Roach on China

Financial Times

On the surface, China appears to be leading the world from recession to recovery. After coming to a virtual standstill in late 2008, at least as measured quarter-to-quarter, economic growth accelerated sharply in spring 2009.

A back-of-the envelope calculation suggests China may have accounted for as much as

2 percentage points of annualised growth in inflation-adjusted world output in the second quarter of 2009. With contractions moderating elsewhere, China's rebound may have been enough in and of itself to allow global gross domestic product to eke out a small positive gain for the first time since last summer.

That's the good news. The bad news is that China's recent growth spurt comes at a steep price. Fearful that its recent economic short- fall would deepen, Chinese policymakers have opted for quantity over quality in setting macro-strategy, the centrepiece of which is an enormous surge in infrastructure spending funded by a burst of bank lending.

If the enthusiasm for China dims the equity markets and commodities will get smacked. Plus Roach has a history of being early on his warnings.

Jeff Saut's excellent weekly.

Jeff Saut  very good this week.

In conclusion, we find it interesting that when President Obama took office, vehemently voicing his three major tenets of “Healthcare,” “Cap and Trade” and “Card Check,” the equity markets experienced a mini-crash. However, when he began “softening” his approach to those tenets the equity markets have rallied. Our sense is all three tenets will fail in their current form; and that, ladies and gentlemen, is one of the reasons the equity markets have rallied over the past few weeks. Our hunch is the SPX will now “rest,” oscillating between 940 and 980 as the overbought condition is worked off and our indicators reenergize themselves, and then rallies again toward our long-standing target of 1050.

i woul add to Jeff's observation that fact that this week all the talk is congressional limitations on speculation and guess what? The market advance stopped.

FT: Animal spirits rarely stay down for long

Nice perspective with analysis on duration of recessions  in this article at the Financial Times.

As late as the autumn of 2008, economic forecasters in general were far too optimistic about 2009. Are these same forecasters now too pessimistic about recovery? The historical evidence reveals a typical pattern of recession and recovery that suggests this may be so. Very few recessions last longer than two years. And most recoveries, once they start, are strong.

Don Coxe Wekly 7/24/09

Don Coxe

Bloomberg: Maybe Buffett Does Know What He Is Doing

Bloomberg:

Berkshire Profit on Goldman Sachs Passes $2 Billion

July 23 (Bloomberg) -- Warren Buffett’s option to buy shares of Goldman Sachs Group Inc., part of an agreement reached at the depths of the credit crisis, has earned a profit on paper of more than $2 billion, a return of about 44 percent.

Goldman Sachs today passed $162 in New York trading for the first time since rival Lehman Brothers Holdings Inc. collapsed in September. Buffett’s Omaha, Nebraska-based Berkshire Hathaway Inc. holds warrants to buy $5 billion of Goldman common stock for $115 a share any time in the next four years.

“It must feel good to be Warren Buffett,” said Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington, who has studied the billionaire’s investing history. “That number just flies in the face of people who like to say he’s lost a step.”

Plus Berkshire is getting 500 million a year in interest payments on the preferred.

Clusterstock and a different view of earnings numbers

Folks, These Companies Are MISSING Earnings (KO, UTX, DD, CAT)

Let's go back to earnings.

We're not going to second-guess the way investors react to an earnings report, since that's a fool's game, and some news really is baked in. In other words, we're not going to say it's silly that Caterpillar is up today, despite it's horrendous number.

That being said, we can second-guess the media, which is kind of banging on this signs-of-stabilization-green-shoots drum again, with respect to earnings. The problem is, earnings are crap.

The article goes on to illustrate the failure of revenue to grow. Worth reading so click over to Clusterstock.

Mr. Mauldin, I Respectfully disagree.

John Mauldin is one of my favorite writers and I find myself in agreement with his opinions far more often than not. On this occasion however, I completely disagree with one portion of his weekly letter. specifically this portion:

But first, I want to direct the attention of those in the US finance industry to a white paper written by Themis Trading, called "Toxic Equity Trading Order Flow on Wall Street." Basically, they outline why volume and volatility have jumped so much since 2007; and it's not due to the credit crisis. They estimate that 70% of the volume in today's markets is from high-frequency program trading. They outline how large brokers and funds can buy and sell a stock for the same price and still make 0.5 cents. Do that a million times a day and the money adds up. Or maybe do it 8 billion times. It requires powerful computers, complicity of the exchanges (because the exchanges get paid a lot), and highly proximate computer connections. Literally, the need for speed is so important that to play this game you have to have your servers physically at the exchange. Across the river in New Jersey is too slow. Forget Texas or California. This is a game played out in microseconds.

The retail world doesn't get to play. This is a game only for big boys who can afford to pay for the "arms" needed to fight this war. But the rest of us pay for the game, as that half cent is like a tax on transactions, not to mention the increased daily volatility, which skews pricing. Think it doesn't affect you? That "tax" is paid by mutual funds, your pension fund, and every large institution.

Frankly, this is outrageous. The more I read the madder I got. And it is going to get worse as computers get faster and software more intelligent. We need rules to level the playing field. Themis suggests one simple one: just make it a rule that all bids have to be good for at least one second. That would cure a lot of problems. One lousy second! In a world of microseconds, that is an eternity.

Goldman Sachs went after an employee who stole some of their latest and greatest software this last week. The US assistant attorney general said in the courtroom that the software had the potential to manipulate the market. Imagine that. I am shocked. There is gambling going on in the back room? Gee, commissioner, I had no idea.

All this "algo" (algorithmic) trading also gives a very false impression of volume. If you are a fund and see 10 million shares a day traded, you might feel comfortable that you could hold one million shares and exit your trade easily. But if 80% of the volume is false "algo" trading, that volume isn't really there. You may have a position that will be a problem if you want to exit, and not know it.

"High-frequency trading strategies have become a stealth tax on retail and institutional investors. While stock prices will probably go where they would have gone anyway, toxic trading takes money from real investors and gives it to the high frequency trader who has the best computer. The exchanges, ECNs and high frequency traders are slowly bleeding investors, causing their transaction costs to rise, and the investors don't even know it." (Themis Trading)

We are literally talking billions of dollars here. The SEC needs to step in and stop this, and soon. This is a lot more important than the salaries of investment professionals, for which the Obama administration today suggested new rules, which would allow the SEC to oversee salaries at member firms. Seriously? They don't have enough to do already? the paper referenced is here

I don't disagree with any of facts about volume increases or the existance of the liquidity provider incentive payments or the algorithmic trading systems, What i disagree with is the notion that this is harmful. My experience is that markets are tighter and more competitive than ever before. It is easier to get larger sizes done at lower total cost than before. It has not been very long since the minimum bid ask difference was a sixteenth not a hundredth. Plus one had to pay broker fees to get an execution, now one pays very, very little to get an electronic execution.

The quarter cent paid to the liquidity provider is paid by the exchange as means of remaining competitive with other exchanges for volume and tight bid ask quotations. What has been eliminated is several levels of commission that used to be paid to brokers. All of this reduces the frictional cost of trading for the public. These are good things.
The institution with a 20.00 price order doesn't have to pay 20.01 just because it is offered but it certainly is better than the best offer of 20.06 that used to exist. I believe the market is more efficient in terms of cost and liquidity down at this micro level than it has ever been.

Blaming electronic execution systems for the increased volatility of the market when the entire banking system is falling apart seems to reflect the bias of agency brokers whose business is being rendered semi-obsolete. i understand and sympathize with brokers being cut out of the process but all sounds like the complaints by floor traders at the commodity pits when electronic trade began to steal volume from the pit, an it is just as self interested and incorrect.

Bespoke: stocks with largest short interest

From Bespoke:

Stocks with highest short interest

Don Coxe weekly conference call

Mr. Coxe and the chart he mentions

Clusterstock Chart of the Day

clusterstock;

Not a pretty picture. Maybe they aren't saying green shoots but green shutes.

Two problems for Obama plans

Bloomberg: Firs this article

California’s Nightmare Will Kill Obamanomics: Kevin Hassett

It takes years and years to make a mess as terrible as the California debacle, but the recipe is simple. All that you need is two political parties that are always willing to offer easy government solutions for every need of the voters, but never willing to make the tough decisions necessary to finance the government largess that results. Voters will occasionally change their allegiance from one party to the other, but the bacchanal will continue regardless of the names on the office doors.

California has engaged in an orgy of spending, but, compared with our federal government, its legislators should feel chaste. The California deficit this year is now north of $26 billion. The U.S. federal deficit will be, according to the latest numbers, almost 70 times larger.

Bleak Picture

The federal picture is so bleak because the Obama administration is the most fiscally irresponsible in the history of the U.S. I would imagine that he would be the intergalactic champion as well, if we could gather the data on deficits on other worlds. Obama has taken George W. Bush’s inattention to deficits and elevated it to an art form.

and this article

Glut of $4.5 Trillion Will Haunt Obama’s Dollar: William Pesek

July 6 (Bloomberg) -- It’s not a job Barack Obama signed up for, but it’s his nonetheless: Bond salesman-in-chief.

Such is the lot of a U.S. president overseeing an historic increase in debt issuance. Cartoonists are busily churning out depictions of Obama, who partly nationalized automakers, standing on a car lot hawking Detroit’s clunkers. It’s time to begin picturing Obama shilling bonds few may soon want.

These problems are not unrelated. Obama is doing many things wrong but he didn't cause this, nor did his predecessor. These problems are laid at the door of the congress who continue to behave only in their own self interest and never face up to a problem. Senators and Representatives in Washington represent the largest group of unprosecuted con men/women
in the western world. Throw the bums out!!

More from Hugh Hendry at the FT

The Financial Times interviews Hugh Hendry. Well worth listening too. Note the interview extends through 3 recordings.
Hendry has been terrific for several years now. He is generally out of line with the consensus opinion, a very good thing.

Bloomberg: Currency Funds Crushed on Death of Trends

bloomberg;

July 6 (Bloomberg) -- FX Concepts Inc., the world’s largest currency hedge fund, says it lost 5.4 percent in this year’s first five months. John W. Henry & Co.’s foreign-exchange fund told investors it lost 2 percent, after 2008’s 76 percent gain, the best since its 1986 launching.

Both use computer models to spot currency trends and, along with other momentum chasers, are getting hammered by this year’s lack of clear direction as the markets are pulled in opposing directions. Deflationary pressure from the first global recession since World War II is being countered by the inflationary forces of record stimulus spending and currency printing across the globe. contd at Bloomberg>

The confusion in currency markets stems from the fact there are no strong currencies. Everyone wants to be the weaker currency. Next will be rising protectionist legislation. That will be a disaster if Obama doesn't stand against it. He won't is my guess.

The largest tax bill ever and bad policy beside.

The House Opens Pandora's Box
By Robert Romano

On Friday, the House of Representatives opened up a Pandora’s Box. And although the Waxman-Markey carbon-cap bill may not contain all of the evils of humanity, it is a not-so-good start.

The only silver lining is that the American people are now keenly aware of what Congress is up to.

You see, the politicians in Washington probably thought they’d get away with it. That nobody was paying attention. That they could just jam it down the throats of the American people while nobody was watching. That there’d be no time to mount significant opposition to it. Indeed, that there was no time to even read it.

Now, millions of phone calls and emails later sent from Americans across the fruited plain to key legislators, a brief filibuster from the House Republican Leader while he read from an amendment that was filed by House Democrats at 3AM Friday morning, and now a razor-thin vote by which it barely passed, one thing is clear: They were wrong

Read the whole article for the details on this huge boondoggle that has no chance to accomplish its goals.

Kaletsky: The ECB's ig leaf has completely withered away.

TimesOnLine;

Now that the global recession appears to have passed its low point, panicmongers in the media and financial markets are shifting their attention from deflation to inflation — and especially to the debasement of the dollar by the money-printing operations of the US Federal Reserve. Whether printing money necessarily always leads to inflation is a long-running theoretical debate which the economics profession shows no sign of resolving, there is a factual question related to this argument that is much more important and straightforward, yet completely misunderstood. Leaving aside the question of whether it is a good or a bad idea to print money, which of the world’s leading central banks is printing money faster: the Fed or the European Central Bank?

Go read it all  here.

Hugh Hendry on the markets

Hugh Hendry on CNBC with thanks to Random Roger for posting this. Hendry has had a great record over the last several years.

Not a pretty set of pictures from Calculated Risk

Calculated Risk presents a large set of charts covering realestate and economic statistics from June. click on through.