Archive - Nov 2010

Zero Hedge friends Chris Martenson writes in: "For a very long time I have been calling for, expecting and otherwise anticipating the day that the Federal Reserve would begin openly monetizing government debt. I knew the day would come intellectually, but in my heart I hoped it wouldn't. But with the Fed's recent decision to directly monetize the next 8 months of federal deficit spending, that day has finally arrived. I have to confess, while my prediction has proven accurate, I’m still stunned the Fed actually did it. In this report I examine the risks that this new path presents, what match(es) may finally ignite the decades-old pile of dry fuel, what the outcomes are likely to be, and what we can and should be doing in preparation."

Pixilating the News...

So here were are in 2010 and the US and China are now butting heads in a major way. The US (debtor, consumer, declining empire) wants to devalue the Dollar and export inflation to China. China (creditor, producer, rising empire) doesn’t care for this arrangement as its hurts profit margins at Chinese companies, increases food inflation (food is a higher percentage of income for the average China compared to the average American), which in turn means civil unrest.

If there is one reason why the market has not sold off far more broadly today, it is that traders are currently gearing up in anticipation for the upcoming brand new POMO regime, which will start in earnest tomorrow and will continue for the next 6 months. And for those who would like to see just how much greater of an impact the next 20 trading days' POMO will have compared to the old QE Lite POMO regime, John Lohman has prepared the following two charts. To wit: the median size of any given POMO will be $7 billion, nearly three times as large as the old median of $2.5 billion. As for frequency: in the next 20 days we will see 19 POMOs, virtually one a day (and in some cases two per day), compared to the old POMO incidence which was roughly one every two days. In other words, it certainly appears that the Fed will not allow the GM IPO to be subject to any "market conditions."

CLSA's Chris Wood latest Greed and Fear is out, and in his latest discusses virtually all the critical issues that are at the forefront of investor minds, namely QE3, the next collapse in the GSEs courtesy of the current housing bubble, any signs of releveraging in the private sector, a potential rise of capex in corporate America (not sure where he is seeing this), insolvent states, Japan, which he thinks may be an reflationary alternative to gold (as Dylan Grice has claimed in the past) and last but not least, his disagreement with Goldman's take on China, which he believes is still an attractive investment opportunity.

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.