At the open 5-18-11

Opinion - The US dollar is trading lower once again today as fears of declining global growth fade for the time being. With commodities denominated in USD and the highest gross domestic product of any single country (the EU is larger but the union remains a largely dysfunctional political force and cannot project military power globally without our help) as well as the current world military “super power” it remains incumbent upon the US political leadership (forgive the oxymoron here) to come up with a solution to our current fiscal bind.

We’re just looking for a pathway here…these problems won’t be solved overnight so there must be some binding constraints that force political behavior in ways that are fiscally responsible going forward regardless of the situation. That clearly in and of itself is risky under certain circumstances but not as risky as giving the bureaucracy carte blanche to do whatever they wish (the system failed us on Lehman Brothers anyway regardless of Bernanke’s lame excuses)…which will always be to pander to their political base and try to collect as many additional votes as possible by either hook or crook.

I believe that the one un-debatable fact is that by nature the vast majority of human beings will accept a handout rather than work…work is hard, handouts are easy and it becomes a habit as debilitating as alcohol or narcotics…we’re becoming a “handout” nation…now those in favor of handouts will argue that it’s compassion for others that is behind this behavior. I will argue that government has to be dispassionate. The government should be about running the necessary underpinnings of the country that are the so-called “public goods” that will not be taken care of unless a central authority does so. There are other private institutions set up and designed to deal with those less fortunate and certainly we have a surfeit of those people. What we need is the proper set of incentives and this is true with regulatory behavior as well as with individual social policy. Figure out how to get kids to stay in school and perform at their best (note this may involve legalizing drugs to reduce the allure of “easy money” from selling drugs) so that they will be productive members of society instead of social remoras in many ways a “product of the system”. We’ve got to start thinking outside of the box because the walls are closing around us…

For those interested here’s a link to Walter Williams website, an economist with a unique insight into what ails America and worth a look…he’s a prolific author and professor at George Mason…enjoy

http://econfaculty.gmu.edu/wew/

Equity Markets – stocks appear set to break the streak of 5 losing sessions as most Asian markets were higher in overnight trading (India was the lone exception with trading ending just moments ago @ 06:00)…European indices are higher in the morning session…domestic futures are indicating a flat opening.

Sovereign Credit market – the credit markets in Europe opened a crack for the PIG countries as Portugal sold 2-month bills at 4.5%...that’s pretty steamy for a country that has been assured a bailout by the EU finance ministers (but wait all of the countries have yet to have parliamentary votes on the bailout)…spreads widened as it appears that the “naked short selling” rules in Europe will not apply to the credit default swap market so that means no big short covering rally. The market awaits further news on the next Greek bailout/restructuring.

News –

• The battle lines are beginning to form around the top job at the IMF…European countries are closing ranks as they try to maintain control over the position that they’ve held since the IMF’s beginnings following WWII. The calls for DSK’s resignation are growing and the process of finding a replacement needs to begin as John Lipsky (the current #2) had already planned to step down in August. The emerging markets are going to make their presence known here as they have been angling for a larger share of the decision making process for some time and it is rather difficult to blame them given that collectively they now account for 2/3 of the world economy. The key here is that the US controls the head of the World Bank and it may have to agree to a rotation of leadership with Europe to placate both the EU and the emerging markets countries…it’s a brave new world.
• Bond offerings from investment grade non-financials are spiking…issuance has been almost $28 billion in the first two days of this week…in part this could be building up a war chest for opportunities to snap up less fortunate competitors or other target companies if the market turns south. It could also herald additional stock repurchases should shares flag and or executions of leveraged re-cap strategies. Regardless of the rationale, what 2008/2009 taught corporate America is that you can NEVER have too much liquidity (I’m making this “law #9” going forward) so let’s take it while we can.
• Unemployment claims in the UK rose in April at the fastest pace since January 2010…this serves further notice that the economic recovery in the OECD countries remains on very tenuous footing…Cameron is taking steps to reduce the government payrolls which is clearly necessary in the case of Great Britain, grown bloated over the years of Labor Party rule, and as such it will likely be a slow and painful process. This argues for King’s stance on interest rates (keeping short term rates on hold in spite of inflation) but the lure of easy money (just turn those machines on and sterling comes out the other end) is a siren’s song.
• Delta Airlines (DAL) is setup to take over terminals C&D (getting C from US Airways which has indicated that a final deal on the slots may be only weeks away) @ LaGuardia which will give it control of almost ½ the flights in and out of the smaller of the two airports in Queen’s…the next largest carrier out of LaGuardia is American Airlines.
• John Deere raised its forecast for 2011 earnings and posted a fiscal Q2 result that topped estimates amid increased demand for Ag and construction equipment…the stock is up a little over 1% in the pre-market.
• What’s the latest from the Federal Reserve Bank of New York (FRBNY) regarding the Maiden Lane II special purpose vehicle set up to take mortgage securities off of the books of AIG at the height of the crisis? Below is a table outlining what’s been going on with the bidding process for the securities in ML II after the government rejected AIG’s offer to buy the securities back and the market value estimated by Blackrock (the government’s asset manager of choice)…So far the FRBNY has successfully sold 28.1% of the securities held by ML II (note this doesn’t adjust for any principal amortization in the portfolio)…4.9% of the securities went unsold from the 7 auctions held to date…so ML II is rapidly turning into an adverse selection fund.

Phillip Pennell, CFA
Turnberry Capital Management
(203) 861-2708 (Direct)
(203) 861-2700 (Trading)
(203) 917-2255 (Mobile)

The contents of this posting do not constitute recommendations to buy or sell specific securities. Any individual wishing to buy or sell securities for their investment account or that of others should consult with their investment advisor prior to entering into any securities related transaction