Archive - Aug 19, 2010

What's REALLY going on with the oil leak?

If this were a stock, the analysts and pundits would be all over the "breakout" ---blah, blah, blah.

As we expected, the murder (or whatever a group thereof is called) of wall street Ph.D. lemmings is appropriately positioning its collective tail between its legs and duly following Jan Hatzius into preliminary double dip(ression) territory. JPM's Robert Mellman just cut his Q3 and Q4 GDP forecast from 2.5% and 3.0% to 1.5% and 2.0%. The firm has not touched its 2011 estimates yet. Obviously once Q2 GDP is revised to sub 1% as we are fairly confident will be the final revision, it will. We are waiting for the hilarious capitulation from Wall Street's most discredited cheerleader: that of BofA's David Bianco.

Who’s putting out those estimates for the Philly Fed Survey? Obviously not an exact science but I demand a Congressional Investigation. While they are at it, how about a look into the crush in the Spoos and NDX futures after 4 pm yesterday (on no news) for 6 and 14 points respectively. That’s all I have to say about that. The market unraveled on the worse than expected Philly Fed Survey with a couple of support levels being taken out. Around noon, the S&P found support at 1070 but with the NYSE a/d off worse than 5 to 1 negative, I don’t expect a bounce to carry that far. If the market continues its slide tomorrow, I expect the S&P 500 to make a stand in the 1055-1060 area.

Even as the public debates aggressively on the nature of bond bubbles and whether they have a footing in the US economy, Tim Geithner's office has no intention to discover the denouement of this particular polemic, and instead is preparing to belch the lastest batch of US-backed paper. In the upcoming week the US Treasury will issue a total of $102 billion in 2, 5 and "curve sweetspot" 7 year notes, with nominal amount all in line with expectations. In other news, the Fed will surpass Japan as the second largest holder of USTs by the end of September, and China, which holds just $40 billion more, by the mid-term elections. In other words, we should not worry that China will soon forsake us - after all the Fed is gladly once again monetizing the Chinese stake.

We have just released our extensive forensic analysis and valuation of Research in Motion (RIMM), delving into its intense competition with the rapidly growing Android, and the well received iPhone. Guess what (and as I warned weeks ago, before their recent product launch)... It doesn't look too promising for the Blackberry crew!

Those who were disappointed by the earlier CBO budget reestimate which increased total deficit by about $44 billion over the next two years, will have to weep more tears based on the just released statement by Congressional Budget Office director Doug
Elmendorf who said that in reality the budget deficit could come much higher than the just disclosed estimates, and the recent economic data releases have been "more negative" than data factored into the projection. Which, in government talk, means that the real deficit will likely come at least 20-30% higher, and since debt issuance tends to track around 40% higher than nominal deficits, the bottom line is that the US will have to issue a gross $3 trillion+ over the next two years. But who cares: one could add 10 zeroes to this number, and rates would likely drop to zero overnight.

Two years ago when I told everyone I knew that the United States was bankrupt and would ultimately default of its debt one way or the other (by inflation or restructuring) I was called crazy and dismissed by 95%+ of the people I met. These days many of the same people still think I am crazy when I say that a political, financial and intelligence elite which has now teamed up with large corporations is attempting to create a global currency and world government (with them at the helm of course), but the notion that the U.S. is bankrupt is now more or less mainstream. Even the corporatist/socialists in power are now unable to merely dismiss questions about the deficit. The public has woken up from its slumber of consciousness and is now starting to see things as they are. This is an extremely positive development and is why as I have said before I think the elite are in their last days as the freight train of consciousness runs them and their twisted illusions of grandeur into the sea. The weakest link in this sick and corrupt financial system that was forced upon many of us before we were even born with its mechanics purposely hidden in the shadows so that we remained ignorant of its preposterousness, is the commodity market. However, within the commodity market the weakest link is gold. - Mike Krieger

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 19/08/10

Retail threw in the towel weeks ago, which is why at this point confirmation that nobody is trading is like watching reruns of Weekend at Bernies (or GETCO's). ICI reports that the week ended August 11 saw a record 15th weekly outflow from domestic stock mutual funds, this time of $2.1 billion. YTD outflows are now just under $48 billion. Hedge funds are not the only ones who missed the miraculous and completely senseless July stock ramp: retail pulled out $13.1 billion in the same time, and has followed up by redeeming another $4.1 billion in August so far: nothing matters anymore - stocks can go up, they can go down: it is all the same to the one segment of the stock market responsible for the biggest portion of market capitalization. There is no improvement in the trend - retail has no faith in stock valuations, in the SEC, in the possibility that another flash crash won't happen tomorrow. Furthermore, retail is getting older and the retiring baby boomers would rather drink cyanide than put their money in stocks. We wish all the best to the computers and the Primary Dealers - they are now all alone. We dread to even think what cash levels are like at mutual funds.

Though the official London Gold Pool disbanded in 1968 when it suffered massive outflows of bullion trying to frustrate free market forces that were manifesting themselves as insatiable demand for the metal, someone is now operating, albeit covertly, a second London Gold Pool. However, what I will show unequivocally in this article is that this “Second London Gold Pool” is about to suffer the exact same fate as the first one did. - Adrian Douglas

Today's POMO has closed, with the Fed monetizing $3.609 billion in debt, far more than previously expected, and much more than last auction's $2.5 billion (is Liberty 33 sweating in its reliquification attempts courtesy of today's nightmarish economic date). The hit rate was also worse than the previous one, coming in at 16.5%, with 12.2% previously (another way of saying this is that the submitted/accepted ratio was 6.07). And yet again, Morgan Stanley was spotless, with its 9 bond predictions all eligible for purchases, and in fact seeing 6 of the 9 proposed issues purchased by the Fed. In a basket which had 27 eligible CUSIPs, this is quite an impressive result.

As more and more pundits, and amateurs, debate the endless futility of the bond bubble, as in does one exist or are nominal rates, in addition to swap spreads, going negative, the one real asset - gold - is surging to highs last seen in early July. Of course the bond debate is silly: it merely indicates a flight to safety in a time when stocks continue to live in a fantasy neverland of "timid" inflation, when the reality is accelerating deflation for levered goods, and rising inflation for goods "for the rest of us." As for those who never see a bond auction failure (and no, explaining the dynamics of a ponzi dutch auction is neither necessary nor sufficient), they will be absolutely correct- until they are wrong. And since we have gotten to a quantized state where even a rise in rates (due to the Fed's stance on liquidity) is virtually equivalent to a failed auction, the distance from the base orbital to the energized level, to keep the quantum analogy, is far closer than most believe. But such is the way in a ponzi non-gold standard system, in which endless credit is chasing extremely finite cash flows. Ssince we have now moved past the point where incremental debt creation can fund viable, cash flow generating assets, any incremental debt serves no role save for window dressing. Whether or not there is a formal announcement by the UST of a failed auction is irrelevant. In the meantime, gold is brushing all these pointless discussions aside and doing its thing. However, gold likes to keep it complicated, and has once again inverted its 120 day correlation with stocks, hitting the lowest level since March 2009. In other words, if stocks are correlation to inflation, gold is now a deflation benefiting asset. Which is also wrong, as gold merely is seen increasingly as an alternative to the great alchemy experiment in the bottom of the 9th being conducted by the Central Banks of the world, which is the last hope to preserve the status quo. In other words, gold is merely the hedge to whether either side in the bond bubble debate is right.

What if we told you there was a trade that was appealing, obvious, talked about daily and yet you hadn't heard of it? Would you be interested? What if we told you there are fixed income instruments being bought with a higher yield than US treasuries in currencies that are undervalued; and there is a high probability these currencies will soon appreciate; and the yields on the bonds will decline? What if we told you the same institution that is buying the bonds controls the timing of the bond's underlying currency appreciation and is directly responsible for the current undervaluation of the currency, and the higher yield offered? What if we told you the institution was China?

- Faros Trading

The Congressional Budget Office (CBO) estimates that the federal budget deficit for 2010 will exceed $1.3 trillion—$71 billion below last year’s total and $27 billion lower than the amount that CBO projected in March 2010, when it issued its previous estimate. Relative to the size of the economy, this year’s deficit is expected to be the second largest shortfall in the past 65 years: At 9.1 percent of gross domestic product (GDP), it is exceeded only by last year’s deficit of 9.9 percent of GDP. As was the case last year, this year’s deficit is
attributable in large part to a combination of weak revenues and elevated spending associated with the economic downturn and the policies implemented in response to it.