Market Watch

Welcome To the Grand Illusion

Welcome to the Grand illusion
Come on in and see what’s happening
Pay the price, get your tickets for the show

- (“The Grand Illusion” – Styx)

The party is set to begin. Fanfare will blast from the rafters. Great hosannas will rain down from on high. General Motors, the official car company of the US Government, will be turned back into a private enterprise. The S1 filing with the SEC occurred; the IPO will take place in 30-90 days.

In fairness, it is somewhat of a good news story. GM will no longer be “Gubbermint Motors – Home of The American Trabant!” But there is a sense of artificiality to this entire filing. To quote an old blogosphere meme, “I question the timing!”

Joe Weisenthal, of Business Insider.com, writes up a good bare-bones briefing sheet on the IPO. According to the S1 on file, the underwriting syndicate is to Wall Street what the OJ Simpson Legal Defense Team was to the Legal Profession; a line up reminiscent of the New York Yankees when Joe DiMaggio still swung the stick. Morgan Stanley, JPMorgan, BofA/ML, Citi, Barclays, Credit Suisse, Deutsche, Bank, Goldman Sachs, and RBC all will be part of the syndicate. Details regarding syndicate management rights and take-down have not yet been negotiated.

The stock will go straight to the NYSE and will trade under the symbol GM. The offering will include both public and preferred stock. This, like everything else involving our Photo-Op President, will be a show, a party, and a gorge-fest in pointless excess. It will all be aimed at countering the perception that Barack Obama doesn’t love the free enterprise system and all that it entails.

It will be the first major corporate IPO in US History to double as a Democratic Party campaign advertisement. “Vote Team Donkey, we don’t really want to nationalize all your assets.”

Predictably, risk and moral hazard still abound. Like the old Soviet Ekranoplan Flying Boats, this IPO is a high-stakes, state-directed enterprise that may or may not ever make it off the ground. The SI filing details extensive entrepreneurial and external economic risks to GM in the near and far future. The S1 lists the business risks on page 13 of the filing. They continue until page 28.

Obvious, recession-driven risks include…Our business is highly dependent on sales volume. Global vehicle sales have declined significantly from their peak levels, and there is no assurance that the global automobile market will recover in the near future or that it will not suffer a significant further downturn.(P13, GM S1 filing) and also,“Failure of our suppliers, due to difficult economic conditions affecting our industry, to provide us with the systems, components, and parts that we need to manufacture our automotive products and operate our business could result in a disruption in our operations and have a material adverse effect on our business.”(p14)

Business plan risks include some goodies as well. They are still being pile-driven into the Astroturf by their prior contracts with the UAW. Our U.S. defined benefit pension plans are currently underfunded, and our pension funding obligations may increase significantly due to weak performance of financial markets and its effect on plan assets. (P16) The GM financier, Ally Financial has major capitalization issues. If adequate financing on acceptable terms is not available through Ally Financial or other sources to our customers and dealers, distributors, and suppliers to enable them to continue their business relationships with us, our business could be materially adversely affected. (P17)

They have a mongo conflict of interest risk. The UST (or its designee) will continue to own a substantial interest in us following this offering, and its interests may differ from those of our other stockholders. As a result of this stock ownership interest, the UST is able to exercise significant influence over our business if it elects to do so. This includes the ability to have significant influence over matters brought for a stockholder vote. (P18) And they owe the UAW their souls and first-born children as well. Restrictions in our labor agreements could limit our ability to pursue or achieve cost savings through restructuring initiatives, and labor strikes, work stoppages, or similar difficulties could significantly disrupt our operations. (p.22)

And since all of that doesn’t suck enough, they also, even with Barack Obama’s aid and abidance, were unable to successfully still all of their prior debt obligations. Despite the formation of our new company, we continue to have indebtedness and other obligations. Our obligations together with our cash needs may require us to seek additional financing, minimize capital expenditures, or seek to refinance some or all of our debt. (p.22) Not surprisingly, they have no plans on offering dividends on common stock.

The risk list finally dies. But only after listing several environmental and foreign government risks that I ran out of motivation to catalog, evaluate and include. The Hindenburg had a better margin of error than the current GM business plan. And beneath the surface of all of this lurks another risk that nobody other than I am obnoxious enough to publically air – the moral hazard that a politically-connected enterprise will saw off its creditors the first time President Barack Obama publically denounces them as speculators. Is the preferred stock in GM really going to remain preferred if President Obama decides he doesn’t like the people who own it? Try pricing that uncertainty using a standard quantitative model.

So there you have it. General Motors has filed for an IPO that has a significantly good chance to unwind a week or two before the 2010 Midterm Election. The hortatory sound bites just may save some marginal Democrats. But will the capital raised be sufficient to save a marginal car company? Only the cynical and world-weary offer prickly questions such as that one. In the meantime….

Someday soon we’ll stop to ponder
what on Earth’s this spell we’re under
We made the grade and still we wonder
who the hell we are.

Where on earth is there economic optimism?

Across the 117 countries Gallup surveyed in 2009 the respondents to the poll were asked this question:

Right now, do you think that economic conditions in the city or area where you live, as a whole, are getting better or getting worse?

Now I certainly do not claim to be the citizen of the world like the current occupant of the oval office, but I had read enough economic news stories that I thought I knew which countries would be in the top five for local economic optimism. I figured they would be China, India, Brazil, Malaysia, and Indonesia. You know, the places where manufacturing is going on. I knew it was not going to be Greece, Portugal, Spain, Italy, and Ireland. The only one of the top five that I got right is China which is #1 where 81% of the respondents think local economic conditions are getting better.

Real Clear World wrote up a piece about the top five, and while I do not take issue with the Gallup poll itself the conclusions miss the mark in my opinion. The piece concludes that rich natural resources, stable populations, and globalization are what makes respondents in these five countries the most optimistic. What I conclude is that urban manufacturing populations that are in a market-oriented instead of a centrally-planned economic system have minimized regulatory and tariff trade barriers to bring about this local economic optimism. Below are the other four countries that make up the top five. You can draw your own conclusions, and let me know if you expected to see these countries listed.

#5 Djibouti

This urban concentration – coupled with the city’s strategic proximity to the Red Sea – sets Djibouti apart from the rest of the sub-Sahara. This also allows for a lot of economic experimentation and investment in the country, such as the Djibouti Free Zone.
Djibouti Free Zone was created with one primary goal in mind – to bring about a sea-change in the way Africa thinks and does business. No red tape, ruthless efficiency and genuinely exhaustive services – in essence, we offer the ideal conditions for trade and commerce to flourish in.

#4 Vietnam

After market-oriented reforms and entry into the World Trade Organization in 2007, Vietnam has enjoyed strong GDP growth of 5.3 percent in 2009, with significant exports to the United States. A booming garment industry has put thousands of Vietnamese to
work, while the country has transitioned from a centrally planned economy.

#3 Qatar

Sitting atop the world’s third largest reserves of natural gas (and plenty of oil), your average Qatari appears to have much to be optimistic about. Indeed, citizens of Qatar enjoy the second highest per capita income in the world, and the second fastest per
capita income growth rate. As for unemployment, there is nearly none. The country has the second-lowest unemployment rate in the world at 0.5 percent.

#2 Bangladesh

China has proposed to help Bangladesh build a deep-sea port in Chittagong and agreed to exchange data about the Brahmaputra river that flows from Tibet to Bangladesh through India. China has also promised assistance in installing Bangladesh’s first space satellite.

China offered last month duty-free access to some 5,000 Bangladeshi products in a goodwill gesture. The garment industry has boomed over the last decade in Bangladesh.

Across 110 countries Gallup surveyed in 2009, median approval of U.S. leadership by asking the question:

Do you approve or disapprove of the job performance of the leadership of the United States?

I thought it might be interesting to compare the results of respondents in these top five countries that are obviously on a different economic track than the US is on.

#107 Vietnam 17% approve
#103 Qatar 22% approve
#82 Bangladesh 38% approve
#18 Djibouti 81% approve

China was not surveyed, and Djibouti was lower approval than most of the polled African countries. There are a lot of reasons I would not want to move to these five countries that have nothing to do with economics. In the past these countries have been led by corrupt tyrants who put them on the wrong economic track. I think the polls indicate they are currently doing some things right. Good for them.

Cross-posted at RedState

GROWL: The Seinfeld Rally

Much as Seinfeld was a show about nothing, yesterday’s 3% rip up in the NYSE is probably much the same – the market was ready to rally, all indicators to the contrary, and used yesterday’s total nothingburger initial unemployment claims report from the Bureau of Making S*** Up (also known as the Bureau of Labor Statistics) as all the catalyst they needed to gap up at the open and stay there.  Nothing was going to get in Mister Market’s way yesterday, not even a depressing report on the May monthly deficit – which was dutifully spun as “great news” by the propaganda wing of Fraud Street.

I guess Benron doing his Kevin “Remain Calm… All Is Well” Bacon schtick was totally killer yesterday.

Whatever. There are going to be plenty of days like this on the way down into the abyss.

Meanwhile, despite zero interest rates and almost no stated standards (again) as to who can get a federally-backed loan, credit is continuing to contract.  Yeah, that “reflation” strategy is working like a charm, eh Benron?

We have the weekly report on retail sales in before the open – a slight contraction from last month is already baked into the cake, so expect another rocket shot if there’s another “unprecedented” sign of “strength” there.

Update: Oh, and about those retail sales numbers? Uh, oops.

Could be a, ahem, bumpy day for the bulls.

GROWL: Gotta hand it to the PPT

They truly are amazing when they’re on their game. I mean, a 12-handle ramp-up on the SPX with no volume, no news, and no reason what so ever in that closing 45-minutes of trading yesterday. Simply amazing, really. Bravo. Take a bow, lads.  Gotta get that DOW back near that ever-vital, completely totally important 10,000 mark again.  Got my DOW 10K v3.0 hat all ready for the occasion.

Well, for today we have people openly talking about a jobless “recovery” imploding into a jobless depression (OK, depression was my choice of word).  Credit seems to be drying up a bit (again) in one of the PIIGS, Merkel and Sarco are escalating their feud (which can only be great for the Euro and the credit/debt markets, right?) and central banks obviously feel they don’t even have try to hide their blatant, if it were done by a truly private enterprise it would be illegal, manipulation of the FX markets.  Meanwhile Wolfram and Hart Goldman Sachs did a nice data-dump on the FDIC earlier in the week – meaning they must want to be bury something.

Just another glorious day in “free market” Paradise, comrades.  Good luck!

UPDATE: More awesomeness on housing…

Without “tax credits” and other distortions, there simply are no buyers at the current prices – even with grossly-depressed rates on 30 year money under 5%.

The bottom line is that the solution to high prices is lower prices, but that requires that everyone up and down the line, most important the banksters who loaned money imprudently, accept the losses they made when they wrote that paper.

Yeah, I look forward to that happening in 5… 4… 3… 2… NEVER.

GROWL: A temporary pause in the collapse?

It’s been suggested that, after a roughly 4% sell-off in the markets over the last 2 trading sessions, there might still be some appetite for a short burst of “Risk On!” on Fraud Street. That’s probably a pretty reasonable assumption, particularly for the next day or so (assuming reality doesn’t intrude with a real nasty surprise – probably emanating from Europe).  Plenty could go wrong and spoil the PPT’s party, but it’s going to be a pretty light couple of days data-wise, we’re in the home stretch of the quarter, and there’s no retail left to sell-off.

The long term trend continues, of course, unabated.  But there will be plenty of bumps and hops along the way.  The next couple of days seems primed for a zero-volume melt-up of the equities markets as everyone tries to get their bearings for the long plunge into Dystopia.

Gold up, consumers continuing to deleverage, Benron telling us to remain calm and that all is well (which is, of course, his job).

GROWL: What will the Ministry say?

Update and Bump: OUCH! is right.  And that number (+431K) is even worse when you do even the slightest little bit of digging.  No doubt about it, and no way to spin this away (though the MSM is certainly trying their darndest), this is a f-u-g-l-y number.

Original post:

Well, everyone is waiting to see what the Commerce Department – also known as The Ministry of Making S*** Up – has to say about Non-Farm Payrolls (NFP) this morning. Expectations are for a “blow-out” number of +700K, though Government Sachs seems to be hedging on that a bit and even FinViz is currently showing an expectation of +500K.  I suspect that’s the number that is already baked into the cake of our ludicrously inflated equities markets and that anything “surprising” will either lead to a massive plunge (if it’s a downside miss), triggering the FedCo Plunge Protector 10K, or a massive surge (which will, of course, not trigger anything other than massive back-patting among members of the Administration).

My guess is that we’re going to see a print of +700K and it will be almost entirely BS.  If it comes in at anything less than +500K though, look out below.

BP-Day 43

Bloomberg Television focuses on BP from a British perspective.  As the company is domiciled in the UK, the London financial market will be the place where the company’s global shareholder base will ultimately determine the fate of CEO Tony Hayward.  There is increased speculation that the company could become a takeover target as its political woes mount.

Meanwhile, the company faces the formidable task of keeping the public informed as to what is going on.  BP explained the most recent procedure on its YouTube channel.  The complexity is daunting when one takes into account that these task must be accomplished at a depth of one mile below sea level.

Illustrating this complexity, the Fox News Channel reports that the saw that is performing the pipe cutting maneuver has become stuck. 

GROWL: Lunacy

First of all, and most importantly, I hope all had a wonderful Memorial Day weekend, that you thanked a Vet and that you prayed for those who are still in harms’ way.

OK folks, I wish luck to all attempting to trade in this basket-case of a market. We are coming off the worst US Stock Market month of May in about 70-years, after a substantial sell-off at the close Friday. The European Central Bank (an oxymoron, but anyway…) warned yesterday of a second wave of loan losses resulting from “the continuing financial crisis” (I suppose it’s verboten to actually use the word “Depression” in polite circles these days), China’s growth has slowed, we had yet another “fat finger” sell off, this time in Japan (as panic-selling is also, evidently, verboten), Gold is putzing upward while the “industrial” metals (Silver, Platinum, etc.) slump a bit.

US markets appear set to continue their downward trajectory, can Dow 10,000 v3.0 be far behind?

Meanwhile the goldbugs and non-goldbugs are continuing their ongoing feud – so all may indeed be right and well with the world after all.

Just remember, it’s only money.

GROWL: Pivot week?

Teeing-off Bob’s recent summary, it’s an open question as to what the week ahead is going to look like (FWIW, I’m not going to be posting much next week as I’m double-booked pretty much 24/7 with my employer’s customer conference). But if I knew that, I’d be trading and not talking about it, right?

Anyway, last week ended with a last-minute (literally) rocket-shot zero-volume rally (20-handles on the S&P in about 13-minutes certainly qualifies), providing all the evidence anyone needs to just how screwed-up is the “free” market of ours.

We have the prospect of “financial reform” that could weigh on the markets, but seeings as how Goldman and company pretty-much wrote this farce and they were leading the charge of the week-ending rocket-shot it’s a sure bet that The Banksters will continue to make piles of money at the expense of, well, everyone else – so that’s a data point for RALLY ON!

At least we have the World Cup to distract the world’s mind, if only for a month or so, from the fact that the entire bloody planet is bankrupt and an age darker than any we’ve ever seen may very will be in the offering quite soon.

So for me the bottom line is that there really is no bottom line.  My humble opinion is that anyone who is at this time in the equities or commodities markets with money they cannot afford to lose is a moron who richly deserves to go under – and no, you’re not too big to fail so you can forget about any sort of “Obama’s gonna pay my mortgage” bailout.

Double Dip On the Horizon? Commodities Take A Hit

The news cycle has been focused on the equity markets this week, as stocks took a pounding due to continuing fallout over the Euro crisis and disappointing jobs numbers.  The Dow has recently lost almost 10% of its value.

The bond markets have also been in a jittery mood.  Yields on US Treasuries have fallen substantially, with the 10-year dropping to 3.2%.  This is remarkable considering the normally upward pressure on interest rates driven by the federal government’s ever-ballooning deficits.  Bond investors appear to be sensing stagnation, or worse.http://money.cnn.com/2010/05/21/news/economy/bonds_warning/index.htm]

Finally, investors are also fleeing the economically sensitive commodities sector, particularly crude oil and metals.  This is significant because, when added to the equity and bond markets, professional investors appear to be arriving at a consensus that the economy is heading south again.  Bloomberg Television takes a look at the slide in commodities.