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Huge Bullish Demand for Less Than Nothing


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#1 Russ Winter

Russ Winter

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Posted 13 July 2012 - 05:22 PM

“It seems there now is huge bullish demand for less than nothing.” – James Grant

It is time to abandon the idea that treasuries are a special asset class, let alone “risk-free”; this no longer makes sense in a G-zero world.” – Merrill Lynch memo to wealthy clients.  The term “unstable G-zero world” refers to poor governance (nobody in charge).

Black boxes China, JPM, WFC and Univ. of Michigan put out bullish “reports” on Friday. Besides the black box plays, the other market leaders were so called defensive stocks, toilet paper and cereal makers. The XLP, which represents non-discretionary consumers, trades at a mere 9 implied volatility on the puts, absolutely zero fear there.There is also a huge bull market and demand for bonds that pay nothing or incredibly even “less than nothing” (to quote Grant here on CNBC). Investors park in some increasingly insolvent sovereign (called by the Ministry of Truth term “core”) , and receive an actual negative yield in nominal terms.  When James Grant was asked about income, he suggests with a straight face utilizing the asset class of “walnut trees”,  feeling it is far preferable to “risk-off bonds”. That’s the problem with price discovery nowadays, you can’t make this up. Grant’s descriptive of a Jim Carrey “Truman Show” faux-like market state is apt.Posted ImageBloomberg provides this chart on bond allocation: Record fictitious capital and chasing rainbows with a 40% allocation.  The constant reference to “quality” income and “defensive” and the risk off trade is one of the most worn themes I can recall going back to the TNT bubble.   The second chart shows huge in-flows into bonds, especially since the 2008 crisis.source: Kevin DepewPosted ImagePosted ImageBack in the real world comes an assortment of revelations.- On China’s bogus black box economic reports:  start with electricity usage, then to Shanghai container throughput, to nationwide rail freight ton-miles, to steel output – and you will notice that none of these shows a rate of growth during the second quarter of more than 4% from 2011, and some are as low as 1%.- The Bloomberg Consumer Comfort Index holds at -37.5 for the week ended July 8. 86% of respondents say the economy is in bad shape, 21 points higher than the average since 1995. For those with incomes greater than $100K, confidence declined to -8.2, the lowest read since January.- State gambling regulators in Nevada say casino revenue in the state fell 10% Y/Y in May to $885M, led by a sharp drop in action on the Las Vegas Strip. Gambling revenue from Las Vegas Strip casinos fell 18.15% in May.- More signs of disinterest in Japanese stocks - Goldman Sachs (GS) has scaled down its prime brokerage business there, according to sources, moving a chunk of the operation to Hong Kong. In May, Goldman shuttered its Japanese stock loan desk, also moving those operations to Hong Kong. The bank is Japan’s biggest prime broker.- Ford (Fforecasts sales in Europe fell to their lowest level since 1994 for the first half of the year. H1 sales fell 10% Y/Y in 19 Western European markets, with June sales off a steep 16%.  European auto manufacturing is operating at 76% of capacity.- Boeing (BA) received about 50% less orders at the Farnborough International Airshow that just completed.- Warren Buffett’s comments on CNBC yesterday about the abrupt slowdown in some of his businesses have hit in last month or so.- A “defensive” stock getting risk off bids is Proctor & Gamble.
  • In June cut its earnings outlook for the second time in three months, as the maker of Tide, Pampers and Crest failed to make some price increases stick, lost market share and struggled to manage rising commodity costs.
  • Sales likely fell 1% to 2% in the quarter, the company said.
  • P&G Chief Executive Bob McDonald acknowledged at the time that the results reflected in part the company’s own management failures. But they also underscore howbudget-conscious consumers are putting pressure on P&G’s strategy of pricing its products at a premium.
- United Technology:Chief Financial Officer Greg Hayes told a conference in June that he estimated the worsening situation in Europe and China could cost the company between $50 million and $100 million in operating profit this year.
  • “Clearly, the situation in Europe has gotten a lot worse than what we had expected,” Mr. Hayes said. “We thought that perhaps we had a year or two of kind of reasonably solid if not growth, at least stability in Europe. That view has changed completely.”
  • About 17% of the company’s revenues come from Europe and about $1 billion of revenue from Spain.
- In California there were three city bankruptcies in the last month, Stockton,  San San Bernardino and Mammoth Lakes . Each year, California governments with the rating agents looking the otherway have borrowed huge amounts of money by selling low cost municipal bonds in late July to finance the period until they collect the majority of their tax revenues in December and April. The State of California was expecting to borrow $28 billion and municipal governments were anticipating borrowing anther $50 billion. The state deficit is running $9.6 billion.California also wants to do a rail “stimulus” program.  Moody’s who was expected to provide the credit rating to justify selling the debt, has just tripled their estimate of the state’s unfunded public pension liability from $38.5 billion to $109.1 billion liability and raised the annual cost of state pension funding by $7.3 billion.  What the rating agents fail to do adequately, the Governmental Accounting Standards Board (GASB) will.-And in case you forgot, Greece (from Testosterone Pit) :

Inspectors of the “Troika”—the EU Commission, the European Central Bank, and the International Monetary Fund, the entities that have agreed to bail out Greece under certain “conditions”—were back in Athens earlier in July to review Greece’s books, check on progress of the agreed-upon structural reforms, and meet with government officials, all in order to determine if these certain “conditions” have been met. The inspectors already expected the worst, after a three-month hiatus while Greece was embroiled in political turmoil and two elections, an interregnum during which nothing was implemented.

Apparently, it was even worse. Elements of their preliminary and still unpublished report due by the end of July seeped out: it painted an “awful picture”; of the 300 specific measures to be implemented by now, 210 were completely ignored and left by the wayside. This is the report that the Troika will use in deciding whether or not to send the next bailout tranche to Greece. And without this money, Greece will have to default and most likely exit the Eurozone.Time is running out for Greece. Completely dependent on bailout payments to keep its finances from collapsing, Greece is losing ever more support where it counts the most: in Germany. According to the latest poll, 61% of Germans reject giving Greece and other bailed out countries more time to solve their problems. They’ve had enough of the broken promises. They’ve become so bitter about the whole process that, according to another poll, 58% of Germans want their Deutsche Mark back, up from 39% in 2010.


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