Night Reading

by CC July 1, 2011 12:36 am • Commentary


  • 9:55 a.m. ET all the time: Come and get your final University of Michigan consumer sentiment index for June. It’s expected to fall because consumers feel lousy.
  • 10:00 a.m.: Now that Chicago PMI has flat-out blown the doors off of expectations, do we even really need to read the ISM manufacturing index for June? What’s that? We do? I don’t know, it could be kind of bad.
  • 10:00 a.m.: The Commerce Department belatedly rolls out construction spending data for May. Nobody ever pays attention to this because it’s so crusty, but it’s not supposed to be all that fantabulous either.
  • All the live long day:Auto sales for June. Analysts are expecting big fat gains from May’s slump and from a year earlier.


The S&P 500 rallied again today, up 1.01%, the fourth consecutive day of strong performance but still ended the month in the red, down 1.83%. The index is now up 5.01% year-to-date but down 3.15% from the interim high set on April 29.

From an intermediate perspective, the index is 95.2% above the March 2009 closing low and 15.6% below the nominal all-time high of October 2007.


You know, a certain FT reporter took a lot of shtick for a this article.

The gist — European sovereigns were increasingly turning to the kind of pre-crisis financial engineering to shift them out of crisis. The European Financial Stability Facility, you’ll remember, was often likened in principal to a giant Collateralised Debt Obligation, with its emphasis on credit enhancement.

Anyway, the ‘CDO’ comparison was enough to annoy EFSF chief executive Klaus Regling, who picked up his pen in February to coin a letter of refutation to the FT. “The essential difference between the EFSF and a CDO is that EFSF debt has no tranche structure. There is no seniority and all investors have exactly the same rights,” he wrote. But even if the EFSF itself reckons it’s not a CDO…

… The market seems to disagree.

Last week, the eurozone agreed to increase the size of the EFSF from a lending capacity of €225bn to a full €440bn, by upping the guarantees from participating EU countries. Now there will be two sets of bonds issued from the EFSF — those from the pre upsized facility, and ones from the enlarged EFSF.

And guess how analysts are comparing the two? By using CDO valuation metholodology.

Northern Trust

The Greek parliament has passed the latest austerity package asked for by the IMF/ EU, and has approved the implementation legislation spelling out the various steps in detail. The markets have heaved a sigh of relief, comforted by the assumption that a new “bailout” plan is in the works. However, nothing has fundamentally changed: Greece is still facing an unsustainable debt burden and the various agencies of the European Union are still unable to come up with a coherent approach to the financial and structural challenges facing many member states.

The European Union is at heart a political project. Back in 1951 the six-member European Coal and Steel Community (ECSC) was founded as a way to tie the economies of France and Germany so closely together that they would never again go to war. The ECSC morphed into the European Economic Community (1957), the European Community (1967), and the European Union (1992) and new members were added along the way. In 2001 came the launch of the common-currency Euro-zone. Critically, each evolutionary step was seen differently by the various countries involved, and each new member joined for its own reasons. In addition, those idealists hoping for a federal Europe assumed that political unification would follow market integration; the anti-federal types saw the creation of a single market as an end in itself.Humphrey chuckled… “We went in [to the EEC]” he said “to screw the French by splitting them off from the Germans. The French went in to protect their inefficient farmers from commercial competition. The Germans went in to cleanse themselves of genocide and apply for readmission to the human race.”  -Lynn and Jay, 1984: The Complete Yes Minister. P.273

The above quote may be dated, but the sentiment is revealing. Today, we have a Union of 27 members and a 17-member currency zone, but each one of these countries sees “Europe” as something different. And that lack of political unity lies behind the ongoing debt saga plaguing the Union.


HOUSE Speaker John Boehner is fond of saying that a debt-ceiling deal that raises taxes cannot pass the House of Representatives. Slice the numbers a bit more carefully and you can easily conclude the opposite: a deal that doesn’t raise taxes won’t pass, either.

Why is this? Mr Boehner’s party controls 240 of the 435 seats in the house. That means that if more than 22 of his members vote against a deal, he will need some Democrats to pass it. I don’t know of any precise count of Republicans who have sworn to vote against any increase in the debt ceiling. But Chuck Conlon, the veteran budget guru over at CQ (a sister publication of The Economist) points me to the Republican Study Committee’s “Cut-Cap-Balance” letter. Its 103 signers imply they won’t vote to raise the ceiling unless three conditions are met: halving of the deficit via spending cuts next year; implementation of a statutory spending cap of 18% of GDP; and a balanced-budget amendment to the constitution. (The letter is here; the signatories are here.)

Needless to say the odds even one of these conditions are met, much less all, are close to zero. The signatories have left themselves wiggle room. But even if Mr Boehner got the $2 trillion, spending-cuts-only deal that his deputies were angling for in their negotiations with Joe Biden, it seems likely many of these Republicans would vote against it.

For precedent consider the continuing resolution in April that narrowly averted a government shutdown. By any reasonable accounting the Republicans got more than they gave up; budget authority in 2011 was cut by $40 billion from actual spending in fiscal 2010, and by $78 billion from Mr Obama’s 2011 budget request; Republicans had wanted $100 billion. Yet revelations that much of that spending wouldn’t have occurred anyway infuriated many Tea Party members, and 59 voted against the final resolution. It passed with the support of 81 Democrats.

Getting Democrats to vote for a deficit-reduction deal that slashes sacred programmes and doesn’t touch taxes will be a stretch. Conceivably enough Democrats in the Senate could be cobbled together for such a deal, but who in the House, after the culling of so many conservative members in last fall’s election, would want to defend such a vote in November, 2012? So rhetoric aside, the Republicans can’t afford to close the door completely to higher taxes. This may explain the mixed messages coming from their leadership on whether eliminating tax breaks, as Mr Obama proposes, constitutes a tax increase. John Kyl implies no; Mitch McConnell implies yes.

Baseline Scenario

After receiving US support at the critical moment, Christine Lagarde was named Tuesday as the next managing director of the International Monetary Fund.  In campaigning for the job, Ms. Lagarde – the French finance minister – made various promises to emerging markets with regard to improving their relationships with the IMF.  But such promises count for little and the main impact of her appointment will be to encourage countries such as South Korea, Brazil, India, and Russia to back away from the IMF and to further “self-insure” by accumulating larger stockpiles of foreign exchange reserves – the strategy that has been followed by China for most of the past decade.

Seen from an individual country perspective, having large amounts of dollar reserves held by your central bank or in a so-called sovereign wealth fund makes a great deal of sense; this is a rainy day fund in a global economy prone to serious financial floods.  But from the perspective of the global economy, such actions represent a major risk going forward – because it will further push down US interest rates, feed a renewed build up in private sector dollar-denominated debt, and make it even harder to get policymakers focused on a genuine fix to our long-term budget problems.


Jim Grant: My grown children have sort of a naughty phrase they say: beer goggles. Meaning the charitable perception that comes over one after a pop or two with respect to a member of the opposite sex.
Bloomberg’s Tom Keene: Really!
Jim Grant: Investors collectively, unknowingly have been wearing interest rate goggles.

Dynamic Hedge

If this rally is going to stick the spreads below need to continue to move higher.  $GS and $BAC are deeply oversold financials and $FCX has been a bellwether for the entire year.  All three of these stocks should continue to outperform relative to the S&P 500 or we are likely in for another dip.


Ford Motor Co.’s chief sales analyst predicts June car sales will be level with or somewhat better than those in May, but after June, the sales rate will begin to rise through year-end. “There are some indications that May and June could be the slowest sales rates of the year,” George Pipas told media Wednesday. “There are positive signs in June’s results that suggest at some point in the second half, we’ll return to a sales rate of the first half or better.”

Indeed, Ford is sticking with its forecast that 13 million to 13.5 million vehicles will be sold in the U.S. in 2011; is predicting 12.9 million vehicles will be sold this year. Pipas said July should be improved but it won’t be until at least August before the U.S. industry returns to a 13 million or more SAAR due to inventory shortages of Japanese automakers caused by the March 11 earthquake. May car sales came in at a Seasonally Adjusted Annual Rate (SAAR) of 11.8 million vehicles – the lowest rate of the calendar year. is predicting June car sales will inch up to an 11.9 million SAAR.

Boy Genius Report

To the RIM Senior Management Team:

I have lost confidence.

While I hide it at work, my passion has been sapped. I know I am not alone — the sentiment is widespread and it includes people within your own teams.

Mike and Jim, please take the time to really absorb and digest the content of this letter because it reflects the feeling across a huge percentage of your employee base. You have many smart employees, many that have great ideas for the future, but unfortunately the culture at RIM does not allow us to speak openly without having to worry about the career-limiting effects.

Before I get into the meat of the matter, I will say I am not part of a large group of bitter employees wishing to embarrass us. Rather, I believe these points need to be heard and I desperately want RIM to regain its position as a successful industry leader. Our carriers, distributors, alliance partners, enterprise customers, and our loyal end users all want the same thing… for BlackBerry to once again be leading the pack.

We are in the middle of major “transition” and things have never been more chaotic. Almost every project is falling further and further behind schedule at a time when we absolutely must deliver great, solid products on time. We urge you to make bold decisions about our organisational structure, about our culture and most importantly our products.



A RIM Employee