Archive - Jan 18, 2011

Bill Fleckenstein: The Race To the Bottom Will Be Won By the Dollar

"This printing money is going to lead to huge trouble. It’s going to lead to higher interest rates. It’s going to lead to more inflation and at some point there is going to be a train wreck in the currency and the bond market." Market commentator and money manager Bill Fleckenstein sat down for a recent interview with and opened fire with both barrels on the Fed and the monetary policy it's pursuing. He and Chris discuss the factors that enabled Bill to be one of the first to accurately identify and warn of the housing and credit bubbles - and how history is now repeating itself via the profligate printing of US dollars. The interview covers a wide range of topics meaningful to the investor trying to make sense of where things are headed from here - including central banking culture, bubble psychology, high-frequency trading, inflation/deflation, and the true relative value of the dollar vs the Euro.

Eric King Interviews Rick Santelli

After what seems another day of tireless brainwashing, it is always preferable to close, listening to the one man who continues to call it like it is. In today's feature interview, which touches on virtually every currently relevant topic, Eric King speaks to Rick Santelli discussing such items as European insolvency/austerity, try to get to the bottom of the quandary where Japan (itself massively in debt) is getting the money to fund the European rescue, deconstruct the once anathema and now mainstream topic of a global ponzi system (less than two years ago one would be branded a fringe idiot for calling the global financial realm one big ponz... now it is rare to find someone who doesn't), the Japanese demographic crunch, the US municipal collapse and its implications on the USD (judging by the blowtorching of the DXY tonight, nothing good), the food riots and their causes (surging demand due to monetary policy as well as supply constraints), on the inflationary aftermath of the CNY peg (and what it means for Chinese FX reserve investment strategy), the continued reckless issuance of debt by the Treasury, gold, and much more.

Goldman Acknowledges Higher US Food Prices, Says Not A Concern If They Stabilize Soon

We were wondering how long the Goldman economic koolaid team would continue living in a pretend "priced to perfection" reality. The answer is just 2 under months. After ignoring the topic of surging food prices, head economist Andrew Tilton finally decides to discuss the issue (following 5 countries with violent riots demanding to learn much more about the issue). Not surprisingly the conclusion is one that will not make any dent on the firm's Goldilocks outlook for a QE-inspired, pretend economy. While Tilton attempts to preserve some credibility by noting that yes, it could get very bad, his conclusion is one of keeping to the party line, i.e., that everything will be ok and that much time has to pass before things get bad, even if they were to get bac. To wit: "the recent surge in food commodity prices poses upside risk to both our core and headline CPI forecasts, particularly the latter.  The rise in food costs should push up headline CPI inflation by roughly ½ point even without meaningful pass-through effects into the core index, reducing household real income growth accordingly.  While clearly undesirable from the standpoint of households, these results suggests that as long as commodity prices stabilize relatively soon, the burst of food inflation would not have a major impact on the broader economic outlook." And what happens if commodity prices do not stabilize "relatively soon", which they won't as long as Ben Bernanke continues to step in for the increasingly sparser foreign Treasury purchasing interest (also known as the Frost-Sack Top Secret "Dow 36,000 Project").

Goldman's Top Vol Trades For 2011

Goldman's Krag Gregory has proposed several interesting vol ideas all of which, however, are predicated by Goldman's attempt to merely leverage (clients) into the company's bullish outlook on the economy and markets. To wit: "Our US Portfolio Strategy team’s SPX target of 1500 coupled with high 1y skew and low rates biases us to strategies that sell expensive puts to fund upside." The eight trades specifically are: Trade #1: Sell S&P 500 Dec-11 variance at 22.8; Trade #2: Sell RUT Dec-11 variance at 30; Trade #3: Sell S&P 500 Apr-11/Dec-11 forward variance at 24.2; Trade #4: Risk reversals. Buy a Dec-11 S&P 500 104.6% call; Sell a 90% put to fund; Trade #5: Knock-in risk reversals. Buy a Dec-11 S&P 500 102.7% call. Sell a 95% put with a 82% (1060) knock-in to fund; Trade #6: 1x2 Call spread overlay. Buy Mar-11 SPX 100%/104.4% 1x2 call spreads for 1.4%; Trade #7: Buy Dec-11 SPX 100%/116% 1x2 call spread; sell a 8.5% OTM put to fund as a standalone options strategy; Trade #8: Calendar spread as a hedge. Buy Mar-11 SPX ATM put, sell Dec-11 82% put to fund.

Crude Fireworks

Something is spooking the reflation trade. While both gold and silver have moved decidedly higher in the past hour, little compares to the fireworks in West Texas, where crude has just gapped up a solid dollar, in what briefly appeared to be an offerless market. Furthermore the move seems contained to WTI: the move in Brent is far more cool and collected, although will likely soon follow and pass the $100 barrier. And while the disconnected between the two (north of $5 recently) has been well noted, if not completely understood, the sudden move in WTI does not seem to have an immediate catalyst: the all critical Chinese CPI/GDP/retail data is not due until tomorrow, so either someone is trying to start a HFT algo melt up in various futures markets, or fat fingers (soon to be denied) are far more prevalent than previously expected.

US Mint Reports January Silver Sales Hit 26 Year High

When we had last checked on the total silver sales by the US Mint earlier today, the amount given was 3,407,000 ounces, a number which we had earlier speculated would be a monthly record if sales were maintained at the current pace. And as the number had not been updated we assumed that "either buying interest has ceased overnight (unlikely), that the
mint is not updating its numbers (likely), or, worse, that the Mint has
now stopped selling any form of silver for reasons unknown." Indeed, the result was the likely one, and following a quick check today on US Mint sales confirms that sales have once again surged following the Mint's delayed update. As of today they stood at a whopping 4,588,000, or nearly 1.2 million ounces sold in a few short days. This represents the biggest monthly total sold by the US Mint going back to 1986 when the Mint disclosed its first monthly sales record... And the month is not even over yet. In other words in just the first three weeks of January, the mint has sold more silver than in any month in its history according to its public records going back 26 years.

Guest Post: Tossing The Consumer Under The Bus...And Insanely Expecting An Economic Recovery

I’ve been pouring through the Fed Reserve’s recent release of circa 2005 FOMC meeting transcripts. The most striking observation that one can make is that the consumer - the very lifeblood that determines whether our economy will live or die - has been discarded...The solution is simple, we are broke since we take in with taxes and borrowing less then we owe. Our deficit alone ensures default or Quantitative Easing from now until the wheels come entirely off. It is time we reissue the currency, tie it temporarily and loosely to gold, get our manufacturing jobs back and move on.

JPM's Mortgage Unit Sued To Disclose Loan Quality Data, Following Allegations It Misrepresented Over 70% Of Loan Portfolio

The lawsuits over loan level detail continue to come fast and furious. After late last year Allstate sued Bank of America, providing proof that that the Too Big To Fail bank had repeatedly lied about the quality of its loans and broadly misrepresented its loan book to purchasers, today the Fed's favorite bank, JP Morgan, and specifically its EMC Mortgage division, were sued by Wells Fargo (the trustee) of a mortgage portfolio for refusing to turn over documents detailing the quality of loans bought by the trust. Bloomberg reports that Wells Fargo & Co., the trustee, is seeking access to files for more than 2,000 underlying mortgages in the Bear Stearns Mortgage Funding Trust 2007-AR2, according to the complaint filed today in Delaware Chancery Court in Wilmington. “The trustee has repeatedly requested that EMC provide
access to the subject documents,” Wells Fargo said in the
complaint. “EMC has played proverbial ‘rope a dope’ and
otherwise continued to drag its feet, and has produced
nothing.” Reading through the complaint, we find that the same rep fraud that Bank of America continues to be in hot water for (and that seemingly everyone involved, and on the defensive side, believes will eventually get swept under the rug) has been quite rampant at all other banks. Specifically, "on August 31, 2010, the Trustee sent a letter to EMC, notifying EMC that the Trustee had received a letter from the law firm of Grais &  Ellsworth LLP (“Grais”), which represented an investor in the Trust owning 42% of the outstanding face amount of the Certificates in the Trust, dated August 3, 2010 (the “Grais Letter”). The Grais Letter gave notice to the Trustee that Grais had investigated the condition of 1,317 of the 2,049 Mortgage Loans held by the Trust, and determined that EMC appeared to have violated its representations and warranties in the MLPA with respect to 938 of those loans." That's roughly 70%: a number which any jury will find to be beyond statistically significant and will certainly impugn intent to defraud. Not surprisingly, neither JPM nor EMS has scrambled to provide the backup... or any required information.

Apple: Selling The News?

Update: Steve Jobs is not participating on the earnings call

While Apple's results were surely impressive, and we are waiting for the call Q&A for more details, we may have finally gotten to the proverbial sell the news event in the iconic company. After surging to a high of $357, the stock has since dropped almost back to the pre-halt levels, and at last check was trading at $344.66, granted to after hours volume. The action does beg the question, however: with 190 hedge funds in the name, who will be the marginal buyer especially since with Jobs now gone indefinitely the possibility of another beat's beat is seemingly getting increasingly problematic.

Apple Reports $26.7 Billion In Revenue On $6.43 EPS, Beats Whisper Numbers

Apple posts revenues of $26.7 billion on EPS of $6.43. EPS consensus was for $5.38 per share, up from $3.67 per share a year ago, while revenue was expected to be up 55 percent at $24.3 billion. Whisper numbers were as high as $26.3 billion and EPS of $6.29. Apple's own guidance was for $23 billion in revenue and $4.80 in EPS.

  • Q1 revenue USD 26.74bln vs. Exp. USD 24.42bln
  • Q1 Macs sold 4.13mln, up 23%
  • Q1 iPhone sold 16.24mln, up 86%
  • Q1 gross margin 38.5% vs. Exp. 37.3%
  • Q1 iPods sold 19.45mln, down 7%
  • Q1 iPads sold 7.33mln
  • Sees Q1 revenue about USD 22bln vs. Exp. 20.87bln, sees Earnings at $4.90