Archive - Jan 2011

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 13/01/11

The worst that might have happened - a systemic financial breakdown - did not happen, and we can be thankful for that. But the alternative has had costs that are only now becoming better appreciated. With constant bending of the rules, the only constant was that every bent rule favored the big banks, often uniquely so. With this special attention given to a favored few, the social mood darkened considerably among U.S. citizens, especially those far removed from the beneficial impacts of the Fed's largesse. Where states are struggling with extremely painful budget deficits measured in the single billions (in most cases), the Fed has been busy printing up and handing out some $75 billion per month to its coziest clients. While millions of people ran out of extended unemployment benefits and lost houses due to completely fraudulent and illegal banking practices, nothing was ultimately fixed and (seemingly) nobody went to jail or was charged with anything. Small, regional banks without access to unlimited and essentially free capital from the Fed are now forced to compete with big national banks that have been granted an unlimited backstop by the Fed. This is how too big to fail leads to too small to succeed.

Today's POMO closed, with Frost Sack playing the F-E-D chime and not only buying up $8.412 billion in bonds, but paying Primary Dealers about $50 million in commissions. Not a bad deal for 45 minutes worth of work. We have already discussed that issue extensively and at this point it is up to Congress to deal with it. And while they are at it, perhaps they can also address the flipping churn of recent issuance that is just getting ridiculous. As the chart below shows, of the $8.4 billion in bonds, a whopping $3.8 billion was represented by just one issue: the 2.750s of 12/31/2017. This is the bond that was issued two short weeks ago, on December 29, 2010. Nobody even pretends not to be throwing the Treasury's feces right back at Ben Bernanke. And if the PDs can pocket billions in the process courtesy of a bunch of NYU students, and an "algorithm" running the whole process (in the absence of Bloombergs), so be it. It is not like anyone will ever make a fuss. After all the US is now just one Mutually Assured Destruction threat away from a complete and total dictatorship.

Not all the leaders who rise to the top during crises have to be supportive of the democratic system. Both Mussolini and Hitler were elected first, and there is a risk of a tyrant with a simple goal-oriented solution will be the choice of desperate voters. Crises are risky. The Western democracies are drifting dangerously close to economic disaster, but the political rhetoric both in the United States and in Western Europe has completely avoided the underlying causes and possible solutions to these problems. Five of the ten largest states in the US are teetering toward bankruptcy and the financial position of the federal government is deteriorating fast, but no leadership is apparent — and the voters are unaware. In Europe the Latvian, Irish, and Icelandic examples are ignored even though they point the way to deprivation and strife. Governments will fall in Europe. The Irish one will on March 23 and the Portuguese will later this spring. The winners will be the ones that make the necessary changes — if they don't, they will be quickly gone. We need real leaders now!

The simmering situation in Ireland may soon be coming to a boil once again. The Irish Times reports that "speculation is growing in Leinster House that a motion of no confidence against Mr Cowen may be tabled by backbenchers at a crunch Fianna Fáil parliamentary party meeting this afternoon. [His] position is looking increasingly under threat following further revelations about his contacts with Anglo Irish Bank officials in the lead-up to the controversial bank guarantee in September 2008." Not surprisingly, this is the same bank that we wrote about in October, spotting one Goldman Sachs among the list of bailoutees. And, as we described in painful detail over two months ago, it is very likely that one Peter Sutherland, Chairman of Goldman Sachs International, may have been instrumental in discussions with the Irish government which led to a taxpayer funded bailout of not only AIB, but the preservation of Goldman interests. We are confident that if related allegations are proven, being fired from his post will be the last of Mr. Cowen's concerns.

Should I jump on to a moving train? Half of global demand for the red metal is now coming from hedge funds. Friends with warehouses stashed around the country with copper ingots stacked to the ceiling. Next stop: $6 a pound? (CU), (JJC), (ECH), (FCX).

What are the Swiss options? None.

Unfortunately, the Ministry of Disinformation and Data Revision will not be able to blame the latest major economic data point revision on dyslexia. After as we previously noted, the Chicago PMI was revised lower from 68.6 to 66.8 just three short days ago, today that other standout number, the Philly Fed, which had originally printed at the better than expected level of 24.3, has just been revised much lower to 20.8. Since this number means the Philly Fed actually declined from the November print of 22.5, one can see why even the Chinese are seeing their jaws drop at the ceaseless "adjustment" of what has now become an unrepentantly upwardly economic data stream. Specifically, the December Employment Index has been lowered to 4.3 from 5.1, the December New Orders Index has swooned to 10.6 from 14.6, the December Current Inventories was lowered from -2 to -5.9, the Current Number of Employees dropped from 5.1 to 4.3, and the Current Average Employee Workweek contracted from 19.3 to 16.8. The silver lining: the December Prices Paid Index to 47.9 from 51.2. Also, virtually all the future indices improved. Then again, as today's PPI indicated, and as surging commodity costs validate, nobody doubts the margin collapse any longer. We can't wait to find out just how many more of the melt up inducing December economic indicators will continue to be revised lower (even as the BLS continues to backward revise jobless numbers higher).

As part of the most recent observations on the boil up (melt up is so QE1) in the S&P, we find something quite interesting. A quick glance at the chart below shows the general market 45% climb since Bernanke's leak of QE2 in August, as well as the market's 10 day (purple line) and 50 day (green line) moving averages. As a point of reference the S&P has been above the 10 day average for 30 days straight, and above the 50 day average for 92 days straight. What is remarkable are some statistical findings as pertain to the average's movement with respect to the SMAs. Sentiment Trader points out that while as part of the recent surge in the S&P, the market has gone for "92 days without closing below its 50-day average, which has been matched only 17 other times since 1928." Where it gets scary, is that as pointed out, during this time market has not closed below the 10 DMA once during the past 30 days. And as Sentiment Trader notes, "this has never happened before, in 82 years of history." Congratulations to the Centrally Planned Socialist States of America: its Chairman has just made the Guinness Book of Manipulation Records.

The CFTC webcast on position limits and how to best preserve the status quo in precious metal market manipulation is starting. Readers can watch it at the following link.

Gold and silver have fallen by less than 1% in all major currencies today. Asian equities were mixed with strong selling seen in India and European equities and US index futures are tentatively higher. Eurozone periphery bonds yields have fallen as have those in Germany (10 year) after rising above 3% in recent days.

Just out from Goldman's FX group: another "tactical" top tick call extraordinaire: "From an FX point of view we would go long EUR/$ at current levels of 1.3180 for an initial target of 1.37 with a 1-day stop on a close below 1.2850." Of course, that Goldman had a "strategic" 1.55 EURUSD target as the pair plunged by 1,500 pips is irrelevant. Time to take the other side of the trade (i.e., the same as Goldman's 50% margin prop desk).

Those looking for vol in stocks really should shut down their E-Trade account and get some forex terminal. As we have been stating for well over 6 months now, with the Fed artificially ramping stocks, and making stock vol extinct, daytraders continue to be forced to find other avenues to day trade volatility. And the FX is just that market. The EURUSD has just done its daily 200 pip song and dance, putting yet another several hundred Japanese housewives using 50x leverage underwater by 10 times their capital amount. But at least China is happy. Oh and yes, with $4 trillion in FX turnover per day in 2010, this kind of mindblowing volatility is sure to end well.

So much for that amazing beat in the last 2010 number in initial claims, which is now proven to have been purely a figment of the BLS' imagination and a whole load of guesstimations. Today's initial claims number throws cold water to all those who expected the trend in claims to be improving. At 445K, this was a huge miss to expectations of 410K, and a major deterioration from last week's (upwardly revised of course) 410K (was 409K before). Elsewhere, continuing claims came at 3,879K on expectations of 4,088K (with the previous naturally revised higher as well from 4,103K to 4,127K). And the kicker: in NSA terms initial claims were a mammoth 770,413, a 191,686 increase in just one week, and the highest NSA number in one year! The result: the spread between SA (3.1%) and NSA (3.8%) unemployment rate jumps to year highs. Of course, the BLS blames the huge disappointment on "paperwork delays", yet blamed nobody for the amazing beats in the end of 2010 which brought the market to a complete frenzy.

• Prices Soar on Crop Woes (WSJ)
• S&P, Moody’s Warn on US Credit Rating (WSJ)
• How Oil Affects the Price of Peas in China (FT)
• The banks' ongoing accounting gimmick: JPMorgan Reserve `Bleeds' Distort Record 2010 Earnings (Bloomberg)
• Geithner Urges New Start for U.S.-China Relations (NYT)
• Swiss Franc Slumps After SNB Says Currency Threatens Growth (Bloomberg)
• U.S. Foreclosure Filings May Jump 20% This Year as Crisis Peaks (Bloomberg)... or not
• South Korea raised rates unexpectedly from 2.5% to 2.75% (BBC)
• World Bank Shocker: China To Drive Asian Growth (AP)
• Brisbane Wakes to Devastation, Death as Flood Peaks (Bloomberg)