Archive - Oct 4, 2011

There is only one word to describe the opinion that the U.S. dollar is in a multi-year uptrend: heresy. Understanding why this is so may well be critical to understanding market action in the 2011-2016 timeframe. Embracing the contrarian viewpoint offers little joy, because heretics are constantly being hounded by devotees of orthodoxy seeking their conversion to the one true faith or their crucifixion as mortal threats to the orthodoxy. Why is this so? For two simple but profound reasons. The human mind strongly prefers certainty to uncertainty and simple, fixed explanations over complex, contingent explanations. The human mind has a second, superglue-like quality: Once a viewpoint has been plucked from the swirling chaos of beliefs and explanations, then the mind quickly solidifies that view, resisting any future modification. Very little energy is devoted to questioning the position, while enormous energy is devoted to defending it.

Ever wonder why the final SEC report on the flash crash doesn't match up to the forensic evidence found by Nanex? It seems the SEC/CFTC failed to disclose they didn't get around to interviewing the traders that actually executed the algorithm blamed for dumping 75,000 emini contracts on the market "without regard to price or time" until 2 weeks after publishing their final report on the flash crash! Apparently, they were making a lot of things up to fit a foregone conclusion. According to the media, it was Waddell & Reed who executed those trades right? Well, no. Barclays executed the contracts using their time tested algorithm called Participation. You simply can't crash a market with the Participation algorithm. This is an algorithm that in fact has sophisticated price and time components. This is an algorithm that would only sell at the offer -- and never at the bid. This was discovered and pointed out by Nanex after just one day reviewing the actual 6,438 eMini contract trades (75,000 contracts) which ZeroHedge helped obtain. But the media was happy to hang the guilt on an out of town mid-west Mutual Fund company, and besides all this stuff was getting way too complicated. After all, when it comes to such complexities, it is only economy PhDs who are fit to opine at will. Only the SEC/CFTC wasn't counting on anyone double checking their work..

At its very core, to price something complicated, you lay the most similar liquid asset you can find next to it that has a liquid price. You deconstruct the liquid one by its risk premia, and then you reconstruct the one you are trying to price by applying suitable risk premia to it. The output is fair value. All the talk of “Japanification” is just a variation on this theme at a pretty remarkable order of complexity. Call it modeling, call it storytelling, whatever: one compares an economy going through a multi-year banking crisis with one that is just a few years into a banking crisis. Compare trajectories, similarities, and differences. Then figure out what matters and what doesn’t in a macro-sense. One has either past observation to understand reality, or rely on dumb luck to understand future events.

Down 20% from September 2006. Toyota and Honda got brutally slammed. But don't blame post-earthquake inventory shortages. They have been resolved. It's a shift in the market.

Anyone tearing their hair out trying to answer how it is that this great Keynesian experiment of a nation managed to sneek by with so little new incremental debt over the past month can now relax. As Zero Hedge reported yesterday, the US closed out Fiscal 2010-2011 with a $95 billion surge in debt in one day brining the total to just under $14.8 trillion. That, however was not nearly enough to settle all outstanding debt, and on the first day of the next fiscal year, Timmy G added another $47 billion in debt, to have a closing balance of $14.837 trillion on the first day of the 2011-2012 fiscal year. In other words, in just the past two work days, America has technically settled a whopping $142 billion in debt. There was a time when a year was needed to issue this much debt. Then, a month. Now, we are officialy down to two days. What is ironic is that the recently expanded debt ceiling of $15.194 trillion has just $400 billion of additional dry powder. At this rate, it won't last the US until the end of the calendar year.

Because while soaring volatility in gold and copper, not to mention silver, results in one after another margin hike to "cool off the speculators", when it comes to financial stocks, especially in the "tail wag the dog" variety where the synthetic drives the stock price, a surge in vol means a cut in margins, or 33% to be precise. As of minutes ago, the biggest futures exchange just cut XAF margins by a whopping 33%, exploding vol be damned, or actually, because of it. The CME would be even more delighted if clients were to pledge their gold as collateral, especially following yesterday's expansion of gold's marginability from $200 to $500 million. So just in case anyone missed the message from today, when fins plunged then soared on a rumor, the CME would be delighted if you could repeat all of that but this time with 23% more margin. Expect more margins cuts, this time in ES offset by margins hike in all other instruments, especially of the public enemy #1 variety such as precious metals and crude.

The official list of demands sucks ... oh, wait ... there isn't any official list of demands

Ignoring the knee-jerk reaction of stocks to rally 4% on the headlines that Dexia will be save and other banks will be recapitalized, it is worth thinking about what this really means and the next logical steps. For now I will not even focus on the fact that this was from a meeting of Finance Ministers and not heads of state.  I left my "EU Leadership" trading cards at the office, but so far, not many of the big names, who can actually close the deal, have spoken.  I won't even focus on the fact that Dexia has been on the fringe of "contagion" discussion.  Look at articles about "contagion" or "debt crisis" and PIIGS and French Banks and German Banks and Italian Banks show up in nearly every article.  Dexia is discussed less frequently, though ZeroHedge has been on top of it for awhile.  So stocks rose 4% on a plan of a plan to plan a plan for a bank they hadn't heard of until this morning.  Hmmm.

UPDATE: Moody's ITA downgrade took some shine off as EUR drops 60 pips and ES now 13pts off its highs. TSYs are 3-4bps lower in yields. Gold/Silver not moving much on it.

On the basis of old news, more promises, lack of any clarity, and Dexia's dump on the Belgian government, the equity markets staged a 4% rally in the last 45 minutes to end an incredible day. Our assumption is that this was simply the bounce that everyone expected as we seemed to have squeezed shorts into lunch and were limping back lower on AAPL disappointment. Quite clearly, there were a few uncomfortable equity shorts who were squeezed out rapidly and incessantly as the S&P massively outperformed credit as well as the broad basket of risk assets - even TSYs only managed to sell back to earlier day's high yields (as opposed to extending). Gold/Silver rallied (though well off week highs) as the USD dumped back near the week's lows and copper and oil rallied but again no where near as ebullient as stocks. Evidently, the equity move is exuberant at best but these squeezes seem able to maintain longer than anyone expects.

And here we go again. Ironically, this is nothing. Wait until S&P, which just telegraphed very loudly the next steps earlier, puts France on downgrade review...

Here are the key selected sections from the FT story that sent the Dow Jones soaring 400 points from its intraday lows: "Although the details of the plan are still under discussion, officials said EU ministers meeting in Luxembourg had concluded that they had not done enough to convince financial markets that Europe’s banks could withstand the current debt crisis... “There is an increasingly shared view that we need a concerted, co-ordinated approach in Europe while many of the elements are done in the member states,” Olli Rehn, European commissioner for economic affairs, told the Financial Times. “There is a sense of urgency among ministers and we need to move on.” Mr Rehn cautioned that while there was “no formal decision” to begin a Europe-wide effort, co-ordination among EU’s institutions – including the European Central Bank, European Banking Authority and the European Commission – on necessary measures had intensified." So, there is .... nothing definite, just more speculation, more rumors, and more innuendo. But hey, it worked last week with the Liesman rumor. It obviously would work for the FT which has become the End of Day rumor source du jour, first with China bailout rumors (since denied), then with recapitalization rumors (denied), and now with this joke. Pathetic.

If anyone had any doubt this market is broken beyond compare and controlled by complete idiots, this should put all doubts to rest. Anyone wondering why stocks are soaring, the reason is that according to non-news, because this was first reported yesterday by the FT, Dexia will park €180 billion in worthless assets in a bad bank. This is beyond ridiculous as Belgium, even in JV with France, will be unable to ringfence and hence fund this amount of capital for the now nationalized bank. It also means that Belgium is about to be downgraded following a long-overdue warning by S&P and Moodys to cut the country. It also means that Belgian CDS will soon trade points up front. It also means that Belgian funding costs will soar. It also means that French CDS will explode tomorrow and that interbank markets in Europe will collapse (even more) once the market realizes that France has just diluted its "bailout dry capital" by rescuing a Belgian bank. And so on. And so on. But for now the ripfest is here. Fade every uptick as this is sheer desperation out of Belgium which pretends it is Switzerland and can do with Dexia what the Swiss did with UBS. Hint: it is not and no, it can't.

I am amazed at how these Captain Obvious “analysts” do nothing more than state the obvious, and rather late at that.

We warned you of the crowded Apple trade last week.

Update: Apple.com appears back up for now. Which is more than we can say about Countrywide Financial.