Archive - Nov 19, 2010

The three biggest problems with QE 2 are:

1) The potential for a US Dollar break-down
2) Treasuries falling and pushing interest rates UP
3) China retaliating.

Of these, #3 is the most worrisome for the global financial markets. Let’s be clear here, China is extremely adept at making investing/ financial decisions. And while we do need to take its decision to cut Treasury exposure seriously, I cannot believe China would actually telegraph that it was dumping Treasuries when the dumping really starts.

"Take a position. Do the right thing. Pass Bill C-216. It is the right thing to do. By doing nothing, by leaving us hanging, in my opinion, they are effectively giving their blessing to the court judge and lawyers we are dealing with to bury us alive. I do not know why. I do not understand what I and 400 other sick people did wrong to be treated like this."

- Jackie Bodie, Nortel disabled employee

Retailers are counting on holiday sales this year but on the other hand they are rather pessimistic. It remains to be seen if holiday sales will improve substantially this year. Bling yes.

While not directly under the purview of finacial matters, a topic that has received much attention recently are the now two consecutive censures of MSNBC hosts: first Keith Olbermann, and now Joe Scarborough for political donations. The reason given by MSNBC (NBCsubsidiary) president Phil Griffin is that "since [Scarborough] did not seek or receive prior approval for these contributions, Joe understands that I will be suspending him for violating our policy." As for Olbermann: "Days before the November 2 congressional elections, Olbermann gave contributions of $2,400 each to Jack Conway, the Democratic candidate for U.S. Senate in Kentucky, and to two members of the House of Representatives from Arizona, Raul Grijalva and Gabrielle Giffords." Presumably the decision to censure the two arose out of NBC News, MSNBC's broadcast partner, which attempts to protect the news organization's image as unbiased. Zero Hedge is all for unbiased reporting, even at such purportedly extremely far from the center stations as MSNBC and Fox News. After all, both of these are watched purely for entertainment purposes, and serve to merely create an echo chamber environment. Yet one station, which is also under the control of NBC, and which should pursue neutrality more than anything due to the sensitive nature of its coverage, is financial station CNBC. Which is why we were very surprised to discover that none other than Larry Kudlow recently donated $1,000 to former Connecticut Congressman Chris Shays. We wonder whether this means we actually may a day or two without supply-side general extraordinaire Larry Kudlow at the CNBC helm since obviously NBC will strive to enforce objectivity at all of its broadcast partners?

Chris Martenson who recently launched a fascinating series of interviews and podcasts with a variety of the most interesting pundits in the world, chats with Ted Butler, discussing such germane items as why silver has such a compelling value story, the coming silver supply crunch, the argument behind the allegations of silver price manipulation, drivers behind the recent price action in silver, why price volatility will increase and the expected outcome of the CFTC’s investigation and why Ted thinks it will be "a bombshell for the silver market."

Looking at the CFTC Commitment of Traders data for the past week confirms that the momentum unwind continues. In Treasury's net spec positions in both the 2 and 5 Year tumbled (from -11,125 to -35,142, and from 152,782 to 102,885 respectively) even as bets that prices on the 10 Year would jump almost doubled (from 58,661 to 97,346). After chasing curve steepening, specs are now going all in on a major 2-10 flattening. The same thing is evident in commodities, where spec bets on five key categories all declined week over week. Lastly, the unwind in dollar shorts, and everything else longs is accelerating: dollar net spec increase from 6,315 to 10,827 as all other FX (except the GBP) saw spec bullish interest decline.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 19/11/10

Is Max Keiser's attempt to put JP Morgan out of business working following the mother of all silver physical squeezes? The price of silver has been stable in the past few days, but if the US official precious metal seller is to be trusted, this will not last long. According to the US Mint, sales of 1-ounce American Eagle silver coins are headed for the strongest month since at least May, Bloomberg reports. More details: about 3,175,000 of the coins have been sold this month, compared with 3,633,500 in May, according to data on the Mint website. Silver futures in New York touched a 30-year high of $29.34 an ounce on Nov. 9. American Eagle coins also are available in gold and platinum. The Mint said 62,500 ounces of gold Eagles have been sold in November. What is interesting is that sales of the coins continue at an astronomic pace despite the nearly 10% premium one has to pay over spot. What is more interesting, is that the Mint has not run out yet. Yet the refreshing thing, is that instead of buying paper certficates promising that one's presumed purchases of gold is held by the DTCC, Americans are once again going straight into physical. Here is hoping Keiser's plan ultimately unravels whatever the RICO suit against JPM and HSBC leaves untouched.

Now that RINO is on its deathbed following the Muddy Waters report that started it all, it is time to give the specialized research shop some kudos...And move on to their next (or technically previous) target - Orient Paper. With RINO likely to open just north of 0 if at all (and will do so on the Pink Sheets), investors are curious which other name brought to you courtesy of the NYSE overeagerness to float any garbage, is just minutes away from becoming the next Chinese fraud export du jour. We present ONP, or Orient Paper, which Muddy Waters has been even more bearish on (since late June), and has a target price of $<1.00 (in essence, barely a liquidation recovery). The research report begins boldly enough: "We are confident that ONP is a fraud. Its purpose is to raise and misappropriate tens of millions of dollars" and then goes on to prove its allegations. The stock was last trading at $5.88. The only question is how much lower can it go.

I think we have created a Banksta thrashing Monsta...;-)

As the US, due to its key role as primary supporter of the various IMF rescue facilities, is already intimately involved in the Greek bailout (not to mention that the US Central Bank will soon again reprise its role as key lender of dollars, once the Irish crisis flares up again next week), there are those who are already calling to prevent the US from participating in yet another European bailout (second of many). The first person to have voiced this objection is Washington Congressmwoman Cathy McMorris Rogers, who in a just issued press release notes that she had warned the administration in April that a blank check for Europe would cause a “gathering storm." She is, of course, right. She will, of course, be ignored. We hope that politicians will gradually realize what traders have known for about two years - namely that courtesy of the Bernanke put, there is just no risk left, which means ever escalating bail outs until, one day, NASA will be sending out binary message to Alpha Centauri seeking the assistance of intelligent, and more importantly, rich, life to save the earth. Until then, the all in bet (with other people's money) will simply keep getting bigger.

Things were going according to plan (even though the plan was horrifying) and everyone was happy but then Uncle Ben had to screw it up this morning when "The Bernank," speaking in Germany, indicated that the Fed would pull the plug on QE2 if they thought inflation would rise higher than "2 percent or a bit less."

Lately it seems that the entire world has forgotten that in addition to China, the EMs are also the BRI - Brazil, Russia and India. However, now that Brazil is outright hostile toward US policies (not so much toward China), and Russia continues to be Crazy Ivan, the only relevant other overheating economy appears to be India. The reason why India has not attained much media attention in recent years, is that unlike China, the country has been doing its thing and not engaging in overt or covert conflict with the developed world. And as China's inflationary star may be waning, we believe ever more investors will continue looking toward India. Which is why, courtesy of Ambit, we present an analysis of what the investment bank believes will be the five key megathemes which will dominate the Indian economy over the next five years.

Bill Gross continues to telegraph that an MBS monetization announcement is just a heart beat away. Either that, or the firm is now fully convinced it will be able to putback every single MBS in its book (and then some) to some soon to be sad shell of a bank (read- Bank of America and/or Wells Fargo). In October, Pimco's Total Return Fund saw its margin cash jump by the most since February 2009: the time when the full QE1 was announced: at $28.1 billion in margin cash, the firm increased it dry leverage powder from $7.6 billion to $28 billion. And where did this money go? Virtually all of its went in Mortgage Backed Securities, which stood at $100 billion as of October 31. This is a $50 billion increase in the past two months, and brings the total to the highest since February 2009, again - just before the Fed started monetizing UST and MBS/Agency debt in earnest. As Gross never does anything without a reason (and fundamentals are never a "reason" for the Fashion Island denizens) there are only two possible explanations: either Gross knows that the Fed will have no option but to promptly shift from monetizing MBS in addition of USTs (now that rates have once again started leaking wider), a topic we have covered repeatedly in the past, of the firm is convinced it will be successful in getting the BofA's to accept all of its putback demands, and possibly more. As both outcomes will result in a material profit on all recent purchases, the bottom line is that taxpayers (either via QE or via TARP2) are about to make the GEM (Gross-El Erian-McCulley) even more valuable.

Once we realize what we all agree on, we will have a much better chance of turning our economy (and country) around.