Archive - Nov 2010

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.

For those who wrongly believe that the biggest real estate bubble in the world is in Manhattan, the following may come as a surprise: according to Dylan Grice, in central Hong Kong, a 400 sq. foot property recently sold for HK$14MM, or about $1.8 million: an insane $4,500 per square foot. And that's just the beginning. Yet, as we have started to speculate recently, is this precisely the goal of Ben Bernanke - to create pockets of silly inflation within China so that the country is eventually forced to unpeg the CNY? If so, this is a huge gamble, as the bulk of the country still has far more slack than America ever can. And while China, and the bulk of its wealthy citizens, continue to pretend there is no bubble (created by the same free credit mechanism that results in the 2008 near-death of the US economy), has, as Dylan muses, China "already lost control? And if so, who's to say what will happen if the asset inflation goes into reverse? Maybe when the authorities engineer the slowdown they desire and tell investors it's safe to buy again, those investors  won't want to buy. In which case a hard landing shouldn't be beyond the realms of imagination." Grice then proceeds to explain the obvious, namely that the fall out of the inevitable collapse of the Chinese bubble will be unprecedented, as not only the EM world, but the developed economies have all hitched their fates upon the successful continuation of the Chinese bubble - the same bubble Bernanke has to unwind to get the much desired CNY reflation. Grice says "Go to Ireland and ask them how they feel about bubbles. They'll tell you a bubble is a curse, not a blessing." Of course, Ireland is about to be bailed out. Who, however, will be able to bail out China when the overheating economy gets it trillions in loan supports taken out? That one not even Chairman Ben will be able to rescue...

A topic we covered extensively in the past makes a second appearance, this time courtesy of Abigail Doolittle and The Weekly Peak, whose weekly musings focus on the much fabled ratio between the price of gold and silver. Some observations:

• 323 B.C. – The ratio stood at 12.5 upon the death of Alexander the Great.
• Roman Empire – The ratio was set at 12.
• 12th to 17th Century – The ratio was around 12.
• End of 19th Century – The nearly universal, fixed ratio of 15 came to a close with the end of the bi-metallism era and England’s attempt to demonetize silver and conceivably because the country had little of the precious metal.
• 1980 – At the time of the last great surge in gold and silver, the ratio stood at 17.
• 1991 – When silver hit its lows, the ratio peaked at 100.
• 2003 - 2007 – This part of the bull market in silver caused the ratio to drop to 45 from 80.
• 2008 – The ratio rose back to 80 on the Great Recession.

PG: A company that earns above its cost of capital (positive Economic Margins) and is growing its asset base is considered to be following a wealth-creating strategy. Back-tests have proven these companies to be more likely to outperform those companies following a wealth-destroying strategy (negative Economic Margins and growing assets). PG also is trading below it's intrinsic value.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 19/11/10

Last week, the US Treasury issued $16 billion in 30 year notes due 2040 (CUSIP: 912810QL5) which was one of the ugliest 30 Year auctions in recent history (Santelli grade: F), and which we speculated may be a dud as PDs were not aware of what the POMO schedule would look like, and that in turn it would likely be promptly refunded back to Bernanke. We covered that issuance in detail. Today, Brian Sack just completed a $2.2 billion POMO focusing on bonds in the 17-30 bucket, at a relatively high Submitted to Accepted Ratio of 5.1x (and yes, the higher than median ratio may be an indication why stocks are red again as explained before). What is most notable is that the last bond on the accepted list (highlighted below), of which the Fed monetized $24 million worth, is CUSIP QL5: the 30 Year bond auctioned off last week. And so the shell game continues.

Skip General Motors, which is getting over inflated through a combination of media and government hype. Today Toyota, the world’s largest car maker, has been slammed by the perfect storm. Toyota has become the BP of the auto industry. Since the company is Japan’s largest exporter, it would benefit greatly from any weakness in the yen. Buy when there is blood in the streets. (TM), (FXY).

Atlantic Capital Management, whose previous analysis on why the US Economy is caught in another perfect storm (link) was spot on, presents its latest special report focusing on the "desperate" Fed, and why it believes QE2 "Is a hail mary toward the wrong endzone." The must read report, has three parts explaining why spending is about sources, not cost, the differential between wealth and the Chinese imbalance, and the last part emphasizes the Bernanke put, i.e., how there is no longer real risk in the decision-making process. For those who enjoy flipping to the last page of a book, here is the conclusion: "QE 2.0 moves us further in the wrong direction. It removes even more market enforcement in favor of political hocus pocus, “nobody loses” nonsense. To return to sustainability and longterm growth, discipline must be enforced on everyone, including the Fed...As to the consequences of QE 2.0, we believe this new monetary amplifier will produce exactly the wrong responses for the reasons contained within this report. It’s as if Chairman Bernanke has lined up in the wrong direction, ready to heave one to the wrong endzone. The only question is whether the rest of his teammates will tackle him before the damage is done, and the game lost."

Marc Faber was on Bloomberg TV sharing his thoughts on China's 5th RRR tightening in 2010. While the man whose on the ground perspective affords him a good sense of what is really happening, does not anticipate major adverse developments out of the recent round of tightening posturing, he does warn that unless China manages to control commodity inflation, things could get ugly, essentially reiterating what Albert Edwards said yesterday. "Inflation is a dangerous situation everywhere in the world. I think in general that Consumer Price Indices published by China and the US do not reflect the real cost of living that households in these countries have. In Emerging Economies it is worse in the sense that if you have a per capita income of $1000 per year, food accounts for 50% of our expenditures... Even if China tightened, interest rates are still far below the true rate of inflation, and I spoke to a lot of people in China - my view is that inflation in China is running at 10% per annum." On Bernanke's overnight defense of his failed policies: "All I would say is that the problem of the world is that the US overconsumed and spends too much on consumption, and as can be expected some currencies didn't want their currencies to appreciate too much. I think that China and the US are on a collision course, both economically and politically." In other words, our speculation that China and the US are playing a global game of chicken is validated, the problem is that billions of people will suffer no matter who blinks first.

GM is now officially threatening to break the IPO price, less than 24 hours after breaking for trade yesterday. The stock had dropped to as low as $33.11 before a spurt of buying by DMM GETCO pushed it higher. The question of whether the HFT firm can internalize what has become an onslaught of selling is open. We can only hope GETCO has sufficient redundancy to absorb the massive volume, which at last check was 36 million shares and jumping: it appears GM will once again dominate NYSE volume. Should GM drop further from here, the world's greatest IPO will need some serious cheerleading by Phil Lebeau to rekindle America's hope in the company that went bankrupt, and was saved by taxpayers a year ago. And the one aspect of the stock that nobody seems to be mentioning is that GM is now a China play: with more cars sold in China than in the US, should China persist in its tightening, GM will be among the first casualties as excess liquidity redemption hits car purchases as consumers are forced to save all their money for more relevant purchases... like food.