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

Jan Durable Goods rose twice expectations at the headline level, up by 3% but ex transports they fell by .6% vs an expected gain of 1%. However, ex transports was revised up by 1.1 % pts in Dec, so taken together, it was only a touch light. Leading the headline gain was a 126% rise in nondefense aircraft orders, partly offset by a 2.2% drop in vehicles/parts. The drag on the core was a 9.7% fall in machinery orders. Shipments, which get directly plugged into GDP, fell .2%. The core cap ex figure, non defense capital goods ex aircraft, fell by a disappointing 2.9% but does come after gains in Nov and Dec. Inventories were flat and the inventory to shipment ratio remained unch at 1.67, the lowest since Sept ’08. Bottom line, manufacturing has led the statistical recovery in the economy but today’s data shows how lumpy this process has been and with still a lack of firm end demand evident, lumpiness will likely continue.

Moody’s followed S&P yesterday in warning Greece that a downgrade or 2 may be forthcoming in a few months if they “significantly” deviate from the plan of austerity. Further down the dangerous road though, S&P said “a sovereign default is not going to happen in the euro zone.” They likely say this because of the bailout scenario if push comes to shove. The Greek 10 yr yield is higher by 8 bps to a 2 1/2 week high, Greece 5 yr CDS is trading around 390 bps, now up 40 bps in the past 3 days and Greek stocks are down almost 2%. Euro zone economic confidence fell a touch from Jan and was slightly below expectations but Germany’s Feb jobs figure was better than forecasted as unemployment rose by 7k vs the consensus gain of 16k. Bernanke repeats his testimony in front of the Senate today with only the Q&A of course being different. Jobless Claims and Durable Goods are the two key data points of the day.

Jan Durable Goods rose twice expectations at the headline level, up by 3% but ex transports they fell by .6% vs an expected gain of 1%. However, ex transports was revised up by 1.1 % pts in Dec, so taken together, it was only a touch light. Leading the headline gain was a 126% rise in nondefense aircraft orders, partly offset by a 2.2% drop in vehicles/parts. The drag on the core was a 9.7% fall in machinery orders. Shipments, which get directly plugged into GDP, fell .2%. The core cap ex figure, non defense capital goods ex aircraft, fell by a disappointing 2.9% but does come after gains in Nov and Dec. Inventories were flat and the inventory to shipment ratio remained unch at 1.67, the lowest since Sept ’08. Bottom line, manufacturing has led the statistical recovery in the economy but today’s data shows how lumpy this process has been and with still a lack of firm end demand evident, lumpiness will likely continue.

In likely weather related noise, Initial Jobless Claims totaled 496k, 36k higher than expected and up from a revised 474k last week. Continuing Claims, delayed by one week, rose just 6k but were 47k above expectations. Extended benefits, reported on a 2 week lag, fell by a net 320k but follow a gain of 275k last week. Bottom line, the snow storms were a definite influence on the reported data likely due to the administrative backlogs that got created, thus don’t read too much into the data. With this said, the trend in initial claims is still too high and while the pace of firings still has slowed dramatically, companies still remain very reluctant to aggressively add workers on a permanent basis.

And speaking about not understanding what caused the bear market, we have this recent SEC action:

“The Securities and Exchange Commission narrowly approved curbs on short selling, addressing what some consider a cause of the 2008 financial crisis despite criticism that there was no evidence to support the move.

The commission voted 3-2 on party lines to make the curbs final, in another indication Chairman Mary Schapiro is having trouble gaining unanimity for her ambitious agenda to toughen the nation’s securities rules.” (emphasis added)

Once a company’s stock price falls 10% from the prior close, traders could only execute short sales for the stock at a price above the market’s best bid. The curb stays in place through the following day.

At least it was a 3-2 vote . . .

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Sources:
Curbs Short Selling, Disappointing Goldman Sachs
Jesse Westbrook
Bloomberg Feb. 24 2010
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aDtSKApox3UM

In 3-2 Vote, SEC Limits Short Sales
FAWN JOHNSON
WSJ, FEBRUARY 25, 2010
http://online.wsj.com/article/SB20001424052748704240004575085344139674042.html

Oh, and adios muchachos can be heard here.

Source:
Weak New Home Sales Report Least of Housing’s Problems, Barry Ritholtz Says
Aaron Task
Feb 24, 2010 02:51pm EST

http://finance.yahoo.com/tech-ticker/weak-new-home-sales-report-least-of-housing%27s-problems-barry-ritholtz-says-430520.html

And speaking of nuance:

Too many reporters still don’t seem to fully understand what killed Lehman, AIG, Bear, etc. Paragraphs like this in today’s NYTimes are simply wrong:

“Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.”

No, those trades are not what “nearly toppled” AIG; rather, the company purposefully took on an inordinate amount of highly leveraged risk — 3 trillion dollars worth — with a massive concentration in housing and mortgage markets. Their models assumed that home prices were not going to falter, something demonstrably false had they done 15 minutes worth of research on it. Add to this the fact they failed to have any reserves on those ginormous trillion dollar bets. Further, the bulk of their most volative exposure was to rapacious counter-parties who out-maneuvered them at every turn.

These credit default swaps (CDS) were a bet on the deteriorating fundamentals of a company whose death was inevitable.

The CDS argument is a variation of the “Shorts are killing our company” nonsense that so many money-losing firms (Now, with accounting restatements!) hide behind.

Later in the piece, the Times captures the issue much better:

“A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.

On trading desks, there is fierce debate over what exactly is behind Greece’s recent troubles. Some traders say swaps have made the problem worse, while others say Greece’s deteriorating finances are to blame.”

That captures the subtlety better.

Lost in this argument is an understanding that ALL credit and banking is based upon a belief system: That the borrower is acting in good faith, that they remains credit worthy, and they have the means to service the debt.

The good faith and belief of their clients, trading partners and under-writers is a very fragile thing. That was something Dick Fuld of Lehman Brothers discovered way too late. It took a long time to fritter away 100 years of good will — it happened so slowly that he did not notice it. Perhaps if he saw that belief fading, he would not have rejected the firm saving billion dollar deal offered by Warren Buffett . . .

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Source:
Banks Bet Greece Defaults on Debt They Helped Hide
NELSON D. SCHWARTZ and ERIC DASH
NYT, February 24, 2010
http://www.nytimes.com/2010/02/25/business/global/25swaps.html

I had lunch the other day with several other analysts, strategists, money managers and economists, all of whom shall remain nameless.

All make frequent media appearances.

The conversation drifted over to CNBC. The consensus is everyone at the table wants to do less of it.

The reasons given:

-Producers try to tailor the discussion (“Be more Bullish/Bearish”);
-Too time consuming;
-Law of diminishing returns — the benefits are less and less each appearance;
-Nuance has become a dirty word (“Pick a Letter to describe the economy”);
-Last minute cancellations when “better” names become available;
-Dumbing down of the discourse (One person called it “Foxification”)

I then mention that while I still do a ton of media, I have become Persona Non Grata at CNBC.

There was an issue with some really obnoxious blog comments (they were deleted); I started asking not to be booked with really dumb guests (I also requested no Octobox). I did do Fox  a few times (But really, who cares about that? I do all media outlets on behalf of my firm).

With Dylan gone, I dont hear from Fast Money, and with Kudlow, I was told I was “too nuanced“– a phrase that is hardly ever used to describe me. I hadn’t done Squawk Box in years, and I know Joe Kernan ain’t no fan of blogs.

Such is life in the big city . . .

Spyker Cars is now the proud owner of Saab. And according to the news release from G.M., the wind down of Saab’s operations is over:

“This transaction represents the successful outcome of months of hard work and intense negotiations, all aimed at securing a sustainable future for this unique brand, and we are pleased with the positive outcome,” said John Smith, G.M. vice president for corporate planning and alliances.

Wednesday afternoon linkage

• Bernanke Expects Extended Low Rates (NYT)
• Martin Wolf: The world economy has no easy way out of the mire (FT)
• SEC votes to limit ‘short selling’ of stocks (LATimes)
• Wall Street shifting political contributions to Republicans (WaPo)
• Bust the Health Care Trusts: Why do health Insurers Have an Anti-Trust Exemption? (NYT)
• The doomsday cycle (Vox EU)
• Swaps Show European Contagion Won’t Hit U.S.: Credit Markets (Bloomberg)
• History in the Remaking: A temple complex in Turkey that predates even the pyramids is rewriting the story of human evolution (Newsweek)
• How Google’s Algorithm Rules the Web (Wired)
• The Scale of the Universe (New Grounds)

What are you reading?