Archive - Mar 10, 2011

Yesterday, when we considered some of the possible compression trade opportunities presented by the suddenly jittery market, we highlighted a very attractive convergence trade between the Gold-Copper ratio and that of Cold/Copper Miner stocks, which for the mast part excluded the impact of the manipulated stock market indices and relied purely on alpha differentials. Indeed, a few trading hours later, all those who put that particular compression trade on (which like every self respecting BSD TBTF wannabe of course involved lots and lots of leverage), can now take the rest of the day off, as the spread between the two legs has now collapsed by about a third.

While not at the lows from January, when NYSE short interest hit a multi year low of 12.4 billion shares, the just released update shows that into the end of February, total short interest once again declined from the Mid-February dead cat bounce which saw it at 12.8 billion, with the latest print at 12.6 billion shares. And now that the market is finally realizing that there is a several hundred point vacuum underneath if indeed there is even a brief break in Fed monetization, the number of shorts that may opt to cover on the market's way down is far lower than in recent history. Of course, this is what happens when everyone bets on the Bernanke Put and said Put starts to sputter, which simply means that the Fed chairman, who traditionally equates economic growth with the Russell 2000 is more boxed into a corner, than ever: QE3 will second gold to 2,000 and oil to 1,50. No QE3 will send the S&P to sub 1,000. Place your bets.

Raoul Pal has released his monthly update on markets which, as always, is one of the best summary reports on everything that is happening in the markets, in the world, and in the business cycle. As the Global Macro Investor observes, there is indeed "a lot going on." Not surprisingly, the key issue that Pal continues to focus on is the global debt-to-GDP ratio which is, and will likely always be, in excess of 300% until either we see global defaults or inflate our way out of it. His summary on the issue of unsustainable sovereign issuance: "Something has to give or bankruptcy will ensue as the markets dictate both the private sector's and the public sector's ability to borrow. The first part of this equation came to pass in 2008 as bank lending to the private sector shut down. No amount of regulation, political shenanigans or QE has fixed this in any way. Bank have got no money so they are not going to lend. End of story." Of course, the wildcard is the Fed, which can and will continue monetizing future debt issuance, and pumping money in blind hopes of a pick up in borrowing and inflation expectations, until the US finally wins the race to the bottom in the FX race (and once again, for the cheap seats, the so very inappropriately named hyperinflation is not a phenomenon of high inflation - it is the loss of faith in the currency). Yet the Fed refuses to acknowledge this, just as it refuses to acknowledge that the US needs deflation, something which the banking criminal syndicate will never allow: "The dirty truth is that no one wants to take the pain and allow for debt deflation. The debt pile is still growing although at its slowest pace on record. The debt deflation that everyone so wants to avoid is the thing the US needs the most." Pal's conclusion: "All this means is that the economy becomes ever more reliant on low interest rates for it to function. One day the markets will not allow the Fed to run this policy and rates will rise and the system will be brought to its knees. The outcome will happen regardless of whether they try to inflate their way out of debt and rates rise, or they increase the debt burden and sovereign risk is priced in via rate rises. With a continuation of the current economic policies, the end result of a default is inevitable. It's not rocket science." For the traders out there GMI has the following simple recommendatio: "Buy the DXY."

Some 97% of the financing for the housing market is about to disappear. If Fannie Mae and Freddie Mac aren’t recapitalized soon, the home loan market will be privatized. One bubble too far. A free, unsubsidized market for home loans will be a much more expensive market. The grim outlook for home prices. That is when we find out how much freedom really costs.

Erste bank has released the definitive report on oil price dynamics (attached) accounting for all the latest geopolitical hoopla. For what it's worth, the Austrian bank is constructive on oil prices, and see substantial upside from here: "We see mainly upside risk for the oil price. Even though the supply in the market is currently still sufficient, we believe that the wave of revolutions will continue to roll and could thus push the oil price to new highs. For technical reasons we therefore expect the upward trend to continue at least in the first half of the year, and we also think that new all-time-highs are possible. As soon as the parabolic phase has been reached, the sentiment starts spiking, and first divergences are emerging, we recommend stops be set. However, it currently seems to be too early for that. We expect an average price of Brent of USD 124 for the full year." 57 pages of pure factual and chart goodness.

Keep a very close eye out on the 55 DMA. As John Noyce pointed out over the weekend, this is the most important support level for the S&P, which has been above the 55 DMA for about 132 consecutive days. Should this be taken out, and we are about 1 point away from it, the freefall below it (at least for those who believe technical analysis) will make a few heads spin. Next support: 1,174.

That didn't take long: From Goldman's Hatzius "News Reinforces Our Sense Of Downside Risk To Q1 Growth." Ah, the propaganda bureau's primary dealers: predictable as a Swiss watch. How long before RenTec's headline parsers read between the lines and realize that QE3 will launch at the latest by September. Of course, there are a few European near-defaults and passed stress tests in the interim, so the dollar may well jump for a month or two, only to plunge to fresh(er) all time lows once more QE is announced (just prior to which Gross will start buying bonds).

And another piece of bad news for both the US economy and US exporters in particular, even despite prevailing dollar weakness over the past several months: the January US trade deficit printed at $46.3 billion, on imports of $214.1 billion ($10.5 billion higher M/M) and exports of $167.7 billion ($4.4 billion higher). This was the worst number since August 2010. The December deficit was revised to $40.3 billion from $40.6 billion. The December to January increase in imports of goods reflected increases in industrial supplies and materials ($4.4 billion); automotive vehicles, parts, and engines ($2.7 billion); capital goods ($2.1 billion); consumer goods ($0.9 billion); and foods, feeds, and beverages ($0.5 billion). A decrease occurred in other goods ($0.6 billion). The December to January increase in exports of goods reflected increases in industrial supplies and materials ($3.7 billion); automotive vehicles, parts, and engines ($1.3 billion); and foods, feeds, and beverages ($0.1 billion). Decreases occurred in consumer goods ($0.6 billion); capital goods ($0.4 billion); and other goods ($0.3 billion). And unfortunately for Wall Street, few are importing US financial innovation any more: "Services exports increased $0.5 billion from December to January." So how much lower does the dollar have to plunge before someone actually starts importing US goods? And an amusing discrepancy: according to the US, the January trade deficit with China was $23.3 billion. According to China, the trade surplus with the US in January was $13.6. Just 100% off between two departments of truth. Due to notable weighting of trade data in GDP calculations, look for another round of downward GDP revisions. The Goldman spin is becoming increasingly difficult at this point. Next up: Next up: Hatzius on the Dudley hotline asking for instructions?

Update: it appears the suicide bomber has been arrested.

Earlier, Heathrow's Terminal 5 was shut down earlier on rumors of a package. According to Sky News, however, the package is about 5'10", is packing a bomb and is now in a standoff with armed police. Unclear if extra baggage fees are the culprit. The one thing so far missing from the latest geopolitical escalation was terrorism. Hopefully this incident does not usher that in.

Just a headline from Dow Jones. No reaction from the oil complex yet.

And so the economic "improvement" data takes another big step back after the rumored improvement in claims reverts, following the traditional negative prior revision to 371K, coming at 397K on expectations of 376K. Non-seasonal claims surge by 52K higher from 354K to 406K. Continuing claims declined from an upward revised 3791K to 3771K, missing expectations of 3750K. And according to a BLS official this time the factor to blame is "school holidays." It appears there was no snow last week. Disturbingly, those on EUCs and Extended Benefits surged by 200K.

• Brent crude futures fall $2 on dollar strength (Reuters)
• Inflation in Asia Strikes at Core (WSJ)
• China Central-Bank Adviser Urges Yuan Reform (WSJ)
• Prospect of China Bank Crisis Dismissed (FT) - we feel better already
• Europe’s Banks Face 5% Stress Test Ratio (FT) - Stress Test II is not Stress Test I
• Gold retreats in line with oil, but Libya underpins (Reuters) PM liquidations very likely if there is a sharp market pullback today
• Gaddafi tanks, jets strike deeper into rebel heartland (Reuters)
• FBI: ‘Sovereign citizen' cases on the rise (AJC, h/t Robert)
• Spain to Reveal Cajas’ Capital Hole in Fight Against Contagion (Bloomberg)
• Deficit Proposal Picks Up New Allies (WSJ)

After China was expected to post a $4.9 billion February trade surplus, the centrally planned economy demonstrated just how easy it is to shut all CNY "undervaluation" critics up, by posting a miraculous $7.3 billion trade DEFICIT in February, which just happened to be the largest in 7 years, following January's surging surplus. The result was due to a general contraction in both exports and imports during the month, but obviously a much larger drop in the former - Exports growth decelerated to 2.4% Y/Y in February (consensus forecast: 27.1% yoy) , down from 37.7% yoy in January. The implied month-on-month; seasonally-adjusted; annualized (s.a. ann.) growth rate was 40.7%, down from the 74.0% growth recorded in January. At the same time imports growth softened to 19.4% yoy in February (consensus forecast: 32.6% yoy) , down from 51.0% yoy in January. On a M/M seasonally adjusted annual basis, imports growth was 58.3% in February, down from 101.8% in January. And as the chart below shows, while February is traditionally the weakest export month for China, this level of surprise can only be attributed to political determination to once again shut up CNY critics, as the case that the renminbi is undervalued goes out of the window should this level of deficits persist. As for the party line, where something is always blamed for everything, this time it was the Lunar New Year's fault.

Markets in negative territory this morning on the combination of Spain’s credit rating downgrade and an increase in oil prices linked to Libyan President Qaddafi’s airstrike against his country’s own oil export centers yesterday. The U.S. budget remains in limbo as the Senate rejected both a Republican and a Democratic plan yesterday, showing that some compromise is necessary for the budget to move forward. Note that the government’s spending authority ends on March 18. Trade balance figures to be released this morning are expected to show a larger deficit for January at -$41.5BE v -$40.6 prior, owing to the increase in the price of oil imports. Treasuries rallied yesterday as European risk became more apparent. Today’s initial jobless claims are estimated to increase slightly to 376KE from last week’s 368K, the lowest level in nearly three years.

You know, timing is everything. If you hit brakes after you pass the red light... Bang! If you pucker up after you press your face against that of your sweetheart's.... You bonk her/him on the forehead. If you downgrade a nation after obvious signs of insolvency...
As the markets slowly wake up to the risks I've been outlining over the last two years, reality will reassert itself in a most assertive fashion. The (re)adherence to fundamentals will feel like the reinvention of gravity.