Archive - Dec 2010

We are approaching 2008 pre-crash market highs with many stock trading higher than they were then on LESS revenues than they had at the time. Meanwhile, 10% of our population is unemployed, consumer credit is down by over $1,000,000,000 (15%), household wealth is down 20% and income is down while the CPI, even by BS Government measures, is up 5% since then, effectively giving those people who still have jobs 5% less to spend anyway.

Today the Fed monetized $1.6 billion in TIPS from across the entire curve, with purchases as recent as bonds due 2012 all the way back to 2040. Curiously, the most remarkable TIPS issue ever, the MY3 of 2015, issued this October which came at an unprecedented negative -0.55% yield, was not bought back. Actually, we take that back: that particular Issue is now trading at a huge loss to everyone who was so sure deflation was inevitable as recently as two months ago... Which judging by the entire TIPS curve is everyone. Below we present a compare and contrast from the TIPS breakeven as of October 13, which did not anticipate inflation for about 7 years, to today: the current breakeven is at about 4 years, as the herd has panicked and from all out deflation is now sensing that despite the Viceroy of the Printers 100% confidence that he will not blow up the world, it may be prudent to take the other side of the bet. In the meantime, the collapse in rates continues.

As the market has rallied over the past few months, the expectations for sales growth have risen and currently look lofty relative to what the S&P 500 has delivered in sales growth historically.

An interesting animated clip from one of my blog's readers

Both gold and silver are having a rough day to say the least. After a forced slide in the gold complex pushed the metal to sub $1,380, fueled in part by recurring rumors of a large macro/commodity fund taking profits ahead of the year end, numerous stops were triggered, bringing it to nearly $1,370, almost $50 below the all time high reached, oh, yesterday. And since traders are now desperate for volatility, which has disappeared from stocks, the daytrading crowd has taken over both the precious metals space... and the bond market. That said, momentum chasers entering the gold and bond market may have the makings of the greatest comedy witnessed in markets in the past several years.

During the past two days the differential has narrowed between the US and Germany, but the euro has yet to show much weakness. The shorter cycles on EUR/USD appear quite clear to us and call for euro weakness into Thursday. There is a chance the euro has just formed a significant peak and if it closes below the strong support at 1.3030 it has begun a downtrend lasting into the end of the week of December 27 and will fall to 1.2650, signaling it is headed lower into April or May. If the next few days lack much weakness then the euro will turn higher and a close above 1.3375 signals it is headed higher into the middle of next week and will rally to the 1.3625 area. The movement in interest rates will be a major determinant of which course the currencies take.

Indeed, the US, like all crumbling empires, is so caught up in its self-centered notions of superiority and “bread and circus” entertainment (in today’s world McDonald’s hamburgers and garbage TV like Jersey Shore) that it is TOTALLY “change blind” to the fact that China has not only ascended from a communist backwater to THE key player in the world’s global economic balance (more on this in a moment)… but is now holding MOST if not ALL of the trump cards from a global monetary/ economic standpoint.

Looks like the market does not like the massive flattening we discussed over the past two days. To wit, we present market commentary from a trading desk, appropriately titled "dead cat" bounce: "Another "dead cat" bounce in the Treasury complex as prices are now sitting just above session lows. Additionally, while still outperforming, 30yrs are starting to feel some of the heat. The curve remains mixed depending on what your long end maturity is. Real money remains quiet aside from some light nibbling. Fast/pro/dealer accounts continue their defensive trade and remain in control. Techs are negative but cautious due to oversold conditions."

As more Chinese IPOs come to market in the US (thank you NYSE) providing an endless supply of surefire shorts for addition to the "Chinese Fraud" basket, that epitome of Chinese accounting perfection RINO has reopened, after a nearly one month hiatus, on the pink sheets... and is down almost 70%. Expect many more comparable "inverse fireworks" chart formations out of the recently IPOed Chinese crowd.

Bernanke's 60 Minutes appearance was an unmitigated disaster. Two major failure points, namely "QE is not printing money" and 100% cock-sure-ness, have become an instant butt of jokes. Just because we don't have an economics PhD from a decent department, doesn't mean he should treat us as idiots. Yes, QE doesn't expand the M1 monetary base. But after credit is included, it is expansionary, and this is exactly what he was hoping for. It was embarrassing to watch the Fed chairman talking like a disingenuous, idiotic politician. So, Fed wants inflation, and inflation is what they'll get. 30-yr treasuries yield has shot up since the announcement of QE2, meaning mortgage rates will go up soon. Coupled with the glut of supply and timid demand in housing, we can all thank the Fed for a prolonged housing dip. Yes, the treasury curve has flattened a bit in the last few days, but the bad news is it's by 10-yr yield going up, not 30-yr going down. Oops. Did somebody just say 100% sure about something?

It seems it was just yesterday that the Chairman penned the following famous last words in his Washington Post Op-Ed: "The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August. This approach eased financial conditions in the past and, so far, looks
to be effective again. Stock prices rose and long-term interest rates
fell when investors began to anticipate the most recent action. Easier
financial conditions will promote economic growth. For example, lower
mortgage rates will make housing more affordable and allow more
homeowners to refinance." Um, Chairman, so what happens now, a month after your Op-Ed justifying QE2, when the prevailing mortgage rate is about 1% higher, and is resulting in about a 10% decline in home prices to maintain the same level of affordability?

Sick of bears explaining QE2? Prefer to watch Jon Stewart roasting the monetary Hewlett Retard instead? Here is your chance. Somehow catching Ben Bernanke lying on national TV has become not only a national sport, but one that provokes uncontrollable laughter... Ironically that is the laughter of all those whose money on a daily basis is worth less and less, courtesy of the Chancellor (Chairman is so QE1) buying back $50 billion in debt every week. Presumably laughing as one's net worth is getting destroyed makes it more palatable. Just wait as the country collapses into uncontrollable hysteric guffaws as the 30 Year mortgage passes 5%, then 6%, then 7%, etc. destroying up to 25% of household net worth.

China has made it clear that it is NOT pleased with the US’s current monetary policy (China has blamed the Fed for its inflation woes with some officials going so far as to label the Dollar’s status as a reserve currency, “absurd”).

The US has in turn responded by labeling China a currency manipulator and blaming it for the US’s economic woes. Indeed, it seems almost every other week that some US Government official comes out with a “it’s ALL China’s fault” statement.

However, when push comes to shove, it is China that holds the trump cards in the form of interest rates.

As the 10 Year continues to plunge, the one topic nobody on CNBC is daring to discuss is the absolute slaughter for all those calling for a steeper curve, and the resultant misery that banks are again experiencing as a result. With financials supposed to be the new market leaders one can't possibly bring up the sad truth that as QE2 fails, the US financial system will take the brunt of the hit. And even as Goldman and MS get their wish for a sell off in the 10 Year, unfortunately for them this is accompanied by a less than comparable dumping of the long-end, resulting in an even greater flattening of the curve, and validating our call from last night that the bond world is about to get a whole lot more flat. Lastly, as the 30 Year Cash Pay Mortgage jumps by 20 bps W/W, the result is about a $200 billion loss in home net worth in just one week. The Uberprinter is now torn whether QE3 should be one of monetizing municipals, or, as Bill Gross has been positioning so very well for the past two months, throw it all into MBS once again.

Update: Reliable sources in the trading community with closer ties to Wolverine assured us that the story published about Wolverine Trading has zero validity.

We received contacts from several independent sources in our community yesterday that Wolverine Trading, a PMM, options market-making firm in everything from global equities to commodities may have solvency issues. As of this writing this is unsubstantiated. Sources were CME floor members and financial analysts familiar with their business model. The only physical sign we saw was a lack of physical presence in some major commodity option pits for the last two days. If this is true it would be a terrible thing for the markets, as Wolverine was a classic market-making firm, one that provided backstop liquidity in all kinds of assets.