Archive - Sep 2010

A buddy of mine in Athens is a lot less optimistic on Greece's economic prospects...

In his new post, Gonzalo Lira analyzes the Oil Shock of '79, and the subsequent run up in inflation. He comes to some interesting conclusions about 1979, and how those conclusions might apply to today, if and when there is a run on Treasuries. "In both 1979 and today, dollars were poised to chase after commodities, following a triggering event. In ‘79, it was the fall of the Shah. In 2010, we are waiting for our moment to exit Treasuries. Therefore, one can look at the events of ’79–’82 as a dress rehearsal for what I think will happen today, and in the immediate future, if and when the Treasury bond bubble pops." — Gonzalo Lira

The wholesale demand for physical gold continues without reprieve, as the Sprott Physical Gold Trust (PHYS) has just announced it will sell another 22 million units. Use of proceeds: "The Trust will use the net proceeds of this offering to acquire London Good Delivery physical gold bullion in accordance with its objective and subject to the investment and operating restrictions described in the Preliminary Base Prep Prospectus." Somehow we are confident that Sprott, when determining the pent up demand for this trust, is fully aware that gold is not very edible, if at all.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 16/09/10

Rouibini has never been much of a fan of gold. Which is why we were not too surprised when we read RGE's latest recommendation on the precious metal, which, as expected was to take profits. Doctor Realist says: "September may be a good month to take partial or full profits for an
investor with a long gold position. Alternatively an interested investor
could buy December put options." Of course, had RGE clients followed the good Doctor's advice back from December 2009, there would have been no profits to be had. To wit: "Investors should thus be wary of getting the gold bug and being stuck with this barbarous relic. The recent swings in gold price—up 10 percent one month, down 10 percent the next—prove  the point that gold has little intrinsic value and that most of its price movements are based on beliefs and bubbles. As an insurance policy against the tail risk of eventual inflation, it may be useful to hold a small amount of gold in one’s portfolio, but stocking up portfolios with a fiat currency that has marginal practical use, a zero nominal interest rate, high storage costs, and the price of which is subject to volatile whims and bubbles is totally irrational. If you want to hedge against inflation, stock up on Spam or other canned food or buy futures on commodities that have more physical uses and consumer demand....Unlike other commodities, it has little intrinsic value. Much like a fiat currency, gold’s value is based largely on the irrational beliefs of investors. In a depression or near depression, one would be better off stockpiling canned food and other commodities like oil that are useful for riding out Armageddon. You cannot eat gold or burn gold." Ah yes, the good ole "can't eat gold" argument. Yet somehow, despite gold's indigestible qualities, it is precisely gold which today hit an all time high once again, despite RGE's December note and a chorus of other infidels screaming for gold's metaphoric blood. We expect to hear ever more pundits to attempt to top tick the market. Will they succeed? Sure, if the starting sample is a few thousand, one will always be spot on. Pure statistics.

Once upon a time in America $100 Billion dollar errors were considered a “big deal.” Not so much anymore. So if you are one of those confused souls who has no idea who the fuck is buying US Treasuries, take heart. You are not alone. Tim Geithner has catapulted himself to tops on that list by revising a few numbers on the “ Treasury’s Estimated Ownership of U.S. Treasury Securities” report.

Who'd a thunk it - the feedback loops inherent in every aspect of the stock market, courtesy of trillions of simplistic algorithms which only know to do what everyone else is doing, and get stuck in an upward grinding feedback loop, are starting to impact the (pseudo) rational thought of their carbon-based creators. According to AAII, the "net" bullish sentiment jumped to a whopping 50.9% from just 20.7% a month ago, while bears plunged from 49.5% to 24.2% over the same period. While the Bloomberg chart below shows that weekly net Bulls minus Bears read for any given period, a more indicative chart of just how manic-depressive the market has become is the following chart which tracks the monthly sequential change in the investor sentiment. Lo and behold, the most recent 4 week cumulative change is the the 4th highest since 2010, and the biggest since April 2004. In other words, all those who were screaming for an oversold market 4 weeks ago based on AAII data, are now expected to say that this is the most overbought market in 6 years. What is also notable is that the 4 week volatility on the chart itself is the highest since the March 2009 lows, further confirming that nobody knows anything, humans (at least that handful of them that still trades) have no idea what to do, and sentiment is now changing literally on a day to day basis, to keep up with the ridiculous moves in stocks. All in all, a terrific trading environment, where being late in pulling a trigger by one second can and will mean the difference between a profit and a loss.

The folks at Nanex have done another very interesting forensic analysis looking at the volume on either side of the flash crash, i.e., between 14:43 and 14:45 when the most vicious part of the selling took place, and on the rebound, between 14:46 and 14:49, when the bounce to unchanged took the market right back up. Not at all surprisingly, there is a huge mismatch, at least on the SPY (which, however, being the most traded security in the market, is a pretty good representation of overall volume trends): selling volume is orders of magnitude, and far more concentrated than the bid side on the bounce. This leads Nanex to conclude that "Basically, when the shelling stopped, there was no one left standing with good
pricing information -- and when the shorts went to cover and buy back stock
they found prices rocketing skyward with almost no effort." In other words, if anyone wanted to created a short covering squeeze by pulling all the borrow (wink wink State Street and BoNY) they could have immediately undone all the damage associated with the 1000 point drop in the Dow. Incidentally, this is precisely what set off the market on its steady bear market rally back in March of 2009 - a concerted effort, orchestrated by the State Streets of the world, to pull every single financial stock's borrow, creating the biggest short covering spree in the history of our broken stock market.

Other than that, its a totally level playing field ...

File this one under the category of "creating TBTF Frankensteins" - Reuters has reported that as part of arranging rescue pre-petition financing for the broke state of California, Arnie is now in discussions for a $2 billion loan from Calpers which will help close the state's $19 billion budget deficit by about 8%. Of course, the balance would come from the FHA, or Goldman, both of which will see this as a lucrative mezz-IRR type toehold investment (with no downside, remember - there is no risk if you work for the government or are Goldman) in the world's 7th biggest economy. Of course, we jest about the latter. For now. What is truly ironic is that Calpers itself is in no danger of every being able to fund its own future pension obligations, which means this is merely a way to intertwine Calpers and the state of California, creating the most ridiculous TBTF public-private behemoth ever seen, which would mean that the collapse of either would be promptly preempted with more Federal taxpayer dollars. Well played, Ahhhnold, well played.

Despite the title of this piece I do not wish to engage in some inane debate about whether deflation or inflation is the risk...When a money manager of financial assets looks into his future and sees deflation he is correct. When the majority of “Main Street” looks into their future they also correctly see inflation. That is because when you have 40 million Americans on food stamps I am sorry but they have much bigger issues to deal with than the S&P500. So the world we are looking at is where a BLT sandwich could cost $12 and home prices drop another 20%. Investment professionals have a very hard time getting the heads around this concept for some reason but that is the reality we are looking at. Goods that are wanted around the world will rise in price in debased dollars while non-essential items deflate. The Chinese want pork but they could care less about some McMansion in Ohio. There is nothing anyone can do to change this. It is a natural cycle as simple, powerful and inevitable as any cycle in nature. If it must happen, it will happen. - Mike Krieger

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 16/09/10

One more man awake to the farce that are stocks. Although this being a man as realistic as David, it is not much of a conversion. We can only hope that by 2099 Mary Schapiro's just as blatantly incompetent successor will finally dare to take on the Wall Street lobby and bring some normalcy to capital market topology, instead of nickel and diming micro prop shops which do nothing worse than what the biggest Supplementary Liquidity Providers do on a daily basis. Speaking of, it has been a while since Irene Aldridge was on CNBC defending the practice of small- and medium-investors scalping.

What are the drivers of the recent heat-up in M&A activity in the past few weeks? A healthy prospect of the Global Economy? Cash burning holes in CEOs’ pockets? Valuation for the acquisition targets is compelling?