Archive - Dec 2, 2011

European stocks gapped impressively higher from a weaker-than-credit close yesterday and credit rallied to catch up with equities until just around the US NFP print. Downgrade rumors and the Republicans legislation threats took the shine off dramatically as EURUSD dropped almost 200pips from its intraday highs and equity and credit markets cracked lower in a hurry into the close (though ending higher on the day). European sovereign bonds were performing very well but also leaked notably wider into the last hour or so (perhaps France and Belgium driven by the Dexia news?). Ending the day under 1.34, EURUSD has retraced more than half the 'bailout' gap higher. EUR-USD basis swaps and FRA-OIS spreads also started to decompress (worsen) again as we noted earlier the ECB's dramatic rise in deposits and emergency loans suggests all is not well and perhaps this was the greatest central-bank-driven opportunity to reduce exposure ever?

Name: Jon Corzine, Profession: Wall Street Con Man, Destination: Swindler Hall of Fame...

As rumors and chatter circulate across trading desks, European equity and credit markets are starting to lose their giddiness. European sovereigns are leaking back wider and financials starting to underperform and it is being noted that, as reported by The Hill, that conservatives say they will try to block the IMF from bailing out Italy and Spain. Pointing to the huge bill this could leave at US taxpayer's feet, Republicans are concerned at the secrecy with which Geithner has acted. Sen. Tom Coburn appears to be at the helm of this legislation, noting:

"We're throwing good money after bad down a hole that I think is not a solvable problem. Europe is going to default eventually, so why would you socialize their profligate spending."

As we have been saying all along, with every reincarnation of the idiotic "IMF to bailout [XXX]" rumor, there always is just one snag. A rather substantial one at that: US congressional approval for expanded IMF bailout capabilities.

Simply put, “productivity” is giving to the future, instead of taking from the future. Parasitism is the opposite: Borrowing from the future to fund present desires without credible connection to future healthy growth. Successful productivity requires the development of beneficial new approaches to value creation and the rigorous identification and confrontation of approaches that destroy value and that destroy the environmental, financial, social, and personal fabric of human endeavor. Debt forgiveness is initially brought into play to address the latter requirement, but cannot be viable over the long haul without affirmative new ways to create and exchange value. Given that we have the collective integrity, self-preservation instinct, human will, and the sense of necessity to confront our broken system, let’s first establish philosophical and practical corollaries to guide debt forgiveness as “giving to the future instead of taking from it”:

As regular readers know, back in September 15 we speculated that MBIA could be the next Volkswagen-type short squeeze courtesy of a rising short interest and huge Institutional shareholder base (amounting to 96% of the float for the top 30 accounts) not to mention the possibility for a BAC settlement that could be as large as the company's current market cap. The recent BTIG upgrade only confirmed that view. As a result the spike now continues, and the stock has returned 30% since our initial observation. If indeed this is caught in a short squeeze loop, the final return could well be in the triple digits, especially since the short interest is now the highest since May 2010!

While this story has not been caught by any of the major wires, The Australian's Jerusalem correspondent Sheera Frankel reports something quite disturbing: "All eyes on Israel after second Iranian blast. CLOUDS of smoke billowed above the city of Isfahan - evidence that the latest strike against Iran's alleged nuclear weapons program had hit its target." We will report more if this story is confirmed by any other news agencies because if true it means that at this point things behind the scenes are no longer happening in the shadows.

Couldn't happen to a nicer advisor to Joe Biden

• JOHN CORZINE SUBPOENAED BY HOUSE COMMITTEE
• HOUSE AGRICULTURE VOTES TO ISSUE SUBPOENA IN WASHINGTON TODAY

Don't forget to get your popcorn out for next Thursday:

• HOUSE AGRICULTURE COMMITTEE SETS DEC. 8 HEARING ON MF GLOBAL

We will simply copy and paste, with the appropriate adjustments, the form text we put up after each and every NFP report calculating the number of people that have to be added by the end of a hypothetical second Obama term. Using the November boilerplate: "Every few months we rerun an analysis of how many jobs the US economy has to generate to return to the unemployment rate as of December 2007 when the Great Financial Crisis started, by the end of Obama's potential second term in November 2016. This calculation takes into account the historical change in Payroll and includes the 90,000/month natural growth to the labor force, and extrapolates into the future. And every time we rerun this calculation, the number of jobs that has to be created to get back to baseline increases: First it was 245,500 in April, then 250,000 in June, then 254,000 in July then 261,200 in October [and finally 262,500 in November] . As of today, following the just announced "beat" of meager NFP expectations, this number has has just risen to an all time high 262,500 263,700. This means that unless that number of jobs is created each month for the next 5 years, America will have a higher unemployment rate in October 2016 than it did in December 2007. How realistic is it that the US economy can create 15.8 million jobs in the next 61 60 months? We leave that answer up to the US electorate."

Long before the magnificent NFP headline data mesmerized USD buyers and flushed commodities down the pan, Copper at the LME saw a 'Flash Crash' and was forced to cancel all trades for the 646amET timestamp. Considering the post-'flash' action, it seems yet again a flash crash gives us a glimpse of reality.

Here are the four most important data points and charts from today's job report: the civilian labor force declined from 154,198 to 153,883, a 315K decline despite the civilian non-institutional population increased (as expected) from 240,269 to 240,441: always the easiest way to push down the unemployment rate. Percentage wise this was a drop from 64.2% to 64.0%: the lowest since back in 1983. Naturally, this would mean that the people not part of the labor force rose, and indeed they did by 487,000 to a record 86,558 from 86,071. This also means that more people are looking for a job: and indeed, the number of "Persons who want a job now" rose by 192K to a record 6.595 million. And lastly, confirming the behind the scenes disaster of the US jobless picture, the average duration of unemployment rose to a new record 40.9 weeks from 39.4 weeks previously. And that is your "improving" jobless picture in a nutshell.

I Think This Means I'm Not Getting Invited To The Squid's Christmas Party This Year :-( I understand that taking stabs at the Vampire Squid is risky, but the sources of these interviews stem from Russia and the Netherlands. Is it time for the guys stateside to represent?

NFP Prints At 120K, Below Expectations Of 125K, Unemployment Rate Drops To 8.6% on Expectations of 9.0%. And for those wondering how it is possible to have such a major drop in the unemployment rate, here it is: Labor Force Participation down from 64.2% to 64.0% as ever more people leave the work force once again.

The Bank of Korea’s continued diversification of its foreign exchange reserves is a bullish factor which may have led to the price gains today. The central bank of South Korea announced that it had purchased 15 metric tonnes of gold in November to raise its reserve of bullion in an effort to diversify its portfolio of its foreign reserve investment and reduce risks caused by market volatilities. According to the Bank of Korea (BOK), it made a purchase of 15 tons of gold last month to increase the nation’s gold reserves to 54.4 tons worth $2.17 billion as of the end of November. It boosted the size of its gold reserves by US$850mn in November, up a massive 39% from the previous month. Its total gold reserves are now worth US$2.17bn.

As Macbeth said, It is a tale told by an idiot, full of sound and fury signifying nothing. Fading the "Grand Plan" rally worked very well.  There was a couple days of pain and then generally the market followed a nice path lower.  Last week the market had felt oversold and was looking for a reason to rally.  I thought that Monday was overdone, and that Wednesday was extremely overdone, but I started cutting shorts yesterday, and am now getting long. Everyone seems to understand that the "globally coordinated rate cut" plan was not a big deal in of itself, yet the market didn't give up any of the gains.  Even some of the perma bulls downplayed the move.  I think the move was meant to be more pre-emptive than a strong show of future support, but Ben is not dumb, and he has seen the outsized impact such a simple move had. Cracks will appear in this rally, and we will ultimately figure out the problem with the current attempts to fix Europe, but right now it is too vague to fight, positioning has been too extreme, and Bernanke and Draghi have to see the opportunity to push things forward while the market is behaving positively.