Archive - Feb 14, 2011

We will spare you drinking (or reading as the case may be) the latest Koolaid from the White House. The only thing one needs to know about Obama's latest budget is that projected revenues are expected to grow from $2.2 trillion in 2011 to $3 trillion in 2013 (and $3.6 trillion in 2015). We wonder just where the tax increases will come from considering the new "compromising" administration has pretty much given up on the option of tax increases in order to get republican complicity to extend national looting and pillaging until the end of Obama's last term. What is unclear is whether the Treasury counts as revenues the interest payments remitted back to Geithner by the Fed on the trillions in monetized debt. In other words, the more debt monetized, the stronger the "revenues!"

The latest S&P 500 insider buys/sells report is out, and it is more of the same. Looking at the 8 inside purchases for a total of $21.4 million one may say that the buying interest was not too shabby. That is until one realizes that there was one purchase for $20.2 million by News Corp insider skewing the entire distribution. Where the fun was, however, is as usual on the selling side, where insiders dumped the biggest amount of shares so far in 2011, selling over $1.3 billion worth of stock (a 61.4x insider buying to selling ratio), which was nearly double last week's $749 million. The biggest selling: MSFT ($417 million), Nasdaq ($268 million), and, surprise, Juniper at ($65 million) and AutoNation ($30.5 million). In other words, with each artificial uptick in the market, we see a new YTD record pick up in selling. With that in mind, remember that the S&P will hit a fresh all time high before the end of June. Cause Bernanke said so.

When scientists get further along with epigenetics, they may discover the Chinese have two unique DNA: a gambling gene, and another for hospitality. The first, of course, explains why Macau is odds-on favorite for replacing Vegas as No. 1 world gambling champion. The second suggests why few escape the lure of a Chinese campaign to win visitors’ hearts and minds.

As more and more contracts roll to an April OTR, the entire commodities curve is going parabolic.

And so, the departures will continue (following Warsh and Weber) until all dissent is eliminated. More if we get it, but it really doesn't matter. The greatest unsupervised ponzi wealth transfer has just been greenlighted.

The Fed is boxed in: by expectations of continued massive intervention and by political pressure to cease or curtail these very same interventions. Ironically, if the Fed flouts political pressure and ramps up its manipulations via a monumental QE3 program, that may well disrupt the markets as much as a policy of diminished intervention, for the markets would soon grasp that the Fed would be guaranteeing a political firestorm of resistance if the Fed's manipulations didn't spark a hiring/jobs boom by the 2012 election season.
And we all know the Fed's QE3 will not spark a hiring boom, for the Fed's policies are designed to serve one goal: preserve and enrich the financial sector's Elites. Now that they're safely in the lifeboats, the failure of the Fed's policies to "trickle down" to the steerage passengers is increasingly evident.

The recently released Presentation to the Treasury Borrowing Advisory Committee (consisting of a 13-member committee of bond dealers and investors that meet quarterly with Treasury officials), which somehow managed to slip by under the radar, is a must read for anyone curious about the funding ability of the US government. A closer examination (and it is chock-full of must read observations) reveals far more conclusively than whatever today's budget myth may reveal, the US is truly in a dead-end situation, and that there is no way the Fed can now possibly step away from indefinite future debt monetization. And the stunner that nobody has yet mentioned: the US is actually considering GDP-linked bonds: the last recourse of a country about to go bankrupt.

China, as an investment, is important for three reasons. They are:

1) The Chinese economy is believed to be leading the world into recovery
2) The Chinese stock market has lead the S&P 500 for years
3) The Chinese/ US monetary relationship

I’ve covered #’s 1 & 3 several times before and I’ll providing an update of my analysis in tomorrow’s edition of Gains Pains & Capital. So today we’re focusing on #2.

"To sum up, although the national economy experienced a pick-up in activity during the last quarter of 2010, the region saw a pause. The loss of momentum locally is disappointing because until the fourth quarter, much of the region was recovering somewhat faster than the nation. However, I would not be overly discouraged by this. After all, soft patches are not uncommon during economic recoveries. Both nationally and regionally, unemployment remains stubbornly high, but many indicators suggest that conditions are in place for stronger growth in the coming months. With respect to debt, households in most parts of the region are in better shape than the nation as a whole. They increased their debt burdens less during the boom and thus have had less need to deleverage. In addition, there are emerging signs both nationally and regionally that consumers have begun to spend more and appear willing to take on some new debt. This bodes well for another step forward in terms of economic momentum in the nation and the region. However, high delinquencies in New York City and Long Island are a reminder that many households remain under significant stress." - Bill Dudley

Following Algeria over the weekend, the latest country to see an escalation in rioting following the revolutions of Tunisia and Egypt, is the tiny island of Bahrain, situated just off the coast of Saudi Arabia, which just happens to be home to the US Navy's 5th fleet. From the Washington Post: "Bahrain's security forces fired tear gas and rubber bullets Monday at thousands of anti-government protesters heeding calls to unite in a major rally and bring the Arab reform wave to the Gulf for the first time." We are currently searching to bring readers a live feed, but don't hold your breath. As noted above, this country is situated just off Saudi, and the last thing the oil exporting country needs to show is how volatile the region has suddenly become despite attempts by various emirates in the region to purchase the loyalty of their citizens.

The power elite that believe they can control the masses as puppet master commands a puppet should beware. The wrath of the masses can be fierce and sudden. Ask Hosni Mubarak. As Steinbeck realized many decades ago, selfishness run amok, supported and encouraged by the authorities lead to poverty, despair and sometimes revolution. The false mantra of an economy based on self-interest and free markets is a smokescreen blown by the few with wealth and power to obscure the truth that they have used their wealth and power to rig the game in their favor. The have-nots can dream about becoming a have, but the chances of achieving that dream today are miniscule. Steinbeck pointedly distinguishes between the selfishness of the moneyed class and the altruism of the working poor. In contrast to and in conflict with this policy of selfishness stands the migrants’ behavior toward one another. Aware that their livelihood and survival depend upon their devotion to the collective good, the migrants unite—sharing their dreams as well as their burdens—in order to survive. Those in control need to keep the masses divided. They need Americans to be distracted by phantom terrorist threats, inconsequential political differences, American Idol, Charlie Sheen, Lindsey Lohan and Lady Gaga. They need Americans to be focused on “I”. Their greatest fear is that the American people realize that “We” can change the direction of this country and bring the perpetrators of crimes against the people of this country to justice.

Did Larry Meyer (the one man Fed "expert network") lose Bill Gross as a client? Because looking at PIMCO's latest holdings shows a dramatic shift in strategy and leaves one wondering just what PIMCO is doing. After the firm had been buying MBS on margin like it was going out of style, peaking in June when the company's cash margin balances hit a local record of 15%, resulting in MBS holdings surging to 51% of the company's flagship Total Return Fund, ever since then it seems Gross' bet on MBS as benefiting from either massive putbacks to the banks, or QE3 being focused on mortgage backed securities has fizzled. Most notable in the January update is the huge change in Treasury holdings, which have plunged from 22% in December to 12% in January, a $24 billion drop. This is the lowest relative holding of government securities by PIMCO since January of 2009 when it was a 2% short exposure. The other result: cash has surged from a 7% short position to a 5% positive: the firm no longer is utilizing margin for the first time since August 2010. The other issue: the company's holdings of Muni securities continues to be a black eye, resulting in a continued decling in total TRF AUM: in January it hit the lowest since June 2010 of $238.5 billion (it peaked at $255.9 billion in October). Bill Gross can not be too happy about these various developments.

Markets are mixed this morning. Muni ETF rallied on Friday on news of the extension of the BABs program. The BABs program that expired in 2010, which originally permitted a 35% subsidy on state and local government-issued taxable munis, would now allow a 32% subsidy this year and 31% in 2012 under this new proposal. WSJ reported that due to Republican Party resistance, a more moderate 28% subsidy would create a political compromise. The Treasury department reported that interest expense is expected to rise to 3.1% of GDP in 2016, a threefold increase that is likely to raise borrowing costs.

• Budget Forecasts Bigger 2011 Deficit (WSJ)
• Geithner Tells Obama Debt Expense to Rise to Record (BusinessWeek)
• Hussman: Rich Valuations and Poor Market Returns (HussmanFunds)
• Amazon.com said it is closing Irving facility, will not hire 1,000 people in retaliation over sales tax issue (DallasNews)
• China in talks over Panama Canal rival (FT)
• Rising China Bests a Shrinking Japan (WSJ)
• In placing stock bets, listen to the shorts (Reuters)
• Rallies Draw Crowds against Berlusconi (FT)
• Roubini’s Next Crisis Is Scary Food for Thought (Bloomberg)
• Egypt Army Suspends Constitution, Meets Protester Demand (Bloomberg)

The gradual drain of COMEX silver inventories seen in recent months continues and COMEX silver inventories are at 4 year lows. Total dealer inventory is now 42.16 million ounces and total customer inventory is now at 60.68 million ounces, giving a combined total of 102.847 million ounces. The small size of the physical silver market is seen in the fact that at $30 per ounce, the COMEX silver inventories are only worth some $3 billion....Talk of a default on the COMEX is premature but the scale of current investment demand and industrial demand, especially from China, is such that it is important to monitor COMEX warehouse stocks. The possibility of an attempted cornering of the silver market through buying and taking delivery of physical bullion remains real and would likely lead to a massive short squeeze which could see silver surge as it did in the 1970s.