Archive - Nov 2011

You can't handle it. 

Let's face it: with the Iranian invasion foreplay having gone on about 3 years too long, everyone is just waiting for the flashing red "GDP boosting" headline. But to know how close we are to I-day, there is one question needing an answer: where are the boats? Below we share the latest weekly update of US naval positioning, as usual courtesy of Stratfor. The chart is self explanatory: the 5th Fleet AOR is getting just a little too crowded.

Comments from the EFSF's CEO Klaus Regling that they will issue short-dated debt to ensure they will be ready to help - for instance, Italy - is extremely worrisome and smacks of desperation in our view. Peter Tchir of TF Market Advisors agrees noting that shifting to shorter term funding for EFSF is a sign of weakness and creates real risk of contagion much sooner than if they stuck to the higher cost, but longer term funding programs. The dramatic widening in EFSF spreads that has occurred since some clarity on risk transfer, post EU summit, was made suggests market participants are extremely skeptical also.

Every day we are blugeoned with a variety of economic reports from various government agencies about the state of the economy.   Most of these reports have some form or another of "seasonal adjustments", speculations, estimations or just flat out "guesses" about what is going on in the economy.   What we tend to find out over time is that these numbers are generally overly optimistic during recessionary periods as we are in today. Today, we are going to look at three different polls from the Gallup organization on consumer spending, the economy and employment.   The Gallup organization has studied human nature and behavior for more than 75 years and focus on what people "think and feel" about various issues.   They employ many of the world's leading scientists in management, economics, psychology, and sociology, and other consultants to identify and monitor behavior. The key difference between Gallup and the various government agencies is that these polls are direct questionnaires to individuals and the responses are tallied and reported.   There are no adjustments, assumptions, guesses, etc.   In the famous words of Bill Clinton; "What is...is."

Once again, it is time for the Banzai7 Thursday Rip! [COFFEE IS ABSOLUTELY PROHIBITED]

Yesterday we wrote that according to a Handeslblatt report, Angela Merkel is "investigating ways to enable countries to leave the Euro." Today Handelsblatt has a follow up with some very critical clarifications which change the equations of the European bailout all over again. Yesterday, the Handelsblatt reported that the CDU "wants to make it possible for European Union members to exit the euro area....A commission within the party, that is crafting a framework to be presented at a party meeting, has proposed allowing a euro member who doesn’t want to or isn’t able to comply with the common currency rules to leave the euro region without losing membership in the EU, the newspaper." In other words, the transition out would be "voluntary." So it is somewhat surprising that in under 24 hours we discovery that this proposal has just escalated substantially: according to the just released Handelsblatt update, "The CDU wants to change the EU treaties to not allow the departure of a debt-ridden country from the euro zone, but also their expulsion. From the request for the party on Sunday evening at Leipzig, by the Handelsblatt (Friday edition), the crucial word "voluntary" was deleted."

The correlation between SPX and EUR has been high, but it seems to have hit unprecedented levels today. All you need to know is where EUR is and you can pretty much nail where treasuries, SPX, and an assorted number of other assets are. Credit is also totally divergent from equities today once again.

Minutes ago the Treasury auctioned off yet another block of $16 billion in 30 Year bonds. The auction was pretty horrible: the When Issued was trading at 3.155% when the press release hit that the bond cleared at only 3.199%, a huge 4+ bps tail for the longest duration paper. Internals were not pretty either: the Bid to Cover dropped from 2.94 to 2.40 and Dealers had to buy well over half again or 55.7% with Indirects taking a meager 28.4%, and the remaining 15.8% going to Directs, nearly half of the 29.5% from October. Obviously this is the inverse of what happened in Italy today, when the tail was a negative 150 bps and the 1 year Bill closed at just over 6% with the WI trading in the mid-7%'s. Perhaps the global banks, in an attempt to preserve the Ponzi one more time, pushed all their freely allocatable and repoable capital into Italy and had far less left for long US paper. Nonetheless, the yield at 3.199% was just the second lowest. We salute anyone who believes that as central banks are about to set off on a record printing episode to bail out Europe, that inflation will not rise. Needless to say, the weak auction pushed the entire treasury complex lower, as senn by the second chart of the 30 Year following the auction. With this auction, the refunding trio of issuance for the week is over and when all is settled on Monday, total US debt will be just shy of $15.1 trillion. We are so lucky that the Supercommittee is working up to snuff even as the next debt ceiling hike is rapidly approaching.

Ben Bernanke is speaking in Texas to some soldiers and ther families in what is mostly a boilerplate presentation: he mourns the bubble economy, protects his policies and tries to deflect focus away from the Fed, just like the ECB, to the legislative. To wit: "it doesn't feel like the recession ever ended. The unemployment rate remains painfully high, and more than two-fifths of the unemployed have been out of work for longer than six months, by far the highest ratio since World War II. These problems are very serious, and we at the Federal Reserve have been focusing intently on supporting job creation. Supporting job creation is half of our marching orders, so to speak; the other half is controlling inflation." On Congress: "the Federal Reserve was never intended to shoulder the entire burden of promoting economic prosperity. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector." Most interesting is Bernanke's attempt to get quite cozy with men and women in uniform: "soldiers who had taken the course were more likely to make smart financial choices, such as comparison shopping for major purchases, saving for retirement, and educating themselves about money management. They were less likely to make questionable financial decisions, like paying overdraft fees, taking out car title loans, and continually running credit card balances. Making good, well-thought-out financial decisions can make all the difference to your financial future." Like saving, yes? But with 0.001% deposit rates, just why should these brave men and women do anything "smart" choices: can't they simply do what the banks do every day and make dumb choices, instead knowing full well that you will bail them out. Will you bail out the soldiers of this country who follow in the banks' footsteps? Or do they need more weapons before they become too big to fail?

Having tracked each other almost tick-for-tick for much of the last few weeks, WTI crude has disconnected dramatically this week from the rest of the commodity complex. We mentioned the disconnect yesterday and see three potential reasons: 1) Unwinds from long EU risk hedges due to margin calls, 2) the escalation in the Iran-Israel shenanigans, and/or 3) the weakness of the IAEA report. It seems that after last night's dismal macro data from Europe that this is not the sign of growth that so many would like it to be - but has all the consumption-deflationary impetus we have become accustomed to.

A wonderfully orchestrated 1Y Bill auction in Italy and some clear 'help' from the ECB early on was enough to shift a heavy BTP market in a positive direction for the first time in a week. However, while headlines will be writ large with the 40bps compression in 10Y BTP spreads to bunds, the action in the last few hours of the day in French bonds, European financials, and higher beta credit were much more symptomatic of risk aversion than buyers coming back. Record wides in OATs and EFSF spreads as senior and subordinated financial credit is dramatically wider on the week. In the same way as yesterday, ES was exactly 'balanced' as Europe closed, having shifted back to VWAP as broad risk assets leave a slight positive bias though the selloffs in gold, silver, and copper (and AAPL) suggest some liquidation was underway - even as the dollar leaked lower a little from overnight highs.

As far back as May 2011, Bernanke admitted the benefits of QE were less attractive. Now he’s not only admitting that asset bubbles exist (something Greenspan never admitted) but that Central Banks may even need to “burst” them!?!? In plain terms, the Fed will NOT be launching another round of QE or major policy changes until the next round of the Great Crisis hits in full force. And by that time it will be pointless anyway as once the defaults begin, the leverage in the global banking system will implode rapidly.

Just out via S&P:

As a result of a technical error, a message was automatically disseminated today to some subscribers of S&P's Global Credit Portal suggesting that France's credit rating had been changed. This is not the case: the ratings on Republic of France remain 'AAA/A-1+' with a stable outlook, and this incident is not related to any ratings surveillance activity. We are investigating the cause of the error. Media Contact: Martin Winn, London (44) 20-7176-3740;

At least they did not find €55.5 trillion in the couch. In other news, it is good to see that now a hacker can singlehandedly wreak havoc to a $60 trillion bond market by finding a back door entry to the S&P turboserver. But at least we now know that the next time S&P downgrades someone we will first have to ask if the release was preapproved by Norton AntiVirus...

While Europe stubbornly refuses to get off the pedestal of daily "risk On-Off" headline news disinformation, the time has come to shift our attention to the epic misnomer which is the US supercommittee, or the unelected sub-branch of the legislative body which is supposed to find $1.2 trillion in cuts to enact the debt ceiling hike that Obama passed in August so that America can spend itself into the drunken sailor coma. Incidentally, the country has already issued $700 billion in debt since then, and by the end of the week, total US debt will be just shy of $15.1 trillion. So at least the "benefit" of the debt ceiling, pardon, debt target hike has been implemented, if not any of the mandated budget cuts that are supposed to offset this. Unfortunately, they won't, because as the attached supercommittee trading cards created by JPM's Michael Cembalest demonstrate, as well as the associated Q&A from Goldman explaining all one needs to know about the supercommittee, hell has a better chance of freezing over than these 6 republicans and 6 democrats coming to some agreement.