Archive - Jun 17, 2010

The world's undisputed monetization grossmaster (Electronic Liability Outsourcing rating of around 1.8 trillion), representing Wall Street, the Federal Reserve, may be about to see some stiff championship title competition from the little Central Bank that could - the ECB, in a blitz (and very much blind) game of quantitative easing. In a speech, that not too surprisingly missed all the main wires earlier, Fitch head of sovereign ratings, Brian Coulton, warned a banking conference, in discussing the ECB's monetization activity to-date, that "there has been an unwillingness to follow through, and markets are going to want to see the ECB's money. It will require hundreds of billions in my opinion." Which means that Bob Pisani will report on many "extremely successful" Spanish bond auctions over the next year or so, as the ECB buys up every single primary issuance not just out of Madrid, but every single country in Europe, where the non-subsidized (i.e. private) capital markets are now officially dead. Courtesy of Greece, and the fatal decision to bail it out, the Eurozone will one day be described in textbooks as the greatest ponzi scheme ever created (or, at worst, joint in first place by the Fed).

Sounds like Ucits will be the next big hedge fund flop...

The BP oil spill is part of the same problem as the financial crisis: They are two examples of the era we are living in, the era of corporate anarchy. In a nutshell, in this era of corporate anarchy, corporations do not have to abide by any rules—none at all. Legal, moral, ethical, even financial rules are irrelevant. They have all been rescinded in the pursuit of profit—literally nothing else matters. As a result, corporations currently exist in a state of almost pure anarchy—but an anarchy directly related to their size: The larger the corporation, the greater its absolute freedom to do and act as it pleases. That's why so many medium-sized corporations are hell-bent on growth over profits: The biggest of them all, like BP and Goldman Sachs, live in a positively Hobbesian State of Nature, free to do as they please, with nary a consequence.

A basic property of religion is that the believer takes a leap of faith: to believe without expecting proof. Often you find this characteristic of religion in other, more unexpected places–like the stock market.

It takes a while for a company to develop a “religious” following: Only a few high-quality, well-respected companies with long track records ever become worshipped by millions of investors. The stock has to make a lot of shareholders happy for a long period of time to form this psychological link.

There’s a great deal of chatter in the press and online about the tremendous US$1-trillion-dollar mineral “discovery” in Afghanistan headlined by The New York Times recently. Most of the discussion seems to centre on whether or not this is really news and whether or not the NYT was played by the powers that be for purposes of their own. Few, if any, people seem to be questioning the value of the so-called discovery itself. The US$1-trillion-dollar figure, at best, cannot be anything more than the wildest of hopeful guesses. One does not have to be a geologist or an engineer to understand why. When geologists find outcropping mineralization, or other signs that an economic deposit of minerals may be present, that is not called a discovery. Even if the signs come from the latest scientific equipment flown over the country, as the U.S. government appears to have used, the result is still just an anomaly: a hopeful indication of where to look. And anomalies are like opinions: Everybody has one.

On one hand you have BNP revising their mid-term EURUSD forecast to 0.98, on the other you have such pessimists as Jim Rogers saying to buy the Euro. Who to trust anymore? Granted, Rogers' thesis is only predicated on a a relief rally, pretty much the same as what we suggested when we saw the Goldman downgrade of the EURUSD, and immediately beckoned readers to get right back in. We consider the +50,000 pips picked in the ensuing week a direct gift from god (or at least his favorite worker). At this point the relief rally has likely fizzled, and the direction now is indeed down, at least until the next time the CFTC notes the net EUR shorts have hit a fresh record. Back to Rogers: in the long-term, Jim is just as bearish as always: "The European governments are not getting their act together, not at all. All paper money is flawed, nearly every currency in the world."

Treasuries, employment, manufacturing data, Spain, head & shoulders, BP, PIMCO, & World Cup... All in one.

Which door do you choose?

When the ECB said recently that a slide toward parity would be tantamount to admitting defeat for the euro and the eurozone, we took it somewhat seriously. Which is why we were rather surprised to see that the biggest French bank, and by implication, organization which would suffer massively should the eurozone implode, is out with a EURUSD forecast that goes even beyond parity, and bottoms out at 0.98 by Q2 2011. As we have noted before, it is the very same  European banks who are most interested in a destabilized euro, as it would merely entail trillion after trillion in ECB bailouts, providing quarterly bonus make whole packets for all bankers involved. So, without further ado, here is BNP's thesis, which just as easily could have come from Evans-Pritchard: "Now we are convinced that EURUSD will have to remain weaker for longer and we expect it to drift to 0.97 in Q3 2011. The competitive and wealth gap within EMU will have to be closed to rescue the European project. Peripheral Europe will be exposed to a significant deflationary shock and asset transfers from core European countries will be required to keep these countries and its financial system afloat." It kinda makes us wonder whether the ECB may have been lying to us all this time.

A stronger euro helped push refined products prices higher on Thursday. But crude oil prices were lower on Thursday as traders reacted to high inventory levels in Cushing, Oklahoma. Crude oil prices ended a three-day rally in the process, even as refined products prices advanced. The oil complex was overbought on Thursday afternoon, and traders seem to have decided to sell July crude leading into its expiration, which will be on Tuesday, June 20th. By the final bell, crude oil prices were lower and refined products were higher on the day. This is a normal movement, seasonally, and crack spreads typically reach their seasonal high right around Independence Day. - Cameron Hanover

Two days ago, we posted a story titled "Why VaR Is A Joke: Morgan Stanley Admits Losses in April And May Were "Much Higher" Than Anticipated" in which we extracted a segment from a report by Jim Caron to claim that VaR models are broken beyond fixing. Today, Morgan Stanley has asked us to provide a clarification on our post. We gladly comply.

Tyler,
The comments from Jim Caron that you reference in this article concern a model portfolio maintained by Morgan Stanley Research.  This fact isn't clearly reflected in the headline or in the article.  The headline in particular suggests that the Firm is disclosing losses.  This is not the case.  Again, Caron's comments concern a model portfolio within Morgan Stanley Research.  Please let me know if you can clarify this in an update, and let me know if you have any questions.

Thanks,
xxx
Morgan Stanley | Corporate Communications

We hope this clarifies everything.

The closing of gold at an all time high price did not prevent GLD from purchasing 1.9 tonnes of gold on the last 24 hours. The ETF increased its gold holdings NAV from 1306.1 to 1308. The all time record high holdings of the precious metal represent a 7.5% increase in the tonnage of gold held in the past month alone, which increased by 91 tonnes, or 7.5%, from 1217 tonnes. As the chart below shows, we have entered into a parabolic purchasing period for not just GLD, but for all other precious metal ETFs, which struggle to keep their NAV at 1. In fact, if those who claim that ETF are among the primary sources of gold demand currently, such reindexing is now creating a positive feedback loop, whereby daily record gold prices are forcing the ETFs to purchase more and more gold to retain a mandated NAV, which in turn is leading to even higher prices on the margin. The accumulation blow off phase has begun, and with a variety of ETFs announcing either shelf or follow on offerings, with the proceeds to be used to buy gold, it is only a matter of time before the actual price blow off follows. A more suitable question is why, if the purchasing of gold has picked up so much, has the gold fixing not followed?

Bloomberg's Erik Schatzker interviews Jim Chanos, in which the cynic notes that while not short BP, he has been short other majors (and likely making a decent profit doing so), for the very simple reason, which as we have been pointing out for almost a year now, namely that ongoing underinvestment in business, read declining maintenance CapEx and zero growth CapEx, will erode all revenue growth (and even stability). "If you look at their cash-flow statements relative to their income statements, you will see companies that haven’t replaced reserves in years, and haven’t seen any increase in revenues in years. They’re borrowing their dividend. They’re in effect liquidating." As we pointed out previously, one of the drawbacks of soaring cash levels is plunging CapEx: this is happening across all companies in the S&P, not just exploration, although the effect will be drastically magnified in this space, and we completely agree with Chanos that his short is spot on. Chanos also discloses his additional shorting of Ford: "It’s going to be very interesting to see how it is that the union, which controls the employees -- and I contend these entities are still run for their employees and retirees more than the shareholders -- are going to look in an environment going forward, where the UAW is a major equity holder in some of the other entities. It adds a new dynamic to the twist.” Jim Cramer, if you are reading this, you may reconsider your favorite long. Lastly, as expected, Chanos discusses his China shorts and how he puts those on in a country which is not very shorting friendly, to say the least.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 17/06/10

"Valuations have improved slightly after the recent correction but remain way above fair value in most regions. Buy&
hold is not an option one should consider. The US markets is currently priced at or above all the major structural tops with the exception of the last few months of 1929 and the 1997-2000 absurdity (but at least then there was a huge style dispersion with small caps and value stocks undervalued). And one has to keep in mind that assets and earnings quality is not what it was in the past adding uncertainties to the mix. Analysts and strategists are starting to use cash flows and free cash flows ratios extensively to demonstrate markets undervaluation. It is true that markets look less expensive using those measures. The main reason is that companies are not investing and have capital expenditures which are below their amortizations & depreciations. This is a rationale decision when your WACC is lower than your expected return. Nominal growth is likely to be low in this new environment of deleveraging, reduction of overcapacity, rising taxes and regulatory uncertainties. The same cash flows ratios where used in Japan in the early 90’s." - Damien Cleusix