Monday, October 11, 2010

Morning Note...


Note the bond market is closed for the Columbus Day holiday today…  Futures are ~10bps higher on relatively light news.  This past weekend’s IMF meeting was essentially a non-event.  Q3 earnings season begins this week in earnest, as we’ll get INTC results tomorrow, JPM Wednesday, GOOG on Thursday, and GE on Friday.   Plenty of recent chatter about the Obama Administration halting the foreclosure process nationwide, and the effect that might have on fragile real estate markets.  Europe up slightly.  Asia higher overnight led by +2.5% in Shanghai.  Oil -30bps.  Gold flat.  USD flat. 

Looking ahead, I thought BTIG’s October outlook – and the call that “2010 is 2007 inverted” – was an interesting read:

           
Regarding Friday’s jobs number, I thought this piece from BofA/MLCO was interesting:

Modestly disappointing; risks keep rising for QE2 Today's employment report was modestly disappointing on the surface and weak underneath. This is not the kind of report that makes QE2 a done deal in November though it does raise the risk; the Fed is getting closer to QE2. The economy remains in the throes of a growth recession: a below-potential economic landscape where the unemployment rate is unable to grind lower.

No momentum in the labor market
The number that matters, private payroll employment, advanced by 64,000 in September after a 93,000 increase in August. The net revisions to private employment in the last three months totaled 36,000. Over the last three months, the average monthly gain in private payroll employment is running at 91,000, which is basically in line with the average for the year. In other words, there is no momentum in the labor market.

Shocking decline in state and local employment In the government sector, Census employment declined 77,000 in September. There are only another 5,000 Census workers left to fire. The big surprise however was the massive 76,000 decline in local government employment. This was the largest one-month decline since the early 1980s and highlights the severity of the belt tightening at the lower levels of government. Two-thirds of the decline in local employment was in educational services (-49,800). This is why headline nonfarm employment came in weaker relative to expectations: -95,000 in September. So, there will be no chaperones this year at the kid's Halloween Dance at school. We will see the extent to which the federal government's recent aid to states/localities can arrest the decline in local government employment in coming months; our fear is that the cuts will continue. Our forecast assumes declines of 30,000 a month in state and local government employment through the end of the year.

Unemployment rate going nowhere
The unemployment rate held steady at 9.6%. This was "good" in the sense that the Household measure of employment actually rose 141,000 and unemployment decline by 93,000. The labor force participation rate held steady at 64.7%. This is a welcome development: what we have typically seen is the unemployment rate holds steady because folks vanished from the labor force and that did not happen this month.

Caught up with Fred Hickey’s most recent High Tech Strategist over the weekend.  Nothing new here, but I think he clearly outlines the looming “currency crisis:”

History shows that a country's structural problems cannot be swept away simply by printing money. This country has been losing manufacturing jobs for a long time, well before this latest economic recession.  We're simply not as competitive as we once were. Costs are too high - regulatory costs, legal costs, labor costs (including health care benefits), corporate tax rates (one of the highest in the world), etc. Globalization has brought billions of hard-working people (with fires in their bellies to improve their lots in life) into the global workforce.

Against this onslaught of competition, we're trying to sustain our standard of living the easy way. We've borrowed up to our eyeballs, and consumed more than we've produced. This approach was not sustainable and the day of reckoning has neared. But instead of taking the difficult corrective steps necessary- we're trying to push them off to the future again. Instead of reducing debt, curbing consumption, saving and investing and putting policies in place to make us more competitive; we're massively increasing government spending and expanding government handouts. Actions such as quadrupling the length of unemployment payments to 99weeks, bailing out the imprudent financial firms, auto companies, underwater homeowners- and mandating higher health care benefits (Obamacare) do not make this country more competitive.

To pay for this government largess, we're piling up government debts and paying some of it off in a debased currency. That's where the Fed's money printing campaigns come in. To date, our country's creditors (foreign and domestic) have continued to lend to us. They still have confidence in us. A gauge of their confidence is the U.S. dollar. Though the dollar is weakening, it has not collapsed- yet. However, the massive $1.7 trillion QE(I) round of money printing didn't work and now we're about to embark on round II. It's simple math- by increasing the numbers of dollars in existence, the Fed lowers the dollar's value. Creditors generally do not like having the value of their assets (dollar-based bonds) debased.  Eventually, the creditors will rebel, causing a currency crisis. This is a dangerous game that the Fed is playing. Money printing doesn't solve our structural problems, so they have to keep doing more of it. The more quantitative easing they do, the closer they bring us to a currency rout.

But until the crisis occurs, most remain complacent. They rationalize that because a currency crisis hasn't yet happened, it won't. Of course, investors didn't expect the housing bubble to collapse or the tech stock bubble- but they did. They had to eventually. The same holds true for the U.S. dollar. If the Fed continues with its grand money printing experiment there will be a dollar currency crisis. History says so. These central planners may think they're in control - but they're not. Money printing governments never expect that their actions will lead to crisis. Unfortunately, fiat-based currencies have always been destroyed- and they're wiped out by governments trying to take the easy way out of problems- by debasing their currencies.

Natixis cuts ARMH.  RBS cuts BP.  CHK and CNOOC (CEO) announce Eagle Ford Shale Project agreement.  Vornado realty trust announces 9.9% stake in JCP.  NOK says C7 phone has started shipping.  DBAB ups BLK.  WEFA ups VRX.  DBAB cuts ADM, MTW, TROW.  BARD cuts FO. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Today’s Trivia:  We currently celebrate Columbus Day on the 2nd Monday of October…but what was the actual date that Columbus made landfall in the “New World” in 1492?

Yesterday’s Question: What company originated with the 1980 merger of SaferWay and Clarksville Natural Grocery?

Yesterday's Answer:  Whole Foods.

Best Quotes:  “Good Morning – Bond market is closed today.    Third quarter reporting picks up this week with tech and financials heavy on the schedule.  Last week’s rally was a fear of the QE3.  This week we will need some earnings, and guidance to keep the upside momentum rolling.  Our Guy Bianco expects a strong 3q earning season, and he has been a monster bull.    1164 was Fridays high, and the months high.   Plenty of room till we get to 1175.     Sorry nothing earth shattering here.    I am rooting for massive upside surprises out of Fins, we’d all be happy.”  BofAMLCO trader note