Archive - Sep 2010

The USDJPY has just dropped to a 15 year low as the market is in full risk-off mode, hitting 83.54. Philip Hildebrand is also seeing black and blue as the EURCHF approaches all time lows, now that the BoJ once again let matters into other central bankers' hands. In the meantime, based on funding correlations (AUDJPY and Curve Butterfly) stocks are so mispriced here, it is just getting ridiculous: ES is easily 20 points rich to correlation intrinsic values. There appear to be no viable correlation desks left in the world, willing to take on the Fed's now grotesque mispricing of stock markets.

Gold is rapidly approaching its all time high intraday high (and someone please inform Dennis Gartman that Gold in euro terms is close to its record again), as spot has surged $12 in a few minutes and is now near $1,260 (record intraday was $1,265 set back in June). In addition to the CHF and the JPY, gold is once again the safety trade. This comes hot on the heels of the recent report issued by UniCredit SpA’s Jochen Hitzfeld, the most accurate gold forecaster tracked by Bloomberg in the last three quarters, in which the analyst raised his estimate for the metal’s average price next year by 12 percent to $1,400 an ounce, and for 2012 to $1,600. As the full report below indicates, the surge will be helped by concern about the effect of government economic- stimulus plans and speculation about increased demand in China, the world’s second-largest buyer after India. Hitzfeld also is so daring as to think what will happen when actual demand, and not central bank interventions, sets the price of gold: "gold supply will increasingly be determined by investors. Twenty years from now, investors will probably find it hard to imagine that there was once a time when jewelry demand determined one of the world’s most important asset classes. If investors were to switch only 1% of the global market capitalization of equities and bonds into gold, at the current gold price of around USD 1,250 per troy ounce, this would translate into demand of 36,000 tons. According to the US Geological Survey, this is roughly equivalent to the known gold reserves. In reality, however, there will be a mix of gold purchases and increases in gold prices. At a gold price of USD 2,500, only 18,000 tons of gold would be required to reach a share of 1%." But you still can't eat the damn thing!

A few preliminary facts on gold from Matterhorn Asset Management:

• It is a fact that gold in US dollars (and many other currencies) has gone up 400% in eleven years or 16% per annum annualised.
• It is a fact that the US dollar has declined 80% in value against gold since 1999.
• It is a fact that the dollar and most other currencies have gone
  down 98-99% against gold since 1913 when the Federal Reserve Bank of New
  York was created.
• It is also a fact that the Dow Jones (and many world stock markets) has declined over 80% against gold since 1999.
• It is a fact that gold has made a new all time monthly closing high in dollars in August 2010.

As to how Matterhorn gets to its 3 gold price targets of $6,000, $7,000, $10,000 read inside...

• Noooo, they lied to us, this can't be: Europe's Bank Stress Tests Minimized Debt Risk (WSJ)
• Captain obvious headline of the day: Strong Yuan Would Hurt China: Economists (Reuters)
• Captain obvious headline runner up: Greece Default Risk Is `Substantial,' Pimco's Bosomworth Says (Bloomberg)
• Peter Orzsag shows why he got out of Dodge: "In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether." (NYT)
• French unions test Sarkozy in pensions strike (Reuters)
• The Obama Economy: How trillions in fiscal and monetary stimulus produced a 1.6% recovery (WSJ Editorial)
• Get ready for anti-incumbent wave (WSJ)
• GDP plus change in debt - and the US flow of funds (Steve Keen)

And another one wakes up. Better late than never. We wish to remind the Senator that perhaps he should first follow up on why after the SEC "banning" Flash trading, DirectEdge and other exchanges still frontrun orders on a daily basis, and why flash trading continues to lead to, ahem, flash crashes. "U.S. Sen. Charles Schumer urged federal securities regulators to explore ways to slow some high-speed trading at times of market stress and to investigate strategies that have raised concerns of stock manipulation, including one known as “quote stuffing.” Schumer, a New York Democrat, urged the Securities and Exchange Commission to launch a formal inquiry into whether computer-powered trading firms’ rapid entering and canceling of stock orders, called quote stuffing, played a role in the so-called flash crash of May 6, and to more broadly reconsider these participants’ role in the U.S. marketplace."

• Asian stocks fall for first time in five days; Japanese automakers decline.
• Australia extends interest rate pause on concern global growth is slowing.
• Australian Labor Party gains enough seats to form a minority government.
• China's 4 biggest banks lent $32.2B in new yuan loans in August, in line with govt ruling.
• China passenger car sales increased 18% in August.
• China rejects currency pressure.
• China's slowdown in industrial output growth will deepen, Government says.
• Copper declines in London.
• Asian steelmakers rally on Obama's infra plan; Euro drops on bank funds concern.

The Irish-Bund spread is going nuts on reports that the ECB is bidding up sovereign debt once again, together with a WSJ report that the Stress Test was, as everyone with half a brain knew all too well, a blatant lie, and sovereign debt was misrepresented. Earlier, a report in the FT Deutschland suggested that the bailout of Anglo Irish alone, (not to mention AIB and Irish Nationwide) would be sufficient to threaten the country's solvency. Things domestically are no better, after a poll in the Sunday Independent found that 74% of respondents believed the country would default, and preceded earlier news that Irish consumer confidence plunged from 66.2 to 61.4. The IMF's recent expansion and creation of credit facilities is now roundly seen as having focused on Ireland, but many now believe that it may be too late and a Greek-type rescue is in the works as the second domino is about to topple. Hopefully the Irish will figure out the Ambrose Evans-Pritchard was right all along, and that the time to riot is now if they hope to get the same preferential treatment by the ECB/EU/IMF as was afforded to Greece... Because we all know what the endgame is now.

Reality is the great antidote of hope. Whenever my colleagues and friends ask me for my global economic outlook, by the time I’m done, they always provide a cheeky response about the depressing nature of my outlook. However, the outlook doesn't have to be depressing at all for those willing to face reality and take a proactive stance.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 07/10/10

Update: RBA leaves rates unchanged as expected, AUD slides as unexpected.

The AUDJPY goes berserk jumping by 20 pips as the pair goes offerless on news that the BoJ has decided to keep its policy unchanged, not precisely the news the market was expecting but the knee jerk reaction in the wrong direction shows just how habituated the market now is to endless stimulation by CBs. The news was complete as expected, as GCI pointed out earlier: "Many traders believe the central bank - after bowing last week to intense political pressure - will keep its policy unchanged for several weeks. Volatile moves in the yen will likely be the single largest determinant of additional BoJ action. The central bank's ability to purchase additional Japanese government bonds is limited to rules that require the central bank to limit holdings in long-term bonds to the outstanding balance of banknotes in circulation. This means Japan's ability to purchase JGBs fell to less than ¥20 trillion." Elsewhere, Bob Katter just confirmed his support for an Australian coalition government, which would end an impasse and result in a minority government by Labor Prime Minister Julia Gillard. The news also comes in advance of the RBA decision, which is expected to be unchanged, as summarized by Goldman (below). In the meantime, after the initial surge in the AUD, the result is an immediate selloff in the AUDJPY pair, bringing the rate to unchanged, i.e. trading on mere noise.

"Sometimes the cheapest situations are the ones that everyone agrees are cheap, but there's no catalyst. We think cheapness is its own catalyst and if you can be patient, sometimes for a year or two, you'll be rewarded. Our patience and the investor base we built that allows us to be patient is a big advantage."

Another fascinating interview by Jim Rickards, in the first part of which the LTCM GC explains why he has told his clients to get out of stocks (yes, it does have to do with market manipulation and the Fed - the two most popular topics on Zero Hedge over the past year): "Markets have ceased to function as they are intended - traditionally a place to exchange values, but more importantly to perform price discovery (people rely on markets to tell them what to do or to at least give them some guidance). What's happened is that all the markets have become so badly distorted that their price discovery function and therefore the information content around it no longer has any value. The market has become self-referential, an algo playing itself out, almost the way you would run a self-recursive equation on a computer and you get very unpredictable results from very simple equations. It has degenerated into a joke." Perhaps more relevant for those seeking some advice on where to put their money if not into stocks, is his observation that now that the Fed is in dire need to getting people to start spending, the only option left is to instill the fear of a dollar devaluation, but not against other fiat (as that would in turn lead other central banks to follow suit), but depreciation against hard currencies such as gold. "If you are the Fed and you buy up gold to $2,000 an ounce what have you done? You've depreciated the dollar by not quite 50%. Well that's pretty powerful stuff if you are trying to get people to spend money and dump dollars. So they are not out of bullets, they have what I call the golden bullet..." As Kohn today said, it is all about expectations... Well, why not make people expect that the dollar they have today will be worth half as much tomorrow versus gold?

Last week I forecast that stocks would either re-test 1,040 and breakdown or rally to 1,100. Stocks once again opted to accomplish both of my forecasts falling to test 1,040 on Tuesday before starting the mother of all ramp jobs Tuesday afternoon into Friday.

All in all, stocks rallied over 5% in the span of 72 hours. The move started off as the most obvious manipulation in history, with stocks exploding higher in the final 15 minutes of trading in August to insure that the Dow closed the month above 10,000, which appears to be the proverbial “line in the sand” that the PPT has drawn (more on this in a moment):

Morgan Stanley's Qing Wang has created a new tracking concept, the China Macro Risk Radar (CMRR), whose sole goal is to provide a framework to asses and monitor risk events of low to moderate probability (high probability events already have their own standing at the firm and are singled out in client calls) and high impact. As part of its inaugural edition, MS has assigned 10 risk events to four different categories on the CMRR - each risk event is assessed according to six aspects, including its description, content, potential impact, likelihood, timeframe, and evolving direction. We present the top 10 items that are of concern to investors in China, and are likely to provide even more ammunition to the ever increasing roster of China bears.