Archive - Feb 2011

Is the stock market rally coming to an end, or is there more to go? Should we be buying dips or selling rallies in gold and precious metals? Is the commodities boom a yearlong or decade long phenomenon? Which sectors on the international landscape will be the winners or losers? Are the agricultural plays getting tired, or is it time for a second helping? Will the collapse of the bond market or a spike in oil prices bring the party to an end? Get the answers by attending this free webinar.

According to Mercer, climate change will end up costing pensions trillions...

Ever since the advent of QE2, few if any, sellside analysts employed by Too Big To Fail banks have dared to voice a negative opinion of the Chairman's third mandate, that of raising stock prices (for obvious reasons: nobody will bite the hand that feeds them trillion in taxpayer bailout money). Which is why we continue to believe the BofA credit strategist Jeffrey Rosenberg is one of the few men standing who dares to call it how it is. In his latest piece, Rosenberg lays out what is the most harshly (yet diplomatically) worded criticism of QE we have read to date. "In our view, the longer term problem with such a strategy is that in delaying the adjustment to the root causes of the credit crisis, namely excessive leverage in the economy and financial markets, the essential vulnerabilities from that excessive leverage remain. What triggers their realization again is the inflationary shock leading to an interest rate shock that undermines the cheap cost of that debt that currently enables its maintenance." As for the implicit assumption that savings and wealth are inversely correlated, Rosenberg points out the glaringly obvious: "Inflation erodes the value of those savings and decreases their standard of living." The only option left: "Lowering the value of savings creates a powerful incentive to take on investment risk to maintain the real purchasing power of those savings." And while everyone getting aboard the investment ship at the same time is a horrible idea when it happens in one country, it is a guaranteed disaster waiting to happen when it occurs at the global level. Which is precisely what has happened: "Today, we see that same pattern again at play. But this time, it’s not limited to just the US Fed policy. Globally, central banks are pursuing coincident easy money policies. And even in Emerging Markets where the inflation fears stand most acute, the policy rate increases are just keeping  up with inflation increases. The result: global negative or zero real policy rates." The entire global "economy", which really means stock market, is now one timebomb, just waiting for the first central banker error-induced 'crack' to appear in the windshield, following which the destruction will be unprecedented.

As is by now well-known, Apple stock is underperforming after hours following reports of an allegedly sickly-looking Steve Jobs leaving the Stanford cancer center. The National Enquirer has released photos supposedly of an emaciated Jobs, yet one who is not readily identifiable as the Apple CEO. The National Enquirer, who initially reported the news today (to be published tomorrow), talked to critical-care physician Dr. Samuel Jacobson, who said, “Judging from the photos, he is close to terminal. I would say he has six weeks.” That said, given the reliability of The National Enquirer, waiting for further news before jumping to conclusions is advised. Furthermore, as TNW reports, "We’ve done a little digging into Dr. Samuel Jacobson. Jacobson appears to be a Florida based pulmonologist (breathing doctor) – not Oncologist. Which would naturally make you wonder just how qualified he is to diagnose someone via a photo, especially outside of his speciality." Obviously, a prudent question. While there is still no definitive confirmation either way, and Apple has not issued any statement, the stock has moved on the news, and we believe that this information should be shared as it is in the public doman and market moving.

All those focusing on the politburo policy tool known as stocks have missed what is by far the biggest mover in corporate (distressed) land so far in 2011. MBIA, whose CDS had traded in 2010 at levels assuming virtually no recovery, have plunged from 55 points up front a fortnight ago to just 37 up today (a 4 pt tightening today alone), a pick up that could make many a distressed credit fund's (sorry Oaktree) quarter. And while the move has been stunning in its velocity, many have been left scratching their heads as to the reason why. Enter Protium: a Barclays 2009 spin off fund which according to the British bank's results posted yesterday, entered into a CDS commutation with an unnamed monoline effective January 2011. And since it was already known by the market that banks such as JPM and Barclays had dropped lawsuits against MBIA in 2010 in exchange for comparable CDS commutations, it was immediately assumed that the beneficiary of this generous 'Protean' gift is none other than MBIA. The net result? A boost to creditor recoveries, a surge in unsecured claim prices, and a near 20 point tightening in CDS.

10 economic charts that you are about to see are completely and totally shocking.

Forget high unemployment, hyperinflationary central bank policies, competitive devaluations, and all those useless demographic and political factors that go into the Shoe Thrower’s Index. In what can only be described as a moment of pure Keynesian genius, Paul Krugman concludes that the primary reason for the surge in food riots is…global warming. Perhaps he’s right. In order to put an end to these pesky riots and revolutions we should reduce our carbon footprint via extensive taxes on emissions (even though many scientists believe CO2 actually lags temperature change). Come to think of it, we should reduce all activities which are ‘positively correlated’ with a rising temperature anomaly, just to be on the safe side. And millions of public sector jobs would be created as new regulatory agencies would be needed, thus solving our structural unemployment issue.

The numbers for silver demand are starting to make some market-watchers nervous. The U.S. Mint sold over 6.4 million silver Eagles in January, more than any other month since the coin’s introduction in 1986. China’s net imports of silver quadrupled in 2010, to 122.6 million ounces, roughly 13.7% of global production. Meanwhile, mine production can’t meet worldwide demand; the only way demand gets fulfilled is from scrap supply. That is some very hungry demand. Which raises the question, how long can this pace continue?

Chris Dodd's political corpse may just come out of the grave for one last dance. The reason - the even more worthless half of Frankendodd is about to see all of his preferential Countrywide records exposed in the open. Darrell Issa has just announced that he has issued a wide-ranging subpoena to Bank of America for all documents and records related to Countrywide’s VIP program. Yes, this means all of Dodd's dirty laundry is about to be made public. Not like it matters: at this point everyone in America knows too well that the biggest criminals in the country are those in charge of it (and those regulating them, just happen to be the biggest porn-addicted idiots: see Matt Taibbi on the SEC). And it is not like Wall Street's favorite pet Dodd even has a remote chance of getting within miles of a courtroom...

Today, WTI spreads continued their blow out, making the lives of all Goldman clients who expect the spread to collapse a living hell (with ever louder rumors of pending or already transpired energy fund blow ups). The spread between April-delivery WTI futures and Brent, the basis for European and West African crudes, widened $1.63 to $15.70 a barrel at 12:16 p.m. in New York. And since in addition to Brent, there are roughly 100 other grades, here is how WTI has been trading compared to some of the more illiquid varieties: Light Louisiana Sweet premium increased 30 cents to a record $20.10 while Heavy Louisiana Sweet premium widened 30 cents to $20. Mars Blend’s premium to WTI strengthened 40 cents to $14 a barrel, while Poseidon increased 30 cents to $14.30 over the benchmark. Southern Green Canyon’s premium widened 40 cents to $13. Thunder Horse’s premium to WTI strengthened 5 cents to $19.20. West Texas Sour’s discount narrowed 35 cents to $6.40. Syncrude’s premium widened 50 cents to $8.50 a barrel. The discount for Western Canada Select widened $1.25 a barrel to $21 a barrel. Yet despite all these divergence dynamics, it is the WTI that is of critical importance due to its prevailing liquidity and utilization in the US. Luckily for Ben, the WTI glut just hit a record, allowing the Fed to continue pretending that the real price of oil is not well over $100. Per Bloomberg: "Stockpiles at Cushing, the delivery point for futures traded on the New York Mercantile Exchange, rose in the week ended Jan. 28 to 38.3 million barrels, according to the Energy Department. That was the highest level in records begun in 2004. Last week TransCanada Corp. started deliveries to the hub from its Keystone pipeline, which connects Alberta and Cushing." What is more interesting is recent speculation that ConocoPhillips may reverse its Seaway pipeline to relieve the Cushing excess. This would make economic sense for Conoco, yet for some odd reason the company refuses to proceed.

When George Bush first was informed about the 9/11 attacks, he was reading a children’s story to second graders. The attacks caught him off guard and interrupted his reading of My Pet Goat, and he sat perplexed as to how he should respond. Ben Bernanke was similarly blinded by the crisis even though lawmakers on capitol hill had on many occasions asked him about the possibility of a housing bubble caused by subprime mortgages. Bernanke had his My Pet Goat moment in 2008, where in a panic, he lowered rates all the way down to zero. At least George had a military that he could send out to fight for him. Poor Ben’s options were limited, lower rates and print more money, which he did with the same sense of panic and righteous rage. If we can agree that the 0% short term rate put out by the Fed, is not a market rate, then what should it be? At 1%, the real rates are still not positive. An honest rate would have to be well above 1%. Increasing the rate would push up rates on your mortgage and car loans, but it would also allow you to not lose money in real terms by placing it in the bank. The Fed reduces borrowing costs, but only by screwing savers and investors. Again we see the bailout mentality of having the righteous pay for the wicked’s sins.

Today (On Wednesday), Sanofi-Aventis (NYSE:SNY) inked an agreement to acquire Genzyme Corp (NASDAQ:GENZ) after sweetening its bid price to $74 per share plus a contingent value right (CVR), up from the $69 per share bid that GENZ rejected as too low back in October. We wrote in October that SNY was overpaying for GENZ because we valued the shares at $64. Including the CVR, which is contingent on recovering from the manufacturing problems it’s faced for its 2 key biotech drugs, as well as receiving FDA approval to market its multiple sclerosis drug candidate Lemtrada, and increased sales targets, the market is valuing the total bid price at about $78 per share.

"Curveball" comes back to haunt the boys who lied us into war ...

Using the Birinyi technical methodology of market "extrapolation", and recreating our "analysis" from last week, we observe that following the micro dip observed yesterday (which happened to be the second largest since late November), the S&P is on track to surpass its all time highs right on schedule: June 27, 2011, or in 93 trading days. This should be just around the time when QE2 ends, and passes the baton to QE3, as neither the unemployment situation, nor the housing double dip will have improved by then. And in the unlikely case that the Fed does not resume QEeasing, the plan seems to be to get the market to its new all time high at the moment when the rug is pulled from underneath it.

Last August, Anthony Ward's Amajaro fund tried, and failed, to corner the cocoa market. He may have been half a year early, as the country may soon let cocoa speculators (at least those on the long side) finally enjoy their day in the sun. After an ongoing political crisis has left the country with two presidents, neither of which is willing to abdicate power peacefully, and technically bankrupt the latest development is the logical: a countrywide bank run. The Globe and Mail reports that the world's largest exporter of cocoa, which has now effectively been isolated by the global banking system, following its technical default on $2.3 billion in bonds, is seeing bank after bank shut down as residents are scrambling to withdraw whatever money is available in the financial system. "A third bank shut its doors Wednesday amid a political crisis in
Ivory Coast, as residents in the commercial hub lined up at banks to try
to withdraw their savings amid rumours of a cash shortage. British
bank Standard Chartered confirmed in an e-mail Wednesday that it had
suspended its operations in Ivory Coast, joining two other banks, BICICI
and Citibank, and the regional stock exchange. Hundreds of people marched from one bank to the next in downtown Abidjan
Wednesday afternoon, trying to find a working bank machine." Well, not really a bank run. More like a bank march. However, unlike Egypt, we don't anticipate the government (one of the two), to start flying in hundreds of millions in currency to placate the mob.