Quick Macro Assessment of Risks

I don't think Wall Street sees this yet. I wouldn't be surprised if we see another rally at the open of the trading day this morning. Risks of another calamity are rising. Risk abounds!

The World Bank just released a rather dire assessment, too. The President of the organization says that we're just "one shock away from a full-blown crisis" and that we risk "losing a generation" due to high food prices. Unrest assured!

excerpt from FT:
As the US moves into the second quarter of 2011, it is tempting to make comparisons with a year ago, just before the double-dip scare in the country pushed down global markets and interest rates. Now, US growth estimates are slipping, the Federal Reserve is talking about an exit strategy and external shocks – the Arab Spring and Japan’s earthquake – have boosted macro-economic risks. Furthermore, US fiscal policy is tightening instead of easing.
In contrast to 2010, which saw extra fiscal stimulus in December, forthcoming public spending cuts will lower growth in 2011. The battle over a possible US government shutdown has already cut $40bn from the 2011 budget, shaving about half a percentage point from midyear annualised growth rates. Momentum on reducing the deficit is building in Washington as Congress and the White House consider reform to benefit entitlements.

Stocks Futures Continue to Rise Despite Macroeconomic Data

Wall Street is so imbibed on monetary heroin that they will continue to ignore the fundamentals and overbought valuation levels until news hits that can no longer be ignored. Market overnight was very choppy.

from Knight Capital
Overview: Markets mostly positive this morning ahead of the ADP Employment numbers and despite sovereign ratings downgrades for Greece and Portugal yesterday.
U.S.: Housing figures continue to disappoint as MBA Mortgage Applications today showed a decrease of -7.5% for the week v 2.7% prior. Challenger Job Cut figures for March came in at -38.6% YoY v +20.0% prior. ADP payroll figures estimated at 208K additional jobs will also preview this month’s labor market as the anticipation for Friday builds. This estimate is compared to February’s 217K that exceeded market expectations and put the market into frenzy over the Friday release. All indications point to today’s release showing some traction and we tend to take the over on the 208K consensus. Yesterday’s consumer confidence of 63.4 v 65E disappointed the Street, but as we noted yesterday, this was not a total surprise given recent commodity price spikes and a still downtrodden housing sector. In an interview last night, President Obama showed confidence yesterday in the effectiveness of sanctions and U.N. military action against the nearly defeated Libyan leader Qaddafi. The President also noted that the U.S. may support Libyan rebels through the provision of arms. Luckily the speech did not interfere with “Dancing with the Stars”…
Europe: Yesterday S&P cut Portugal’s sovereign debt rating for the second time this week to BBB- from BBB and Greece’s rating from BB+ to BB-, with Portugal left on negative outlook and Greece left on watch negative. The decision centered on both countries’ unsustainable debt levels and inevitable draw on the EFSF as well as the agency’s rather dim view of the future ESM. We agree with the less-than-rosy-view of what one client has wittingly termed “the new new new new final comprehensive liquidity solution to the solvency problem.” The IMF appeared peeved by the announcements as a report published yesterday highlighted that ratings news adds to the region’s instability. Portugal will also have to revise their deficit figures to Eurostat after an accounting irregularity. With bank stress test coming up in April and the bad news continuing, we feel the agencies will have no choice but to continue their downgrade trend and that spreads remain too tight relative to risks. Fitch noted this morning that the summit results are unlikely to ease new term financing conditions for the periphery. Euro Zone consumer confidence in March continued to be hit by the region’s sovereign debt troubles and held steady at -10.6 v -10.6E. Ireland’s unemployment rate reached 14.7% in March v last month’s 14.7% revised up from 13.5%. German inflation remained at its two-year high in March, with preliminary HICP at 0.5% MoM v 0.6% prior and 2.2% YoY v 2.2% prior. Spanish inflation also remained elevated high in March, with HICP increasing 3.3% YoY v 2.4%E. These levels provide further support for Trichet’s proposed ECB rate hike. Retail sales in Spain fell again to -4.8% YoY v -4.7% prior on a real basis. The Bank of Spain also revised up its 2011 jobless rate to 20.7% for 2011 and 20.4% in 2012. Portuguese retail sales dropped 4.6% YoY v -7.1% prior revised down from -5.3%. Portuguese industrial production figures were more optimistic at +0.9% YoY v -0.7% prior and +1.5% MoM v -3.7% prior, although levels remain low.
Asia: Asian stocks on the rise after Japanese manufacturers resumed production for the first time since the earthquake earlier this month. The Chinese press is reporting that the PBoC may raise RRR 6 more times this year to add onto the 3 adjustments made already in 2011. The Chinese leading index pushed up slightly to 101.05 v 101.04 prior. New Zealand building permits fell 9.7% MoM v -1.0%E and erased last month’s +9.1%. South Korean real GDP in 4Q10 grew 0.5% MoM v 0.5% prior and 4.7% YoY v 4.8% prior. Preliminary figures for Japanese industrial production showed +0.4% MoM v -0.1%E, though these figures are pre-earthquake. Radiation concerns continue to grow in Japan as Iodine levels in seawater close to the nuclear power plant show abnormally high iodine levels. Japanese farmland will tested for radiation and will be complete in the next few weeks.
From Brian Yelvington of Knight Capital

Goldman Sees Much Slower U.S. Growth

US Macro Outlook for the Next 12 Months and Dollar Implications

Combining the new information over the summer with our global growth forecasts, it appears the most likely scenario now is one of ‘pro-cyclical decoupling’ of the US economy from the rest of the world.

As the table shows, we expect the US economy to grow substantially below trend over the next 12 months and in 2011 as a whole. This expected weakness remains directly linked to a number of persistent structural imbalances, which in some cases have started to deteriorate again. In particular, the following points have caught our attention:

• Survey data points to sluggish growth. The latest ISM readings for the manufacturing and nonmanufacturing sector point to continued sluggishness in the  respective sectors. Although the latest headline reading in the manufacturing ISM showed marginal improvements, the order-inventory gap and other forward-looking components suggest further sequential slowing lies ahead.
• Persistent high unemployment is a particular feature of the current US problems, hinting at a large output gap. It reflects the need to reallocate considerable economic resources from artificially inflated sectors (in particular, real-estate-related). A shift of a sizeable part of the labour force from one sector to another takes time.
• The US household savings rate remains too low relative to the US’s own long-run history, international comparisons and the demographic situation. As savings rise, the unusually high share of consumption in GDP will likely decline.
• Import demand has picked up strongly during the inventory cycle, highlighting just how little the US economy has rebalanced and how much US demand seems to depend on foreign supply. Relocating production to the US is a slow process.
• Rate differentials have moved sharply against the USD as markets increasingly priced in our own sluggish US growth scenario. Our expectations of renewed Quantitative Easing in the US, following the recent ‘baby step’ of extending the mortgage program, suggest rate differentials are unlikely to boost the USD anytime soon. On the other hand, stronger growth outside the US, in a positive decoupling scenario, would likely weaken the US via a corresponding shift in rated differentials.
• Finally, fiscal consolidation needs in the US are among the most important globally and on many measures, including from the IMF, the adjustment need in the US is comparable to that in the UK, Spain and Greece. Tighter fiscal policy will add to the outlook for slowing final demand in the US, a potentially USDnegative development.

Back to Bearish?

With stocks down nearly 100 points on the Dow, and in the negative throughout the trading day, one has to wonder if the mood has shifted once again. Over the weekend, various prominent voices in the finance community have continued to assess the economic fundamentals, analyzing more closely the internals of last week's day, and are increasingly turning thumbs down on stocks and the macroeconomic picture.

During these consolidations, I take numerous small trades for 3-4 ticks each. They often last only a few minutes each.  There are numerous small bad trades, but more good trades. They add up!