Archive - Jan 2011

Like 2008, the attempts by the Fed and the Government to prop up the economy are doing nothing at all to fix the problem, merely shoving the problems under the rug for another few months until we have that final day of reckoning.

So we have a lawless system. What does this mean for citizens and investors? In the near term it means that the fundamentals will not apply. Anything that maintains or augments elite wealth and increases elite options will be supported, and anything that consumes or converts common people’s wealth and labor and restricts their choices will be pursued. Anything that reinforces accountability, rational response, or cause and effect will be actively suppressed. Forget reversion to the mean. One only has to observe where the respective value/wealth of each party resides and where it gets channeled to know what the market will do and where policy will go. When the stock market should crash, it won’t… until some time frame far longer than even the most generous fundamentals would dictate.

For anyone following the recent collapse in mortgage applications, the recent "strength" in new and existing home sales is nothing but the latest joke to spin the nth bounce from the bottom as the "this is it" moment which Cramer has been trying to do with disastrous results ever since the summer of 2009. Oddly, reading a recent surprisingly bearish Goldman economic outlook (or not so surprising: it lays out the framework for Goldman to start advocating MBS purchases as part of QE3) piece from Sven Jari Stehn confirms our concerns that any attempt at shining light behind the headlines exposes ever more cockroaches. In "Mortgage Applications Point to Near-Term Home Sales Weakness" Stehn highlights the same issues we have been pounding on the table for months: namely that near contemporaneous plunge in mortgage applications is far more troubling and should be given far more impact than new, pending and existing home sales in any one prior period. Goldman summarizes: "The number of mortgage applications, however, has declined sharply in recent weeks. Specifically, the volume of mortgage applications for purchase—reported in a timely fashion every week by the Mortgage Bankers Association—declined by a cumulative 14% during the last three weeks. Does the decline in mortgage applications suggest that home sales are set to decline again in coming months?" In short the answer is yes, and the full note below explains it. Additionally, we have provided some technical perspectives from Peak Theories which predict a 7% drop based on recent chart patterns. Needless to say, we believe the drop will be far greater when all is said and done, now that the Bernank has given up on attempting to keep mortgage rates low and only cares about boosting stock prices.

For those who have long been hoping to see AIG's Joe Cassano, the man who more than anyone let AIG become the risk behemoth it was when it blew up, end in jail, whether it was for massive fraud, or any other violation of justice, may be one step closer to the vindicaation. A discovery by David Fiderer today discloses that the former head of AIG's Financial Products group may have just purjured himself when previously, under oath, he said that AIG never took less than super senior tranches of CDOs it insured. It turns out that the firm was quite often double dipping lower in the risk stack and gobbling subordinate tranches alongside all the now insolvent European and Japanese banks, better known as "investors" in the Goldman rolodex of biggest morons in the world.

And as Africa is burning, Europe is getting ever more insolvent. But don't let the charts posted earlier showing both Portugal and Spain spreads back at all time highs fool you: Europe is on top of it again. The latest development is the formerly taboo topic of extending bailout loans to Greece and Ireland to 30 years from the current 3. Obviously, this merely confirms just how ugly the demand picture for European sovereign debt must be if the block is considering essentially extended bail out guarantees in perpetuity. From Reuters: "The idea surfaced in intensive talks among euro zone ministers, central bankers and officials on the sidelines of the World Economic Forum in Davos this week, the sources said." Well, that half a million in (taxpayer funded) participation fees for the G-Paps sure is paying off.

Shockingly, the "pundits" have suddenly realized that courtesy of the upheaval in Suez, the canal with the same name may be closed, which would wreak havoc on shipping costs. Once again, Zero Hedge was just ahead of the curve: "Egyptian Stock Market Plunges Over 11% To Fresh Multi-Year Lows; Is A Suez Canal Transit Halt Imminent?" The just announced countrywide curfew will not make Suez Canal operability any easier. For those who are concerned about what a Suez closure means, we recreate what we wrote previously on the topic. And just in from Reuters, Energy Secretary Steven Chu has declined to say if he is worried Egypt protests may disrupt Mid-East oil, but believes that serious disruptions will have oil prices. By harm he means make them surge higher.

On Monday we posted an article, highlighting Morgan Stanley's observations that we may be on the verge of an August 2007-like quant wipeout. Considering what is happening today, it may have proven eerily prescient. Below, we repost the full thing as some may not have taken it seriously the first time around.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 28/01/11

Gold is the only asset that takes the escalator down and the express elevator up. Incidentally, the 3% surge in WTI was predicted by Zero Hedge yesterday on what is completely common-sensical assumptions. What kind of idiots are running this market if someone is surprised by what is happening today?

As we've been noting over the past several weeks this rally bore a striking resemblance to the Feb-April 2010 rally and as we've been predicting we believed it would top out and end in the exact same fashion.

Yeah, we went there. Time for the SEC to institute a market wide circuit breaker before Waddell And Reed does what they tend to do every time a revolution is televized. In other news, can we get a bid on all the Dow 36,000 hats we took delivery of yesterday?

Goldman FX's latest flip flop comes two days after the firm raised its target on the EURUSD pair. "We raised our target and stop recently in expectations of further potential upside. However, over the last few days a lack of additional catalysts has keept EUR/$ largely range bound and the risk reward more symmetric compared to when we initiated our recommendation. As a result we have decided to lock in the gains and look for better opportunities to express our constructive view on the Eurozone." Translation: we are all Cramer now. If Green, we upgrade it. If Red, GTFO. Now pay us our soft dollars.

Update from Egypt: The Al Jazeera broadcast live from Egypt is about to be shut down as the police are literally knocking on their office door in Cairo.

Watch it go down live here.

Over the past several weeks there had been rumors that the reason for the precipitous drop in gold was primarily driven by a hedge fund liquidating its futures positions. This has now been confirmed: "Yeah, that was just me liquidating my spread position," Mr. Daniel Shak, [of SHK Asset Management] 51 years old, said in an interview. "I had a significant, fully margined position. The dollar amount of the gold liquidation was very small, it was just a lot of contracts." Of course in the extremely jittery gold market, the kind of persistent marginal gross selling of contracts was all that was needed to spook weak hands into a consistent dump of the precious metal, which as we pointed out was beyond overdone. Judging by this morning's jump in the PM complex, SHK's liquidation is now not only over but about to promptly reverse as daytrading momos realize they were duped by one single guy. Look for gold to resume its upward advance as investors realize that the gold dump was nothing more than an ongoing futures position liquidation.