Archive - Mar 2011

inflation is pretty much our entire bullish premise

This weeks analysis of the COT Index and Retail Trader positioning

At present, investors are viewing the markets unfavorably, but their opinions are by no means extreme.

Not even a full day after the UN-endorsed attack on Libya began, and the "invader's remorse" is already manifesting itself as discontent among the "peacemakers" emerges. Per the AFP: "The Arab League on Sunday criticized Western military strikes on Libya, a week after urging the United Nations to slap a no-fly zone on the oil-rich North African state. "What has happened in Libya differs from the goal of imposing a no-fly zone and what we want is the protection of civilians and not bombing other civilians," Arab League secretary general Amr Mussa told reporters." We wonder what the Arab League will say when reports of innocent civilians, up to a million of whom have been forcefully armed by Gaddafi, being butchered en masse begin emerging. And how long before the entire operation is deemed a total failure... to be redeemed only by a full scale land invasion?

Some updates

Well, those devious gold bugs and sound money advocates are at it again! They had the audacity to produce economic analysis that consistently outshines and embarrasses mainstream Keynesian pundits. They had the nerve to expose the seedy underpinnings of the private Federal Reserve. They even had the gall to bring the long established short manipulations of metals markets by global banks like JP Morgan and HSBC into the light of day, where anyone whose head was not buried in the dark recesses of their own colon could see and say “My god! There really is an organized cabal against gold and silver!” But if you thought all that was outrageous, these people, who promote the insane notion that our currency should actually be backed by tangible wealth and should be under the control of the voting public instead of some unaccountable parasitic corporate central bank, have now brought state legislators into the mix! The return to sound money has begun…

An interesting thing happened last week, garnering no coverage in the face of a global meltdown, literally and figuratively. Nike reported horrible earnings. A rare miss by the industry all star is best summed up by CEO, Mark Parker ”higher costs for materials, labor and freight are here, as predicted.” Then there was Fedex with another miss “earnings could be trimmed by ongoing Middle East turmoil and fuel costs.”... These are not isolated warnings but rather across all industries. Month after month PPI and CPI have been showing rising inputs costs, margin compression, rising non discretionary prices and contracting discretionary prices. At what point will corporate profits peak? It is quite possible that time is upon us.

In his latest Market Outlook, CLSA's Russell Napier, who has long been one of the better big picture strategists, comes to the same conclusion as we did when we penned from last Friday "$440 Billion Drop In Shadow And Conventional Banking System Liabilities In Q4 Gives Bernanke Carte Blanche For QE3" namely that the contraction in broad money aggregates (shadow banking in Zero Hedge's case, M3 in the case of Napier), opens the door wide for Bernanke to usher QE3. "recent data imply that the US reflation is in trouble. QEII has boosted reserves but banks continue to reduce credit, while broad money has contracted. There is material downside risk to equity valuations." In other words - "Sell equities as the market wonders whether there will be a QE3 and in what shape it will come. Napier's conclusion - "Whether equities will fall further depends on how flexible and successful the Fed’s next monetary package will be. Given the risk, investors are better off watching from the sidelines." This should not come as a surprise to Zero Hedge readers: we have been claiming since January that the market is due for a major correction in the end of March, early April in time to set the stage for the political wrangling that will inevitably accompany more monetary injections. That recent geopolitical events have forced some to coin the term "Glow in the Dark Swan" only makes the Fed's job that much easier...

As the world awakes, Japan discloses another round of good news/bad news about the Fukushima crisis. The good news: Reactors 5 and 6 went into stable condition on Sunday, after a successful
cold shutdown, authorities said. The reactors at the power plant went into cold shutdown following restoration of cooling
functions late Saturday. Alas, 5 and 6 were never the issue to begin with. The same came not be said about reactors 1 through 4, where the bad news comes from this morning. According to the Japan Times, a risky venting of Reactor 3, which saw its pressure rising yet again, was being considered, which would see another release of radioactive gas into the environment. "Pressure within the No. 3 reactor at the Fukushima No. 1 nuclear plant
was rising at one point and Tepco considered releasing more radioactive
gas into the environment to avert serious damage to the containment
vessel, the nuclear safety agency said Sunday afternoon. Tokyo Electric Power Co. had considered releasing the contaminated steam
directly into the environment, not through a "suppression pool" as it
did earlier in the crisis. The pressure needs to be lowered to protect the structural integrity of
the reactor, and the first step is to open the valve on a pipe connected
to the suppression pool. By going through the suppression pool, the
reactor's gas would liquefy and thus lower the pressure." And here is where the recent Operation Irrigation is now backfiring: "But if the pool is already filled with water, a valve on the reactor
itself would need to be opened and the radiation level of the released
gas would be higher than with the first method, explained Hidehiko
Nishiyama of the Nuclear and Industrial Safety Agency. "Without water, there would be more radioactive substances in the gas released into the environment."" In other words, the attempt (which some say is futile) to fill the containment pool with water is about to lead to another round of irradiation of the environment. And while all that is going on, here is what the already certain chain of downstream events is going to look like for the region, for Japan, and for the world.

Black Swan Clusterflock +1. As if earthquakes, tsunamis, nuclear meltdowns and war was not enough, the Examiner now discloses that a replay of the BP oil spill could be in the making, sending WTI to the (super)moon, the economy collapsing, and Ben Bernanke starting the printer in advance of QE 666. To wit: "The U.S. Coast Guard is currently investigating reports of a potentially
massive oil sheen about 20 miles away from the site of the Deepwater
Horizon oil rig explosion last April." There are no definitive reports yet, but we should now for sure within hours, if the Keppel FELS built TLP is indeed the culprit: "According to Paul Barnard, operations controller for the USCG in
Louisiana, a helicopter crew has been dispatched to the site of the
Matterhorn SeaStar oil rig, owned by W&T Offshore, Inc." And if preliminary reports are correct, BP will have been the appetizer: "Multiple reports have come in of a sheen nearly 100 miles long and 10 miles wide originating near the site." If confirmed, Obama can kiss tomorrow's Rio golf outing goodbye.

The Libyan war has now begun. It pits a coalition of European powers plus the United States, a handful of Arab states and rebels in Libya against the Libyan government. The long-term goal, unspoken but well understood, is regime change — displacing the government of Libyan leader Moammar Gadhafi and replacing it with a new regime built around the rebels. The mission is clearer than the strategy, and that strategy can’t be figured out from the first moves. The strategy might be the imposition of a no-fly zone, the imposition of a no-fly zone and attacks against Libya’s command-and-control centers, or these two plus direct ground attacks on Gadhafi’s forces. These could also be combined with an invasion and occupation of Libya. The question, therefore, is not the mission but the strategy to be pursued. How far is the coalition, or at least some of its members, prepared to go to effect regime change and manage the consequences following regime change? How many resources are they prepared to provide and how long are they prepared to fight? It should be remembered that in Iraq and Afghanistan the occupation became the heart of the war, and regime change was merely the opening act. It is possible that the coalition partners haven’t decided on the strategy yet, or may not be in agreement. Let’s therefore consider the first phases of the war, regardless of how far they are prepared to go in pursuit of the mission.

30 miles from Los Angeles!

According to the BBC, the Gulf Cooperation Council has just gotten involved with the UAE pledging 24 aircraft and Qatar - 4 to 6. It is still unclear if Saudi Arabia will now lead a two front war following its invasion of Bahrain last week. Additionally, Al Jazeera reports that the Libyan authorities had detained one of its reporting teams several days ago when working in west Libya. The channel said, in a report on its website, that the team included two correspondents, one Tunisian and another Mauritanian, and two cameramen, one Norwegian and one British. But most troubling is that per Gaddafi's earlier address to the people he would start arming the civilian population to defend Libya. From Reuters: "Libyan leader Muammar Gaddafi said on Saturday he will arm civilians to defend Libya from what he called "colonial, crusader" aggression by Western forces that have launched air strikes against him. "It is now necessary to open the stores and arm all the masses with all types of weapons to defend the independence, unity and honour of Libya," Gaddafi said in a speech broadcast on state television hours after the strikes began. "We call on the peoples and citizens of the Arab and Islamic nations, Latin America, Asia and Africa to stand by the heroic Libyan people to confront this aggression, which will only increase the Libyan people's strength, firmness and unity," he said." Whether that means that UN forces will treat every civilian as a possible enemy combatants will be seen upon the land incursion which should commence within a few days. Unclear if Xe will be involved this time.

Allied warplanes in a coalition led by France and backed by Arab nations have gone into action to stop Libyan leader Muammar Gaddafi's forces attacking the rebel-held city of Benghazi. U.S. and British ships and submarines fired more than 110 Tomahawk cruise missiles at Libyan targets to take out their air defences, although no U.S. aircraft were flying over Libya. Following are assets that are being used, or could be used, in action against Muammar Gaddafi's troops and those belonging to his military.

Feeling overwhelmed by all the news coming out of the Middle East and North Africa (MENA)? With at least 12 different countries now on the verge of full blown violent rioting, or already having succumbed to a revolution of some form, it is easy to lose track of all the ins and outs. Luckily, the WSJ has compiled a handy real time interactive timeline that highlights the increasing escalation in events in the MENA region, broken both chronologically and cartographically. Bookmark the following link to be always up to date on all the most recent events.