RANsquawk European Morning Briefing - Stocks, Bonds, FX -- 25/10/10
Some interesting insights on how even Wal-Mart is doing its best to mask inflation by penny pinching here, there and soon, everywhere. Below is an example of 20% inflation in the span of a few weeks, which will most certainly not be captured in government statistics of food inflation. Additionally, with cotton just opening 470 ticks higher and 30 away from limit up, we hope readers took our advice from a month ago.
Measured by the Shanghai Stock Exchange Index, Chinese stock market advanced 12% in 10 trading days in October 2010. While investors big and small are celebrating their returns in a market where shorting stock is not allowed, a bigger topic emerges: how did it happen? Increasingly, people point their fingers to the direction of Beijing.
On the 19th of October, we told readers that Goldman is pitching a short EURCHF trade; and that, as a result, it is time to go long. Back then we said: "Like every other time Goldman says to do something, the prudent thing to
do is the opposite. Of course, this means more weakness for gold, as
the Swiss Franc is simply the safest equivalent of gold in the monetary
realm. Oh well - if better cost bases are to be had, than so be it." We were pretty much spot on, as usual, vis-a-vis our evaluation of Goldman involvement (and gold has indeed presented a better cost basis). Since then, the EURCHF has ploughed straight up, and gold has plunged. Just relased: Goldman has closed the EURCHF trade, after the 1.36 limit was hit. End result to clients - loss of 1.4%. End result to those who took our slightly jaded view on things: profit of 1.4%. We also suggest readers take profit on our "profit" limit being hit.
The market is now bracing for the November onslaught. Yet the next week will hardly be light on the data front. As Goldman describes, following the weekend’s meeting by the G20 finance ministers the markets will likely come to realize that the immediate impact on current trends in FX will be limited. It is therefore likely that attention will shift back to data once again and on the likely course of action by the Fed. On the data front, we have a heavy data week in the US with GDP, Chicago PMI, durable goods and consumer confidence. Overall and on balance we are less positive than consensus albeit by a smaller number. Potentially hawkish comments from central bank meetings in Poland and Sweden could be catalysts for FX appreciation. Finally, data out of Europe includes another German employment report and a UK GDP. We expect both to show further improvements.
With just over a week left to the QE2 announcement, discussion over the amount, implications and effectiveness of QE2 are almost as prevalent (and moot) as those over the imminent collapse of the MBS system. Although whereas the latter is exclusively the provenance of legal interpretation of various contractual terms, and as such most who opine either way will soon be proven wrong to quite wrong, as in America contracts no longer are enforced (did nobody learn anything from the GM/Chrysler fiasco for pete's sake), when it comes to printing money the ultimate outcome will certainly have an impact. And the more the printing, the better. One of the amusing debates on the topic has been how much debt will the Fed print. Those who continue to refuse to acknowledge that the economy is in a near-comatose state, of course, hold on to the hope that the amount will be negligible: something like $500 billion (there was a time when half a trillion was a lot of money). A month ago we stated that the full amount will be much larger, and that the Fed will be a marginal buyer of up to $3 trillion. Turns out, even we were optimistic. A brand new analysis by Jan Hatzius, which performs a top down look at how much monetary stimulus is needed to fill the estimated 300 bps hole between the -7% Taylor Implied Funds Rate (of which, Hatzius believes, various other Federal interventions have already filled roughly 400 bps of differential) and the existing 0.2% FF rate. Using some back of the envelope math, the Goldman strategist concludes that every $1 trillion in new LSAP (large scale asset purchases) is the equivalent of a 75 bps rate cut (much less than comparable estimates by Dudley, 100-150bps, and Rudebusch, 130bps). In other words: the Fed will need to print $4 trillion in new money to close the Taylor gap. And here we were thinking the economy is in shambles. Incidentally, $4 trillion in crisp new dollar bills (stored in bank excess reserve vaults) will create just a tad of buying interest in commodities such as gold and oil...
Niall Ferguson Explains Why Keynesian Policies Are Dooming The World Economy To Round After Round Of Asset BubblesSubmitted by Tyler Durden on 10/24/2010 - 11:37
If there is one thing that everyone should watch to understand just why every policy attempt to fix the ongoing depression is doomed, it is the following short clip from Niall Ferguson in which he deconstructs the primary fatal flaw of Keynesianism. Ferguson explains why those who push for Keynesian policies in a globalized world are doing nothing to stimulate the economy, but merely inflate ever more bubbles. Quote Ferguson: "I wonder if it's worth revisiting the now familiar debate about whether or not Keynes can save us. Because I have some doubts about this. Deep doubts." Zero Hedge has no doubts about this - we are confident that the confines of a theoretical Keynesian system have been the recipe for the disaster unfolding now before our eyes (which is not to say that Austrian economics is necessarily better, although intuitively they certainly make a far more compelling case, and would certainly not have led to the current pre-apocalyptic economic situation, which only the most addicted to Kool Aid pig lipstickers refuse to acknowledge). However, that is not news - we have always made our position on the false voodoo religion of economics well known. We are, however, happy that more and more of the "mainstream fold" are finally starting to question the key flawed premise of this fundamentalist doctrine.
Bo Peng submits a theoretical thought experiment on the discontinuity of security prices in a world in which two bids one millisecond apart are an eternity away from each other thanks to supercomputers in charge of markets, and thus the price discovery function can go anywhere from zero to infinity in the space of nanoseconds. Are the now daily flash crashes nothing more than an actual representation of the fractal nature of markets, as popularized by the now late genius Benoit Mandelbrot, and as was validated on Zero Hedge some time ago? If so, prepare for a market in which melt downs and melt ups become a daily, hourly and millisecondly fact of life.
In the nearly two weeks since the rescue of the 33 trapped miners, there has been a collective afterglow in Chile: Everyone feels happy. Everyone feels confident. Everyone feels as if any and every problem—no matter how big—can be taken in hand, and solved successfully. There is none of that feeling in the United States. America hasn’t felt success in a long, long time—at least a decade. Ever since 9/11, Americans have been living in a state of constant panic—constant fear—an irrational fear egged on by the leadership classes. This constant state of panic has exhausted America. —Gonzalo Lira
For some reason there are those who still believe today's G-20 meeting was relevant. For them, we provide the following summary from Goldman's Thomas Stolper which confirms that this weekend's theater is over, and nothing has changed. "Bottom line: The overall outcome and statement is about what we expected. Slow but steady progress in the right direction, mainly driven by the fact that individual countries come to the conclusion that they have no real alternative to accepting appreciation." Of course, the alternative to this Goldman desired "real alternative" now that the play is over and real life can resume, is currency and trade war. Which is precisely what is on the docket next.
After months of US bitching and moaning about China's so called unfair exchange policies, when it is the US Fed which is the biggest currency manipulator in the world by orders of magnitude, one country finally had the guts to stand up and call out Tim Geithner on his endless bullshit. At the G-20 meeting, German
Economic Minister Rainer Bruederle said that the Fed's "push
toward easier monetary policy is the “wrong way” to stimulate
growth and may amount to a manipulation of the dollar. Excessive, permanent money creation in my opinion is an
indirect manipulation of an exchange rate." The fact that China was smart enough to peg its currency to the most rapidly devaluing currency in the world is a different story altogether, and merely confirms that they are leap and bounds more sophisticated in their monetary policy than anyone gives them credit for. If Geithner wants to prevent a relative depreciation of the Yuan versus all other currencies in the world (especially the EUR, against which it continues to be in freefall), the answer is simple: stop bloody printing!
CFTC Weekly Options Update: Total Treasury Spec Longs Surge By 40% To 2010 Record, Dollar Inflection Point Reached?Submitted by Tyler Durden on 10/23/2010 - 14:43
This week's CFTC Commitment of Traders confirms that market momentum schizophrenia is persisting: in the past week Treasury net non-commercial spec long positions across the curve (2s, 5s and 10s) surged from 221k to 311k, a 41% increase. In other words the momo crowd is betting the farm that treasury prices not only won't stop going higher, but that the entire curve with be transposed lower with a slight preference for the belly (as Morgan Stanley now expects). The Combined total is more than half a million contracts compared to early April when the 10 year was threatening to break out of the 4% range (dashed line Chart 1). Yet this is in contradiction to the options activity within selected commodities, which after taking a slight breathers have continued to see increasing spec demand to the upside (Chart 2). Lastly, and probably most importantly, looking at currencies shows that the unprecedented surge in bearish bets in the dollar may be over: for the first time since the end of August, dollar net spec bets have actually gotten marginally bullish.
When financial markets have become riddled with fraud, embezzlement and corruption that goes unpunished, then institutional players will avoid that market as crooked: the well has been poisoned. The full consequences of what I termed The Rot Within: Our Culture of Financial Fraud and the Anger of the Honest are now unfolding: the well has been poisoned. One of my most astute correspondents made a critical observation that I've seen nowhere else: once a market has been poisoned by fraud which goes unpunished, then institutional players will avoid that market as untrustworthy. Without institutional trust and participation, the market then withers on the vine-- exactly what has happened to the U.S. mortgage securities market. The market for mortgage-backed securities has vanished, except for one player: the Federal Reserve, which has bought a staggering $1.2 trillion in the past 18 months to create the facsimile of an active market.
Weekly Chartology: Goldman On Earnings - "Good, But Not Good Enough" A/K/A The Calm Before The November StormSubmitted by Tyler Durden on 10/23/2010 - 13:14
While everyone knows that the broader economy is now largely slipping back into re-recession, so far corporate America had been relatively insulated courtesy of the low-cost of credit wealth transfer from taxpayers (whose saving potential is getting destroyed) to blue chip CEOs. Yet in Q3 even this trend is starting to gradually come to an end. As Goldman's David Kostin says: "3Q earnings are off to a good start, particularly relative to the modest expectations that we detailed in our earnings preview. 159 S&P 500 firms accounting for 45% of the total equity cap have reported 3Q 2010 earnings so far and 52% of reporting companies have beat consensus EPS estimates by at least one standard deviation, above the historical average of 41%. However, two points of caution have emerged: (1) 20% of firms have missed revenue estimates; and (2) large positive EPS surprises have been required for a stock to outperform the market." Also, it appears investors now only reward 3 std dev EPS beats: "Stocks beating consensus EPS by three standard deviations have a median outperformance of 211 bp while firms beating by between one and three standard deviations have underperformed by a median of 17 bp. Notable positive surprises include Google, Parker-Hannifin, Oracle, Carmax, and Best Buy. Each of these stocks beat consensus estimates by at least three standard deviations and outperformed the market by at least 500 bp." Is this sustainable? Of course not.