Archive - Feb 10, 2011

What, exactly, would cause a highly paid executive to abruptly quit his job? The executive in question is Howard Atkins, former CFO of Wells Fargo (NYSE: WFC). In 2009, Mr. Atkins' total compensation was $11.6 million. That was up from $4.9 million in 2009 and $5.7 million 2007 – that’s not bad living by any standard. The folks over at The Street.com say it was for “personal” reasons. I will let them speculate on what those reasons may or may not be. I would rather take a look at some numbers. As I suggested in an earlier post, the Wells Fargo numbers look suspect when compared to its universal banking peers.

Earlier today we speculated that due to central planning goldilocks breaking down, and the corresponding downtick in the EURUSD, the minions of the ECB's royal palace in Frankfurt will be scrambling to pretend things are under control, and gobbling up Portuguese bonds. Sure enough, this has been confirmed. But even we had no clue to what degree the spin to "explain" the situtation would reach. According to the FT, the ECB was "forced" to buy Portugal bonds. FORCED. Because unless the ECB did what was expected of it (see global moral hazard), the convergence trade between reality and central planning may have finally generated record daily P&L. Luckily for all those who still have their heads shoved deep in the sand, the bank that Weber prudently told to go and do some anatomically impossible things to itself, was FORCED to bail out Portugal from the rough sea of reality yet again. Also, after an untarnished two week record of non-monetization, widely publicized by the ECB's favorite news rag, the ECB's SMP will once again be burdened with exposing that the beautiful dream of prancing European unicorns, purple skittles and rainbows is once again coming to an abrupt end.

While nothing new to Zero Hedge readers, the realization that everyone's purchasing power is about to be yanked from underneath them has gone mainstream. Omaha.com has just come out with a headline that leaves little to the imagination: "Get ready for higher food prices." The issue is that no matter how Chairsatan Rudolf Vissarionovich von Bernankestein spins this to whatever congressional minions he is supposed to be lying to at any given moment, the undisputed truth is that consumers have just gotten that much poorer, as prices of staples surge, and as a result capital available for discretionary trinkets plunges (here's looking at you Guitar Hero which has just been discontinued due to lack of interest... Coming to an Apple store near you in 3-5 years). Because no matter what economic voodoo Bernanke, concocts there is little he can do to change the laws of mathematics. So for those who wish to stock up on staples in advance of a price surge (thereby bringing the price jump forward), and still haven't done so, here is the "mainstream" explanation for why now is a very good time to start doing so.

With many once again believing that a rate hike is just around the corner (as has been the case for the past 2 years... the same with expectations that NFPs will finally push higher any month now), here is a reminder of what happened the last time there was a concerted effort by the Fed to contract liquidity. And this is just hiking rates. Never before has the US stock market had to ween itself off $125 billion in QE-related monthly liquidity. All in all, no matter how long Bernanke tries to delay the end of QE2, the outcome will become a self-fulfilling prophecy which will slam stocks, and by the Chairman's definition, the economy, making a QE3 episode inevitable (not to mention the $2 trillion in debt each year that has to be monetized). We are on the same side of the Peter Shiff bet who has given Steve Liesman 5 to 1 odds for $10,000 that QE3 is imminent. FX Concepts' John Taylor explains: "What happens if the Fed hikes rates? Even with a tiny hike, the good times are over...Although we think of the 1990's as great equity years, stocks were down almost everywhere and in some cases dramatically in the 6 to 9 months after the February surprise. The government bond market was a total shambles and portfolios suffered their worst year since Volker had taken control in 1979. Currencies went every which-way, but those that had a need for offshore capital were crushed as inflows quickly became outflows...With the sharp reversal in liquidity, 1994 burst a lot of hopeful balloons and was a terrible year for asset managers."

The wacky new game the whole market's been talking about...

Gold, and particularly silver, lease rates (see chart) have been rising recently. The rate is found by subtracting the silver forward offered rate from the London Interbank Offered Rate (LIBOR). This likely signals increasing tightness and illiquidity in the bullion markets (as recently said by Sprott Asset Management, and UBS yesterday). The rise in silver has been very sharp, having gone from 4.29 basis points (0.0429%) to 77.65 basis points (0.7765%) since the start of the year (31 December 2010). While the rise is very sharp, it is important to put it in context, and silver lease rates remain well below the levels reached after the Lehman Brothers systemic crisis in late 2008 when silver lease rates surged to 2.5%. At the same time, the very small silver bullion market is clearly under strain as seen in the continuing backwardation. This clearly shows that demand for physical is robust, evident from retail demand in the US where there were record US Mint silver eagle sales last month. There are delays (3 to 4 weeks) to get branded LBMA silver bars (100 oz) in volume.

So what is wrong with this picture: 457,000; 419,000 (upward revised of course from 415,000); 383,000. Those are the initial claims (Seasonally adjusted, as in adjusted for snow) over the past three weeks. Stock vol (which is now non-existent), has moved to BLS economic time
series... And yes, we had a sub 400k print in December, which was also
one of those "the economy is stronger, no doubt about it moments." Most notably, the data is for the week of February 5, when all of
America was covered in a blizzard. Odd how that is not mentioned. And someone is supposed to take this number seriously? Not the market, as stocks don't respond one bit. Oh yes, the weather. One thing is certain: no snow removal workers were fired in the past month, right BLS? In the meantime, NSA claims come at 438,548, a 26k drop from the prior week number. And the cliff keeps pushing out: those on EUC and extended benefits changed by +100K and -16K respectively. Continuing claims came at 3,888K on expectations of 3,900K, with the previous number naturally pushed up from 3925k to 3935k.

RealtyTrac's January foreclosure update shows that banks are once again starting to flex their muscles. Total foreclosure events (defined by the firm as default notices, scheduled auctions and bank repossessions or REOs) came at 261,333, a decline of 17% from a year earlier, but a 1% increase from December (one in every 497 houses received a foreclosure notice). “We’ve now seen three straight months with fewer than 300,000 properties receiving foreclosure filings, following 20 straight months where the total exceeded 300,000,” said James J. Saccacio, chief executive officer of RealtyTrac. “We’ve now seen three straight months with fewer than 300,000 properties receiving foreclosure filings, following 20 straight months where the total exceeded 300,000,” said James J. Saccacio, chief executive officer of RealtyTrac. “Unfortunately this is less a sign of a robust housing recovery and more a sign that lenders have become bogged down in reviewing procedures, resubmitting paperwork and formulating legal arguments related to accusations of improper foreclosure processing.” What is interesting is the growing distinction between judicial and non-judicial state REO activity. Readers will recall that Bank of America (partially) stopped foreclosure activity in non-judicial states in January. "Lenders foreclosed on 78,133 U.S. properties in January, up 12 percent from the previous month but still down 11 percent from January 2010. Bank repossessions (REO) in non-judicial foreclosure states increased 23 percent from December but were still down 9 percent from January 2010, while bank repossessions in judicial foreclosure states decreased 7 percent from the previous month and were down 16 percent from January 2010." In other words, look for non-judicial activity to drop off even more.

Markets down for a second day this morning. Look forward to the release of initial jobless claims this morning which may provide some additional insight into last week’s unemployment numbers. NYSE shares rallied yesterday off of Deutsche Boerse AG’s announcement of its negotiations to buy the exchange, which would make it the country’s largest market for derivatives. While speaking in front of the House Budget Committee yesterday, Fed Chairman Ben Bernanke reminded Congress that the Fed is not solely responsible for the U.S.’s overwhelming deficit. He defended QE2 but hinted that there is a limit to its effectiveness. The chairman acknowledged that fiscal adjustments "occur at some point." On a related note, today will see the release of the U.S.’s monthly budget deficit.

• Mervyn King (the UK's Chairsatan) Faces Ticking Clock on Interest-Rate Increase as U.K. Inflation Soars (Bloomberg)
• Bernanke (our own Chairsatan) Warns Against Steep Budget Cuts (Reuters)
• Bernanke Makes Sure Fed Reminds Congress Deficit Bigger Than QE2 (Bloomberg)
• China Developers Move Beyond Shanghai, Beijing, Defy Curbs (Bloomberg)
• Was Weber Sacrificed for the Euro? (WSJ)
• Wall Street Justice Means Nobody Gets Pinched: Jonathan Weil (Bloomberg)
• Weber's Withdrawal Opens Up ECB Race as Debt Crisis Persists (Bloomberg)
• Credit Suisse Cuts Profitability Goal as Net Misses Estimates (Bloomberg)
• Now that Ron Paul actually has some power over the Fed, what is he going to do with it? (Slate)
• Asia Moves Up a Gear in Fighting Inflation (Reuters)
• Egyptian Party Pulls Out of Talks After Threat of Army Role (Bloomberg)

Risk is off with a vengeance. After Asian markets (ex-Japan) experienced a total rout, which also included Hong Kong, the emerging market money is now in full withdrawal. And if it is going in the US (ex. a rotation out of munis into equities, something which Meredith Whitney should be congratulated for), you could have fooled us: futures are decidedly negative on the back of last night's horrible Cisco numbers. The cherry on top is a rumor reported by Islam Times that Saudi King Abdullah has passed away: "King Abdullah talked with Obama about the situation in Egypt over the
phone yesterday. Obama and the King got into a  heated debate about
their opinions of what Hosni Mubarak should do. After the phone call
sources stated that King Abdullah was furious and then suffered a sudden
heart attack. Doctors ran to his rescue  but were unable to
save him.  He was pronounced  dead, but his death was  not reported
due to the  sensitive conditions that  exist in  the region. The Saudi
Arabian government will reject this claim; but the ball is in their
court to prove that he is alive." Obviously this is not helping the brent bid, which hit nearly $103 overnight (although the rumor has yet to be confirmed). Lastly, all this of course means that glass house, i.e., European peripheral bonds are plunging, and the result is that the ECB has to come in and after two weeks of inactivity is forced to manipulate the bond market by buying directly. So much for that European sense of calm, which we said last night was going to be blown away very shortly (here and here).

Claims, inventories, the federal budget balance, and the Fed’s balance sheet…No POMO today, but we do get a new POMO schedule at 2 PM.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.

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