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Hotline Sample Report
This report is a sample for information purposes only. These recommendations are closed.
5/5/2010 9:12:59 AM Eastern Time Putting Out Fires…Then Focusing on Prevention (Final Edition) Can a country be too big to fail? Yesterday, Germany rattled global markets by unveiling conditions to the Greek bailout that includes a mandate for "orderly insolvencies." That sounds like too big to fail to me. In some ways, talk of moving from "crisis management to crisis prevention" is putting the cart before the horse. In America, the focus on wealth redistribution and additional consumer protection is ridiculous with unemployment at 9.7%. Getting people on their feet is infinitely more important than making sure Wall Street is neutered. Why is the leader of the Free Democrats talking about prevention when the current crisis is still in DEFCON 1? We are talking about walking into a volcano while it's erupting. I get where Germany is putting up billions of Euros for this bailout and could be on the hook for billions more if Portugal and Spain succumb to mounting deficits and mountains of debt. Germany and France would like to tweak EU rules a bit and have supranational authority in policing member nations and punishing member nations. Just as the notion of a $50.0 billion bailout fund undermines the goal of ending too big to fail for large banks, Germany's action hint at imminent failure across Europe. There is much confusion and a need for leadership and decisions without hidden agendas. Germany must protect its taxpayers and not enable the moral hazard that has already placed the continent on the cusp of collapse despite pleas to the contrary from Spain's Prime Minister Jose Luis Rodriguez Zapatero. It's a political free for all. Angela Merkel is facing a major election on May 9 and she needs to reassure Germans that they aren't going to be on the hook for bailing everyone out. At some point, talk of prevention would make perfect sense, but right now it's only fanning the flames of fear. Prevention or supra control of the rest of Europe could be a moot point if it's burning to the ground. Too Big to Fail What does too big to fail look like? Well, there are many similarities between too big to fail banks and too big to fail countries, although in some ways too big to fail banks stand out even more. As it turns out, too big to fail countries are actually small countries with old populations and low birth rates. On the other hand, too big to fail banks are really big, having large staffs and large revenues. None of the banks that might be deemed a threat to the U.S. economy currently command even a AA debt rating status. Bank of America (BAC), with 283,914 employees, generates more than half of the GDP of Portugal ($150.4 billion versus $223.4 billion) and more than a third of Greece ($342.0 billion). These numbers are remarkable when you think that Bank of America has a workforce that's 2.6% of the population of Greece and Portugal and 0.02% of Spain's. It is easy to see why some in government would love to control the big banks. The prize is as attractive as a one-Europe under a supranational democracy. The American government put $23.0 trillion at risk to backstop and control banks, although the notion of nationalization was dropped against too much opposition (transparency can be a double-edged sword). Germany is playing it dangerously close but Greece seems to have overplayed its hand as well. The rest of Europe is watching as precedent will be established. For a continent asleep at the wheel for decades, now just isn't the time to be looking too far ahead. I'm talking Europe, but it applies to the U.S. too where we are going to supposedly prevent the next crisis while the other is still in full bloom (unless you don't count jobs and housing). In the meantime, violence in Greece is adding yet another element to this drama as three deaths have been reported in the wake of massive strikes and protests that have crippled that nation. The financial angles have been examined, but the human side is a reflection of not only a different kind of moral dilemma but also how tough it is to get people that have had the good life too long to take their lumps even if it might mean better lives for their children. This same story is playing out in America, although the sense of urgency isn't there so those folks willing to make a stand now are being portrayed as backward goons. The backward goons are those running through the streets of Athens setting fires and threatening violence because they can't spend as much time on the beach as they used to.
California has 36.9 million people that generate $1.84 trillion in economic activity. The state's bond rating is A- and it is flat broke. Economic Data ADP Employment Report We are seeing the word "uninspiring" being used to summarize this morning's ADP data. Payrolls increased by 32,000 in the month, 2,000 above consensus forecasts. Importantly, there was a positive 42,000 revision for the February to March period. Manufacturing added 29,000 jobs, consistent with the positive manufacturing reports received in recent weeks. Where the "uninspiring" might be coming into play is that there wasn't a significant headline beat that would spark upward revisions for Friday's non-farm data and that construction jobs continued to languish. The construction sector shed 49,000 jobs in the month, the 39th month of decline. This does not fit well with the improved construction spending results and housing market data. Since the January 2007 peak, the construction sector has cut close to 2.2 million jobs.
The outplacement firm reported that planned job cuts declined 43.0% in April from March, which was encouraging in that the March numbers spiked. Overall the report was positive on the surface, with one caveat. The retail sector was one of the industries not seeking to cut as much staff going forward likely as a result of having to meet the renewed demand at malls and outlet centers. However, there continues to be uncertainty regarding the consumer rebound and whether it will be strong and sustainable enough to push along the economic recovery. Furthermore, retailers continue to invest in technology that schedules employees at peak shopping times and makes distribution centers more efficient, both of which reduces the need to hire fresh faces.
It's getting uglier and fear is permeating into our markets, reflected in bond yields and this morning's equity futures. As a hedge I think that everyone should own SDS, perhaps 10% of your portfolio. The ADP number this morning showed punk job gains, not the kind of thing to write home about, and not the kind of thing that gives confidence going into Friday.
Long Idea: UltraShort S&P500 ProShares (SDS) @ $30.97
SKINNY: See Market comments
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