Archive - Nov 11, 2010

What do "hot money," gold, sovereign debt, foreign trade, and Germany and China all have in common? Everything. They are all lined up against the U.S. and our new quantitative easing (QE2). There is fallout related to quantitative easing, and the markets are reacting, from the Fed's perspective, badly.

A few weeks ago, Hinde Capital's Ben Davies delivered a terrific speech to the The Committee for Monetary Research & Education in which the asset manager presented his insight on not only the futility of linear forecasting, on the flawed assumptions of economists, and on the very errors in the current monetary system, but went on to suggest several "Variant Themes" which put him at odds with the consensus, chief among them being of course his views on the monetary system and gold (both discussed repeatedly before on Zero Hedge), but also on specific socio-political and economic catalysts when looking at the future. Among these are : 1) "Japanese stocks are the most unloved in the world. Small-cap stocks in Japan will skyrocket in years to come, but then they would, as I see hyperinflation there in the next five years", 2) "The Swiss Franc as a bastion of safety is a fallacy. They too are debasing their currency", 3) "Turkey: the Ottoman Empire will return. Great enduring demographics and entrepreneurial spirit", and 4) "Mongolia will surpass Japan in GDP on a PPP basis." Aside from his recommendations, which may well be right or wrong, the epistemological basis of Davies view is a must read for any participant in what is becoming an increasingly chaotic, full of noise and reflexive market, in order to get a grasp of what may truly be relevant for creating, and influencing, correct opinions.

An interesting development for the biggest market event of the year for US capital markets, the GM IPO, which is supposed to start trading next Thursday (why else would Brian Sach have a POMO every day next week) is the news out of Dow Jones that Goldman Sachs will close its books for GM share allocation on Friday at noon. Dow Jones takes this as an indication of massive demand. Perhaps, although with Goldman third row in the bracket, below MS, JPM, BofA, Citi, Barclays, Credit Suisse and Deutsche, they hardly had a big allocation to fill. More likely, this is merely a way to snub the government and demonstrate that unlike the other banks (none of whom are closing books early) it has done its job the fastest and the most efficient. That said, should Brian Sack not be able to contain the suddenly very jittery market, we would not be too surprised to see someone pulling the "market conditions" cop out card over the next week.

After last night's completely unsurprising "beat" of Chinese annualized inflation of 4.4%, Goldman today has come out with a note which, however, is very surprising: Goldman's Robin Brooks and Dominic Wilson have decided to close out their "long China" recommendation, which was one of the firm's Top 2010 Trades presented previously on Zero Hedge. And while the profit on the trade of 11.3% is appealing, the reason for the unwind makes little sense. As everyone had been fully aware (see our note here) in advance, the inflation number would come out at 4.4% (and so it did). To use this as an argument for tightening expectations seems a little disingenuous. Which begs the question: why is Goldman truly no longer bullish on China? And does this mean that the firm no longer buys Jim O'Neill latest decoupling thesis? Lastly, as China has been a key dynamo for world growth, if there is little equity upside to be had in the one last capitalist country, what can we say about the less than capitalist America? This is further compounded by Jan Hatzius' suddenly rosy again outlook on the US economy (coupled with Goldman's ongoing demands for up to $2 trillion in QE, which with every passing day is becoming increasingly more improbable)...

As readers recall all too vividly, CSCO has traditionally been the one stock whose drop has precipitated at least one major tech market correction in the past. Will it do so this time? For now it is unclear: never before was the Fed the open buyer of every resort and thus risk used to exist, now not so much. Nonetheless, here is a look at the intraday losses for the top holders in the stock. A quick look at the top 50 holders indicates that today alone has generated over $10 billion in intraday losses. Will this lead to margin calls for already massively cash strapped funds, and thus waterfalling liquidations, remains unclear but should be carefully monitored.

The Fed are the ultimate swindlers. They say one thing and turn around and do another. More important to me however is why did Ben Bernanke just do what he did even though it was a truly desperate act. My answer is that the failure of the economy to have even a fake boom recovery with job growth risked further exposing all of the acts of financial terrorism committed by the Federal Reserve and the TBTF (too big to fail) banks. Worse, they continue to rob and pillage and therefore the Fed will do “whatever it takes” to cover it up. If that means flooding the world with dollars and destroying its value so be it. Anything so that the perpetrators of the greatest financial crime in world history do not get caught and brought to justice. But as I wrote recently, the tipping point has been breached, the Rubicon crossed, the zeitgeist of America changed and justice will be done though the heavens fall. This will really accelerate into 2011. Potential whistleblowers should start thinking about coming clean and protecting themselves now while they can. - Mike Krieger

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 11/11/10

Update summary added.

Just a headline on Reuters, citing Medley Global Advisors:

• FED WOULD CURTAIL ASSET BUYING IF COMPELLING EVIDENCE OUTPUT GAP CLOSING QUICKER THAN EXPECTED

Is the Warsh-Hoenig-Plosser-Fisher-Kocherlakota mutiny about to go nuclear? We will bring you the report if we see it.

As Bank of America was plunging throughout October, it appears its short interest was, counterintuitively, following suit. As the NYSE reports, short interest in John Paulson's favorite bank (or not - the Paulson & Co. 13F coming out in a few days may have some nasty surprises for longs) was 153MM shares at the end of September. This number dropped by a whopping 54 million shares, or 35.3% in just one month (see table below). This means that the ongoing drop in the name had little to do with a resurgence in shorting, and all to do with increased selling. Furthermore, the far more proportionately bigger drop in SI, means that should there be another notable weakness in the name, then the drop this time will be that more accentuated, as there is less of a short covering impetus to the downside (and greater room for new shorts). In addition to BofA, other notable observations are that shorts in Ford rose to 282 million, making it the second most shorted stock on the NYSE, just after perennially most hated company Citi, which had 423.8 million shares short. The other usual suspects were mostly ETFs which as readers know all too well by know, are merely short hedging vehicles to long single name positions by hedge funds.

Earlier in the week we posted that Market-Neutrals were deleveraging, we then further speculated that a market drop would soon follow as liquidity disappeared and small sell block trades would move the market. We received many emails from individuals asking for further explanation of this metric and why we feel it is a useful indicator to look at. While this is merely a theory with no empirical evidence, we would like to display the following chart 2-year with daily closes in which m/n's rapidly delevered days before a market drop. On all 5 occasions, the rapid decline in HSKAX was indicative of the S&P500 index experiencing further weakness.

Visiting the world’s most overpriced asset. The recent action in the markets suggests that the big turn may finally be behind us. Why have bond prices been falling for the past month, despite an assumed promise by the Fed to provide unlimited amounts of liquidity? (TBT).

To those who have read GMO's last letter bashing the Fed, "Night of the Living Fed", there will be little new in Jeremy Grantham's interview with Bartiromo to be aired later today. For those who haven't, the GMO strategist does a terrific summary of how the Fed's economic central planning (a function it should not have, and should merely focus on monetary policy) has destroyed the stock market: "The Fed has spent the last 15, 20 years manipulating the stock market. I think they know what they do has no direct impact on the economy, the only weapon they have is the so-called wealth effect: if you can drive the market up 50%, people feel richer, they feel a little more confident, and the academics reckon they spend about 3% of that. The problem is they know very well how to stimulate the market, but they step away when the market gathers steam, and resign any responsibility for moderating a bull market that may get out of control, and I fear that the market will continue to rise, it will be continuously speculative. As a consequence you get a boom and bust... I think the Fed should settle for just controlling the money supply, not controlling the economy." Unfortunately, it is now too late, and the Fed, which in addition to lender of last resort, is the economic "controller" of only resort, now that fiscal policy is moot, will soon have to be overthrown for its disastrous effect on the US economy to be finally eliminated.

John Taylor comes out with his most pessimistic missive yet: "The euro, which has been perceived as if it were a German mark, has already topped and will decline until it is priced like an Italian lira in the next few months. With Europe and the US in recession next year, commodity prices will drop again and global growth will suffer despite the outperformance of domestic Asian economies. With the policy stresses, and the risk of significant errors in judgment, international strife becomes more likely as well."

Insiders have officially marked the top of the stock market: last week's insider selling of all stocks (not just S&P) hit an all time record of $4.5 billion. This is the biggest weekly number ever recorded by tracking company InsiderScore.com: as Sentiment Trader highlights no other week before had more than $2 billion in net selling. Furthermore, selling in just S&P companies hit a whopping $2.8 billion: over 4 times more than the week prior! As such the ratio of insider selling to buying is now meaningless. Even Bloomberg, which traditionally just posts the data without providing commentary to it, highlighted this ridiculous outlier: "Insider selling at Standard & Poor’s 500 Index companies reached a
record in the past week as executives took advantage of a two-year high
in the stock-market to sell their shares." We hope those retail investors who dared to reemerge in the stock market and play some hot potatoes with the big boys, enjoy their brief profit as they once again end up being the biggest fools.