Friday, February 25, 2011

GDP Miss...."The New Normal"

Here is a shocker(NOT!):

"WASHINGTON (Reuters) - The economy grew slower than initially estimated in the fourth quarter as government spending contracted more sharply and consumer spending was less robust, a government report showed on Friday.

Gross domestic product grew at annualized rate of 2.8 percent, the Commerce Department said in its second estimate, marking a downward revision from its initial 3.2 percent estimate.

Economists had expected GDP growth, which measures total goods and services output within U.S. borders, to be revised up to a 3.3 percent pace. The economy expanded at a 2.6 percent rate in the third quarter. For the whole of 2010, the economy grew 2.8 percent instead of 2.9 percent.

The pace of growth was too slow to do much to lower the unemployment rate, which fell during the quarter from 9.6 percent to 9.4 percent. It fell again in January to reach 9 percent."

My Take:

Stocks are up on the news which isn't a surprise because we were due for a bounce after 3 days of nasty selling.

I just love these economists and their "misses".  Let me share a funny story here from "the credit trader".  He loves to tell this story about a large banking customer that he traded treasuries for back in the 1970's and '80's.

His client would ask "the credit trader" what his firm's economist was advising when it came to where the 10 year bond was going to trade.  If the economist said that he expected bonds to sell off then his client would immediately take the other side of the trade for shits and giggles and go long.  "The credit trader" told me that his client won way more times than he lost when he took these bets.

They both would share a nice chuckle when his client would make money on these trades.

My point here is economists are pretty much worthless.  There are a few who have a clue, but for the most part they are shills that are bought and paid for by the people they work for on Wall St. 

The Bottom Line

The market is pretty quiet.  The DOW is up around 60 points.  IMO, Stocks going to trade on oil in the near future so if the Middle East stays quiet and oil prices remain steady then I wouldn't be surprised to see us move higher.

The longer term fundamentals however remain weak.  GDP growth below 3% means ZERO job growth folks which is not good when you consider 1/5th of this country is unemployed.

No jobs means that housing will remain weak and continue to deteriorate.  It also means that the consumer cannot recover and start buying the millions of I-phones that Apple needs in order to keep up it's amazing growth.

The stock market has not accepted our "new normal" growth rate of 2-3%.  Stocks are priced for perfection.  We need a robust recovery in order to create the earnings growth needed to sustain these prices.  Folks...I hate to say it but it "ain't gonna happen"!

If QE stops in June(which I am starting to doubt after seeing the bad GDP print), then I expect to see negative growth by Q4 of this year which means we will likely dip back into a recession.  We could possibly even see it in Q3 but I think that might be a tad too early.

If QE does not end and #3 is announced then inflation is going to continue to be a problem.  It's going to destroy profits as input costs continue to rise.  We are seeing signs of this already.

Can you imagine what the dollar is going to look like if QE3 is announced?  It's not going to be pretty.  You can be assured that the bond market won't be too happy either.

The bulls are still loaded with lots of profits so don't be surprised if this POMO market rises from here for a tad.

I stick hold firm on my prediction of a sell off as the ending of QE approaches in the March to May time frame. 

Wednesday, February 23, 2011

What a Difference a Day Makes!

Whoa!  I don't even know where to start today.  Should I begin with $100 oil or the ugly bond auction. 

Let's start with the 5 year bond auction and the 10 year bond's reaction to it:

My Take:

Today was a scary day.  There was nowhere safe for money to hide.  Cash started flying into treasuries in the morning as stocks sold off thanks to more Lybian mayhem.

That was working just fine until the bond auction was announced at 1PM.  Santelli gave it a D-.  Here are the ugly details:

"Bonds fell after the five-year note auction drew a high yield of 2.19 percent and a bid-to-cover ratio of 2.69, below the average bid-to-cover ratio of 2.79 posted over the past ten auctions.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold."

Take Continued:

As you can see above, treasuries sold off following the poor auction results. 

Folks, I don't what to say here....If we can't sell bonds now when stocks are selling off at the same time the Middle East is in the process of blowing up then when in the heck can we sell them???

The bond action spooked me more than the revolution in Libya today.  All I can say is this is a really really bad sign for treasuries moving forward.

Is the Fed Waking Up? 

Sure sounds like it.  Two of the Fed presidents created some serious waves today. The Fed's Plosser first came out with this bomb:

"WASHINGTON (MarketWatch) -- One of the most hawkish of the new voting members of the Federal Open Market Committee, Philadelphia Fed President Charles Plosser, on Wednesday said he's considering voting against continuing the $600 billion bond buying program but is also concerned about undermining the Fed's credibility. "Based on my reading of the economic outlook and challenges that the economy faces, I have expressed some doubts that the benefits outweigh the costs of this policy," Plosser said before the Rotary Club in Birmingham, Ala. "However, I supported continuation of the policy in January because it is generally a good practice for a central bank to do what it says it is going to do unless circumstances significantly change." He said should economic prospects continue to strengthen, he would not rule out voting to bring the bond buy program to an early close. "If the growth rates of employment and output begin to accelerate or if inflation or inflation expectations begin to rise, then it may be time to begin taking our foot off the accelerator," he said. "


Kansas City Fed President Hoenig then hit the wires with a fiery speech that was directed at the TBTF banks.  Here is the speech:

"Fed’s Hoenig Says U.S. Should Break Up Largest Financial Institutions

“I am convinced that the existence of too big to fail
financial institutions poses the greatest risk to the U.S.
economy,” Hoenig said today in Washington in the text of
remarks prepared for a speech. “They must be broken up. We must
not allow organizations operating under the safety net to pursue
high-risk activities and we cannot let large organizations put
our financial system at risk.”

Quick Take

Talk is cheap but this is a start!  Don't think for a second that the political chaos we are witnessing in the Middle East didn't have anything to do with these speeches.

The Fed is well aware of what money printing does.  They are also smart enough to realize that they need to hedge when their games start self destructing on them and the rest of the world.

They can tell us that they see no inflation until it's completely obvious that it's staring us right in the face.

In case you didn't notice we have definitely reached that tipping point:

I mean Christ....

When oil hits $100 a barrel, gold soars over $1400 an ounce, and monarchies start toppling due to soaring food costs I think it's kinda hard for the Fed to come on TV and tell us "we see no signs of inflation".

They understand that people are only stupid to a point.   The question now is will they ACT.  The Fed has a tendency to do a lot of barking instead of biting.  I will congratulate them when I see action Jackson.

The Bottom Line

$100 dollar oil is gonna hurt folks.  I wouldn't be surprised to see $4-5 gas by the summer which is when demand starts peaking.  That's a big punch to the gut for the consumer.

Today's Fed speeches were VERY interesting to say the least.  My guess is the Bernanke is taking some SERIOUS heat from the world's central bankers.  Most commodities are denominated in dollars folks which means the Fed's money printing creates and imports inflation to the rest of the world!

Let me remind you what the dollar has been looking like recently in case you haven't noticed:

This recent price action is going to only make matters worse overseas.  BTW, the dollar is selling off hard ahter hours tonight.

The fact that the Fed is hinting that they might end their QE program tells me that their arm is being seriously twisted by the powers around the globe.

The governments of the world were more than happy to play along with the Fed's games until they realized that they might lose power in doing so.

Folks I don't know how else to say this:  If the Fed is forced to stop QE then the financial system as we know it is toast.  Bond yields will immediately soar(they already are) and the banks will be toast because they own billions and billions of them. 

The Fed knows this, and I think it's a little too coincidental that Hoenig's speech focused on breaking up the TBTF banks.

It's too early to tell what's going down here but today's events are certainly interesting to say the least. 

That's about it folks.  You all saw the market today.  It was ugly, and if the Fed is forced to pull back on QE it's going to get even uglier.

Let's see if the robots can create a bounce tomorrow after two nasty days of selling.

Tuesday, February 22, 2011


This is going to leave a mark:

My Take:

I have a busy day so I thought I would note a few things while I have a bit of time.

Beware:  The Middle East is making all the headlines but there are other problems that lie underneath:

Like this one:

"NEW YORK (MarketWatch) -- The Treasury Department sold $35 billion in 2-year notes on Tuesday at a yield of 0.745%, the highest level since May 2010. Bidders offered to buy 3.03 times the amount of debt sold, compared to an average of 3.58 times at the last four monthly auctions of 2-year notes, which were all for the same amount. Indirect bidders, a group that includes foreign central banks, purchased 31.3%, compared to 32% of recent sales, on average. Direct bidders, a group that includes domestic money managers, bought another 6.8%, versus an average of 16.3%. After the auction, Treasury prices remained higher as investors sought a safe harbor amid the turmoil in Libya and the Middle East. Yields on 10-year notes, which move inversely to prices, fell 9 basis points to 3.48%."

Take Continued:

Not good folks.  If we lose the short end of the curve in the treasury market it's GAME OVER.  I was surprised to see such a poor result when we are seeing such instability in the Arab world.

I also thought the dollars relative weakness given the chaos was also very interesting and a bit disturbing:

So much for the US being the great "safe haven" that it once was!

Unbelieveable:  We are currently witnessing some of the most insane geopolitical risk in over 30 years and the dollar can't rally worth a damn.  Pretty pathetic if you ask me.

This just shows you how far this country has fallen in stature.  Bonds have caught a bid but it's not all that impressive given the heavy sell off in stocks.

The Bottom Line:

The Fed's leveraged bets on the economy via easy money policies is seriously threatened with every country that topples overseas.  Inflation is beginning to topple the dictators in the Arab world.  As Gerald Celente likes to say:  "When people lose everything they lose it!". 

This is what is happened in Egypt.  The average wage thereis $2 a day.  When food prices soared as a result of too many US dollars sloshing around the global system, millions started to wonder how they were going to feed their families.

The Egyptians "lost it" because they didn't see any other choice.  As I like to say "You gotta eat!".

AsI said yesterday:  This is a potential game changer that is going to seriously turn up the heat on the Fed and it's printing presses. 

So what happens if they are forced to change course? We will see higher rates and less leverage in our future.  You can kiss housing and the banks goodbye if this is the case.

Making matters worse today was the fact that Case/Shiller housing index was a complete disaster. 

Also, Japan's debt ratings were dropped to "negative" by Moody's.  Gee, that's a shocker....You mean having a debt vs GDP ratio of 200% is a problem?

So where do we go from here?

There are still plenty of buyers of stocks on any pullbacks so the jury is still out as to whether or not we are about to see a large correction in stocks.

One thing is for sure:  The world is getting a whole lot dicier thanks to our reckless monetary policies.  If the Middle East continues to unravel then things could unwind in a hurry here because we have once again Ponzied up our whole financial system via easy money policies of the Fed.

The market ran up on the thesis that Ben had the markets back.  This may no longer be the case.  

If the Fed's leverage is politically forced out of the system then we are about to enter the financial equivalent of a Category 5 hurricane.

Monday, February 21, 2011

Oil Soars on Middle Eastern Chaos

Ummm...This isn't good(/CL is oil futures for those of you that don't use Think or Swim):

My Take:

I hope you folks filled up your gas tanks over the holiday weekend.  Gas is going to go up sharply if the Middle East continues going "Mike Tyson" crazy.

IMO, $4 gas is the tipping point for the consumer, and we are rapidly closing in on this number as I type.  Gas sat at around $3.40 when I hit the pump today. 

The markets are going to be interesting tomorrow.  Stock futures are down sharply.  On the flip side, food futures, gold, and silver are all soaring as the world sinks into total chaos.

What's scary is it's not just the Middle East

We have our own version of "Egypt" over here in the beautiful state of Wisconsin.  Who woulda guessed that the crap would start hitting the fan there first?

It's comical watching this whole charade.  The unions look like a bunch of clueless little spoiled brats.  Weaning the unions off of the government "teet" is going to be a very painful process. 

Sadly these people don't understand that it's got to happen because the money isn't their to pay for their 100k per year pensions.  The state unions are bunch of morons, and I am going to enjoy watching this legislation get shoved down their throats. 

A note to the unions:  Wake the hell up and realize that we cannot fund the future promises that we made to our state workers.  These promises were made assuming that the market would go up 10% a year forever which is impossible!  

It's time for you people SUCK IT UP and DEAL like the rest of us private workers who have been forced to deal with massive layoffs and 20% unemployment. 

Grrr!!!.....This gets me so angry.....I need a breather!


OK...Feeling better now...

Meanwhile, down in DC, the government faces a complete shutdown in less than two weeks as the Republicans and the Democrats face off against one another over spending.  Watching this face off reminds me of watching the movie "Dumb and Dumber".

Neither side has a clue.  Both sides remain blinded by greed as they continue to try and protect the hands that are lining their pockets instead of focusing on the real issues.  I can't even stomach watching it anymore.  Wake me up when they are ready to raise the social security age to 70.

The Bottom Line

Things are now happening at lightning speed folks.  Fasten your seat belts and enjoy the ride.  Watching this credit bubble unwind is going to be a sight to behold. 

Keep a close eye on the  Middle East.  It's rapidly becoming a game changer.  It's strange, looking back, I always thought it would be the bond market that would stop the Fed's "easy money" spigot.  Now I am not so sure. 

If the global inflation thats been created by our easy money policies continues to heighten the risk of global political instability then you might see this stop the Fed's "helicopter" policy dead in its tracks.  

It will be interesting to see how the trading robots handle tomorrow's trade.  The geeks from the Ivies that program these robots can't prepare them for global chaos.

Please be careful with your investments.  We are entering into a period of extreme instability thanks to the "unintended consequences" of money printing.

Sunday, February 20, 2011

Has America Gotten too Expensive?

Here is the new reality in America:

My Take:

Wages have gone nowhere for a decade for 95% of the people in this country.  Meanwhile the upper 5% has flourished during the same period.

Folks, no matter how Wall St spins it, the economy isn't coming back until the bottom 95% of this country sees more jobs and higher incomes.  To date we have seen nothing of the sort.  

Unemployment remains at around 20% depending on who you listen to.  Housing remains deader than dead.  Jobless claims are now back on the rise.  Inflation is becoming a huge problem, and it's creating chaos around the world.  Oil is up close to $3 tonight as the Middle East remains in complete turmoil.

Corporate earnings are better but it's not helping the job situation.  In fact, it's having the opposite effect IMO.  Companies are not hiring because they feel pressured by the pigmen on Wall St to keep profits growing.  Since the economy sucks, companies are forced to cut costs and increase productivity in order to meet the streets ridiculous profit expectations.

The problem is you can only "layoff" your way to prosperity for only so long before there is nowhere else to cut.  This means earnings become flat and as input costs rise thanks to inflation I expect you are going to see earnings begin to fall in the very near future.

After a 100% rally in equities I think many are going to start questioning the idea of staying long.  This doesn't mean that the market will crash.  The algos now control a lot of the liquidity in the market so it's made it very difficult to anticipate where stocks go.


Let me switch gears here for a second.  I thought I would share some weekend discussions that I had.  I spent it with some Wall St folks and we had a few long discussions about the markets.

Many things were discussed.  The one I found most interesting was the long discussion we had about the effects that the HFT's, algos, and quants(whatever term you prefer) are having on how equities trade.

The conclusion was everyone agreed that the speed traders are having a dramatic effect on the price action of the market.  Most of them concluded awhile ago that there is no investing on Wall St anymore.  One of them said "Jeff, when the average trade is held for 11 seconds how could you possibly call buying stocks investing?".

They all agreed that it's all about speed now versus fundamentals.  I asked them if they thought this could last, and everyone agreed that it would eventually self destruct via a flash crash or some other Black Swan type event.

This was also interesting:  Many of them sit in cash, and some of the ones who have large cash positions believe the dollar is toast.  Thats how crazy this market is! The ones that hate the dollar and sit in cash think they will be able to move it into currency hedges before the dollar gets flattened.

The group generally agreed that the next big profit opportunity will be to the downside in stocks, bonds, and the USD.  All of them are petrified of inflation.  Interestingly, many of them don't like the commodities right now because they think too much "hot money" has already flowed in them.  

For the most part they were all extremely bearish and scared.  One of them noted that the recent money flows from the retail investor into stocks is a definite sign that we are nearing a top.

For the most part they believe sitting on your hands and waiting for a trend change is the thing to do right now.  Food for thought.

Back to My Take

The oligarch of this country will never admit it but they need the middle class in order to turn around the economy.  The truth is that they do because the top 5% represent a very small part of the population.

The biggest problem our economy has is reflected in the wage earning chart above.  Incomes are dropping and they have remained flat for over a decade now.  However, during this same period of time, the cost of living has SOARED!

The harsh reality is middle class can no longer afford to live here anymore.  Americans can't afford the $400,000 house that they got suckered into buying from 2003-2007.  They can't afford to spend 50k a year on a college education. 

In fact, with the way food costs are rising, they can barely afford to eat anymore.  I think the consumer is about to once again fall off a cliff.  The consumer numbers we got last week were 50% short of expectations.

Should we be surprised????  Incomes today are the same that they were in the late 1990's, and the recent data shows that they are actually beginning to decline once again as the economy suffers.  One of the most startling things that I read this week is 50% of Americans now make less than $505 a week. 

Good luck trying to get them qualified to buy a house!

One way I like to emphasize the whole wage point is by telling people to go back to the late 1990's and look at how much it cost to live on the same wages versus today.  Houses in the bubble markets were one third of what they are today.  That's right folks, homes have doubled or tripled in cost in certain markets.  Slower housing markets saw less appreciation, but prices are still up significantly versus 10-12 years ago.

College is up around 30% in price.  Gas is triple what it was back then. 

How in the hell can we recover when salaries have not increased at the same pace of our cost of living?

How is this sustainable?  Answer:  It isn't.   Add in a bad job market and it's even more frightening when you think about it.

The Bottom Line

The Fed can POMO up the stock market all they want.  The problems are not being fixed which means our economy is only going to get worse.    

The Fed's zero interest rates policy/money printing combination is making the cost of living in America unaffordable.   Zero interest rates are also hurting us in more ways than one.  Most people love to focus on the inflation that this policy creates and it's a very valid point. 

IMO,  people are forgetting that this policy has absolutely destroyed people who depend on fixed income.  People who used to be comfortable living off of their 5% CD's are getting pummeled as they are now forced to eat into their principle.  This is crippling many senior citizens.  I would love to see the actual income destruction from this policy.  I bet the numbers are devastating.

The Fed is basically punishing the people who did things the right way all of their lives with this zero rates garbage.  The fixed iincomers in this country are the ones who worked hard all of their lives in order to save enough money to comfortably retire and live off of the interest from their principle.

These people did things the right way and they now they are getting SCREWED by the Fed because the banks need to be saved.  Their lives have been turned upside down by this.  Millions of seniors are now worried that they might outlive their money.

It's really disgusting when you think about it.

Moving forward I just don't see how the consumer can recover under such brutally expensive living conditions. 

The only conclusion that I come to when I look at all of this is that the system will collapse.

If the Fed continues to print then we are going to see a brutal inflationary period that will eventually take down the consumer.  Since the consumer represents 70% of our economy it means the system itself will likely go right down with it.  I can't tell you when this all happens.   What I can say is that in my opinion is it's inevitable.

It's going to suck going through this difficult time but down the road I think it will be good for all of us.

After all, who wants to live in a country where you can't afford the simple pleasures in life?