Yesterday's drop of the BDIY to a one year low, coupled with stocks' (brief) jump to a one year high had quite a few technicians on edge: it isn't every day that we get such a major divergence between the two data series. But does this actually mean anything, and does it predict much in terms of future market performance? For the answer we go to one of the best technical analysts out there, Sentiment Trader, who shares the following piece of advice to those who are curious how stocks have traded in past occurrences of such notable divergences: "Overall, the S&P's median return over the next month or so was certainly below average, and I would consider this to be a minor negative, but not a major or terribly consistent sell signal." That said, there is also the threat that China is merely continuing to add additional supply in terms of Cape and other sized tankers, and we are confident that to some the plunge in shipping rates will be actually seen as a positive as it means less money has to be spent on chartering trans-Pacific transport. Which is good - a difference in opinions is, after all, what makes market.
The Chinese rhetoric on US Treasury holdings is once again heating up. After a year ago former PBOC advisor Yu Yongding called for a reduction in China's holdings of US Treasurys, popular magazine Caijing published another call to arms by the disgruntled ex-central banker. In apparent disagreement with traditional monetary policy and the Yuan peg, Yu said that moving towards a more market-driven exchange rate would mean reduced intervention in the foreign currency markets, giving China the option of winding down its holdings of U.S. debt. "China should strive to reduce instead of further increasing (its holdings of) dollar assets," he said. "Specifically, China should reduce the growth of its foreign exchange reserves as soon as possible. Furthermore, with the Fed now firmly holding far more US debt than China, the world's fastest growing economy is realizing that is negotiating power when it comes to US leverage via bond holdings is getting smaller with every day. Perhaps the country is finally realizing that it would be best to sell to the Fed now when it can, rather than some time in the future, when it has to, and do so on Bernanke's terms.
RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 05/01/11
Today the PIIGS are back at the ECB subsidy trough with Portugal taking center stage with its E500 million 6-month bill auction. The next country to implode sold E500mln of 6-month Bills, and while the bid to cover was just a slightly better 2.6 compared to the 2.4 before, the yield again surged, hitting an unsustainable 3.686% versus 2.045% previously. The net result of this jump in yields is that peripheral spreads have once again commenced leaking wider, with the Greek spreads to Bunds pushing to a new record wide at 974 bps, a 10 point move. This is hardly the last we have heard of record Greek spreads it, and while it is very feasible we will see a four digit spread in the next few days, who really care anymore. After all it is just the ECB that will end up holding the toxic paper.
A common misconception among less aware segments of the American populace is that the phrase “New World Order” was concocted by attention seeking “conspiracy theorists” in dank basement apartments and sinister mountain shacks across the country. In reality, anti-globalists and Constitutionalists had nothing to do with the term’s creation (and most of us have decent digs, too). The truth is that mumblings of a “New World Order” have been floating around various elitist circles for decades, and every once in a while, those mumblings are publicized in the mainstream media. Globalists created the warped ideal; we just point out that it exists. Lately, we haven’t had to try very hard… As most readers here are probably already privy to, elitist spokesman George Soros (who for some reason reminds me of Baron Harkonnen from the movie ‘Dune’) recently let spill all kinds of NWO gossip in a candid interview with the Financial Times.
Contrary To The IMF's Lies, The IEA Finds That Surging Oil Price Actually Will Be A "Threat To The Recovery"Submitted by Tyler Durden on 01/04/2011 - 19:47
Can they please at least keep their lies straight? While two months ago the IMF said that "Oil price rise not threat to global recovery", we now get an FT article with the following title: "Oil price ‘threat to recovery’" based on a quote from the IEA." H.M.M.M.M. we wonder whose opinion is more accurate: an organization run by idiots (who subsequently matriculate into modestly coherent people whose only job is to bash their former employer), whose only purpose is to destroy economies under mountains of debt (or is that the World Bank?) and to bail out insolvent PIIGS... or the International Energy Agency? We'll have to get back to you on that.
Was today's broad and very much coordinated selloff in commodities a result of the just announced news that the CFTC's position limit plan may, contrary to prior expectations, be enforced very soon? It appears that outspoken CFTC commissioner has flipped in his stalling tactic and instead is now endorsing the position limit plan. Per Reuters: "Under the system, if a trader's holdings in a commodity reaches a certain threshold, it triggers a new level of heightened regulatory scrutiny by the CFTC where commissioners could vote to require the trader to reduce their positions." This means that JPM's accumulated holdings in various precious and industrial metals are not only about to likely become public, but that the CFTC will be mandated to very shortly enforce a break up on those positions which are deemed too concentrated. It is unclear how foreign entities, to whom the recent accumulation in various precious metals has been attributed, will be impacted by the proposal which now appears may be shortly enacted.
While we frequently make fun at Maxine Waters, and often for good reason, in this case the Congressional Democrat is spot on: the member of the House Financial Services Committee has denounced the BofA-GSE settlement as nothing more than a "backdoor bailout" funded by taxpayers, precisely as disclosed yesterday in the exhaustive Forbes piece that is a must read.
Given the composition of the Fed's assets, when interest rates start rising, the immediate effect on the Fed's income will be negligible. But the Fed's interest expense will respond immediately, because the interest it is paying is interest on deposits that commercial banks are free to withdraw without notice. That's not a healthy combination. Short-term rates would only need to rise above 6.5% for the cost of keeping the $1 trillion sequestered to exceed all of the Fed's income. The Federal Reserve would be operating at a loss. And the crossover rate, at which the Federal Reserve starts losing money, may be about to come down. The Fed is about to begin round 2 of "quantitative easing," in which it creates still more reserves to buy still more long-term Treasury bonds. Suppose that QE2, regardless of what details are initially announced, adds up to a purchase of another $1 trillion of 30-year T-bonds, at the current yield of 3.9%. That will add $39 billion per year to the Fed's income. But it will double the effect that any rise in short-term rates has on the Fed's interest expense. The net effect would be to lower the crossover fed funds rate, at which the Federal Reserve starts operating at a loss, to 5.3%.
How To Gold Bear Vadim "Chart Of The Day" Zlotnikov, The Undilutable Precious Metal Is Merely Another "Fiat Currency"Submitted by Tyler Durden on 01/04/2011 - 17:59
A few minutes ago we ridiculed Bloomberg's use of Vadim Zlotnikov's opinion on gold as the basis for the otherwise reputable firm's chart of the day. Below, we present a statement from the actual research report that indicates that the man does not have the first idea of what gold is all about. To wit, and we quote: "Gold, which is effectively just another fiat currency, has recently benefited from its perceived ability to hedge against a variety of potential economic outcomes that are currently foremost in investor's minds: inflation, sources of economic growth, downward spiral in fiat currencies, etc." While there is no point to even discuss any part of this report further, we ask: are imbeciles the best that the anti-gold crusade can come up with?
The barrage to get investors to dump their gold is on in full force, after one after another media outlet takes turns to guarantee that a day of profit taking in an asset that two days ago was trading at its time highs, and experienced an uninterrupted 30% run in the past year, means the rally is over pretty much in perpetuity. The motive is clear: get people to abandon the safety of hard assets and throw their lot into the ponzi scheme, based on one week of minimal inflows following endless outflows after the first and certainly not last Flash Crash. The latest such attempt comes courtesy of Bloomberg's chart of the day, whose disturbed logic is just left of alchemy. To wit: the shares outstanding of the GLD etf have declined, therefore you must acquit, or dump your gold. Immediately. And we wish we were kidding.
On The Fun (But Pointless) Debate Between Rick Santelli And Rich Bernstein On What The Yield Curve Indicates (In A Time Of Central Planning)Submitted by Tyler Durden on 01/04/2011 - 16:52
Rich Bernstein who while at BofA used to be one of the few (mostly) objective voices, today got into a heated discussion with Rick Santelli over yield curves and what they portend. In a nutshell, Bernstein's argument was that a steep yield curve is good for the economy, and the only thing that investors have to watch out for is an inversion. Yet what Bernstein knows all too well, is that in a time of -7% Taylor implied rates, QE 1, Lite, 2, 3, 4, 5, LSAPs, no rate hikes for the next 3 years, and all other possible gizmos thrown out to keep the front end at zero (as they can not be negative for now), to claim that the yield curve in a time of central planning, is indicative of anything is beyond childish. A flat curve, let alone an inverted curve is impossible as this point: all the Fed has to do is announce it will be explaining its Bill purchases and watch the sub 1 Year yields plunge to zero. Yet the long-end of the curve in a time of Fed intervention is entirely a function of the view on how well the Fed can handle its central planning role: after all, the last thing the Fed wants is a 30 year mortgage that is 5%+ as that destroys net worth far faster than the S&P hitting the magic Laszlo number of 2,830 or whatever it was that Birinyi pulled out of his ruler. As such, Santelli's warning that a steep curve during POMO times is just as much as indication of stagflation as growth, is spot on.
While everyone has been focusing on American institutions over the past several months looking for entities that may have claims on Bank of America and other domestic banks which have misrepresented their mortgage portfolios, a question that nobody is asking is why are European, and specifically German banks, not joining the fray? After all, when it came to finding idiot investors, Goldman et al's rolodex would always immediately jump to those in the Ruhr and Rhine valleys. And sure enough, as many German (Landes)banks ended up on the receiving end of Wall Street innovation, and thus bankrupt, it has been shocking that very little initiative has been demonstrated by German investors who lost most or all of their capital when subject banks ended up purchasing misrepresented securities. All this may be changing soon (see below). But even if it isn't, a key question is just what leverage does America have over Germany to prevent the country from pursuing rightful putback demands against the mortgage banks. Our guess: those lovely FX lines from Benny and the Inkjets. After all recall that the Swiss tax disclosure was the quid pro quo in exchange for the unlimited Fed credit facility to the SNB when the country was on the verge, and when UBS needed a bad bank to make sure the Swiss giant survived.
Knight Capital's take on the FOMC minutes: "The Fed’s minutes from the December 14, 2010 meeting seem to echo our own concerns (see our “Three Threats, One Risk” report published October 6, 2010). Though noting evidence of growth and an improving “tone” to the labor market, the Fed did not feel that the apparently improving economy warranted any change in QE. The Fed noted that the housing market and debt problems in Europe could curb growth – further noting the impact on LIBOR funding. The rise in unemployment was troubling to policy makers as they noted that the rise came with a backdrop of depressed labor force participation and employment-population ratios. Further stresses come from the depressed housing market, employers' continued reluctance to add to payrolls, ongoing efforts by some households and businesses to delever, and precarious state and local municipalities’ balance sheets. Deflation is also not totally off of the Fed’s radar either (recall it was a buzzword just a few months ago), as some participants noted that with substantial resource slack persisting, underlying inflation might fall further below the levels that the Fed desires."
No reaction on the FOMC minutes, as expected, which basically say that despite the "economic improvement" the Fed does not have confidence in the economy to remove QE. Also, QE is supposedly successful because rates went up, even though the whole purpose of QE is to get rates down. Total idiocy. As for Goldman's take: "Perhaps the best single sentence in this document is the one that immediately precedes the vote on the directive to the New York Fed for its intermeeting operations: "With respect to the statement to be release following the meeting, members agreed that only small changes were necessary to reflect the modest improvement in the near-term economic outlook." In this regard, we remember expecting the committee to upgrade its view only modestly and finding that the upgrade was, if anything, a bit more cautious than we anticipated."