Archive - Dec 2010

Today's $8.3 billion QE has closed and the Fed has monetized 13 bonds of various CUSIPs between 2/15/2018 and 8/15/2020. The Submitted to Accepted ratio was a very low 3.3x, once again confirming that PDs had excess cash, did not need to rely on the Fed's generosity and as a result are now ramping stocks with aplomb. What is most curious is that after we have disclosed that in the last 2 POMOs the most monetized bond was the just auctioned off issue, today Brian Sack put CUSIP PC8, the 10 Year auctioned off on November 9 on the exclusion list (see bolded below), meaning PD were forbidden from flipping the most recent issue. We wonder if the New York Fed no longer enjoys being under the microscope in that it openly and flagrantly allows almost instantaneous monetization of "just issued" cusips? Of course, that QE2 continues to funnel billions of taxpayer money to Primary Dealers is not threatened one bit. After all millionaire bankers have to become billionaires through ongoing perfectly legal theft from the middle class in some way or another.

All who thought that China was merely posturing when it announced a few days back it was creating a fund to allow its domestic investor base to allocated capital to foreign gold ETF, may wish to reconsider after it was disclosed late last night that China gold imports jumped by 500% in the first 10 months compared to all of 2009 on concerns of rising inflation according to the Shanghai Gold Exchange.Other concerns probably include what is happening to the FX and stock market which have now moved on from cash flow to Keynesian failure discounting mechanisms: ironically the higher the S&P is pushed by the Brian Sack cabal, the more sovereign bonds are bought by the ECB, and the more bankrupt European countries are said to be doing perfectly ok by their new dictator Olli Rehn, the more gold will be bought across the world. China does not disappoint: from Bloomberg: "Imports gained to 209 metric tons compared with 45 tons for all of 2009, Shen Xiangrong, chairman of the bourse, told a conference in Shanghai today. China, the world’s largest producer and second-biggest user, doesn’t regularly publish gold-trade figures and rarely comments on its reserves." And that would be in the form of JPM's bogeyman: physical.

As Zero Hedge readers know, the reason why the US mint sold a record amount of silver American Eagle coins in November is unlikely a coincidence, and very possibly an indication that the recently disclosed plan as espoused by the MKs (Mike Krieger and Max Keiser) to destroy JP Morgan is working: to wit, if every person buys an ounce of silver, JP Morgan and its massive synthetic silver short position, will have no choice by the cover, face unprecedented margin calls, and possible lead to an end for the New York Fed's favorite bank. Today, Keiser goes mainstream, detailing his thoughts in The Guardian, which courtesy of its massive circulation is sure to reach far more readers to whom this idea is new. To keep a track of how well this plan is working, we suggest readers check in with the US mint, which frequently updates the amount of silver American Eagles sold on its website (link). The full Guardian article is below.

Following yesterday's completely non-arbitrary release by Jan Hatzius of his about face economic upgrade at precisely 4 minutes ahead of the Fed data dump, Goldman has released the first 5 trades of its top 2011 trades. Hopefully these trades will perform far better than the basket of 2010 trades which left Goldman clients flat at best (especially the FX component which was a total disaster and which Thomas Stolper apologized for yesterday). On the basis of its suddenly rosy outlook for the economy (as always, Goldman by definition is buying whetever a client is selling and vice verse) here are the first five trades that Goldman believes will be the best money makets for the next year.

1. Short $/CNY via 2yr NDFs, currently at about 6.4060, target of 5.9, expected potential return 6%

2. Long US large-cap Commercial Banks (BKX), at 44.76, target of 57, expected potential return +25%

3. Long US High Yield (Selling protection on the CDX HY index), at a current spread of 528, target of 450, expected potential return of 8%-9%

4. Long Nikkei 225 (NKY), at 9,988, target 12,000, expected potential return +20%

5. Long a Basket of Crude, Copper, Cotton/Soybeans and Platinum (‘CCCP’), indexed at 100, expected potential return 28%

Some historical parallels on where the current state of disintegration of the latest artificial European Union construct falls in historical terms from FX Concepts' John Taylor. "As supporters of the hypothesis that historical events display cyclicality that if studied and understood can improve decisions about the future, we are always trying to place current events in a historical context. Our goal is always to develop a strategy that can anticipate the twists that current historical actors will take. The recent crumbling of the Eurozone has been a perfect example...Finding a way to examine these events, we compared the situation leading up to the troublesome periods. We found a very interesting parallel between the 34 years following the Congress of Vienna in 1814-1815 which ended with the tumultuous 23 year span of revolutions and nation-building in Europe, and the time that followed WWII until the millennium, a 55 year span. This period ended with the founding of the euro."

There's an enduring myth that the U.S. has never defaulted on its debt, but that's merely a function of how default is defined. When Treasury abrogated the gold clause in 1933, holders of U.S. debt suffered serious losses, and as evidenced by the dollar's decline versus gold since 1971, Treasury has been a serial defaulter ever since. Assuming a default of the haircut variety, this has been the global norm for at least two centuries, and if the U.S. were to default in this way, it's not something we should fear. Post WWII the largest economic powers were regularly in default of the haircut kind, and the global economy boomed.

The vehicle that will upend the auto market in 2011. Aiming for 10% of the global car market by 2020, or some 5 million units. Tearing up the ball room at the San Francisco Auto Show. Don’t try looking for the tail pipe. PG&E is offering a special Plug-in-Vehicle electricity rate at a 92% discount. What will these cars be worth when oil hits $150 a barrel again? Giveaway price, free fuel, free maintenance. Hmmmmm.

Behold Jean Claude Trichet's fat finger. ECB now lifting every bid. Note that the PGB was at 84 before yesterday's two rumors that drove the market (both sovereign bonds and stocks) higher are now refuted. We have a suggestion: perhaps Trichet and Brian Sack can just take it out back and beat each other. The winner's currency goes to zero and the respective stock market goes to 36,000.

What’s truly strange is to see allegedly educated, intelligent people like Ben Bernanke talk as though the stock market is somehow an economic indicator. I’m sure it’s a great indicator of prosperity if you work at Goldman Sachs or are a corporate insider at a publicly traded company.

However, for those Americans who DON’T have flawless trading records (or stock option grants) stocks have NOTHING to do with your day-to-day activities.

After all, your typical American DOESN’T buy food or pay their mortgage with the profits from their day-trading; they pay with the money they earn from their JOB.

Hearing that as the head of the ECB continues to not answer any question, his organization is buying Portuguese and Irish bonds actively. If the vigilante attack intensifies not even the ECB will be able to withstand the onslaught.

Headline scanning robots unhappy. In addition to the deterioration in initial claims, continuing claims also missed expectations, coming in at 4270K on expectations of 4200K with the previous revised from 4182K higher to 4217K.

All who wish to watch the ECB's 8:30 press conference during which Trichet will finally reveal the size of his pocket bazooka (if one is revealed at all), can do so here.

Key notes:

• ECB's Trichet says ECB to continue to conduct 1-week, 1-month as fixed rate, full allotment until 3rd maintenance period of 2011
• "Overall the current monetary stance remains accommodative"
• ECB's Trichet says monetary policy stance, liquidity provision and allotment modes will be adjusted as appropriate
• ECB narrows range of 2011 GDP expectation from 0.5%-2.3% to 0.7%-2.1, 2010 seen in range of 1.6%-1.8 compared to 1.4%-1.8% prior
• 2011 inflation projected between 1.3%-2.3%, higher than September's 1.2%-2.2%. 
• Notes flattening of yield curve.
• The teleprompter just broke here: says banks have stabilized balance sheets. What he means here is that the ECB's take over of the European banking system is proceeding on plan.
• ECB's Trichet says all Euro area countries should pursue ambitious multi year consolidation programmes: in other words, "plutocrats around the world, globalize."
• Prepared remarks end - no announcement on expected monetization. EURUSD sliding.

• Brazil’s lower house allows Petrobras to be sole sperator of Pre-Salt Fields.
• Deficit panel tackles health care costs.
• ECB to keep unlimited liquidity operations.
• Gold gained for a fourth day, trading near the highest in almost three weeks.
• US foreclosure sales fell, discounts rose in 3Q.
• Acer said it’s aiming to capture 15% of global tablet-computer sales next year.
• Aegon will cut 400-500 jobs in US, take $290M in charges.

For a demonstration of the unsustainable course that European sovereign funding is on, look no further than Spain, where earlier the government auctioned off €2.468 billion in three year notes for a whopping 3.717%. The bid to cover was 2.27 compared to 2.16 in October, and it was reported that foreign buyers bid above 60% of the auction (which means the ECB funded domestic banks bought about 40%). However, the same issued priced at 2.527% at the last sale on Oct. 7, a 119 bps difference. Still it wasn't all bad, considering the bond had traded at almost 4% in recent days. As Reuters reports: "Analysts and bond market players had predicted a leap of as much as 2 percentage points in yields, but Madrid's situation has been helped by mounting expectations the European Central Bank will step up extraordinary measures to contain the crisis." The problem for Spain is that it has minimized the amount of debt it is issuing during turbulent times: "The Treasury had cut the amount of bonds on offer in order to trim financing costs as it faces down market doubts on whether it can bring down its deficit due to sluggish economic growth and persistent concerns it might need to bailout its debt-laden banks." And the problem for the ECB is that it most likely, as many analysts are predicting, will not announce anything of substance, as otherwise the ECB will have to monetize up to €1.5 trillion in total debt and interest through the end of 2011. The result for the EUR will inevitably be disastrous in either case, and if in 25 minutes JCT indeed announces nothing, look for all those who bid up the bond auction earlier to be tearing out their hair as the 3 Year promptly passes 4%.

The rate announcement came in at 1% as expected. The key part on whether the ECB will monetize €1.5 trillion of debt and interest over the next 13 months will come at 8:30am when the full conference is held.