Archive - Oct 2011

Reverting back to short.  The sell-off this morning felt overdone, in HYG in particular.  We bounced on Bernanke, but it wasn't with much conviction.  Although BAC and MS bounced nicely off their lows, BAC hasn't been able to get green on the day, although MS has, but barely.  With such weak performance from ideal short squeeze candidates, it seems clear that we are not out of the woods yet.  I think the failure to trade up significantly means we go through the morning lows.

Five simple lessons from one of the original skeptics.

Today in Hong Kong at the Bank of China main branch on Queen’s Road, I bought an ‘unsealed’ Maple Leaf (i.e. loose coin) for just 0.5% over spot; I also purchased a ‘sealed’ Maple Leaf (i.e. collector-ready) for an additional $60, or about 4.5% over spot. Funny thing, it wasn’t even the best price in town. You can buy gold for as low as 0.2% over spot (practically a rounding error) in Hong Kong. Unfortunately, just about every bank was out of stock. This is a special holiday week they call ‘Golden Week’; it’s one of those manufactured holidays that the government uses to encourage domestic consumption. Given the name, a lot of people traditionally scoop up gold bullion… they apparently think it’s lucky to buy gold during Golden Week. Go figure. Needless to say, the banks start running out of stock and the premiums go up; if I had timed my visit a bit better, I could have gotten a better deal. Such is life. Now, let’s be clear about something– I didn’t buy this gold as a speculation. I’m not constantly refreshing my screen so that I can run back down to the bank and make a quick profit. You don’t buy something that’s appreciated 10-years in a row and has increased 7-fold in the same period as a speculation.

Yesterday, Goldman proclaimed that their new base case outlook is one of a double dip for Germany and France, and hence all of Europe. Now, it is S&P's turn. In a just released report, S&P says that "The prospect that Europe might dip into recession again is looking more likely. The flow of news and market developments in recent weeks, such as sharply deteriorating business sentiment and a projected slowdown in the U.S., has led us to once again revise downward our projections for economic growth in 2012. This follows a number of downside revisions in our last economic outlook at the end of August. We now forecast GDP growth in the eurozone at 1.1% in 2012, compared with 1.5% in our earlier projection. For the U.K., we expect a GDP growth rate at 1.7% in 2012, slightly below our 1.8% projection in August. We still do not expect a genuine double dip to occur in the eurozone as a whole or in the U.K., but we recognize that the probability of another recession in Western Europe has continued to grow. We now estimate the probability of a new recession in Western Europe next year at about 40%. In our baseline forecast, however, we continue to anticipate sluggish and unevenly distributed growth over the coming five quarters." Next up: rating warning for France, and all EFSF bets are off?

The US Treasury just issued $30bn four-week bills once again at the outstanding rate of 0.00000% as the bid-to-cover did drop a little from last week but remains on the same longer-term upward path of the last three years. This is not anomalous, as we see below, that all T-Bills out to 12/15/11 currently offer a negative rate - with most notably the very short-term (less than one week) charging even more to store your money (1.5bps to store our money in T-Bills for 1 week). The buyside demand declined as dealers dominated the bidding with almost $120bn and Direct bidders saw the lowest takedown since Jan10 on a relatively low bid size.

While everyone's attention is focused on just what unconventional policy Benny and the Inkjets will pull out of their collective sleeves to prevent another financial implosion (fear not, something will appear), it is time to redirect once again to the copper plated elephant in the room, China, which last week became the target of a "Hard Landing" vendetta by Bank of America's David Cui (noted here). Well, the China strategist just fired a follow up shot with "Four systematic risks & potential for financial market turmoil." So, for all those who need one more nail in the "China Bubble" coffin here we go, first textually... "we have sensed that the financial markets in China have become increasingly unstable and that the risk of a hard landing is rising. In this report we outline four systematic risks that we believe have the potential to cause financial market turmoil: 1) private lending (a current issue); 2) property price correction (potentially over the next three to twelve months); 3) bank bad debt write-off and eventual recapitalization (potentially over the next two to three years); and 4) “hot money” outflows (event driven and highly unpredictable). Many of these risks are intertwined which is why we refer them as systematic risks, i.e. difficult to mitigate via diversification. As a result, we suggest investors remain defensive in their portfolio construction in the medium to long term (although we recognize that some short term tactical bounces in the market are possible after the recent sharp sell-off)." And, more importantly, visually...

Bernanke will testify before the Joint Economic Committee today to offer his outlook on the state of the economy, governmental financial policy, and federal spending priorities. Last time he testified on the Hill, the Fed Chairman said the U.S. economy was showing signs of a "self-sustaining recovery" but cautioned that another four to five years may pass before unemployment levels fall to historic norms.  Presenting the semi-annual Monetary Policy Report provides an opportunity for the Fed to update its view on the economic outlook directly to Congress. Watch out for any notable keywords such as "QE3-XXX", "Keynesian Paradise", "Turboprint", "Hyperinflation" and last but not least "Gold is money."

The S&P fought reality valiantly, and after every other market in the world entered a bear market long ago, reality won. The S&P 500 is now over 20% lower from the highs, and we are officially in a bear market. Gun to our head, and with an eye on where MS is trading, we are going much lower. But even gun to our head we are unsure if the S&P will enter triple digits first, or if that will be preceded by Morgan Stanley "Benjamin Button-ing" its teenager status...

Ladies, this is getting scary. Someone is betting on the endgame for the house of Mack. We, for one, can't wait for this week's H.4.1 release to find out if not who, then how much was borrowed at the Fed's discount window...

The Day Ahead - Here is an email that went out as daylight hit the East River:

Dexia, the Belgian bank alluded to in rumors yesterday now at center stage. Authorities climbing all over each other with guarantees and assurances. Even some talk of splitting into good bank/bad bank. Trouble here is that this bank was said to have passed the stress test with flying colors.Market unsettled by new talk that “official” haircuts may be set at 50% vs. prior 21%. Once again, markets unsettled by eroding confidence in financial markets rather than by a single event/entity. Traders see neither lifeboats or fire engines. What happens if a real crisis breaks out? Is there a plan? So, far looks like rerun of yesterday – worries and wariness rather than panicky selling. DAX -3%. FTSE & CAC -2%.

Unfortunately, markets have weakened further still. The questions raised about the stress test and the bank that it passed may linger through the day.

The latest EFSF “collateral” package shows once again, just how wrong Europe has it.  Dreams of Eurobonds should be relegated to the trash bin.  Fantasies that EFSF will leverage itself up to save Europe should be discarded.  The latest outcome of EFSF meetings should be enough to let everyone know that even the people with the money have no clue what to do, and the structure of compromise will never get anywhere.  The Greek bond rollover is another example of an overly complex, unwieldy mechanism, that doesn’t do what it portrays. Until Europe is willing to address the reality of the situation and take some simple but painful steps rather than complex, unworkable ones, that sound good but do nothing, the problems will increase.

Fed Chairman Bernanke testimony, second useless Op Twist POMO and August factory orders. And a whole lot of political things happening.