Archive - Feb 2011

Mohamed El-Erian made one of his regular media appearances today (in addition to his almost daily Op-Ed, released earlier) appearing on Bloomberg Surveillance with Tom Keene and talking the developments in the Maghreb. While the full highlights are presented below, there are two items of note. El-Erian once again hits on what we believe will be the keyword of 2011: stagflation. To wit: "we have to appreciate that in the west, what is happening in Egypt and North Africa results in stagflation in the short term. So higher inflation and lower growth because of higher oil prices that take away purchasing power and transfer wealth somewhere else; because of higher geopolitical risk, which tends to diminish animal spirit and therefore impact investment; and let's not forget that the Middle East is a market, particularly for European exports. So from an economic perspective, it is important for the west to understand that these are stagflationary winds that have been added to the global economy." It is important, but not necessary: as long as the manipulated, liquidity glutted market continues to misrepresent the true state of the economy, nobody will care until it is too late. And speaking of "too late", validating our sarcastic observations over the past several weeks that the dollar is no longer the "flight to safety" currency (that would be the PM complex, and the swiss franc if anything), is the Pimco CIO's suddenly very dour outlook on the weakening US Dollar: "It is a warning shot to America that we cannot simply assume flight to quality, flight to safety. That people are starting to worry about the fiscal situation in the U.S., worrying about the level of debt and what they're hearing about states and municipalities. I would take this as a warning shot that we cannot assume that we will maintain the standing of the reserve currency as we have in the past." That's a given - the question however remains, which fiat currency, if any, is willing and ready to step in and replace the USD? With all eyes continuing to be look at the CNY, how long before China finally takes the plunge to find out just who is the real reserve currency in the world?

For those who are still confused why the latest trending index tracking the "revolutionariness" of various countries is called the shoe-thrower index, take one look at the Al Jazeera video below. It captures the popular Libyan reaction to Ghadaffi's 90 minute rambling monologue. The item about to make an impact with the screen, you guessed it: a shoe.

Suffering from revolution burn out? After following all the newsflow from the past month it is understandable, but hang in there while we shift focus back to Bahrain, which had been oddly quiet for the past day. Not so much anymore after BBC reports that a fresh anti-government protest was just launched, joined by tens of thousands of Bahrainis. In the small country numbering just 1.2 million citizens this is a sizable turnout, especially following recent swift and brutal "reprisals." From BBC: "The people want the fall of the regime," protesters chanted on the
first organised rally in the kingdom since protests erupted last week. The protesters are putting the government under pressure,
analysts say, extracting concessions such as the release of political
prisoners." The protester demands are simple: "Aside from the prisoner release - no details of which have yet been
given - they want the government to resign, the deaths of protesters to
be investigated, and political reforms that will lead to a
constitutional monarchy."

One of the cute side-effects of the Fed's third mandate has been the successful elimination of all market shorts. A quick update of the NYSE short interest indicates not only the deplorable presence of shorts in the market (those entities who provide a natural bid when the market is plunging), but that the bulk of the market meltup over the past several months has been due exclusively to shorts covering existing positions. Well, with short interest now at a multi-year low of 12.4 billion shares (lowest since 2007), compared to 14.5 billion just after the Flash Crash, a 13.6 billion average over the period, and the lowest amount since the Lehman failure, our only question is when the market plunges, like it is doing today, who will be the natural short covering bid when stocks are in freefall?

Today's $35 billion 2 Year bond auction priced at 0.745%, on top of the WI. Yet despite the seeming lack of weakness, the internals were not pretty, with the Bid To Cover coming at 3.03, the lowest since the 2.93 at the May 2010 2 Year auction. This alone would indicate a material weakness in the bidside. What is also troubling, is that just like in the 10 Year auction from earlier this month, the Direct Bidders declined notably, coming at just 6.81%, compared to an average of 15% in the last year, and the lowest since November 2009. And while Indirects came in roughly as expected, Primary Dealers took down 61.85% of the auction: the highest amount since July 2009. The dynamic of bond bidding are certain changing as there is a big rotation going on behind the scenes. Alas, there continues to be insufficient information to determine just where the bidding interest is disappearing from. That said, we expect the "UK holdings" in February when they are released some time in May, to be flat or even decline.

Goldman's David Greely released a crude update factoring in the Libyan revolution in his latest estimates. As it hit the tape ahead of the force majeure announcement later in the date, the predictions in it are especially relevant as pertain to future crude price dynamics. Specifically: "We expect Libya’s crude oil production to reach 1.6 million b/d in 2011, 1.8% of global supply. Should this production be lost to the market, it would require over half of OPEC’s spare capacity to replace. This would dramatically pull forward the return to a structural bull market that we saw occurring in 2011H2 and 2012. Already, the spread of political instability to Libya has sent Brent prices to a post-financial crisis high, close to our 12- month target. The continuing spread of protests through North Africa and the Middle East presents a clear upside risk to our forecasts." And while the focus on Goldman's report is on the spread between WTI and Crude, a topic beaten to death previously, and where the firm sees it going, the more important observation is Goldman's updated price forecasts for Crude and WTI. There are as follows: "We are lowering our WTI-Brent spread forecast to -$5.50/bbl, -$4.50/bbl, and -$3.50/bbl on a 3, 6 and 12-month horizon. This lowers our WTI price forecasts to $97.50/bbl, $100.50/bbl and $103.00/bbl and raises our Brent forecasts to $103.00/bbl, $105.00/bbl, and $106.50/bbl on those horizons." For those who are confused by the disconnect between the first part of this Goldman's argument (price surge on Libya), and the second (WTI price drop due to a spread compression), you are not alone.

The purpose of this article – it’s an attempt to bring some transparency to what’s really happening in the precious metals complex by underscoring the words and actions of players in the Central Banking community. Attention is drawn to the fact that these elitists lie as a matter of policy but are prone to making simple mistakes like all humans do. Specifically, light is shone on the degree to which these same elitists will go to keep their surreptitious market activities ‘secret’ and their irredeemable fiat currencies viable.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 22/02/11

Even as Crude continues its strength in light of Gaddafi's filibuster that may soon dethrone's Bernie Sanders record-setting speech, other commodities are not sharing oil's enthusiasm. In fact, the Ag board is a bloodbath, after wheat, corn and soybeans have all traded limit down, on what are rapidly becoming pervasive margin liquidations. Perhaps the fact that the market forgot that it can go down and is experiencing its biggest drop since November, is forcing many specs to unwind huge margin positions (remember that margin levels on the NYSE are the highest since Lehman), causing a rout in virtually every risk asset. One thing is certain: even with stocks down for the first time in arguably forever, the vol in FX and commodities continues to be the place to be for those who pursue rapidly repricing asset classes.

Reuters reports that Libya has just declared force majeure on its oil exports. As a reminder, Libya exports (under non-force majerue conditions) about 1.5 million barrels per day. That's a lot of barrels, especially for Italy which relies on 425,000 barrels a day from Libya to keep its economy going.

For those curious what is happening in Italy, where the stock market has been closed for most of the day, here it is straight from the Google-translated horse's mouth (and in the original).

Watch Gaddafi, without an umbrella this time, at the link below. Among the choice quotes, the leader says some Arab TV are "serving satan." Which one: the chair?

We have long claimed that in advance of the great "to be or not to be QE3" decision in June, there will likely be a major market swoon in March/April. The reason for that is that, as David Rosenberg explains in a very coherent fashion, the market will soon realize that the case for another bout of monetization is increasingly shaky: "when you go back to August 2010, when QE2 was announced, U.S. core
inflation was 1.1% and headline was 0.1%; by June of this year, we will
probably be looking at 1.5% on the core and as high as 3% on headline
inflation. That combined with the reality that the S&P 500 is 300
points higher now than it was then would certainly suggest that the case
for extension of the Fed’s QE program will not be there, at least not
by the time QE2 runs its course. So this is what we would be looking for
in terms of chronology (it may be too late to sell in May this year)." So unlike before, the context this time around will be one of much higher inflation, making the stimulation case that much more difficult. The downside? 300 points of downside due to a marginal hole that will no longer be plugged by the Fed. And with a fiscal contraction coming for more (see Koo's notes from yesterday), one can see why as Rosie says "it may be too late to sell in May this year." We agree that there will be a return to market volatility in the months ahead of June, but we believe that the Fed will have no choice but to continue monetizing sooner or later courtesy of the $4 trillion in bond issuance over the next two years. There is no way around it. What it means for the "inflationary" thesis we leave it up to readers.

As if the world is not complicated enough. Now we have to go to war with pirates.

Reuters reports that according to Canal authority officials, the Iranian ironclads are now in the Mediterranean. Priced in. BTFD.