Archive - Jan 2011

Blowing smoke. Again.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 10/01/11

Back in 2007 and 2008 every single dry shipping company had put in future delivery orders for everything from Panamax to Capesize vessels, at even the most shoddy of Chinese shipyards. Now, a few years later, as these orders are starting to be completed, the world's dry bulk shipping industry is suddenly experiencing an unprecedented supply glut of coal/ore carriers, which has resulted in the Baltic Dry index droppoing below 1,500 for the first time since 2009. And as Bloomberg reports, with at least 200 capesize ships, stretching at 35 miles end to end, expected to be completed by the world's shipyards, which represents an 18% expansion in the world's shipping fleet, the excess supply will once glut the modest demand rise which is expected to come at just 7%. The winners: raw material companies which have massive pricing power in an environment in which shipping costs are plunging, as well as the shipping companies which have managed to lock in charter contracts at historic rates. The biggest loser: dry bulk shippers operating at spot, and which have large, debt-funded balance sheets.There the pain will be substantial.

And now for today's stunning mutual fund first of the month-day statistic: David Rosenberg notes that "134 points of the 143 points that were racked up in 2010 occurred in the first trading day of each month. That is truly remarkable ? 94% of the entire year boiled down to 12 sessions. And what do you know? 2011 started with a 1.1% pop and has sputtered since." Has trading for humans only been relegated to just 12 times a year when mutual funds invest their previously month's capital allocation in the stock market? Statistically, the trade is to go long at closing on the last trading session of any given month, hold long through next day's closing, and short the remainder of the month.

Our recent reports by third parties on alleged Chinese fraud companies, even if conflicted, appear to have hit the nail on the proverbial head. And after all, how different is it to have anyone present a position paper with a bearish bias, compared to what managers such as Ackman, Einhorn and Tilson do on a periodic basis when they talk their book, online or on financial TV channels? At the end of the day, it is the market that decides if the investment thesis of any bullish or bearish report is viable, and if not it merely provides a better, and lower cost entry point (long or short) for those who end up being proven correct about a given company. That said, RINO is now trading on the pink sheets, while our most recent disclosure on China Green Agiculture has pushed the stock down 20% in a few days. But who says frauds are only foreign in origin. Our latest report, courtesy of Dalrymple Finance (and yes, we were correct that a plethora of micro-funds focused on ferreting out alleged frauds would soon appear), focuses on a company that has nothing at all with China, and a lot to do with Bermuda, and the US hedge fund industry. Presenting Gerova Financial Group (NYSE:GFC), which per the authors is a "NYSE-listed shellgame, in our opinion."

Remember when the Chicago PMI came at 68.6 ten short days ago, trouncing expectations of 62.5, and the highest since July 1988? Well, post-revision reality is slowly coming back to roost: the number was just revised down to 66.8. Presumably there will be no more revisions, however since these numbers now come straight from the Department of Imaginary Numbers, we wouldn't hold our breath.

Some unpleasant news for pensioned workers who believe that their insolvent state will be able to afford ridiculous legacy pensions in perpetuity. According to Pensions and Investment magazines, Newt Gingrich is pushing for legislation that will allow insolvent states to be taken off bailout support and file bankruptcy, in the process allowing them to renege on pension and other benefit obligations promises to state workers. And if there is anything that will get government workers' blood pressure to critical levels, it is the threat that money they had taken for granted is about to be lifted, courtesy of living in an insolvent state (pretty much all of them). And obviously what this means for equity investors in assorted muni investments is that a complete wipe out is becoming a possibility, as Meredith Whitney's prediction, which everyone was quick to mock and ridicule, is about to come back with a vengeance.

For all who need another confirmation that the silver physical market is increasingly more illiquid, at least compared to its infinitely dilutable and utterly mangled paper cousin, here is PSLV manager Eric Sprott himself: "Frankly, we are concerned about the illiquidity in the physical silver market," said Eric Sprott, Chief Investment Officer of Sprott Asset Management. "We believe the delays involved in the delivery of physical silver to the Trust highlight the disconnect that exists between the paper and physical markets for silver." Curiously, this has occurred even as the US Mint reports that sales of silver in December was the lowest in 2010, at just 1,772,000 ounces. It is unclear if this number was this low due to an actual supply shortage at the mint. Perhaps the fact that 2,221,000 silver ounces were sold in just the first week of January, a number which if run-rated would be an absolutely all time monthly record, should provide some clarity on this issue.

Ever since Repo 105 (and long before that), it has been well-known that Primary Dealers enjoy padding their books before the end of every quarter, typically collapsing their asset holdings in the week just before the quarter end in order to have cash on the books, and to make their capitalization ratios appear better than they really are. Well, the "book padding" that just occurred in Q4 2010 was a doozy, with total PD asset holdings plunging by a stunning $126 billion in the past month, the bulk of which was due to a drop in PD holdings of Treasurys. Was this huge selling by the Primary Dealer community, either for window dressing reasons, or due to expectations of future increases in Treasury yields, one of the main reasons for the drop in bond prices? It is unclear, but the massive selling certainly has not helped. And now that window dressing is again over for at least three more months, PD holdings can only go up (or so the myth goes). So with PDs now back with fresh books for 2011, and once again lifting offers, is the sell off in bonds about to be replaced with a major buying spree?

What would Nenner do with new money he received today? What are the cleanest trades out there? It’s very simple. He would sell the next two point rally in bonds through buying the (TBT). He would buy any dips in the grains, crude and the dollar against the Euro. He would sell any breakdown in the Australian dollar. Finally, he would be laying on big shorts in the Japanese yen right now. En exclusive interview with The Mad Hedge Fund Trader on Hedge Fund Radio.

• ECB buying every sovereign bond it can find. Seriously
• Obama Eyeing Internet ID for Americans (CBS)
• US Banks Face Fresh Stress Tests (FT)
• SNB Clarifies Stance On Portuguese Bonds (WSJ)
• Demanding the Mark Back: Opposition to the Euro Grows in Germany (Spiegel, h/t Mark Mansfield)
• Evans-Pritchard: Deepening crisis traps America's have-nots (Telegraph)
• Trade War Looming, Warns Brazil (FT)
• Yellen Speech May Offer `Proxy' for Planned Unwinding of Fed QE (Bloomberg)
• Paul Krugman Channels Jimmy Carter, and The Club of Rome (Forbes)
• Portugal under pressure to seek EU/IMF aid (Reuters)
• China City Set to Tax Residential Real Estate (WSJ)
• "Illusory Prosperity" - Ludwig von Mises on Monetary Policy (Hussman)
• Queensland Floods Within Insurers' Capacity Deluge Worsens (Bloomberg)

It seems at least one person read Buiter's 84-page "Europe is pretty much doomed" (our titling) magnum opus over the weekend. Irish CDS tells the whole story.

Markets finally digest weak jobs data out of US, but it is Europe that has everyone's attention. Asia weakness compounding to problems.

David Rosenberg appeared in the Globe and Mail's Market View segment with a bite-sized, 2 minute segment explaining why he is bullish on the USD (not a big fan of the EUR, and with good reason), and why he continues to be bullish on bonds (although admits that at 2.3% the 10 Year was expensive). A great bullet-point presentation for new to Rosenberg (later today, we will present Jim Caron's latest attempt at redemption, explaining why he sees bond fund flows as indicative of a selloff in bonds. He better get the direction right this year.)

Is it about to be deja vu all over again? The FT reports that "oil markets were braced on Monday for the impact of the loss of up to 15 per cent of US crude after a pipeline leak forced BP, the UK-based oil company, to shut down 95 per cent of production from North America’s biggest field...The leak is in the Trans-Alaska Pipeline System, which carries 14-15 per cent of US crude oil production 800 miles to Valdez, where it is shipped out in tankers. It is the only line carrying oil to market from Prudhoe Bay." And yes: BP will be blamed again: "Prudhoe Bay is jointly owned by BP, with 26 per cent; ConocoPhillips, with 36 per cent; ExxonMobil, with 36 per cent; and others with 2 per cent. BP is the operator of the field." And just as the authorities had managed to put a temporary lid on oil prices: "The cause of the leak is being investigated by state and federal regulators, as well as the company itself, but if it is not fixed within a few days, the incident could put upward pressure on oil prices once more." Time to go through the list of all BP CDS counterparties all over again?