Friday, September 30, 2011

THIS IS HOW IT ALL STARTS................. REMEMBER 2008 - 2009

The Decline And Fall Of Morgan Stanley

Morgan Stanley got killed today, falling more than 9% amid all kinds of rumors, talk about its CDS curve, European exposure, etc.

It's fairly stomach churning, and reminiscent of 2008.

What's really interesting is taking a step back. Not only are we looking at a 2008-era close for the stock, we're talking about a decline of some 87% from its 2000 high. Really, it's just a shadow of its former self.

BANKS HAVE LOTS OF BAD NEWS AHEAD OF THEM! 

chart of the day, morgan stanley stock performance, september 2011




Third quarter's a bear-bath..... SURE IT'S A RECOVERY!!!!!!!!!!!!!!!!!!!!!!!! CAN'T WAIT TO SEE A REAL DOWNTURN!

Third quarter's a bear-bath

Stocks fall hard in period, worst since 2008-09 crisis

THIRD-QUARTER ROUNDUP
DOW -11% OIL -16%
S&P 500 -14% GOLD 9%
DAX -25% 10-YEAR -122 bps
  




Major indexes shed about 2% in last trading day of the quarter, with worries over Europe dominating.

European shares dropped sharply Friday, with the Stoxx Europe 600 index posting a quarterly fall of more than 17%.

Oil ends the month down 11%


HIGH DOWNSIDE VOLUME AND CLOSING ON THE LOWS FOR THE MONTH AND THE WEEK ARE NOT GOOD OMENS FOR HIGHER PRICES NEXT WEEK. WE ALL SHOULD BE ON OUR TOES AND LOOKING FOR MORE DOWNSIDE INTO NEXT WEEK. WE ARE POISED JUST ABOVE A VERY IMPORTANT S&P SUPPORT LEVEL AT 1125 GIVE OR TAKE 10 POINTS EITHER WAY. IF WE BREAK AND CLOSE BELOW THIS LEVEL, THE MARKET WILL QUICKLY FALL TO THE 1050 AREA. 

MARKET NOTES AND NEXT WEEK.............

Yesterday saw a huge initial surge, a big mid-day collapse, and then a big turnaround.


The market selloff is getting worse on this last day of the quarter. Dow futures are off over 100. Europe is really not looking so hot. Germany is off over 2.5% right now.
US futures are pointing down hard.Commodities are actually up a little, with copper having stopped Wednesday's bleeding.

Today should be particularly interesting. It's the last day of the quarter, and since it was so violent there could be a lot of last-minute moves/window-dressing, etc. as managers look to pretty up their portfolios before sending out statements to clients. 

DEBT IS THE PROBLEM


It is likely that wiping out the debt overhang will be at the heart of any solution. Such a course of action would not be new. In ancient Mesopotamia, debt was commonplace; individual debts were recorded on clay tablets. Periodically, upon the ascendancy of a new monarch, debts would be forgiven: in other news, the slate would be wiped clean. The challenge facing today's politicians is how clean to wipe the slates. In considering some of the potential measures likely to be required, the reader may be struck by the essential problem facing politicians: there may be only painful ways out of the crisis.

It is long overdue for reality to be finally acknowledged. This reality is masked constantly by the mainstream media and its agents in all walks of life. The truth is far, far uglier than anything anyone in a position of power will tell you because acknowledgment would imply the need to come up with solutions that involve more than merely extending the event horizon for a little longer. Alas, even politicians now realize there is only so far that the can can be kicked.

We all need to understand that balance sheet recessions are very different from normal recessions. The longer the politicians and bankers wait, the more necessary a dire outcome becomes.  Unfortunately, reaching consensus on such tough action might require an environment last seen in the 1930s.

DOLLAR UP........EQUITIES DOWN 

From Morgan Stanley, more dollar bullishness

We believe the USD will remain supported throughout the remainder of the year and into early 2012.  Indeed, a combination of global deleveraging and position unwinding, in both DM and EM, will work to the USD's favour, in our view. Global position unwind will benefit USD. Our analysis of portfolio flows is consistent with the assumption that the USD has been the funding tool of choice over the past couple of years, both for investment in DM and EM. Hence, a global position unwinding would benefit the USD, even given that positioning is lighter than in 2008. We have seen this over the past month, with the USD rallying 5.5% in trade-weighted terms. 

Repatriation – another possible USD positive.  It is not just the international investor flows that are likely to drive the USD.  US investors have bought a net USD370bn of foreign securities since March 2009.  The US investor tends to be pro-cyclical, suggesting repatriation is another potential source of USD support. 

GDP ANALYSIS

At this level of economic growth, we're probably going into a recession, at least if history is any guide.


As the chart below illustrates, the latest YoY real GDP, at 1.6% (revised upward from 1.5% in last month's GDP estimate), is below the level at the onset of all the recessions since the first quarterly GDP was calculated — with one exception: The six-month recession in 1980 started in a quarter with lower YoY GDP (1.4% versus today's 1.6%). And only on one occasion (Q1 2007) has YoY GDP dropped below 1.6% without a recession starting in same quarter. In that case the recession began three quarters later in December 2007. ALL THE BAILOUTS AND STIMULUS FOR NOTHING BUT MORE DEBT! 

If Q3 real GDP shows a continuation of the current trend, the NBER will likely pick a month in Q2 as the beginning of a new recession.


A BUSY WEEK NEXT WEEK

There will be a Eurozone financial ministry meeting on October 3-4. The focus for the market will be on any talk about leveraging the EFSF. Like previous meetings, the official release from the meeting will most likely be a non-event. What's more important will be the discussions behind the curtains that gets leaked to the public during and soon after the meeting.

The first week of the month is always economically sensitive with the ISM numbers and the job data. 

We'll also have the first trading day on Monday after China's PMI data gets released as well as official numbers from Europe. Expectations are low for China and Europe due to the flash numbers last week (remember these helped pushed copper down from $4 to $3.30), but the last tick in the U.S. ISM numbers were up in August. The ADP Employment report comes on October 5th (Wednesday) ahead of the official Bureau of Labor Statistics (BLS) report on Friday.

Bernanke will testify before Congress on Tuesday, the 4thThe Fed is being perceived as a bullish catalyst for the U.S. dollar as current policies have not been inflationary. Congress will be asking the Fed Chairman, "what's next" should the economy and financial markets continue to decline.

Marriott International (MAR), Costco (COST), and Monsanto (MON) will kick off the earnings season next week when they release on Wednesday while the main event starts the week after with Alcoa on October 11th (Tuesday). Investors have bid up the market ahead of the last two earnings seasons. While China and Europe's PMIs have clobbered commodities and material stocks, I've found that positive earnings results from Oracle, Broadcom, Cerner, Accenture, and many others have brought sighs of relief to investors. Many bears have pounded the table that earnings have not been revised lower and they're the next shoe to drop on this bear market. The up and coming earnings season will be more important now than in the last two seasons while the LEIs have rolled over and PMI's at the macro level are indicating recession territory.

Thursday, next week, will be a big central bank day. The European Central Bank (ECB) and the Bank of England (BOE) will announce any policy changes they might have drummed up. Speculation is high that the BOE will add more quantitative easing while any rate change and covered bond buyback programs from the ECB are less certain due to official comments over the last few days stating rate cut speculation is "wild". In addition, I think Trichet will not want to start a new accommodative policy shift ahead of the new President, Mario Draghi, who will take office on November 1st. If and when the ECB lowers rates, it will be bullish for the U.S. dollar and bearish on the euro.

Here's Why Everyone's Suddenly Freaking Out About China................... ANOTHER HUGE PROBLEM FOR THE GLOBAL ECONOMY

Here's Why Everyone's Suddenly Freaking Out About China

Everyone's suddenly wary about China. Copper has been plunging on fears about a slowdown, while the Shanghai Composite continues to plunge to new lows for the year.

Thus more and more people are eyeing China and the increasing possibility of a hard landing.

Bank of America cautioned investors to be wary of China in a presentation earlier this week, and a Bloomberg poll recently concluded that nearly half of respondents foresaw Chinese growth to slow to less than 5% in the next two years, with nearly 60% certain this would happen in the next 5 years.



GDP expectations are tanking.

Nearly 60% of respondents to a global poll conducted by Bloomberg foresaw growth to slow to less than 5% by 2016, with 12% of respondents thinking this slowdown will occur in the next year. 47% of respondents thought this slowdown will occur within the next two years. That's a sharp change from the 10% annual growth China has seen since 1979, and a steep drop from the 9.5% growth it saw in Q2 this year. This led World Bank President Robert Zoellick to remark, "China's economic growth engine needs a tune up," at a press conference earlier this month. "It's hard for me to see that a continued reliance on export-led and investment-led growth will work for China over the next 10 years."


Chinese PMI also fell this month.

HSBC's preliminary China PMI fell from 49.9 to 49.4 from August to September, suggesting a big drop-off in Chinese growth. This was also a major concern cited in a Goldman desk note circulated this morning.

Chinese stock markets have fallen off since April, with drastic losses in the last 5 years.


Chinese stock markets have fallen off since April, with drastic losses in the last 5 years.


Banking issues could be a major impasse for future growth.

A huge underground banking system is emblematic of an aversion to private companies and a poor understanding of banking in general. China has publicly admitted to a $470 billion-large underground banking sector, though in reality it could be much larger. The official banking sector charges state-owned companies far lower rates than private companies, 7.2% versus 36-60% respectively. It's no surprise that private banks turn to large companies for funding at lower rates.

This underground system is also incredibly volatile.

Nine large business owners from Wenzhou province walked away from their underground loans when they found they didn't have the money to pay creditors. It will likely prove difficult to even locate the offenders. Perpetrators of a Ponzi scheme kidnapped the wife of the head of a Bank of China branch after the bank noticed money missing from more than 40 savings accounts.

And lending costs are on the rise all around.

Beijing is tightening official credit, and even the underground lending rate is on the rise. This makes it more difficult for private funds to access funding cheaply.


So firms -- particularly private ones -- are facing a liquidity crisis.

Free cash flow (essentially, the cash companies have beyond maintaining their asset base) is hugely negative, meaning that firms have little money to spend beyond their current investments. Hot money -- though a "wild card" -- also looks to be dropping off significantly, reducing cash available in the short term.


Funding problems could soon lead to a sharp correction in housing prices.

Real estate trust funds -- a last resort for borrowers -- accounted for about 50% of new loans to developers over the past year, according to a Bloomberg report. Junk bonds for Chinese home builders fell by 19% in the second quarter marked a 19.9% drop, the biggest quarterly decline since Q4 2008.


The Bank of China will face higher capital requirements.

The Basel Committee on Banking Supervision is about to add the BOC to its list of "systematically important" banks. This will allow it cheaper access to funds, but also require the bank to conform to keep higher capital reserves than it currently maintains. This could further increase funding costs as the bank becomes "too big to fail."

Infrastructure investment bolstered China during the last recession.

In a note we reported on yesterday, Citi's Shuang Ding wrote, "Investment boom during 2008-10 pushed investment/GDP to a record high -- The ratio reached 48.5% in 2010, unprecedented in recent history of China and major world economies." 

But now Infrastructure growth is leveling off.

But with nearly half of China's GDP invested, this situation is unsustainable. The marginal product of investment has gone down the tube since the financial crisis began, suggesting that public spending needs to reined in to maintain efficiency. According to Bank of America, infrastructure spending as a percentage of GDP was flat from 2009 to 2010, as infrastructure growth fell off sharply during the same period. 

Local government debt is unsustainable, threatening solvency and infrastructure.

The central government extended huge loans to local governments during the recession, and are now facing the consequences. Local government obligations to GDP rose to 63% in 2010. The central government created financing vehicles to fund projects and alleviate local government concerns, but even these are facing problems. One such vehicle recently attempted to default in Yunnan province.

The Justice Department, FBI, and SEC are investigating accounting irregularities at top Chinese companies.

The Justice Department revealed that it is working with the SEC and FBI to investigate accounting fraud at Chinese firms listed on U.S. exchanges, according to Reuters. The SEC has been investigating the matter for over a year. "Not having proper accounting and reliable audit review for publicly traded companies with operations in China is just not acceptable. We have to find a path to resolution of this issue," said Rober Khuzami, head of enforcement action at the SEC.

And a bipartisan bill in the Senate could punish China for currency manipulation and trade manipulation.

A bill in the house right now could alter trade law in order to compensate for what these Senators believe is currency manipulation on the part of the Chinese. It would also slam them for excessive domestic subsidies, violations of labor and environmental standards, and flouting of trade regulations. President Barack Obama, however, is against the bill.

But China has a habit of disguising financial problems.

Because China is unwilling to admit to underground banking activities and prefers to cover up deficiencies in their banking sector, it's hard to make predictions about China's future financial health.
Even if the indicators are pointing to a soft landing, investors are likely to doubt professions of fiscal stability due to the opacity of the Chinese government.

The market is in "attack mode."

A Goldman note circulated about China this morning suggested that Chinese stocks could see a major sell-off over its uncertain economic future. With the market already in "attack mode," the note's author reported seeing shorts laid out for Chinese equities.


2011 is 2008 all over again...................

2011 is 2008 all over again, ONLY WORSE. NO FED TO SAVE US!

Well if so, we're due for a big bang collapse right about now. It's not just that we're at that point in the calendar, but even the actual direction of the market, with this latest up-blip, is aligned!



chart of the day, msci ac world 2008 and 2011, september 2011



THE FED CHAIRMAN SPEAKS.............. SAYS HE IS OUT OF AMMO

Ben Bernanke is growing increasingly vocal about his skepticism that monetary policy can do 

much to save this economy. Fed Chairman Ben Bernanke's Cleveland speech caused a stir Wednesday evening.

It was the Q&A that produced the stir.

Via the Associated Press, here is a brief report on the event:

"Federal Reserve Chairman Ben Bernanke said Wednesday that long-term unemployment is an American "national crisis" and suggested that Congress should take further action to combat it. He also said lawmakers should provide more help to the battered housing industry. Bernanke noted that about 45 percent of the unemployed have been out of work for at least six months.

"This is unheard of," he said in a question-and-answer session after a speech in Cleveland. "This has never happened in the post-war period in the United States. They are losing the skills they had, they are losing their connections, their attachment to the labor force." He added: "The unemployment situation we have, the job situation, is really a national crisis."

Bernanke said the government needs to provide support to help the long-term unemployed retrain for jobs and find work. And he suggested that Congress should take more responsibility.

"Monetary policy can do a lot, but monetary policy is not a panacea," Bernanke said.

Translation; 'I've done my job' and 'we're plumb out of bullets'  Good Luck!

ONE OF THE BEST BOND MANAGERS DELIVERS A GLOOMY PRESENTATION IN NY.........................

Here's The Presentation That Jeff Gundlach Delivered In New 

York Yesterday




Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine

Image: DoubleLine