Archive - Feb 8, 2011

Following a strong break out this morning, gold continues its push higher and is now just $8 away from the critical 50 DMA of $1374, which had served as a major support level up until a recent round of margin collateral requirements and the CFTC's grandfathering clause spooked the weak hands in gold in mid-January. Should the 50 DMA be passed (and with the 30 DMA already in the rear-view mirror), the technicals will promptly become a tailwind again, and allow smooth sailing to resume all the way to the all time nominal highs in the $1430s.

If people tell you to keep politics out of economic and investing discussions, show 'em this ...

Comparisons to last year's market performance continue coming from left and right. Today, David Rosenberg looks not only at the broken trendline from late last summer, when the market's decline was only arrested with the seemingly unnecessary QE2 (not to mention massive fiscal stimulus into year end) - well, if it was not needed why was it implemented, and why is it still running? Because the market, pardon economy, will crack at the first hint of excess liquidity tapering, forget removal. What should market strategists look for to see if we get a repeat of last spring's market topping action? Simple: the 10 Year (and real inflation)- "If we do go to 4% on the 10-year Treasury note on the back of higher inflation expectations, then rest assured the broad expectation will be that it is headed next to 4.5% and it will be interesting to see how the equity market would respond to that prospect." We conclude by looking at why top-line corporate growth, largely driven by foreign growth, is due for a decline.

It has been a while since we were reminded just how bankrupt Europe continues to be. And while the market has put European solvency issues on the backburner now that some CDO is about to purchase 5 times its weight in toxic sovereign debt (which somehow means everything can be swept under the rug for at least 2-3 months), a Belgian think tank reminds us again that the "Greece Question" is still as open and festering as always, no matter how many lies G-Pap throws at anyone gullible enough to still listen to him. Greek paper Kathimerini cites Belgian think tank Bruegel which "has recommended that Greece should restructure its public debt as soon as possible, and that this should be one of the main elements of a comprehensive response to the eurozone crisis to be agreed by European Union leaders when they meet next month. In a policy brief published on Monday, the Bruegel think tank argues that Greece is “clearly on the verge of insolvency” and that the swift restructuring of its debt, with creditors accepting a 30 percent “haircut,” should form part of a three-pronged strategy that includes the strengthening of the eurozone banking system and policies to foster greater growth in member states with weak economies. “Our conclusion therefore, is that Greece has become insolvent and that further lending without a significant enough debt reduction is not a viable strategy,” the think tank argues." Of course, should Greek proceed with the inevitable impairments, the domino effect will promptly take out marginal banks across the continent leading to precisely the toxic spiral which Ben Bernanke and his European colleagues have been trying hard to avoid.

Yesterday Richard Fisher, now it is Jeffrey Lacker's turn to speak out against QE2 and inflation concerns. Just more jawboning or are we actually going to see more dissenting votes finally? Keep in mind Lacker is an alternate member on the FOMC board in year 2011 and is not a voting member. From remarks presented by Lacker to the University of Delaware. "The Committee recognized that the provision of further monetary stimulus at this point in the business cycle is not without risks, and therefore committed to regularly review the pace and overall size of the asset-purchase program in light of incoming information and adjust the program as needed. The distinct improvement in the economic outlook since the program was initiated suggests taking that re-evaluation quite seriously. That re-evaluation will be challenging, because inflation is capable of accelerating, even if the level of economic activity has not yet returned to pre-recession trend."

A further sign of how gold bullion is increasingly seen as not only a safe haven asset and a currency but also a financial asset, is news that the LCH.Clearnet is giving further consideration to a plan to accept gold bullion as collateral. They may accept gold bullion as collateral against margin positions on a range of asset classes and derivatives in the international financial markets. LCH.Clearnet have been considering allowing gold as collateral since October 2009 and the move by the CME and JP Morgan to allow physical gold as collateral may have made their plans in this regard more concrete. "We’re looking at it closely,” David Farrar, LCH.Clearnet Director of Commodities told CNBC (see News). “It’s something that, subject to regulatory approval, we’d look to introduce later this year."... Keynes’s ‘barbaric relic’ is becoming less barbaric by the day. However, the man in the street remains completely unaware of this trend as it continues to be ignored by mainstream media and its implications not realised.

• China Raises Key Interest Rates to Counter Inflation (Bloomberg)
• Egypt approves 15-percent pay raise for government employees (Xinhua) which supposedly are 70% of all employees 
• Citigroup Settles Fraud Cases Tied to Texas Mortgage Assigner (Bloomberg)
• Rival Koreas meet for talks as tensions ease (Reuters)
• Misquoting Keynes (Hussman)
• Osborne raises bank levy to £2.5bn (FT)
• Rich Get Richer as Governments Tout Austerity (Bloomberg)
• Sara Lee profit misses, blames higher commodity costs, but company backs '11 outlook (Reuters)
• Cash Buyers Lift Housing  (WSJ)

In a world in which every central bank is laser-focused on destroying its currency, interventions that serve to stabilize currencies are a fond memory. Yet that is precisely what the Egyptian Central Bank did earlier after it intervened directly in the FX market to support the EGPUSD after it plunged to lows of 0.168. Subsequent to the intervention the pound jumped modestly to 0.1701, which only means that the intervention support level will be promptly taken out in the next four days if not hours. The inverse spot rate is 5.8789, which as we predicted a few days ago is about to surge far higher, even when taking Ben Bernanke's admonitions that the ECB has no choice but to keep its currency weak. Of course, a plunge in the EGP simply means that food will get all that much more expense, and let's remember for a second just what was the reason for the revolution in Egypt to being with...

A key European economic indicator printed earlier today, with Industrial Production coming in at -1.5% on expectations of 0.2%, and a second consecutive negative print, after the former number was revised to -0.6%. This is a confirmation of ongoing European weakness following recent deteriorating data from the export-complex which after all are to be expected considering the EURUSD is held up artificially high courtesy of hopes that various can kicking contraptions by the ECB will buy Europe a few more months of pretend stability. Thus, the trade off is simple: a decline in export activity in exchange for a strong euro giving the impression that things are ok (note the second consecutive week of no sovereign bond monetizations in Europe), and a rising market driven higher in sympathy with what US stocks are doing (even as the US is now supposed to be the growth dynamo of the entire world, which is odd considering that the benefits from the payroll tax cut will start expiring in Q2). And if none of the above makes sense, you always have Goldman, which just blamed it all on, you guessed it, snow.

Markets slightly positive this AM after data showed that consumer credit expanded by over $6.1B in December (v $2.4BE) and consumer credit balances expanded for the first time since August 2008. Revolving credit rose $2.3B in December. The question remains one of jobs. Consumer electing to spend on holiday purchases for the first time since the crisis is a good sign, as is the makeup of the GDP gains we have seen which reflect an increasingly less timid consumer. Without jobs growth, however, we are merely getting a more levered consumer after some debt retrenchment. In the aftermath of a credit crisis – and possibly on the verge of a new one at the sovereign level – is that really such a good thing? China hiked rates 25bp for both of its benchmark rates.

A few second- and third-tier indicators, on small business sentiment, job vacancies and turnover, and consumer confidence. There is a small $1.5-$2.5 billion 17-30 year POMO closing at 11am Eastern, which should be sufficient to continue the relentless stock ramp, and push the Price Oscillator for the S&P beyond 73%, one of the highest levels on record.

Goldman's Francesco Garzarelli throws some numbers at its Bond Sudoku model, spins around its Wavefront Growth equity basket, and the magic firm's 8-ball spits out the following: "we presently show a 3.25% level in US 10-yr rates at the end of Q1:11. In light of the strength of the data, this now looks too low, and we would now lift the forecast to 3.5%. Our end-2011 and end-2012 projections are 3.8% and 4.3%, respectively, and we stick to these." In other words, if the market moves, we will adjust our "forecasts" accordingly. If China hike 3 more times as is expected and the 10 Year falls off a cliff, well then, we will no longer "stick to those."

The attempts to fight Bernanke's inflation resume in Asia, where not even fully recovered from recent New Year celebration partying, the PBoC decided to hike rates for the second time in over a month. The reason: January inflation could be as high as 6% which means trouble for the various members of politburo. Benchmark one-year deposit rates will be lifted by 25 basis points to 3 percent, while one-year lending rates will also be raised by 25 basis points to 6.06 percent, the People's Bank of China said. The rises take effect from February 9. For the time being markets are orderly, even though the announcement did send the EURUSD to the highs of the day.

RANsquawk European Morning Briefing - 08/02/11

BaNZai7s version of the classic game everyone's been talking (and doing little) about...The Bailout Boys Are Back in Town!