mhp,We have our Durable Goods report for August today at 10am.
There are many indications that Durable Goods may miss the high expectations of a 1.2% increase, especially the anticipated 0.7% mark ex-autos (Cash for Clunkers) and, no matter what, it will be a far cry from the 5.1% increase we posted in July, when the car-buying frenzy began. We've been discussing shipping issues – unless they have found a way to have major appliances walk to your home on their own, there simply isn't enough shipping and trucking activity to support a big number. Also, the GDP report, retail sales report, consumer surveys and BBY earnings all indicated that people were just not all hyped up about getting a new washing machine this year.
It was a strong July Durable Goods report that launched this leg of the rally on September 2nd. We at Philstockworld, who actually read the damn reports, noticed that virtually the ENTIRE gain for the month of July was due to a MASSIVE 107% increase in aircraft orders for the month but apparently none of the other analysts seemed to care and those same analysts will be shocked today when pretty much the exact same thing happens as happens after every other major spike in durable goods. I don't have to tell you, we have a chart:
See – this stuff isn't hard… How many times in the past two years have we had two big up months in a row? Zero (0). How many times have we had reversals that were as large or larger than the prior positive month? Five (5). If I were a betting man (and we are, since we play the markets), I'd have to put my money on a miss, contrary to the 26 "expert" analysts polled by Bloomberg who forecast more growth. I could be wrong – gosh, I hope I'm wrong because that would be great for our economy – but after a 10% move up in the markets since our last Durable Goods report, I think I'll error on the side of caution. WHR makes a fun short here as you can buy the Jan $80 calls for $3.10 and sell the Nov $75 calls for $3 so it's net .10 on the spread and, if WHR doesn't gain almost 10% by November expirations, whatever value left in your Jan calls over .10 is your profit.
Also bothering me this morning, is news from the Financial Times, which indicates the US financial sector’s losses on large loans exploded over the past year, EXCEEDING THE COMBINED LOSSES SINCE 2001, with hedge funds and other members of the “shadow banking system” hit the hardest, official figures revealed on Thursday. Regulators’ annual review of “shared national credits” – loans larger than $20m shared by three or more federally regulated institutions – highlighted the toll taken by the crisis on financial groups outside the traditional banking sector.
More than one in three dollars lent by non-bank institutions such as hedge funds, securitisation vehicles and pension funds, went sour, according to the figures, compared with 11.5 per cent for US banks. The results will increase fears that, in spite of a recovery in the shares and balance sheets of many banks, the epicenter of the crisis has moved to the hedge funds and investors that gorged on cheap credit in the run-up to the turmoil. The importance of these non-bank institutions was underlined by the review’s finding that they held 47 per cent of problem loans, in spite of accounting for only 21.2 per cent of the total loan pool.
Overall, the US financial sector’s losses on loans in early 2009 reached a record of $53bn, almost triple the previous high in 2002. The number of loans edging into the danger zone has also surged. Some 15 per cent of the $2,900bn SNC virtual portfolio was classified as “substandard” – the second of the four categories used by regulators – and worse, up from 5.8 per cent in 2008. The pace at which loans got into serious trouble accelerated significantly. The dollar volume classed as “doubtful” or loss-making increased 14-fold over the past year to $110bn. “Doubtful” loans are so weak that collection or liquidation is highly improbable.
Euro-Zone private lending to the private sector also cooled sharply, with the growth rate dropping to a tepid record low of 0.1% in August from 0.7% in July. Economists say the rate may turn negative in September, and warn insufficient access to funds could seriously hurt business and trade in the area, undermining a potential economic recovery. "Nothing here to change our view that the euro-zone recovery looks set to be weak by historical standards," said Ben May, a European economist at Capital Economics in London. The ECB data showed that the annual growth rate of loans to non-financial companies decreased sharply, to 0.7% in August from 1.6% in July.
So no help expected from Durable Goods (confirmed at 8:30) and no help at all from the G20 so far, who issued a communique which states:
"'The process of recovery and repair remains incomplete. In many countries unemployment remains unacceptably high. The conditions for a recovery of private demand are not yet fully in place. We cannot rest until the global economy is restored to full health and hard-working families the world over can find decent jobs… In the short-term, we must continue to implement our stimulus programs to support economic activity until recovery clearly has taken hold… A return to the excessive risk taking prevalent in some countries before the crisis is not an option." G-20 endorses FSB standards "aimed at aligning compensation with long-term value creation, not excessive risk taking… to make sure our regulatory system for banks and other financial firms reins in the excesses that led to the crisis. Where reckless behaviour and a lack of responsibility led to crisis, we will not allow a return to banking as usual."
That all sounds great and it's nice to see that they are working on the problem but it does underscore the fact that THERE IS STILL A PROBLEM. The markets have been acting this month like there isn't and if they were looking for an "All clear – back to business as usual" from the G20 – this isn't it. Not only that, but the White House and other G8 leaders will announce today that the G20 will replace the G8 as the main forum for global economic coordination. This is a huge shift in power to the emerging markets and will shape the global economy for many years to come. The official G-20 roster (comprising 85% of the global economy) now includes: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union. Good luck boys – you're going to need it!
All is not dire of course. Goldman Sachs decided today was a good day to raise their forcast for oil prices before all those contracts they are stuck with expire worthless. Why is it that Congress is all gung-how to investigate Moodys and MHP for their independent ratings calls yet GS – who are up to their eyeballs in black goo that they've been buying with taxpayer bailout money and then doubling the prices the taxpayers pay for oil in order to make their bonuses this year – are allowed to walk around scott-free?
Why, because MHP and MCO are scapegoats for the last scam GS and co. were running. By pushing the spotlight on the rating agencies, Goldman and the other Gang of 12 members can pretend they were innocent victims as they bought trash loans and repackaged them with triple-A stamps and sold them widows and orphans (pension funds) for MASSIVE profits in a con so massive and so despicable that it makes Bernie Madoff look like Robin Hood to Goldman's Sheriff of Nottingham – THAT'S WHY!
Anyway, get mad, write your Congressman, blah, blah… I'm just tired of this crap so I'm just going to move along and play the markets. Play it will be today as we have a hell of a score with our bearish positions this week. Speaking of Evil Empires, Iran has amitted they have another uranium plant today, probably thinking that the G20, with Merkel on her way back to Germany for the elections, would give them a pass for the weekend but no such luck and we already have a move towards sanctions.
A U.S. intelligence official says the U.S. has known about the second Iranian site "for years," but it confronted Tehran only recently after becoming more confident it was being used for uranium enrichment. At the G-20 conference today, Obama, France's Sarkozy and U.K.'s Brown chastised Iran for operating the facility clandestinely.
Similarly, we've know that the market has been overbought "for weeks" but we chose this week to confront this issue after becoming more confident that the media was being used to herd investors in for the slaughter. We'll be holding a state of the market review this weekend where we will chastise Goldman Sachs and others so stay tuned and have a nice weekend.
