Archive - Feb 2011

The market was relatively quiet today as protesters in Egypt clashed with pro-government supporters (apparently one group wore plaid and another wore stripes, how gauche)...

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 offers 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.

New Jersey Governor Chris Christie said he doesn’t mind breaking promises to pensioners to close a $10.5 billion budget deficit -- even if they sue...

After what was largely a quiet day, events in Cairo's Tahrir square have taken a turn for the worse, after at least four protesters were killed and thousands more injured after semi-automatic gunfire erupted, supposedly out of the pro-Mubarak supporters, some of whom were previously exposes as being Egyptian police. End result - Egypt CDS (ignoring that ludicrous $25.5 million AUM EGPT ETF, which for some ungodly reason is supposed to represent the entire Egyptian stock market) are about to bounce once again, two days ahead of the February 4-5 "Days of Rage" in Syria, and as concerns about a Suez stoppage and Saudi contagion spread yet again.

Those poor idiotic rating agencies can never catch a break. Despite doing their fair share of hiring as many prosimians with a single digit IQ (not to mention a penchant for spreading inside information to preferred clients, see Deep Shah) as they can, thereby keeping the labor pool sufficiently susceptible to BLS manipulation, it was they that, according to Koo, destroyed the global economy the first time around, after keeping every toxic CDO at a AAA rating. Now, the Nomura economist, whose obstinacy in his views at times makes even such distinguished voodoonomic shamans as Paul Krugman seem like docile little lambs, is convinced that "these same agencies are once again attempting to interfere with governments that are trying to do the right thing in response to the economic crisis (ie, the balance sheet recession) triggered in part by these agencies’ actions. In spite of the fact that fiscal stimulus is the only effective measure during such a recession, the rating agencies are making it more difficult for governments to spend money by implicitly threatening downgrades." Yeah ok, the right thing is to fight debt with more debt. And more debt with morer debt. And so on. We wonder if that is the case, why doesn't Dictator Bernank just tell his Jeethner lackey to print $100 trillion tomorrow? After all that is the NEF's target for debt in 2020. That way we should grow world GDP by about 100% overnight, and save ourselves ten years of deleveraging misery. But stop there? Why not print $1 quadrillion, $1 quintillion, $1 decillion... After all debt is wealth remember? Because try as hard as we can, we just can't spot any faults with this argument which derives straight from Mister Koo's supposedly irrefutable logic.

One wonders who is right...

Total US debt as of yesterday: $14,109,842,878,903.50. Keep in mind that this number will likely not increase very much over the next several weeks, as organic issuance of about $150 billion per month is offset by $100 billion in monthly SFP draw downs. Incidentally, keep a close eye on stocks tomorrow: since today we had the December 8, 2010 56-day CMB maturity, which will not be met with a rolling re-issuance tomorrow, the Primary Dealers, whose ranks have now swelled by such "traditional" bond trading firms as pure-play derivative expert MF Global (led by ex-Goldman CEO Jon Corzine) and pure-plau futures trading expert SocGen, will have an extra $25 billion in pocket change to invest in 5x beta stocks as they see fit.

The latest inflation fighting strategy in a world that has now completely forgotten the threat of "disinflation", and instead is relishing 30 year highs in sugar and 150 year highs in cotton, comes from Belgium where supermarket chain Delhaize has been exposed as coercing 120 franchisers to sell products at a loss. As a result, said franchisers, formerly on very good terms with the supermarket operator, have organized themselves into an interest group with its own steering committee to make their grievances heard. And while the outcome of this escalation will certainly not be pleasant for any of the parties involved, one thing is certain: prices at both Delhaize supermarkets, and Belgian competitors who follow suit, are about to surge as retailers have no choice but to seek avoiding bankruptcy through reindexing prices. Which makes us wonder just how many supermarket stores and grocery retailer in the US use comparable tactics? But have no fear: according to the CPI, food inflation in December at 0.1% was the lowest it has been in five months. And with nobody having the guts to tell Bernanke that the food emperor is completely naked, we are 100% confident that everyone in America will be able to afford the 0.1% increase in food prices.

This is just like when the British police attacked the non-violent protesters led by Gandhi, or the police in towns in the South of the United States attacked the peaceful protesters led by Martin Luther King, Jr.

Zero Hedge has long claimed that the best stories of Wall Street fraud and corruption come from disenchanted former insiders of the very firms that in 2010 were paid a record $135 billion in compensation. And while we spend day after day chronicling what to other more normal banana republics would seem to be unprecedented criminal activity south of Canal street (and let's not forget the Park Ave corridor), we are always delighted when an ex-insider discovers their conscience and discloses all the massive fraud they and their coworkers engaged in "once upon a time" especially on Over the Counter desks - the same place where firms such as Goldman Sachs dominate all trading. Today's story from Omar Rosen on Citigroup's corporate derivatives team is just such a blatant example. If America had anything even remotely resembling a fair and honest enforcement arm in its regulatory body, this disclosure would be enough to shut down the entire Citigroup derivatives team. As it stands, the firm will probably not even have to pay a fine, without either having to admit or denying guilt.

What if a rating agency downgraded a country and no one listened?

With all of the news outlets focused on tensions in the Middle East, have we forgotten about the elephant(s) in the room? Ireland’s credit rating was downgraded one level to A- today by Standard & Poor’s - leaving it four levels above “junk” status. To add insult to injury, S&P said that the country remains on “credit watch with negative implications.” Nonetheless, the market barely shrugged. In fact, we remain within points of the post meltdown highs. The real kicker was the fact that Ireland’s 5-yr Credit Default Swaps FELL 4.6% today in the face of the downgrade. Perhaps the market has become numb to the rating agencies.

The day started with December volatility being offered in risk reversal form. Volatility continued to soften through the front months until late morning when the December 1800 C buyer resurfaced. Iron butterflies are synthetically offered as dealers offer straddles and funds buy wings. The fat-tailed aspect of gold options is approaching Nassim Taleb proportions, especially in December. Calls between the 1800 and 2000 strike area are constantly bought. Puts from June on back with a value under $5 are also consistently bought. Meanwhile you can buy all the 1400 calls in any month you want at any time. Taken together this can be translated as “We’re not moving anytime soon but if we do we aren’t stopping.” We reiterate our statement that volatility will firm up if we settle below 1325 or above 1346.

While everyone is relishing the Fed's third and only mandate these days, namely to send the Russell 2000 to 36,000 and cotton limit up to infinity and beyond, while everyone else is terrified to short stock in advance of what increasingly appears like near certain additional quantitative easing, congressman Ron Paul has announced that the first Monetary Policy subcommittee meeting will focus on one of those two now forgotten Fed mandates, that of creating jobs. “I’m very pleased to hold our first subcommittee hearing in the new
Congress on a topic that could not be more critical, namely
unemployment.  Despite enormous amounts of monetary and credit expansion
by the Federal Reserve in recent years, the nation’s unemployment
picture remains bleak.  While many focus on the impact of fiscal
policies on employment,  the effect of monetary policy often goes
unexamined.  In my view we are now experiencing the bust that inevitably
results from the misallocation of capital and human resources in a
period of artificially cheap credit.  It is important to understand the
Federal Reserve’s role in creating today’s unemployment crisis, while
also highlighting that high unemployment and low economic growth can
persist even in the face of tremendous monetary inflation.” Of course, the answer to all of these problems is simple: no debt ceiling raise. If the Fed can't monetize any more debt and make the Primary Dealers ever richer (now that the PD ranks have just been expanded from 18 to 20 to include SocGen and derivative (!) trader MF Global, and its CEO Jon Corzine) from commissions on indirect debt monetization, its power is gone. But that will mean doing something for less theatrical than a few hearings, and far more responsible: such as preventing rampaging inflation across America (see cotton chart posted previously).

It seems like so long ago that we noted that cotton was up over 17% year to date. Alas it was yesterday. Yet the time-lag effect is not surprising considering that less than 24 hours following our initial report cotton is now up 23% YTD, or a 5% pick up in one day! This was yet another limit up day for one of the world's most popular commodities, which closed at $169.72, a 150 year high. The reason, per Reuters, for the relentless surge in cotton's price is Asian mills: "It's basically mills panicking," said Lou Barbera, a cotton analyst for brokerage VIP Commodities. "Overseas mills are getting the ball rolling." In reality, mills are just one part of what is rapidly becoming a perfect storm for a commodity which will soon destroy margins for all mid-tier retailers: "Powerful cyclone Yasi in Australia also worried the market because it would hit prime cotton-growing areas. Losses there could further crimp supplies in Asian markets, dealers said. Sharon Johnson, senior cotton analyst at brokerage Penson Futures in Atlanta, said it is "possible there's a squeeze" in the U.S. cotton market."