Archive - Oct 2009

"In November 2008, Chinese banks said they would no longer play by our rules. Top tier banks (Bank of China and Industrial and Commercial Bank of China) reneged on derivatives contracts. They failed to come up with billions in collateral on dollar/yen FX trades, which were out of the money after the yen’s October appreciation. This should have been headline news in every financial newspaper, but it wasn’t." - Janet Tavakoli

• Yields 1.445% vs. Exp. 1.441%
• Bid-To-Cover 2.76 vs. Avg. 2.80 (Prev. 3.02)
• Indirect Bid-To-Cover 1.34
• Indirects 49.1% vs. Avg. 50.45% (Prev. 54.23%)
• Allotted at high 61.96%
• Direct bidders at a sturdy 11%: money market guarantee expiration? Do directs prefer Treasuries over equities?

"Meanwhile, every 20 milliseconds "HFT-Quants" are taking another "too-dumb-to-stop-trading" little investor trapped in the illusion that Fannie, Freddie and AIG will "be worth something, someday." "HFT-Quants" don't think long term. Their algorithms think in milliseconds, just enough time to skim more money from all the 'dumb money' out there." Paul Farrell, MarketWatch

The move in gold to new 18 month highs has not been confirmed by backwardation in the gold basis. Caution is warranted for leveraged traders.

In the 1980s, in Soviet Russia, a few times a year, my class walked to a movie theater, where we were shown a documentary. Attendance was mandatory. The documentaries were different but the themes were the same: to the accompaniment of patriotic music, we learned about the righteousness of socialism, the greatness of Mother Russia, and the intelligence and foresight of our great leaders.

True to form for 2009, anyone trading with a close eye on the fundamentals is getting a major hurt put on, while buying any dip to minor support, such as the 50 day MA, remains as viable a strategy as the most sophisticated SPARC assembly language-optimized HFT algorithm. The order has come down from above, once again today (as it did yesterday), that sellers ain't welcome.

The short answer is...

Yes, probably.

The currency markets continue to allow cheap financing of the carry trade, with the dollar index now seemingly headed back for new lows. We will find consolation in that we offered a decent level of entry to attempt buying the USD, but from where we stand now it seems hard to conceive DXY will not make new lows in relatively short order. 76.21 was the 76.4% retracement which we are still hovering around keeping an ounce of hope, but I am afraid it is just that. Gold is screaming higher fueled by rumors of secrete meetings between a bunch of anti-dollar villains. I will have a lot more to say on that later.

Two formerly confidential memos from the Carter administration highlight the dangers posed by shifting from dollar to SDR denominated oil, to the US economy, and its primary driving force: the US middle class. Arguably the worst president in US history, Jimmy Carter, managed to avoid this transition. The question now is whether the current administration fails where even President Carter succeeded, and what the cost to the US economy, and world trade, ultimately will be as the dollar is sacrificed at the Wall Street altar.

Lots of speculation today about the upcoming death of the U.S. currency, middle class, and by implication, its entire economy, as gold hits all time highs. Max Keiser joins the fray: "This is just another step to the US economy collapsing, and the US, as a major power, collapsing." One thing is certain: Listen, and understand. That Chairman is out there. He can't be bargained with. He can't be reasoned with. He doesn't feel pity, or remorse, or fear. And He absolutely will not stop, ever, until the dollar is dead.

"For years investors laughed at any attempt on my part to draw comparisons between the
inflating bubble in the US and the Japanese experience. For most in the West, Japan might as
well have been on another planet, its post-bubble experience held so little relevance. They’re
not laughing so much now. Yet we hear an increasing chorus that the extreme policy response
will safeguard the West against a repeat of Japan’s lost decade. I remain skeptical." - Albert Edwards

NY Fed President, in prepared remarks to the Fordham Corporate Law Center, presents a surprisingly objective overview of the economy, and highlights the main threats to the economy, from the Fed's point of view:

1. The increasing savings rate and the number of people postponing their retirement

2. The waning of the fiscal stimulus impact

3. Ongoing bank balance sheet deterioration, due primarily to CRE holdings and cap rates increasing from 5% to 8%, as well as CRE debt rollover risk

4. Ongoing and increasing pain for small business borrowers

5. Significant excess resources

• Oil states refute talks of replacing dollar (Reuters, h/t Austrian Filter)
• AUD ripfest as Australia raises interest rate to 3.25% (AP), while America is still at -6% +/-
• National retal group offers weak holiday forecast (AP)
• Chrysler may not make it another year (Mopar Muscle, h/t Patrick)
• Ferguson: There's no such thing as too big to fail in a free market (Telegraph)

• Apartment vacancies in the U.S. rose to 7.8% - a 23-year high.
• Asian stocks rise on US Services Industries data, higher commodities prices.
• Australia raised its cash rate target by 25 bps - first Group 20 to unwind stimulus.
• Dollar weakens as newspaper says Gulf States may drop greenback for oil trades.
• European, asian stocks advance; BHP Billiton, Dexia, Adidas shares climb
• Gartner sees narrower '09 chip revenue fall but cuts '10 forecast.
• Gold inches up towards $1020 on weak dollar

The dollar will go way up the next time the stock market crashes or during the next leg of the financial crisis . . . but will tank long-term.