Archive - Aug 3, 2010

After the longest consecutive decline in the BDIY plunged the Baltic Dry shipping index to record oversold levels, the subsequent 200 point jump was sufficient for many to say that the next dry bulk shipping renaissance has arrived. Alas, the latest inflection point is here, a mere two weeks since the lowest point in years, coming before the index could even reach the psychological barrier of 2,000. The BDIY has now reversed its two weeks of gains, dropping 0.7% from 1,977 yesterday, to 1,963 earlier, with a drop in all three index rates: capesize, panamax and supramax. Is this the beginning of the second leg down in the BDIY?

• Tim Geithner just broke every lie detector in the country: Welcome to the recovery (NYT)
• Treasuries Lack Safety, Liquidity for China, Yu Yongding Says: U.S. Treasuries fail to provide safety or liquidity when it comes to managing China’s $2.45 trillion foreign-exchange reserves, said Yu Yongding, a former central bank adviser. “I do not think U.S. Treasuries are safe in the medium- and long-run,” Yu, a member of the state-backed Chinese Academy of Social Sciences, wrote yesterday in an e-mailed response to questions. China is unable to sell the securities in a “big way” and a “scary trajectory” of budget deficits and a growing supply of U.S. dollars put their value at risk, he said. (Bloomberg)
• China won't relax property measures (China Daily)
• Japan Finance Minister: Markets Should Set Yen’s Rate (WSJ)
• Weber is a Bad Choice to be EU’s Top Banker (FT)
• David Stockman channels Herbert Hoover (Barrons)
• The next sovereign debt crisis... will be here (The American)
• Here comes food inflation: Rise in Wheat Prices Fastest Since 1973 (FT)
• The Death of Market Fundamentals (Jim Sinclair, h/t Kyle)
• Property Slump Adds to US Muni Woes (FT)

While economists were looking for Personal Income to come at a 0.2% growth in June, the actual number was an unchanged print from May (and a drop from the 0.3% revised rise in May). One wonders just where the Chairman gets the temerity to say that US consumers will spend more with time, despite the just confirmed (for the nth time) contraction in actual incomes, not to mention that the second drop in Payrolls in as many months will once again confirm the double dip.Further confirming the Goblin-in-Chief's delusion was that personal expenditures also printed below expectations, coming in at 0.0%, on expectations of 0.1%, down from a revised 0.1%. In other words the savings rate in June was unchanged. Yes, that means consumer did not spend more than in May, and goes against the whole "economic expansion" propaganda. And putting the last nail in the spending coffin, was the personal savings rate, which at a revised 6.4% came at the highest reading since June 2009. The US consumer is done (there are only so many iPads a bankrupt mortgage holder can buy), and no matter how fast the Dow hits 36,000, nothing will change this.

Markets in a Flash

· Asian equity markets continued their rise last night. The Nikkei finished up +1.29%, while the Hang Seng finished up +0.21%.

· European equity markets are slightly down this morning. This is after yesterday strong rise took them to new recent highs.

· Commodities are looking strong today and are pushing to fresh 3 month highs. Oil is trading above the $81.00 level. Wheat prices fell after their recent gains as Russia calmed fears of export problems.

• Asian stocks rose, with MSCI at a 3-mt high, on lower corporate default risks.
• Australia Central Bank keeps key interest rate at 4.5% as inflation cools.
• China's worst floods since 1998 to cut farm output, lift price.
• EU raided offices of companies manufacturing Polyurethane foam in a cartel probe.
• Euro-Zone PPI rises 0.3% - less than expected.
• Fed likely to pass on more stimulus amid signs economy weak: Bernanke.
• Japanese stocks climb on US manufacturing data; Trading companies gain.
• Pending sales of existing US homes probably rose in June.
• 4.9M barrels leaked into GoM from the broken well operated by BP, government agency.

For those who are unlucky enough to be on vacation and having to keep track of the deranged lunacy that passes for markets, the 10 Year just dropped below 2.90% as futures turn green! This is so insane, that it makes all the sense in our bizarro world now. Remember, last week we warned of a 10% meltup in stocks and bonds. So far it is working. In Europe, the same thing as Bund stops are triggered, and as 10 year Gilts trade to lowest yields since April 2009. Thank you Ben Bernanke: you have once again destroyed any semblance of logic in the market and driven another batch of traders out of the market: those who have no recourse to lose other people's money. Bloomberg's Matthew Lynn sums it best in Risk Is the New Black in World Turned Upside Down: "Investors need to reverse everything they thought they knew about risk. Assets such as property, the dollar and developed-country bonds are only for those who don’t mind losing their shirts. Small-time investors who depend on getting their money back should be buying into small companies, emerging markets and private-equity or hedge funds. We don’t know precisely what will emerge as “safe” once the dust has settled on both the credit crunch and the sovereign-debt crisis. But emerging markets are safer than developed ones, equities beat property, and corporate bonds are preferable to government notes. Sometime around 2015, don’t be surprised if bankers are advising widows and trust funds, which need to preserve capital above all else. They will be offered Turkish bonds, a hedge fund or two, and a portfolio of small emerging-market stocks. Real estate, Treasury bills, and dollar or euro blue-chips will only be for people who fancy a flutter -- and have already been warned they may lose everything." Logic is now dead.

Goldman's Jon Pierce asks why, and how much longer, will the EUR keep surging. He provides some answers, but not the real one, which is that the Fed's second round of monetization is now being actively priced in and just like last year, is resulting in a plunge in the dollar. Which incidentally means the end of Europe's export-led economic "miracle" - it was fun while it lasted. Surely US exports can take over from Europe... Of course it would be great if the US had stuff to export. Either way, Goldman has provided another downside stop target of 1.305 (a level we were at as long ago as last Friday). Somehow every time GS goes out and shares its stop limits, they imminently get hit. Although with the Fed now actively back to destroying the dollar, Goldman may just luck out for once.

A modest bout of profit taking in gold, in big part driven by hedge fund liquidations at the end of Q2, has pushed spot price by less than 7% from the all time high, and a variety of bears have crawled out of the woodwork screaming the end of the gold bull market. In the grand scheme of thing this is rather myopic. It was precisely the same quantitative easing the provided the impetus for gold's straight line rise from just over $800 to $1270 in the span of a year as faith in the future of monetary currencies has progressively disappeared, that will serve as the springboard for the next major move higher: and with the Fed now days away from announcing some iteration of its brand new monetization scheme, the days where gold can be purchased cheap may be ending. For those still relatively new to the gold market below is a useful recap of the major developments for the world's best performing asset in Q2 courtesy of the World Gold Council.

The moment many gold bulls have been waiting for - the Chinese Central Bank has just released a directive informing everyone it is commencing the development of a healthy gold market. In the release (below), the PBoC stressed the need to develop the market to serve the overall situation of China's gold industry, based on improving the competitiveness of China's financial markets, effectively strengthening innovation, and promoting the formation of multi-level market system. The PBoC has asked the Shanghai Gold Exchange, Shanghai Futures Exchange and commercial banks to become actively engaged in developing a national gold market. With China owning a mere 1,064 tonnes of gold (sixth in the world and well behind both France and the GLD ETF in terms of holdings), which represent just 1.6% of its reserve holdings, there is only one way to interpret this borderline revolutionary press release. China has now officially entered the gold market.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 03/08/10

Jon Hilsenrath is out with the latest rumor of what the Fed will decide to do to stimulate a double dipping economy next week, and while it is already well known that Bullard is all for QE 2, and the idea of reducing the interest rate on excess reserves has been widely pondered and for now at least, snubbed, the WSJ confirms that the latest plan is to use proceeds from maturing mortgages to buy treasuries. The result: a 2 Year that is at a fresh all time record low yield of 0.542%, and a 10 Year flirting again with the 2.9% barrier. Stocks and bonds are once again terminally disconnected, as the market attempts to front run the Fed in buying up Treasuries, even as the marginal buying isoccurring in stocks since the Fed has essentially announced that anything yielding less than 4% is risk free. Of course, as Jon points out: "Any change—only four months after the Fed ended its massive bond-buying program—would signal deepening concern about the economic outlook. If the Fed's forecast deteriorates significantly, it could also be a precursor to bigger efforts to pump money into the economy...The Fed's mortgage buying pushed investors to buy other assets, including corporate bonds and stocks. Any extension of that program, even in the form of reinvestment, could help support the recent rally in such riskier assets." So can we at least stop pretending the economy is not double dipping and that stocks are in way even remotely indicative of fundamental values. Tangentially, and as frequent readers will recall, any message from the WSJ is very likely to have had the prior stamp of approval of the New York Fed, implying it is vastly more than mere speculation.

It appears that the Fed is ready to debate what they are going to do about a sinking economy and the specter of continued high unemployment. ZIRP isn't working, yet they are afraid to tighten rates. Will they monetize federal debt as a tool of quantitative easing? All signs point to yes.