Archive - Aug 2010

In a prepared report, the Fed announces "U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter." That's great, now if only they could do the same for all non-Treasury, MBS, and Agency (we know they more than intervened there) asset classes, everything would be peachy.

Today's main winning asset class was gold, with ongoing weakness across most other assets, except for bonds of course, which continues to price in concerns about deflation. The divergence we noted so frequently last week, between stocks and bonds is now a thing of the past, and has been replaced by that between gold and bonds. Yet gold rise is hardly driven on expectations of inflation as oil, another much more inflation sensitive commodity tanked. In other words, the QE lite thesis is playing out as predicted, although Goldman's prediction yesterday about a surge in gold likely also put the idiot mutual fund money in the spot bid. Technically, gold is parked at resistance at the highest level over the past 40 days. All those who have been frothing about an imminent liquidation-induced plunge like that experienced on July 16, have been silenced. Should the 1,220 resistance be breached tomorrow, the next level to keep track of will be the record highs from June.

All the major trading desks are staffed by automaton robot traders barked at by the FemBot supervisors all day. The only two stocks getting HeatMapped to new highs are PCLN and NFLX, and several bond funds. However, the meltdown in other stocks must be halted, so Bernanke, Geithner, Summers, et all are demanding some changes at CNBC in order to re-start more Animal Spirits.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 12/08/10

We were pleasantly surprised yesterday when we saw news that Chuck Schumer was starting a campaign to aggressively rein in the HFT market members (which he correctly categorized as responsible for excessive volatility and the flash crash). Some reading between the lines, however, makes it appear that this action could be nothing but a red herring distraction, which attempts to actually promote the interests of the very same HFT lobby which the senator is presumably attempting to control.

Hinde Capital has expanded on an idea we have been toying around with and wish to follow up on soon (that ETFs are de facto the new CDOs, as the most actively traded products (SPY, GLD, etc) are now merely synthetic representations of underlying securities, as the actual securities are increasingly more thinly traded, thus creating a huge "tail wags the dog" paradox), by penning a presentation calling GLD "the new CDO in disguise." We don't think it is disguised - after all the two products share far too many characteristics, although having CDO-like features does not make something evil per se. The reason why implied correlation hit 0.8 yesterday as we first pointed out, is precisely due to the aggregation of products into such synthetic aggregators as ETFs, of which GLD is merely one of many. Yet Hinde's opinion focuses precisely on the disconnect between the "idea" of owning a hard asset, and the reality of merely having claims to a Cede & Co stock certificate which in turn has no liquid and direct physical collateral, in essence condemning GLD and all non-physical ETFs, by saying "we believe ETFs are a risky way to express a gold view." All this and much more on why GLD has more risks than are acceptable for any sophisticated investor in the attached Hinde Capital presentation.

Now that sovereign CDS (and ratings) are back in vogue with everyone finally expecting the world to relapse into a double dip, Zero Hedge has compiled Moody's sovereign ratings and spread these alongside the CDS levels in any given bucket to propose several trade ideas taking advantage of Moody's market lagging inefficiency.

Leak? What leak?

The talk of a possible double dip is now common banter on TV investment programs. And indeed, deflationary forces seem to have the stronger grip right now than inflationary ones. So if deflation is the next reality we have to face, what happens to our favorite stock investments? There’s lots of data about what gold does during periods of high inflation, but less so with deflation, partly because we don’t see a true deflation all that often. But of course we’ve got the biggie we can look at, and the seriousness of the Great Depression can give us a big clue as to how gold stocks behave in a true deflationary environment. From 1929 until January 1933, the stock of Homestake Mining, the largest gold producer in the U.S., rose 474%. Dome Mines, the largest Canadian producer, advanced 558%. In spite of the gold price being fixed at the time, gold stocks rose dramatically. At the same time, the DJIA lost 73% of its value.

Today's auction of $16 billion 30 Years closed at a high yield of 3.954% (55.98% allotted at high), and came at a 2.77 Bid To Cover: the lowest since May. The yield was the third lowest in history, higher only than the February and March 2009 auctions (3.54% and 3.640%). Direct Bidders came in at 18.6% - a surprisingly high number, and bigger than the previous auction, yet nowhere near the record 29.6% from March of 2010. What was most surprising was the record low Primary Dealer participation (blue segment in attached chart) - the Fed's lapdogs took down just 35.3% of the auction: the lowest in many years, if not ever. Are the PDs turning their back on the inflation risk associated with holding LT securities, and/or do they think they would be unable to offload these to retail customers? Keep an eye on PD take down in future auctions for further indications on this.

This guy's been good.

Dead critters? What dead critters?

The Dallas Fed has released an economic paper titled "Keynes' Wet Dream"... just joking - the real titles is - "Can The Nation Stimulate Its Way to Prosperity" in which the author concludes wisely: "While the overall weight of the evidence suggests the stimulus plan has provided a short-term boost, it’s unclear exactly how large this boost has been. What is clear is that stimulus funds have exacerbated near-term fiscal imbalances." Mm hmm. More taxpayer capital well-spent. Yet in the paper is contained the following chart which we hadn't seen in a while, and which says all one needs to know about not only the real benefits from the stimulus (as opposed to those limited strictly to Wall Street), but also is the best grade card of the Obama administration's economic "prowess" to date.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 12/08/10

Lately, Goldman's economists and strategists have been looking at the long-overlooked topic of demographic shifts within a society as a major driver to shaping consumption trends, economic outcomes, and, as a result, investment decisions. A few days ago, Goldman's Anthony Carpet penned "Demographic Dynamics: A case study for equity investors" in which he did an extensive analysis of what the demographic shift of America, driven primarily by the tide of baby boomer retirement which commences this year, means, and presented several stock choices that would likely benefit the most from this generational transition. We will present that report in the immediate future, but for now we wanted to bring your attention to the Goldman economic paper, "Current Accounts and Demographics: The Road Ahead" in which Goldman takes off the investment advisor suit, and puts on that of the economist. The study has some interesting observations as pertains primarily to the ever critical Current Account (which as we pointed out yesterday hit a two year high $49 billion deficit). In a nutshell the current account, or trade balance, is a proxy for the marginal savings or consumption that occur in a given country. The US has ran a current account deficit for as long as it can remember, with the result, as recently as several years ago, being a negative savings rate. The Current Account also tracks the international flow of capital, as global savers (Emerging Markets), tend to fund the deficits of global spenders (using their own recycled money) courtesy of the "spenders" flooding the world with their own currency. This phenomenon is the primary reason for the symbiotic relationship between China's saving society and the US consumer base. As is well-known, one of Obama's more ambitious plans is to double US exports over the next five years which means a collapse in the current account deficit. Yet as more and more Americans exit the prime savings age bucket, and become spenders, is Obama's current account reshaping plan doomed from the start? Goldman explains.