Archive - Mar 15, 2010

A second deflationary tidal wave may hit the US early as April. The Dow is going to crash, possibly heading for a double bottom at 6,000, and bonds are going up for the rest of the year. Gold has had it for the foreseeable future. First, deflation, then inflation. The greatest trade of your lifetime is setting up. This trend could start tomorrow, or in two years. Blow your entry point, and you’ll get wiped out. Oh, and by the way, crude oil futures are discounting war with Iran by 2013!

Well that didn't take long. China just escalated the verbal quarrel with D.C. by retaliating right back. The Chinese Ministry of Commerce stated earlier that the "US should not seek to boost its exports by forcing other countries to appreciate their currencies." The spokesman for the Chinese Ministry of Commerce Yao Jian also told reporters that the US shouldn't be seeking to "develop its own economy" by forcing other countries to strengthen their currencies. We are holding out breath to see what China's reaction is when Geithner forwards them the petition signed by 130 very much erudite congressmen demanding that Beijing float the CNY immediately (or else America will be more than happy tolive with a 7% 30 year mortgage).

We are confident readers will find numerous appropriate occasions to use this...

It's been eighteen months since AIG collapsed, and Congress has yet to seriously focus on the most important questions: What did they know and when did they know it? "What" refers to the fatal flaws in the collateralized debt obligations, or CDOs, that AIG insured. "They" are the bankers that structured and sold the CDOs, plus the AIG executives who took on the credit risk, plus the rating agencies that handed out AAA ratings. "When" harkens back to 2005 and 2006, when those toxic CDOs were first issued.

“The private equity industry always pitches how constructive it is as an investor force to create jobs and growth,” says Mr. des Pallières. “But there are private equity funds that get rich by breaking companies and making others poor — whether they are creditors, states or employees.”

In light of the the Herald of Scotland's discovery that massive US-originated armaments are headed for the middle east, it is relevant to evaluate the likely scenario of conflict that could and likely will transpire if the Israel-Iran situation were to escalate. For that we confer to an extended analysis prepared one year ago to the dot by the Center For Strategic and International Studies titled "Study on a Possible Israeli Strike on Iran’s Nuclear Development Facilities." While the entire presentation is fascinating, we bring your attention to slide 37, which classifies the specific required payloads for assorted tactical strikes focusing on Iranian nuclear infrastructure. And as the presentation concludes, an Iranian strike by Israel would be practically impossible without direct US involvement. Speaking of which, has anyone seen Robert Gates and Michael Mullen recently?

Instead of going into a lengthy analysis about the pros and cons of Chris Dodd's financial reform bill, I'll let the Senator speak for himself ...

Only a few days have passed since its release, and already the Mainstream Media has forgotten all about the Lehman Examiner Report, with barely an occasional mention. As the CJR points out, this unquestionably massive story of corruption and vice, is being covered up by powered interests controlling all the major news outlets, because just like in the Galleon case, the stench goes not only to the top, (in this case the New York Fed and the SEC), but very likely to various corporations that have vested interests in the conglomerates controlling America's key media organizations. One person, however, who refuses to let it go, is Senator Ted Kaufman, whose determined support for an overhaul of market structure we have followed over the past year. The Senator now moves on to yet another pressing issue: the disclosures of unprecedented impropriety conducted by virtually every person of responsibility within the Lehman organization, as well as associated firms like Ernst & Young, and regulators who were asleep at the wheel during the moment of greatest stress for the American financial system. Kaufman calls for a "a thorough investigation, both civil and criminal, to identify every last person who had knowledge that Lehman was misleading the public about its troubled balance sheet – and that means everyone from the Lehman executives, to its board of directors, to its accounting firm, Ernst & Young. Moreover, if the foreign bank counterparties who purchased the now infamous "Repo 105s" were complicit in the scheme, they should be held accountable as well." Zero Hedge sides with Senator Kaufman in this new endeavor (we have yet to see even one other member of Congress or the Senate stand up and voice their opposition to Lehman's criminal conduct). As Kaufman wisely points out: "I’m concerned that the revelations about Lehman Brothers are just the tip of the iceberg. We have no reason to believe that the conduct detailed last week is somehow isolated or unique. Indeed, this sort of behavior is hardly novel." We look forward to obtaining even more raw data on improprieties conducted by other financial firms, and we hold our breath until we can finally get a glimpse at the heart of that most corrupt and secretive organization of all - the US Federal Reserve.

Spreads widened today with breadth notably negative in credit, intraday ranges relatively low, and HY underperforming IG. Even as equity managed a late day surge back to unch (on low volumes), credit (especially FINLs) was unimpressed, managing to end in the middle of its narrow range. European markets closed weak as FINLs underperformed and were the main driver of spread performance. US FINLs (equities and credit) were weaker before Dodd's announcement, legged a little weaker on his actual words, but then diverged in the late day as XLF took off but CDS remained near wides of the day.

By now everyone has undoubtedly been reading reams of primary and secondary opinions based on Krugman's discussion that it is time to play hardball with China on the FX "manipulation" issue. Retaliatory implications aside (and we are confident China will be full of these) it was ironic that one commentator on CNBC today pointed out that since the CNY is pegged to the USD, shouldn't America be looking at itself first when it comes to currency manipulation, before blaming others. In essence, China is merely taking advantage of the exploding US balance sheet, and adding on top of it its own fiat printing largesse, yet offset by its positive trading surplus. Certainly, Bernanke should have thought of that before it set off on the greatest experiment of failed Keynesianism ever. But now that China has served its purpose and was the economic rebound leader for the past year, it may no longer be as needed. No matter the logic though. The people have spoken and they want CNY blood (or the inverse as the case may be -what is that: lymph?). And not just the people. We have just received a copy of a letter signed by 130 Congressmen, and sent to Tim Geithner and Gary Locke, urging the Treasury to immediately address the "growing problems associated with China's continued currency manipulation" and in essence serving as a springboard to the latent protectionism brewing between China and the US, but never really escalating into all out trade war.

In the Department of the Totally Obvious ...

The euro could be in an over-sold situation, says Goldman Sachs and Dr. Feldstein. However, a potential correction can not disguise the elephant in the champagne room - the political and structural weakness in the single currency union.

Is war just around the corner? While in theory it would make perfect sense to distract Americans from the long road to US insolvency, and other more pressing issues such as the endless criminality all around us, in practice we have so far heard merely rumors. The Herald of Scotland, however, may have credible proof that a US-led attack on Iran approaches and could be just days away. The newspaper has procured proof of an arms shipment to Diego Garcia, which consists of "of 195 smart, guided, Blu-110 bombs and 192 massive 2000lb Blu-117 bombs...put in place for an assault on Iran’s controversial nuclear facilities." Additional insight comes from Dan Plesch, director of the Centre for International Studies and Diplomacy at the University of London: “They are gearing up totally for the destruction of Iran. US bombers are ready today to destroy 10,000 targets in Iran in a few hours." Is war imminent? And will Obama repeat Bush's mistake with Iraq, resulting in a huge spike in oil, coupled with a rush to safety in dollars and/or gold? If inflation will not start on its own, its has to be kindled: preferably by a Blu-117 bomb. Is the relatively long period of market stability and low volatility about to come to a sudden end?

The traditional correlation between the S&P and its key leading indicator the EUR-JPY pair just went out of the window, as the market just hit the nitrous with the 3:30pm buying programs.As always, must. close. above. 1,150... or else it is a quadruple top, whatever the hell that is.

The President says "As the bill moves forward, I will take every opportunity to work with Chairman Dodd and his colleagues to strengthen the bill and will fight against efforts to weaken it. I will oppose any loopholes that could harm consumers or investors, or that allow institutions to avoid oversight that is important to financial stability." Concurrently, the market, armed with the Rosetta stone of Presidential BS translation, where it is opposite day all day every day, rips green in a three-fingered gesture of appreciation.