Archive - Mar 2011

It is no secret that everyone who manages money looks at each and every iteration of the European (or US) stress tests as nothing but a glorified farce, attempting to restore systemic credibility, yet which ulitmately always end up hurting it. That the first European stress test identified exactly zero of the banks that failed within months in Ireland is also no secret. However, with Europe once again out of options, here comes stress test round two. For those who care about this grand farcade (sic), here is a simple visual summary. We fully intend to recreate this post some time in March 2012, describing what Stress Test round 3 will look like.

Bring your black berets, Breton shirts, and packs of Gitanes and Gauloises. Enough charts, tables, graphs, and statistics will be tossed at you to keep your ears ringing for a week. I’ll be looking for my front teeth, which I lost in a Left Bank riot in 1968.

In a repeat of the "tightening" days from last spring when the Fed was posturing with one after another reverse repo to demonstrate just how prepared it is to take out money from the system (and look how that ended up), the FRBNY has once again started to conduct Reverse Repo tests, today removing $830 million in liquidity from the market, by reverse repoing $320 million in Treasurys at a 0.1%, $260 million in Agency notes at 0.13%, and $250 milion in Mortgage Backed debt at 0.16%. The term of the operation was 7 days. Considering this is about 10% of the amount POMOed earlier, to say this operation has any impact at all is aggressive. The only question is whether the reverse repo TOMO will be the same easing harbinger that it was last year.

A number of Black Swan events have been ignored / killed by the markets (for the time being). Apart from Nikkei, there was no signficant follow through of selling in other markets, and dips have been bought hand over fists. Also, there have been news of significant buying of Japanese equities by western investments. Perhaps, this was among the the main reason for strong buying of Yen on 16 March 2011, rather than pure speculation or repatriation (Yen surge was later fought by G7 intervention).

Several trades were triggered based on previous analysis of January newsletter, details can be found below.

To understand the structural flaw which dooms the European Union, we need to start with the Union's fundamental financial characteristics. The European Union established a single currency and trading zone for the classical Capitalist benefits this offered: a reduction in the cost of conducting business between the member nations and a freer flow of capital and labor across borders. But there were flaws in the structure that are now painfully apparent. The Union consolidated power over the shared currency (euro) and trade but not over the member states’ current-account (trade) deficits and budget deficits. While lip-service was paid to fiscal rectitude via caps on deficit spending, in the real world there were no meaningful controls on the creation of private or state credit or on sovereign borrowing and spending. Thus the expansion of the united economy via the classical Capitalist advantages of freely flowing capital and labor were piggy-backed on the expansion of credit and financialization enabled by the Neoliberal Capitalist structure of the union. The alliance of the Central State and its intrinsic desire to centrally manage the economy to benefit its fiefdoms and Elites and classical free-market Capitalism has always been uneasy. On the surface, the E.U. squared the circle, enabling stability, plentiful credit creation and easier access to new markets for all. But beneath this beneficent surface lurked impossible-to-resist opportunities for exploitation and arbitrage.

The Financial World has entered a period that is strikingly similar to that of 2008, at least regarding three key issues. They are:

1) The Oil/ USD correlation (as noted recently on ZeroHedge)
2) Bearish bets against the US Dollar
3) “In the Know” investors getting out of the market

Today's first of three auctions, which will total $99 billion and likely put the Treasury on the verge of breaching its debt ceiling, was an issuance of $35 billion in 2 Year paper. Coming at a high yield of 0.789% (largely expected per the When Issued), this was the highest issuance yield since April 2010, just before the market tumbled and the ground was set for QE2. The bid to cover came at 3.16, higher than last month's 3.03, but still the second lowest since September 2010. Direct bidders, after taking a break in the last auction, double their take down from 6.81% to 13.31%, relieving the Primary Dealers from some of their purchasing obligations, accounting for just 53.72% or well over half of the entire auction, which will soon be flipped right back to the Fed (keep CUSIP QL7 in mind: we are confident more than half of the PD's $18.6 billion take down will be monetized by the Fed within 3 weeks). Lastly, Indirects accounted for a modest 32.97% of the take down.

Radiation damage control now shifts over to the granddaddy of all free media China, where Xinhua has just reported a "tiny amount of radioactive material in the air over the nation's southeastern coastal areas" has been detected. But not to worry: just like in Japan and everywhere else in the world, this radiation is of the special "Ann Coulter" variety which actually boosts one's natural healthy glow and facilitates a prompt chromosome doubling courtesy of supposedly uber-benign mutation, and after all: more is better, so surely 92 chromosomes is much better than just 46 diploid pairs: "Xinhua quoted China's Nuclear Emergency Coordination Commission as saying that the radioactive level detected does not affect human health and no preventive measures are necessary." And courtesy of EX-SKF, we now learn that TEPCO is once again doing all it can to massage disclosure and delay the release of potentially unpalatable data, after the Asahi Shinbun only recently announced that the Pressure vessels in reactors 1, 2 and 3 may have holes confirming everybody's worst fears of full blown release of radioactive particles in the environment.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 28/03/11

The main banner ad running on Zero Hedge this morning said: "Public Health Alert: Reishi May Help Avoid Radiation Injury". I've done a little research on the topic, so - for those who are interested - here's a little background ...

According to Bloomberg, the New York Attorney General has petitioned the NRC to force Indian Point to meet fire rules (which probably means they were not meeting them before, and also confirms the NRC is another farce of a regulator). If this gains traction, and it will, watch for Indian Point to be offline shortly. So once Indian Point is shut down, will New York by on a 3 hours on 1 hour off rolling black out or 2 on 2 off? We should find out soon.

How can we compare Japanese radiation levels to "background radiation" ... when radioactive cesium and iodine DON'T EXIST in nature?

Shit just got real. The spin? It is not harmful to human health. Oh really? We can't wait for Kan to eat some plutonium on national TV to confirm this. In the meantime we await the retraction from TEPCO claiming they made a mistake and they really meant platinum not plutonium. Lastly, it appears that this is merely yet another attempt at hiding real time data: "TEPCO vice-president Sakae Muto told journalists at the company's latest briefing that test results showing the plutonium came from samples taken a week ago."

The Dallas Fed diffusion index is out, coming at a disappointing 11.5 on expectations of 18.4, with the market completely ignoring it. After all good diffusion index data is to be bought even if it confirms surging inflation, and bad diffusion index data is to be avoided. And while the component data is pretty bad (projected wages and benefits 6 months ahead plunge by 12 points as do Capital Expenditures, as firms refuse to spend any more organic cash on growth, offset by expectations of lower input costs, which remains TBD), the true nuts and bolts of the index can be gleaned from the respondent surve, presented below, although the most relevant one is here: "Prices are high,
which makes for lower volume. The supply of cattle is limited. The cost
of grain for livestock is unusually high because of high corn prices,
partly attributable  to ethanol subsidies. All of our raw material costs are at record highs. The cost of diesel also hurts us. A weak dollar is not good for us." No surprise there.