and 1087 is just noise. The real story yesterday was this morning’s and this afternoon’s expirations of various options and futures contracts, all of which were anchored by the S&P 500 futures at the 1100 level. (source: Bloomberg)
Last Night

Asia-Pac

Asian markets declined again last night, wrapping up a dismal week for the Chinese markets in particular (most markets closed lower four days out of five this week): Nikkei -0.2%; Hang Seng -0.8%; Shanghai Composite -2.1%; Shenzhen Composite -3.5%; Kospi -0.1%; S&P/ASX 200 Index -0.4%; Sensex -1%; Straits Times Index -0.4%. The sell off is being partially attributed to news from the Bank of International Settlements that it plans to implement more stringent capital requirements by 2012. Earlier, unsourced reports from the Nikkei business daily suggested that implementation might be put off for a decade or more. As a result, the bank stocks which enjoyed such massive gains on Wednesday pulled back. Our negative session didn’t help the cause either. Miners were crushed across the board (Sydney, Hong Kong), joining the downtrodden financials. Transportation stocks outperformed, and tech held up well (see RIMM’s results) providing the only real bright spots of the session. (source: Bloomberg)
South Korea
• Department store sales increased by 6.4% y/y in November, down from October’s heady 11.4% y/y pace.

• Discount store sales fell off by -2.8% y/y in November after rising by 4.5% y/y in October.

Japan
• The Bank of Japan left its benchmark interest rate at 0.1% last night as expected.

• Department store sales fell -11.8% y/y in November, a bit worse than October’s -10.5% y/y decline.

• Tokyo department store sales were off -11.8% from a year ago, a bit better than October’s -13.1% y/y decline.

Sri Lanka
• 3rd quarter real GDP expanded by 4.2% y/y, better than Q2’s 2.1% y/y expansion and better than estimates for a 3.5% y/y print.

Europe
Europe is chopping back and forth in schizophrenic fashion this morning as traders attempt to verify the accuracy of reports from Al-Arabiya TV that Iranian forces have stormed and captured an Iraqi oilfield: DAX +0.6%; CAC flat; FTSE +0.4%. Crude is also trading schizophrenically, having spiked from $73 per barrel to $74.32 (WTI) in a matter of minutes. Also a factor was the expiration of futures on the FTSE, which saw the December contract spike some 40 handles higher (or +0.8%) into expiration. Energy and mining stocks are higher in London, while financials are dragging. It’s a similar story in Paris where auto stocks are also lower. Germany’s holding up better, with tech stocks (RIMM’s results having an impact) leading the way higher. (source: Bloomberg)

Euro zone
• The seasonally adjusted current account deficit narrowed a bit in October to –Eur4.6 billion from September’s –Eur5 billion.

• The seasonally adjusted trade surplus widened out to Eur6.3 billion in October from September’s Eur4.3 billion.

U.K.
• Consumer confidence (GfK survey) dipped in December to -19 from November’s -17. A rise to -15 was expected.

• The Public Sector Net Cash Requirement (PSNCR – consisting of the Central Government Borrowing Requirement, the Local Authorities Borrowing Requirement, and the Public Corporations Borrowing Requirement), which is basically an aggregated budget deficit, was Gbp14.7 billion in November, up from October’s Gbp6.6 billion. The expectation was for a Gbp17.3 billion PSNCR.

• Money supply growth (M4) was flat from October to November, while November’s 9.2% y/y growth dipped from October’s 10.8% y/y growth.

• Mortgage approvals from “major banks” ticked up to 63,000 in November from 60,000 in October. The consensus expectation was for 64,000 approvals.

Germany
• Producer prices (PPI) increased by 0.1% m/m in November, enough to cut the year-on-year decline to -5.9% from -7.6%.

• The IFO Business Climate Index (a survey of ~7,000 manufacturing, construction, wholesaling, and retailing firms) improved slightly in December to 94.7 from November’s 93.9. The consensus expectation was for a 94.5 print, so it was a slight “beat.”

• The Current Assessment component of the IFO index drifted up to 90.5 in December from 89.1 in November, while the Expectations component inched up to 99.1 from 98.9.

Italy
• Industrial orders increased by 0.3% m/m in October after jumping by 5.5% m/m in September. The year-on-year rate improved to -17% (in line with expectations) from -20.4%.

• Industrial sales fell by -1.6% m/m in October, dragging the year-on-year rate down to -18.4% from September’s -17.3%.

France
• Business confidence dipped to 89 in December from 90 in November, although that November figure was revised up from 89. In any case, that is the first decline in this series since it dropped to 68 in February from 73 in January. The 89 print was slightly below expectations for a 90.

• The Own-Company Production Outlook, which reflects the production expectations of 2000 corporate executives, dipped to -7 in December (below expectations for 0) from -4 in November. That’s the second month of pullback from October’s peak of -3.

• The Production Outlook Indicator, another component of the survey for which I don’t have any details unfortunately, dipped to -11 in December from -9 in November. Expectations were for an improvement to -7.

Austria
• Producer prices fell -0.9% m/m in October, dragging the year-on-year rate down to -3.3% from September’s -2.4%.

Netherlands
• Consumer confidence improved to -11 in December from -14 in November. The expectation was for a -12 print.

Greece
• The current account deficit widened to –Eur2.49 billion in October from –Eur1.56 billion in September.
Source for all data is Bloomberg

Interesting argument here by Richard Posner on the (f)utility of GDP.

Money shot:

“But it is necessary to emphasize that it [GDP] is just a starting point. I disagree with economists who say the “recession” ended in the third quarter. The depression (as I think we should call it if only because of its enormous potential political consequences) has caused massive unemployment with all the associated anxieties and hardships, has greatly reduced household wealth, has caused private investment to turn negative, has cost the government trillions of dollars in lost tax revenues and recovery expenditures (TARP, the fiscal stimulus, the mortgage-relief programs, the auto bailouts, etc.), has undermined belief in free markets and altered the line between government and business in favor government, and is threatening a future inflation while deepening our dependence on foreign lenders.

To view a change in GDP from negative to positive as signifying the end of a depression (by which criterion the Great Depression ended in 1933 and again in 1938) is to misunderstand the utility of GDP as a measure of economic activity.

Worth a read . . .

The 3 high profile earnings reports last night, NKE, ORCL and RIMM, all provided positive surprises and they are the main catalyst for the pre opening rally. Today is also quad witch expiration and the S&P quarterly rebalancing.

China is taking another step forward in cooling their property mark set by requiring at least a 50% down payment on any purchases of land. This follows a tax on the sale of homes made within 5 yrs of purchase. Also, late yesterday Fitch said that Chinese bank’s have off balance sheet transactions that are masking the true credit condition of their financials.

In response to both, the Shanghai index closed down 2% to a 3 week low and has now corrected 10% from its ’09 high. Dec German IFO business confidence rose almost 1 pt to 94.7 which was a touch above estimates. Greek bonds are lower again with their 10 yr yield rising another 6 bps, up 45 bps on the week and is again keeping a lid on the euro.

Here is a fascinating twist on the underwater homeowner walking away fromt heir bad purchases: This time, its Morgan Stanley.

They spent over $8 billion on commercial property in 2007 — the peak of commercial real estate in the US.  Now, they are going to preemptively “Walk Away” from five San Francisco office buildings, letting them go back to the lenders.

The buildings Morgan Stanley is giving up are :

One Post
201 California St.
Foundry Square I
60 Spear St.
188 Embarcadero

So this is now a new category of real estate financing: Preemptive “Walks Away” from bad CRE purchases.

Here’s Bloomberg:

Morgan Stanley plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.

The bank has been negotiating an “orderly transfer” of the towers since earlier this year, Alyson Barnes, a Morgan Stanley spokeswoman, said yesterday in a telephone interview. AREA Property Partners will take over the buildings. Barnes declined to say when the transfer will occur.

“This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.”

The San Francisco transfer would mark the second real estate deal to unravel this year for Morgan Stanley, which bet big on the property markets as prices were rising. The firm last month agreed to surrender 17 million square feet of office buildings to Barclays Capital after acquiring them for $6.5 billion in 2007 from Crescent Real Estate Equities. U.S. commercial real estate prices have dropped 43 percent from October 2007’s peak, Moody’s Investors Service said last month.

Morgan Stanley spokeswoman is correct when she says it is technically not a default. Instead, it is a case of Commercial Jingle Mail. Rather than make payments, they are turning the keys over to the lender — just like underwater homeowners do!

Good luck making moral arguments against homeowners doing just that in the future . .  .

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Source:
Morgan Stanley to Give Up 5 San Francisco Towers Bought at Peak
Dan Levy
Bloomberg, Dec. 17 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=aLYZhnfoXOSk&pos=5

Back home from Florida — its a 60 degree temperature swing from Fort Lauderdale to NYC — and I suddenly realize that I have some shopping to do.

I assume many of you are also behind on this most wasteful holiday of consumer spending frenzy.

Here are a few items that are on my list for those of you who have been especially nice:

• The 2000 Year Old Man: The Complete History: (3 CDs, 1 DVD about $50);  Carl Reiner & Mel Brooks are two of the funniest guys on the planet, and its amazing how much mileage they get out of this routine. Great for anyone who appreciates classic comedy  (Anyone I know who would appreciate this already owns it)

• Above the Bones Because you can never have too much Reggae: Imagine Jack Johnson with an even deeper Reggae groove, and that’s the most recent CD from. Strong lyrics and good melodic hooks abound on this mellow reggae debut from (His even mellower 1999 self titled debut, Mishka, is also worth a listen).

• Family Guy – The Total World Domination Collection: Its got 22 Discs, so the $79 price is reasonable — but I just cannot pull the trigger on this one for myself. (Fitz — does this interest you?)

•  The decade’s best unread books: Looking for a few names off of the beaten path? These publishing insiders have identified the 10 best books that unnaccountably never made the ‘best of’ or bestseller lists, but should have:

The Spare Room by Helen Garner (2008)
The Secrets of the Chess Machine by Robert Löhr
Cervantes’ Don Quixote ( John Rutherford’s translation)
Mutiny by Lindsey Collen (2001).
Barefoot Soldier by Johnson Beharry VC (2006)
War Reporting for Cowards by Chris Ayres (2005)
Born Yesterday  by Gordon Burn  (2007)
Black Juice by Margo Lanagan (2006)
Journal by Hélène Berr (2008)
Boy A by Jonathan Trigell (2004)
The Three of Us by Julia Blackburn  (2008)
The Girl Who Stopped Swimming by Joshilyn Jackson

Go read the Guardian for the inside scoop as to why these books are so deserving.

• Don’t forget all the free ebooks at Many Books.net; Download some favorties, and email them to your favorite reader (If they are too big, you can use a download site for assistance)

• Etón American Red Cross ARCFR600R: Hand cranked, no batteries — its the perfect gift for your favorite Dollar Bear/Gold Bug/end-of-worlder. It comes with a  Solarlink Digital AM/FM/SW/NOAA S.A.M.E. Weather Radio with Flashlight, Siren, Solar and CellPhone Charger

• Hey, I found the perfect gift for Mike Taibbi:

• John Hardy does some interesting things with silver; If his prices ever come down, Mrs BP might get lucky!

• I’ve been very impressed with the coffee I get from a simple French Press from Bodum; if you know a coffee drinker who shuns the pricey hi tech coffee machinery, this is the perfect gift — along with a few pounds from your favorite coffee roaster — for them.

• And lastly, because I was a such a good boy this year, I’m putting this on my wish list:  Maxi Marine watch from Ulysse Nardin:

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(Mrs BP, this is NOT a hint)

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Sweet! Almost done shopping . . .

Heh:

via Tom Toles

If you are looking for a “where to invest 2010″ list of investment ideas, strategies, and predictions, you are not getting what you were looking for here; however, this post may be exactly what you really needed — a discovery…

Let’s make this interesting, informational, observational, conversational, and introspective:  I will pose several questions related to the annual onslaught of “where to invest” articles, generated every December by every media type that exists, to provoke thought and elicit responses from readers (you).  Please feel free to share your own “where to invest 2010″ ideas if you wish, but also consider aiding those who have been conditioned for so long by conventional thought that a New Year means a new investment strategy.

“The average man doesn’t wish to be told that it
is a bull or a bear market. What he desires is to be told specifically which
particular stock to buy or sell. He wants to get something for nothing. He does
not wish to work. He doesn’t even wish to have to think.” ~ Jesse Livermore

Perhaps this can serve as useful source of unconventional thought (the right kind, if you ask me) that aids those who found this post and unexpectedly found an intervention!

Please read the questions and proceed to the comments:

• How might recent market conditions color the decisions of those conventional media sources supplying the “where to invest” ideas?
• What if the market were at the same position now as it was in early March of this year (2009)?  Wouldn’t the extreme sentiment of the time predict more turmoil ahead?  Note: The broader market indexes, as most of you know, have advanced more than 65%, as of the writing of this post, since March 9, 2009, which was not something many “predicted” at the time.
• Similarly, won’t the huge run up in prices influence the “where to invest” articles coming out now?
• What correlation, if any, does the calendar year have with market and economic conditions?  Is it simply a behavioral ritual similar to New Year’s Resolutions?
• Does the annual “where to invest” ritual have at least some value for those who would otherwise never look at their investments or would most people be better off not looking at (and hence not tinkering with) their investments anyway?
• How do you feel about the annual re-balancing (returning investment allocations back to the original percentages — in effect buying the “losers” and selling the “winners”) strategy?  Is re-balancing even a good idea to begin with?
• Can a trader gain any kind of advantage or insight by observing and perhaps taking action (i.e. momentum trade or contrarian play) based upon the most common themes found in the “where to invest” articles?  For example, if all of the “where to invest” articles say to “buy gold,” what might a prudent trader do?
• Have you ever made money by following a “where to invest” article’s suggestions?

I think these questions should get the wheels turning for you.  In the comments, I’ll share the one best place to invest in 2010, especially in the wake of The Great Recession…

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Kent Thune is blog author of The Financial Philosopher

For all the talk about inflation appearing sometime in our not-too-distant future and, according to Milton Friedman, rising prices still being a monetary phenomenon, you sure don’t hear too many people talking about the broadest measure of the money supply – M3.

Reconstructed over at nowandfutures for about the last three years after the Federal Reserve discontinued it, much to the chagrin (or, maybe, delight) of those conspiracy minded individuals who viewed the move as a cover-up on the grandest of scales, it’s hard to see how consumer prices are going to be bid higher anytime soon, given a chart like the one above.

Of course, if banks ever start lending some of their massive reserves, an entirely different dynamic could quickly develop and the recent trend could quickly reverse, but, fortunately, our central bank leaders have assured us that they’re on top of that particular situation.

ooo

Tim Iacono is a retired software engineer who writes the blog “The Mess That Greenspan Made”. He is also the founder of  “Iacono Research” , a subscriber-based investment website  focusing on natural resources.

By now, you have heard the term ‘Minsky moment.’ It was coined by Pimco’s Paul McCulley to describe events in Russia that precipitated the LTCM crisis.  McCulley was referring to economist Hyman Minsky’s concept that long periods of stability cause people to take on ever more debt and ever more risk, leading to a gigantic meltdown.

James Galbraith does a good job of explaining this instability of stability in three videos below. Galbraith sees the latest episode of financial crisis as a Minsky moment predicated on ‘Ponzi’-style debt pyramiding that is the end game in the cycle of stability to instability, just as it was post-1929.

My view is that a lack of regulatory oversight allowed the system to veer away from macro-prudential finance (see my little playground analogy with Greenspan as headmaster here). This is not a case of Madoff-style fraud with everyone in finance cooking up schemes to defraud homeowners. Yes, these cases of predatory lending existed. However, I see the systemic risk as more pertinent.

Systemically-speaking, the Ponzi phase is one of risky behavior crowding out prudent behavior in a world free of regulatory controls. If risky behavior is temporarily rewarded with profit and this temporary period is long enough, then risky behavior wins and drives out good behavior.

In the last few years – even the last few decades, financial interests have used the lack of regulatory controls and their increased access to political power to profit using risky financial instruments. They have done so by creating a byzantine maze of Ponzi-style debt schemes (think CDOs levered on mortgage-backed securities or think credit default swaps). I consider this looting as it represents a transfer of income to them from everyone else. Galbraith calls this the Predator State.

How one deals with the intrinsic instability of the capitalist system in an environment of powerful special interests is the fundamental question we face in fixing finance. The natural tendency toward greater risk in a stable macro environment is toxic when mixed with lax regulatory oversight and crony capitalism. Bailing out the system without punishing the fraud while permitting risky actors and their investors to escape the full consequences of their behavior is a moral hazard. This invites more of the same in future.

As for the present day, Galbraith talks about government as the cushion between us and Depression. I see this as an accurate view. Whether this is the advisable way forward (i.e. should we take the pain now?), depends on your view on government’s role in the economy. I believe that witnessing yet more crony capitalism in this depressionary environment will almost certainly induce ‘big government revulsion’ and lead to a recessionary relapse. See my post “A few thoughts about the limitations of government.”

Running time about 45 minutes in three parts.

Enjoy.

(three videos embedded above. If they don’t appear, go to the original post here.)

This is a guest post by Edward Harrison. A version of this post originally appeared at Credit Writedowns.

Nice list via UBS:

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These sorts of forecasts were once uncommon. I wonder what it means when lots of people try to guess what the deviations from normal expectancies will be?

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Source:
Ten surprises for 2010
UBS Investment Research
Global Investment Strategy, 15 December 2009
www.ubs.com/investmentresearch