Archive - Feb 9, 2011

After the ABC Consumer Comfort index yesterday plunged to 2011 lows (stunning we know: don't these ungrateful, unwashed discontents not realize the Russell 2000 is about to take out the Fed's 36,000 limit order) due to surging gasoline prices, today we see precisely what this means from a simple supply/demand perspective. According to just released DOE data, total gasoline inventory has just hit what is virtually an all time high... and certainly the highest since 1990. Surely, this is bullish or something. It is certainly refreshing to see that at least the key equation of economics, that surging price results in plunging demand, has still not been LBOed by Bernankestein.

We have presented this chart before, we are presenting it again. It speaks for itself. We are a little confused where exactly the "3 million "simulated" jobs created" are on this very simple graphic....

Federal Reserve Chairman Rudolph Shalom Von Bernankestein will testify before the House Budget Committee starting at 10 am Eastern today. Congressional employees of the Fed and the Banking syndicate are expected to question the Fed's plans on avoiding inflation and the current unemployment rate. We expect more of the same "QE is working because after spending $2 trillion we got 650,000 part time jobs, and we are certain it is working because rates are surging, and wholesale mortgage are now again at the higest since April, which doesn't make sense but I am a Princeton economist (Ph.D.) and you don't get this complicated stuff."

It was less than three short days ago that we wrote about what is poised to be an imminent surge in corn prices. To wit, we said: "If revised Chinese import estimates by the US Grain Council are even
remotely correct, look for corn prices of $6.80 a bushel at last check
to jump by at least 15% in a very short amount of time. As the FT reports, "Corn prices – and with them, the price of meat – are set to explode if the latest import estimates from China are correct. The US Grain Council, the industry body, said late on Thursday
that it has received information pointing to Chinese imports as high as
9m tonnes in 2011-12, up from 1.3m in 2010-11." Why is this a
concern? Because "the US Department of Agriculture, which compiles
benchmark estimates of supply, demand and stocks, forecast Chinese imports at just 1m tonnes in 2011-12." In other words, the whole forecast supply-demand equilibrium is about to be torn to shreds." And with the market being perfectly efficient, and not dominated by dumb robotic HFT trading at all, it has taken the "market makers-cum-liquidity providers-cum-no volume meltup facilitators" just over 48 hours to understand what this means. And what it means practically is another limit up open in the grain.

Regulatory Capture now appears to be accepted policy procedure as FASB bends over and gives up on even asking financial entities to report accurate market values, leaving only those who spend their lives in spreadsheets and arcane nomenclature capable of discerning trash from treasure. I guess it best that way. The truth has this proclivity to hurt people's feelings, not to mention certain ill gotten gains...

• Two Fed Skeptics of Bond Purchases Say Inflation Underscores Stimulus Risk (Bloomberg)
• 'Heavy Lifting’ Looms as China Rate Below Inflation (BusinessWeek)
• Rothschild to take control of the weather next (EarthNews)
• Underground world hints at China's coming crisis (Telegraph)
• Wait A Minute--Why Should I Hate Bernie Madoff? (Forbes)
• Egyptian Unrest Throws Deficit Goals Off Course as Yields Rise (BusinessWeek), all they need is Paulson pitching blank check TARP now
• SEC to Wean Markets Off Credit Ratings (Reuters)
• You don't say: Commodity prices could squeeze economy, just as in 2008 (Barrons)
• And speaking of, did anyone even notice that Moody’s lowered Jordan's debt outlook (BusinessWeek)?
• Asia Fights Inflation With Stronger Currencies  (WSJ)

With the physical gold market remaining very small when compared to the futures and paper gold market (futures, CFDs etc) there are increasing concerns of illiquidity due to the scale of demand and lack of supply. Pertinently, the size of the physical gold and silver bullion markets is tiny compared to the size of international equity, bond and currency markets. Not to mention the hard to fathom humongous international derivatives market (see chart below). The gold market remains one of the most liquid markets in the world. The market is more liquid than many government bond markets in Europe, with daily trading volumes normally exceeding $100 billion. UBS wrote about “illiquid conditions” in the gold market this morning. They did not clarify but they may have meant illiquidity in the physical gold bullion market.

At 10am today, Ron Paul will convene a sub-committee hearing with the topic “Can Monetary Policy Really Create Jobs?“. It really is too bad that Ben Bernanke will not be at this hearing. But if he was, we have a feeling the hearing would be like a scene right out of “The Godfather II” with Bernanke playing the part of Frankie Pentangeli. In fact, we just happen to have a transcript of how that hearing would have sounded...

Remember when in December, to much fanfare, the Irish bail out was announced, which included a package of €85 billion financed by everyone, up to an including the country's Pension fund (the NPRF)? Well, less than two months later, it has become clear that the funded component is woefully low as the true extent of losses is starting to be appreciated. According to the Irish National Asset Management Agenc, the country's two key insolvent banks will need a fresh infusion of €12 billion. What this means is that as a result of current estimate of full pay outs by NAMA, the property loans underwritten by the banks, are now being discounted by a ridiculous 58%! For the captcha challenged, this means a more than half write down on loans. And Ireland is solvent how again? At least the country's pension funds are being depleted to fund a good cause: banker (read senior bondholder) well-being...

Something curious was noted this morning on CNBC Europe: namely a reference to an article in the Shanghai Financial News, according to which China is quietly (or not so quietly) trying to orchestrate a 30% drop in real estate prices, in the form of a "Thunder attack" which combines increased purchase costs, property taxes as well as the rise in interest rates. If proven true, this is a major flashing red sign of just how out of control inflation, especially property and real estate, is in China, and that future CPI readings (not the official Politburo number, but that which people actually have to live with) will be getting progressively worse. Also, for the government to step in with such a drastic measure, it must mean that the discontent on the ground must be approaching a fever pitch.

Futures appear sluggish this AM, bucking the trend from the recent sessions. US rail shipping data (AAR) reporting that intermodal traffic up 7.4% over 2010. Confidence numbers for small businesses and economic optimism printed better than expected yesterday while the weekly consumer confidence number disappointed. The market's shrugged off the PBOC rate hike initially, but with more speculation of actions to come and further price rises in commodities, it appears time for a breather. 11.3% gain last week. Fed Chairman Ben Bernanke will speak today at the House Budget Committee at 10AM. Expect comments focused on fiscal policy rather than on monetary concerns as he presented last week. We look ahead to tomorrow for initial jobless claims which may add a new perspective on last week's unemployment numbers.

It's all Fedspeak after this morning's news of a drop in mortgage applications...Today is the last POMO of the current schedule in which $6-8 billion of bonds due 02/15/2015 – 07/31/2016 will be monetized. Tomorrow, the new monthly POMO schedule will be released at 2:00pm. Look to see if the Fed will be buying more than the usual fare of 17-30 bonds due to ongoing massacre at the long-end or if, instead, Bernanke is happy with letting the 30 Year plunge.

One of the bigger news this morning is the so far unconfirmed report that Bundesbank President Axel Weber, who has been in the running to replace Jean Claude Trichet, has decided against an ECB future, and instead wants to make money at Deutsche Bank. The sudden about turn in the process has left many wondering why so late in the process, and just what about the ECB is it that makes Weber leery of affixing his fate to the central bank without a unified bond printing facility. From BusinessWeek: "Deutsche Bundesbank President Axel Weber will step down and wants to join Deutsche Bank AG, Deutsche Presse-Agentur reported today, without saying where it obtained the information."

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 09/02/11

Retail traders are notoriously wrong at picking market direction/tops and bottoms. Most retail traders very naturally seem to adopt a counter-trend stance and this very accurate signals for individuals looking to trade against this group. This daily report is designed to help traders focus their efforts on higher probability pairs.