Stalled Stimulus Deters Investment, Subprime Woe Resurfaces, China Attacks US$ Dominance

- If you don’t read the newspaper you are uninformed, if you do read the newspaper you are misinformed. –Mark Twain

RCM Comment: The story below illustrates what happens all too often when government oversteps its mandate and attempts to manipulate the private sector. For those of you who approve of big government read this story very closely. Please understand that I respect your ideals and I'm willing to believe as left wing, big government believers you are only trying to promote equality (those who use big government for their own gain e.g. ACORN, I will not waste time addressing). However, reality must trump blind altruism.

Yes, we need to reduce our dependence on foreign oil, but let's do it in a way that promotes private sector innovation not government handouts. If, for example, significant tax breaks were directed at the renewable energy issue the wheels of innovation would already be moving. Private sector innovation has always been the key weapon in the economic arsenal of the USA.

I'm sorry did I just write something? I must have been dreaming. Tax breaks would help everyone equally and this would never do for those controlling Washington. Government handouts, in the form of "stimulus", can be directed at special interest groups and those who donate to political campaigns. Did you really believe Obama's campaign promise to rid Washington of lobbyists and special interests? If, so then you must go directly to jail without passing Go or collecting $200. Your punishment for naivete: stay in jail until the Community Chest gets around to authorizing a "get out of jail free" card. This authorization should take about as long as it takes for the stimulus package to actually stimulate. My advice: bring a good book. Something written by Thomas Sowell perhaps such as "The Housing Boom and Bust".

Stalled stimulus programs deter investments in renewable energy - WSJ
WSJ reports the U.S. government stimulus package passed in February promised to reinvigorate the renewable-energy industry with new capital and programs, but the prospect of large flows of government money to the industry is holding up private-sector investment. New incentive programs haven't yet been defined, and uncertainty about program rules has deterred investors from backing companies that also may get government money. At the same time, companies are holding off from accepting private capital because of the possibility of getting it more cheaply from the government. "It artificially slowed the recovery," Matt Cheney, chief executive of Renewable Ventures, the U.S. subsidiary of Fotowatio SL, a Spanish developer of renewable-energy projects, said of the stimulus plan.

Reality vs. "Green Shoot" Redux...Combine this story with the commercial real estate story from the 7/8 post and you get a good idea of the real headwinds facing economic recovery.

Subprime resurfaces as housing-market woe - WSJ
WSJ reports the U.S. housing market is facing new downward pressure as holders of subprime-mortgage bonds flood the market with foreclosed homes at prices that are much lower than where many banks are willing to sell. While nationwide figures are scarce, a review of thousands of foreclosures in the Atlanta area shows that trusts managing pools of securitized mortgages sold six times as many properties as banks during the six months ended March 31. And homes dumped by subprime bondholders sold for thousands of dollars less on average than bank-owned properties, the data show.

Experts say this is a bad omen for residential real-estate prices and homeowners trying to sell or refinance, because the fire sales, many to cover soured subprime loans, put downward pressure on the value of nearby homes. All of this undermines federal efforts to stabilize the housing market and revive the broader economy. "While the banks are trying frantically to get loans off their books, they face the problem of large shadow inventories of housing being dumped on the market, which would depress prices further," said Anthony Sanders, real-estate finance professor at George Mason University in Fairfax, Va.

RCM Comment: I continue to run these stories about the US$ because you must appreciate that change is coming and you need to protect your assets accordingly. Should you need help devising a plan may I suggest you visit our website. I will also entertain any and all questions as promptly as possible whether they are received via blog comments, email or phone.

China attacks dollar's dominance - Financial Times
Financial Times reports China has launched its highest-profile criticism of the dominant role of the US dollar as a global reserve currency at a meeting of the world's biggest economies. Dai Bingguo, Chinese state counselor, raised the issue on Thursday when he joined the leaders of four other emerging economies for talks with the leaders of the Group of Eight industrialized nations -- including US President Barack Obama -- in L'Aquila. The remarks, in front of Mr Obama, caused concern among western leaders, some of whom fear that even discussion of long-term currency issues could unsettle markets and undercut economic recovery.

Gordon Brown, Britain's prime minister, said he did not remember Mr Dai making the remarks. But he said the focus should be on moving the world out of recession. "We don't want to give the impression that big change is around the corner and the present arrangements will be destabilized," said Mr Brown. (In other words, Gordon would rather lie about the situation than give an honest impression.)

"We should have a better system for reserve currency issuance and regulation, so that we can maintain relative stability of major reserve currencies exchange rates and promote a diversified and rational international reserve currency system," said Mr Dai, according to the Chinese foreign ministry. While he did not name the dollar, Mr Dai was unequivocal in calling for the world to diversify the reserve currency system and aim at relatively stable exchange rates among leading currencies.

Fear Trade Back? Sergey Aleynikov & HFTs, Goldman's Trading Scandal, 2nd Stimulus, U.S. Office Market Collapse

News that Moves Markets

with RCM Editorial

On Monday I revealed long term trends that, as I said, must be respected. However, today I wish to offer a thought that may help those who wish to trade on a shorter time frame. Government manipulation, with the help of big investment banks, has turned shorter term decision making into a sort of black art form. Many traditional short term traders are becoming increasingly frustrated and chewed up by the seemingly incongruous volatility. Traditional decision making factors e.g. EPS news, technical analysis readings, other company fundamentals, have taken a back seat in the short term, say 3-4 months, to government desired outcomes. It's a brand new world so you must use new tools. Consider this:

The Government felt the need to recapitalize banks in March. So, with the help of GS/JPM and others the manipulation game began to rally the market. "Helicopter" Ben began talking about "green shoots", government statistics "surprisingly" began to look better, and GS proprietary traders made a fortune on the rally because they are just sooo good. Result: A 3 1/2 month equity market rally that led to massive capital raise for the financial space through major secondary offering. GS raised billions with a secondary priced @ $123 up from the Nov. low of $47.41.

However, the equity market rally resulted in a Treasury bond market sell-off and a disturbing hike in interest rates. The "Helicopter" and "Pinocchio" know that rates going up will kill any hope of economic recovery. So, now that suckers have invested billions in the financial space the focus has shifted to supporting the bond market at a time when issuance of new Treasury debt is exploding. Possible Result: Expect an equity market sell-off over the next few months to help support the Treasury bond market and keep yields down. The fear trade is back in vogue.

One more thought, the arrest of Sergey Aleynikov may not be getting the press coverage it deserves. High-frequency trading (HFT) platforms are a major Achilles heel of this market. Joe Saluzzi of Themis Trading wrote a phenomenal piece about HFT that I covered in my July 1st post. Take the time to re read this post to fully comprehend the dangers.

Bloomberg: Goldman May Lose Millions From Ex-Worker’s Code Theft

...At a court appearance July 4 in Manhattan, Assistant U.S. Attorney Joseph Facciponti told a federal judge that "...The bank (GS) has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” When I read this I almost fell off my chair. What a blunder by Goldman. In other words, GS uses the code to manipulate markets but in a fair way? Who determines what is fair? Drop the debate of fair or unfair and you can see that GS admits to manipulating the markets! Read more...

Zero Hedge covers this story with the respect it deserves: Is A Case Of Quant Trading Sabotage About To Destroy Goldman Sachs?
Posted by Tyler Durden

We must follow this story closely because program trades now account for about 50% of the volume on the NYSE and if the HFT model somehow grinds to a halt liquidity will plummet potentially wrecking havoc on prices. For more read the A Goldman trading scandal?

And the beat gets louder...
U.S. should plan 2nd fiscal stimulus: Economic adviser - Reuters
Reuters reports the U.S. should be planning for a possible second round of fiscal stimulus to further prop up the economy after the $787 bln rescue package launched in February, an adviser to President Barack Obama said. "We should be planning on a contingency basis for a second round of stimulus," Laura D'Andrea Tyson, a member of the panel advising President Barack Obama on tackling the economic crisis. said on Tuesday. Addressing a seminar in Singapore, Tyson said she felt the first round of stimulus aimed to prop up the economy had been slightly smaller than she would have liked and that a possible second round should be directed at infrastructure investment. "The stimulus is performing close to expectations but not in timing," Tyson said, referring to the slow pace at which the first round of stimulus had been spent on the economy.

Reality vs. "Green Shoot"...
U.S. office market continues to spiral down - Reuters.com
Reuters.com reports the U.S. office market vacancy rate reached 15.9% in Q2, its highest in four years and rent fell by the largest amount in more than seven as demand from companies and other office renters remained weak, real estate research co Reis said. "It's bad," Reis director of research Victor Calanog said. "It's decaying and getting worse. Given the depth and magnitude of the recession, you can argue that we are facing a storm of epic proportions and we're only at the beginning. The weak demand helped push up the average weighted U.S. office vacancy rate 0.70 percentage points during the quarter and 2.7 percentage points compared with a year ago, according to the report released. Asking rent during the quarter fell 1.4% to $28.43 per square foot. Factoring in rent-free months and improvement costs to landlords, effective rent fell 2.7% in the quarter to $23.42 per square foot. The second-quarter drop was more severe than the first quarter's 2.3%, dampening hopes the office market is bottoming out, Reis said. Year over year, rent was down 6.7%, the largest one- quarter decline since the first quarter 2002. "This is really only the third quarter that we've experienced negative effective rent growth," Calanog said. "Last time, the office sector had four years of negative effective rent growth."

China Calls for Dollar Displacement, China Begins to Settle Trades in Renminbi, India Questions US$, Increase in Stimulus Spending?

News That Moves Markets

Good morning readers, this is your Monday wake up call. The US$ is under attack and the budget deficit will continue to expand like the blackhole it is regardless of congressional protestations surrounding fiscal discipline.

Instead of wasting time arguing about the inevitable and fearing the fallout let's position the portfolio to benefit: Short US Treasuries (Long TBT) as the spending increases make it impossible to keep rates under control. Short US$ (Long UDN) as the talk of a new settlement currency turns into reality, and long precious metals as currency devaluation drives asset prices higher. Repeat after me: inflation is a currency event not an economic event.

Timing the entry and exit points will continue to be the toughest part of the above investment approach. As always we will be fighting the government and the spinmeisters every step of the way. This manipulation onslaught can cause pain over a short period of time, but doing the right thing is never easy. While most of the investment community was drowning last year we at Rosenthal Capital Management defended principal and made money precisely because we understood these dynamics and were using the correct road map.

Please understand that the long term investment themes described above and illustrated below must be respected if you want your portfolio to survive.

China officials call for displacing dollar, in time - Reuters
Reuters reports the financial crisis has laid bare defects in the dollar-led global economy and the world should look to displace the U.S. currency, even if that will take many years, Chinese officials said in comments published on Monday. The push for fundamental, if gradual, reform of the international financial system comes just before the Group of Eight summit in Italy, where China's willingness to question the dollar's role could fuel debate. The Special Drawing Right, a unit of account used by the International Monetary Fund, presents a viable alternative to the dollar as a global reserve currency, said Li Ruogu, chairman of the Export-Import Bank of China, a major state-run bank. "It is a feasible plan to reform the present SDR and make it into a real settlement currency, a universally accepted 'currency basket' that would replace the dollar at the heart of the monetary system," Li was cited as saying in Financial News, a newspaper published by the central bank.


China begins pilot program to settle trade in Renminbi - NY Times
NY Times reports China has officially opened a pilot program to allow companies to settle imports and exports in renminbi in selected regions, marking a major step toward eventually internationalizing the Chinese currency. Three pairs of Shanghai companies with their Hong Kong and Indonesian counterparts signed contracts on Monday to be the first to settle business deals in the Chinese currency. Executives said the move would save costs and avoid exchange rate risks. Bank of China and Bank of Communications were the first lenders to clear transactions in renminbi, considered a lucrative business given China's expanding economy and huge presence in international trade. Hong Kong also kicked off the long-awaited yuan settlement program on Monday. HSBC said it completed its first renminbi trade settlement with Shanghai and its first cross-border credit transaction.


India open to discussing dollar's status as reserve - Reuters
Reuters reports India is willing to discuss proposals to replace the U.S. dollar as the global reserve currency, Foreign Secretary Shivshankar Menon said on Monday. "This would be one of the ideas which is on the table. There have been ideas expressed and we are ready to discuss all of them," Menon told reporters when asked if India would consider replacing the dollar.


Calls grow to increase stimulus spending - WSJ
WSJ reports Vice President Joe Biden said the Obama administration "misread how bad the economy was" and didn't foresee unemployment levels nearing double digits, in comments likely to intensify calls for the administration to do more to counter job losses... White House economists are discussing whether a second round of stimulus is needed, but a decision isn't expected until at least the fall. "We remain focused on putting thousands of Americans back to work" through implementation of the February stimulus act, an administration official said Sunday. "Any discussion of a second stimulus is premature at this point." That timetable isn't fast enough for some economists, who say quick action is necessary to avoid a protracted period of joblessness. "A second stimulus should be the one they should have done the first time, something that is relatively fast and thoughtful," said Phillip Swagel, a professor at Georgetown University's McDonough School of Business. So far, though, politicians of both parties are showing little eagerness to tackle another stimulus bill. Republicans have attacked the current stimulus package as wasteful and ineffective, labeling it as government bloat at a time of record deficits. As the GOP seeks to reclaim the mantle of fiscal discipline, many are loath to support another round of government spending. Many Democrats, too, said they're disappointed with the recovery program so far but, for now at least, are resisting calls for a second package.