Archive - Feb 28, 2011

Wells Fargo filed its 2010 Form 10K late Friday. Extend and pretend is real - here are just 10 of the active ingredients (with a few musings from Mr. Buffett mixed in).

It appears we may have misspoken earlier when we suggested that today's peak-lunaticism will be that spouting from the mouth of one ex-Goldmanite Bill Dudley. Here is another current Goldmanite (whose recent GSAM P&L track record is in dire need of public dissemination), vying for today's prize. "If I look at the whole region together, then just at Africa in general,
MENA has the combined potential to be a BRIC-like economic group. In
this spirit, and despite all the horrible things happening in some of
these places, this revolution strikes me as being essentially rather
bullish." If it weren't for my horse...

Today's POMO closed with the Fed monetizing its usual fare of $6.69 billion in various 3 Year bonds, at a 5.81 Submitted-Accepted ratio. The surge in the S/A ratio is not surprising: a quick look at the internals shows just what the reason for the Primary Dealers' urgency was. Of the entire POMO, one CUSIP: the just auctioned off QH6 3 Year which was sold by the Treasury not even 2 weeks ago represented a whopping 81.1% of the operation. Observant readers will recall that this was the Cusip that was massively monetized ten days ago, when $5.3 billion of QH6 was purchased by the Fed. In other words, in under two weeks, the Primary Dealers have flipped over 50% of their original take down of the auction, or $19,890,840,000! In other words, had the Primary Dealers indicated their true interest in the bond, not accounting for expectations of an immediate flip back to the Fed, the auction would have been a failure. In this way, the Fed has now monetized 33.5% of the 3 Year that was sold to the unwitting public and foreign banks. Luckily, there is a 35% SOMA limit on Treasury holdings. Oh wait, that was scrapped as part of QE2.

Just perfectly anticipated headlines from Reuters for now.

US MILITARY SAYS REPOSITIONING FORCES IN AREA AROUND LIBYA TO BE ABLE TO PROVIDE FLEXIBILITY, OPTIONS

Whatever happened to stretching exercises? More as we see it. This week's US naval update on Wednesday afternoon should be interesting.

Everywhere one looks (assuming one is more than just a market momentum, block order frontrunning algorithm... or a Deutsche Bank "strategist" of course), one sees relentless evidence of collapsing margins. Most recently, this was the Philly Fed, whose Price Paid less Prices Received index spread came at the highest since 1979. Well, at least it wasn't a record the Koolaiders said. Alas, that rebuttal will not work for the Dallas Fed. The latest diffusion index, which came at 17.5, on expectations of 13.0, confirmed two very much expected things: i) economic "growth" continues to be predicated on inventory stockpiling, as has been the case for the past two years, which is nothing but a highly speculative bet that demand will eventually pick up (and we pray the Dallas Fed respondents use FIFO not LIFO accounting), and ii) margins are getting crushed. Recreating the Philly Fed Prices Paid less Prices Received index shows that the differential of 45.50 is now at all time wides. Notably, the last time the spread was at or above 45 was in early 2008 following which everything went to hell. Expect to see many more diffusion indices confirm the relentless erosion in corporate margins, which in turn will result in either accelerating end-user inflation (unlikely), or imminent margin and EPS downside guidance, which even a reluctant Wall Street will have no choice but to take into account over the next several weeks.

It was fun and games so far, with the occasional 10,000 deaths here and there. Now comes the hunger. Reuters quotes a Libyan public health volunteer who says "Rebel-held eastern Libya will start to experience serious food and medical shortages within three weeks. The unrest is disrupting imports, the local supply of fresh food and domestic manufacturing, people in Libya's second city of Benghazi say, with many shops and factories there still closed since the city fell to protesters a week ago. "We will have serious shortages of food, drink, medicine and medical equipment in two weeks, three weeks maximum. We need outside help," said Khalifa el-Faituri, a volunteer with qualifications in public health and pharmacology." So what was merely your 2011 garden variety revolution is about to get really ugly. Somehow we doubt the Libyans will be happy to find that in the past month or so most food prices have increased by 25% or so. The question is who they riot against next?

As the dollar is getting its daily dose of poleaxing, the natural currency substitutes do their usual thing.

Now it's getting plain silly: the Chicago PMI expanded for the 17th consecutive month, grateful for the US policy of total and utter dollar annihilation, printing at 71.2, higher than expectations of 67.5 and the prior print of 68.8. This is the highest since July 1988. And confirming just how credible the data is, the New Order index came at the highest level since 1983. No surprise that inventories surged from 54.5 to 60.2: gotta keep the myth alive. And while priced paid remained near cycle highs, the employment index, in as much anyone cares, dropped from 64.1 to 59.8. But the funniest thing in the PMI was the following response from a survey panel member (all of whom are lamenting the surge in prices): "Seeing turn around in a few areas TOO MANY FRICKEN SPECULATORS in market causing higher price plus weaker dollar and China. Other then that well go figure." Somehow we fail to see how this response mashes with the broader optimistic response.

The Truth! The Truth! YOU CAN'T HANDLE THE TRUTH!!!

Oh, I just love that scene. Doesn't Jack Nicholson deliver?

Former Goldman managing director, and current uberhead of the Fed Ponzi extend and pretend efforts, Bill Dudley, gets the prize for today's moment of lunatic brilliance. Some choice quotes from a speech delivered to the NYU Stern Busines School:

• Fed is not an exporter of inflation and not to blame for inflation in emerging markets
• It would be unwise for the Fed to overreact to recent commodity price pressures
• Current Fed policy is in the interest of the world's economy
• Rates likely to stay low for extended period
• Several areas of vulnerability for US economy, and sees need to be ever watchful for any price bubbles

So much for that "normalization" in European liquidity. After on Friday we noted that borrowings under the Marginal Lending Facility dropped by a whopping €12.7 billion to €2.2 billion, the latest ECB update shows that MLF borrowings have once again surged to a new post launch record of €17.1 billion. And while the original surge was first explained by a "fat finger" and later by the need of failing Irish banks to pledge collateral at a punitive 1.75% rate in exchange for overnight access, this time around the same explanation will be more difficult to fly considering that Anglo Irish and INBS were said to have achieved some degree of normalization over the past week. Today's action puts the whole "blame Ireland" explanation in question, and asks who else is in dire need of liquidity. We can't wait to hear what the ECB floats as justification.

Entering 2011 as the currency that everyone loved to hate, the Euro has staged a dramatic comeback, much to the chagrin of hedge fund managers and traders alike. Since January, the troubled currency has rallied ten cents from $1.28 to $1.38. Is this the beginning of something big? Or has it shot its wad and headed for a spill?

According to the BEA, personal income in January jumped by 1%, on expectations of 0.4%, while Expenditures increased a modest 0.2%, below expectations of 0.4%. The reason - government largesse finally hitting the consumer bottom line: "the January change in disposable personal income (DPI) was affected by two large special factors. Reduced employee contributions for government social insurance, which reflected provisions of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, boosted personal income in January by reducing the employee social security contribution rates (employee contributions for government social insurance are a subtraction in the calculation of personal income).  The January change in DPI was affected by the expiration of the Making Work Pay provisions of the American Recovery and Reinvestment Act of 2009, which boosted personal current taxes and reduced DPI (personal current taxes are a subtraction in the calculation of DPI).  Excluding these two special factors, which are discussed more fully below, DPI increased $11.4 billion, or 0.1 percent, in January, following an increase of $48.5 billion, or 0.4 percent, in December." As a result of this contraction in spending and boost in government largesse, the Savings Rate jumped to 6 month high of 5.8%: the highest since August 2010.

• Madoff to NY magazine: Government a Ponzi scheme (WSJ) - Full NYMag interview here
• U.S. cables detail Saudi royal welfare program (Reuters)
• Saudi activists eye protests, wait for new cabinet (Reuters)
• Congress Inches Back From Budget Shutdown Abyss (Reuters)
• Beijing to Slow Growth (WSJ)
• Will 'Chindia' rule the world in 2050, or America after all? (Telegraph)
• Governors Scramble to Rein In Medicaid (WSJ)
• Irish poll winner eyes bail-out ‘manoeuvre’ (FT)
• Organized Labor: On the Way to Obsolescence? (RCM)
• Cash and Credit - Implications for the Financial Markets (Hussman Funds)

The paper-driven sell off in the gold market seen in January has been trumped by continuing robust physical demand in January and February. This has resulted in gold rising nearly 6% in February and silver’s strong industrial and investment demand leading to a 19% rise to new nominal 30-year highs. Political, and more importantly socioeconomic, revolutions in the Middle East and North Africa are leading to a degree of geopolitical instability and risk not seen in many years. This is leading to concerns about oil supplies from the region and hence the 14% jump in US crude oil just last week and deepening inflation concerns. With all eyes on the Middle East and North Africa, there has been less focus on the continuing European sovereign debt crisis. However, the crisis continues and recent days and weeks have seen government bonds in Greece and Ireland again come under pressure. The majority of Irish people are seeking that the massive debts of the Irish and European banking systems, incurred against them, be restructured or defaulted. Therefore, the new government will be under pressure to negotiate a fairer, more equitable settlement with the European Commission and the ECB with possible ramifications for the many European banks who lent irresponsibly to Irish banks...Mooted proposals by the Vietnamese Central Bank to ban “gold bullion trading” (see news below) are somewhat bizarre. If true this would be a very important development as the Vietnamese are some of the largest buyers of gold bullion in the world.