Archive - Jan 2011

Durable goods, pending home sales, and the usual weekly diet of claims and Fed data….Expect the Fed to monetize $4 – $6 billion of recently auctioned off 2 Year bonds in today's POMO

From S&P: "The downgrade reflects our appraisal that Japan's government debt ratios--already among the highest for rated sovereigns--will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s. Specifically, we expect general government fiscal deficits to fall only modestly from an estimated 9.1% of GDP in fiscal 2010 (ending March 31, 2011) to 8.0% in fiscal 2013. In the medium term, we do not forecast the government achieving a primary balance before 2020 unless a significant fiscal consolidation program is implemented beforehand."

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 27/01/11

The market continued to rally today as the Fed voted to keep QE2 going (something about the economy being shitty, so rally on), bankers at Davos...

Retail traders are notoriously wrong at picking market direction/tops and bottoms. Most retail traders very naturally seem to adopt a counter-trend stance and this offers very accurate signals for individuals looking to trade against this group. This daily report is designed to help traders focus their efforts on higher probability pairs.

Recently there has been much speculation about the nature of the notable divergence between WTI and Brent. Explanations range from the now traditional Cushing syndrome, to Hess attempting to corner the BFOE, to correlation desks blowing up, to the ludicrous, which includes HFT (as much as it is trendy to blame parasitic HFT for everything, is not responsible for correlation trades, especially not in markets that do not have endogenous liquidity at least 1,000 times above that needed for HFT to actually add value). Probably the best explanation to date comes from JPM's Lawrence Eagles who in a just released note asks "Is Brent-WTI wide enough." His lede: "Brent and WTI have been trading increasingly as entirely separate commodities in recent weeks, driven by decidedly different fundamentals. Yet this is an important spread, which tells us a lot about regional Midwest and international crude economics and will, over time, drive investment that will ‘normalize’ price discrepancies." In other words, it is not the spread's wideness that is the outlier: it is the fact that it was overlapping for so long that is peculiar. In time, Eagles claims, speculation may drive the spread so wide that the economic incentive to close the gaping infrastructure holes will be large enough and the discounting of this act will bring the spreads back to parity. In the meantime, the spread will likely persist. Not only that, but he also believes that the 2012 calendar dated differential, currently trading at a far more reasonable $2.50, will likely also diverge, as two years is insufficient time for the required changes to transpire. Furthermore, the last straw that convinces us that it is likely early to bet on a convergence, is Goldman's just released commodities report which has a WTI target $2 above Brent. By now everyone should know what they say about trading Goldman recommendations...

DAVOS: 0600 [EUROPEAN BULL SH*T TIME]--East Coast USA: 12:00 AM [EASTERN SWINDLER TIME]

Frequent readers know that when it comes to Goldman Sachs, Zero Hedge has consistently claimed two things: i) that in the peak bubble days, the firm regularly commingled flow and prop traders on its trading floor(s), thereby allowing prop traders to either front run the firm's flow accounts, or trade alongside them in real time; and ii) that when it comes to OTC derivative trading, Goldman Sachs is the de facto Wall Street monopoly, a status made even more acute following the annihilation of Bear and Lehman, thereby cementing the firm's undisputed role as primary fixed income/OTC derivative market maker. Whereas yesterday we received indirect confirmation of the former, when we learned that Merrill was slapped on the hand with a token $10 million fine for doing precisely what we alleged, and which we are certain will soon be reconfirmed transpired at all other major banks in the 2003-2007 period, Goldman most certainly, and probably profitably, included, tomorrow it will be made clear that Goldman was an effective monopolist within the derivative space, with a bulk of its revenues in its highest margin, FICC group, coming from derivatives. When tomorrow the FCIC releases its long-awaited 545-page report exposing a tiny fraction of the criminality on Wall Street, we will discover that "Derivatives accounted for 70 percent to 75 percent of revenue in the firm’s commodities business from 2006 to 2009, and “half or more” of revenue from interest rates and currencies, the firm estimated, according to a report by the Financial Crisis Inquiry Commission. From May 2007 to November 2008, about 86 percent of $155 billion in trades made by the firm’s mortgage business involved derivatives, the FCIC said."

AlpInvest Partners, Europe's largest private-equity investor, has been sold to Carlyle Group and the AlpInvest management in a move that looks set to shake up Europe's buyout landscape.

Entire towns exploded and collapsed based on where oil was discovered. One area only 15 miles from Titusville, Pennsylvania (where Drake first discovered oil) went from being unnoticeable on the map to a booming metropolis of 15,000 people and back again in one years’ time (the fifty hotels and other businesses that sprang up in that time were all gone within 24 months). Parcels of land went from a few dollars in value to $2 million and back again in less than a decade.

Watching Obama deliver his State of the Union Speech last night, reminded me of all the rah-rah quarterly meetings that we had to attend as Managing Directors at Goldman, where senior management would remind us all of how great we were, and if there were any areas of competitive weakness relative to our adversaries at other banks, all we had to do was step up our game, innovate and globalize (or something like that.) Obama wasn't delivering a summary of what has, or is, going on for most Americans last night, no such negative status report. And, if you didn't expect him to, he gave good speech - full of reminders of how it is America's destiny and the American dream to be great and powerful, "robust democracy" that we are. There was a massive pink elephant in the room called reality though....My reaction was wtf?

I'm asking.

While the Fed refuses to extract its head from deep within the sand of ignorant hubris that only a career in Ivy League education can provide, the world continues to burn, in many places quite literally. For all those who are finding it hard to juggle all the rioting, and confuse their Cairos with their Calcuttas, below we present an interactive map disclosing all recent documented food price hikes, protests, and riots.

Tunisia’s uprising has democracy watchers wondering if the instability will spill over into neighboring North African countries, but really that instability is already there. In the first week of the year, Algeria experienced violent protests after the government hiked prices for staple foods like milk, sugar, oil, and flour. Some 800 people were injured in several days of rioting, prompting President Abdelaziz Bouteflika to cut costs on some foods and lower import duties on others. The rioters went home, but odds are they will return to the streets when prices rise again. But Algeria is not poor – an OPEC member, it is the ninth largest crude oil producer in the world. More importantly for this conversation, Algeria is the world’s sixth largest natural gas producer, pumping out just over 3 trillion cubic feet (Tcf) of natural gas in 2008. At the beginning of 2010, the country’s proven natural gas reserves stood at 159 Tcf, the tenth largest in the world, and notably, Algeria exports some 3.6 billion cubic feet (Bcf) of natural gas each day to Europe. On top of the natural gas flowing to Europe through pipes, Algeria has become a key supplier of liquefied natural gas, or LNG. In 2008, Algeria exported 711 Bcf of LNG, and 90% of it went to Europe.

If there is one thing that the one-time GAO audit of the Fed disclosed, is how woefully insufficient the extremely superficial data discovery was. Another thing uncovered was just how needed this disclosure was: it provided extended material into how the Fed subsidizes banks (both domestic and international) on an ongoing basis, not to mention substantial number crunching for the blogosphere. Either way, if Bernanke was hoping that the Frank-Dodd bill would take care of the Fed opacity, pardon, transparency issue in perpetuity, he may be disappointed: Ron's son, Rand, has just announced he is introducing legislation to, well, Audit The Fed, precisely along the lines of what his father did previously and generated massive support from everyone in Congress. Once again Ben Bernanke is about to become a major thorn on the side of the political puppetry.