Archive - Mar 2011

The following exchange between Ben Bernanke and Senator Kirk is a must watch for everyone who wonders how Ben Bernanke justifies the fact that America is now an open Ponzi scheme. Kirk's question "in laymen's terms this is one part of the government lending another part of the government money, which would not let to long term confidence once the American people understood the basics a little bit better" relates to the open monetization that the Fed does each and every day at least until the end of June. What Kirk did not ask is what happens when the American people realize just how truly preposterous the Ponzi is, and that all the interest "paid" by the Treasury to the Fed ends up being remitted as cash right back to the Treasury as revenue in essence incentivizing the Treasury to spend and borrow more in order to earn more! This is the most circular Weimarian nightmare scenario imaginable, and we can only hope that "the American people" understand this as soon as possible. As to Bernanke's surprise that the US had a currency without any Federal debt to back it up (yes, it is possible to live within one's means, even for a central bank) can we remind the Chairman that the gold on the Fed's balance sheet, all eight tungsten thousand tons of it, is actually Marked to Market to almost $300 billion, and can by definition be used as a pledge to any liability, such as a currency or excess reserves. But oh yes, how could we forget, using just gold as an asset would never afford us the kind of adamantium price stability that we have seen in recent times. Plus how on earth could one infinitely dilute the dollar if the Fed's balance sheet was limited by actual "assets" that do not require Hewlett Packard tech support every now and then.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 09/03/11

Two days ago we pointed out the dramatic change in the ratio of copper to gold, which moved at the highest rate of change since June of 2010. Today, the rate of change is even higher at 4.3%. And with copper starting to seriously take on water, a curious observation emerges: is the gold-copper ratio, which on an inverted basis was virtually a tick for tick correlation conjugate for the S&P, now simply a harbinger of where the stock market is headed. All else equal, once the Chinese exuberance dynamics which appear to have stalled out in copper, move to equities (which as Finisair demonstrated yesterday is only a matter of time) we believe, as the attached chart shows, that the fair value of the stock market is about 120 points lower. Since this is a relative comparison, those who do not wish to trade a single series, can put on a pair trade of short the Gold/Copper ratio (predicting it will decline from the current 3.4 - it is shown inverted on the chart below) and short the S&P in expectation of a compression.

Yesterday we tried (and failed) to make a big deal of the fact that Primary Dealers flipped 53% of the 7 Year Bond just issued two weeks ago (apparently nobody in charge cares or understands what this means, except for Bill Gross of course), so today we will go for an encore, and courtesy of today's $6.69 billion POMO, point out that the Primary Dealers have now managed to flip 50% of the just issued 5 Year Bond CUSIP: 912828QJ2, which was issued on February 23, and which saw $20 billion allocated to Primary Dealers. Well, on the Pomo from March 2, the Fed monetized $4.9 billion, and today this was followed up with another $5.1 billion. The monetization farce is now moving to every single OTR bond, and nobody in congress dares to ask why or how much money the Primary Dealers are making as a result of this travesty. Which is why going forward we may or may not report on bond auctions that have a Primary Dealer component (so all): in essence with the Fed guaranteeing to buy back half of every Primary Dealer take down, it is no longer an auction. Luckily, there is a 35% SOMA limit on how many bonds the Fed can monetize per CUSIP. Oh wait, that was scrapped as part of QE2. It is now a true Vaseline free for all.

The employment numbers are improving, but are there sufficient forces to drive a robust improvement? If not, what do these numbers really mean? Well, relatively little, unfortunately.

DoubleLine's Jeff Gundlach appeared on CNBC earlier, and among other things, the muni market was discussed.It appears that the fund manager whom many consider to be roughly in the same ballpark as Howard Marks when it comes to fixed income investing is very much in Meredith Whitney's camp when it comes to his outlook on muni market prospects. Asked by Faber if he believes that munis are ultimately going the way subprime securities did, Gundlach responds "If by that you mean lower, the answer is yes. If you mean crashing, I am agnostic on that." And for all those who love taking out their actuarial tables and their historical default data to refute what is simply common sense, Gundlach has a few words as well: "I don't think you need to know what the default rates are going to be, or need to know how low low is, munis are going to go down. There are going to be other shoes to drop. There might be so many it looks like Imelda Marcos' closet when all the shoes drop because all the states have to deal with this stuff.... Between here and the endgame lies the valley and the valley is full of fear. And I think the muni market is going to go down by at least 15 to 20%. At least." As for Kaminsky relentless advocacy of munis, this time coming out with the always disingenuous "hold to maturity" defense, Gundlach simply made a mockery of that whole spiel: "You know what the definition of an investor? It is a trader who is underwater. People say they hold to maturity until they get scared and sell. It gets scary when the prices start to drop. The fear factor here is going to be palpable." This is probably the single smartest statement ever made on CNBC, where for once a guest actually replied with what is elsewhere known as common sense, instead of ivory tower economic theories that work everywhere but in the market (yes, stocks just like housing can only go up, until they can't). Aside from that cue the congressional subpoena.

Yves & Tom of Naked Capitalism continue to blame those who shorted housing and housing-derivatives for driving the demand for the structured credit derivatives that almost ruined the financial system. That's like blaming the U.S. for the acts of Nazi Germany during WWII: It's just doesn't make any sense.

It is not like we don't have enough revolutions to worry about, now we have to be concerned about that good old staple: the Thermidorian reaction, made so popular during the first real revolution, and now about to be repeated in Egypt. According to Agence France Presse, Egypt's new government warned Wednesday of a "counter-revolution," the official MENA agency reported, following clashes in several parts of the capital widely blamed on diehards of the former regime.  Those expecting press releases of the "Egypt is not Egypt" variety will not be disappointed: it was only on February 24 that Reuters reported that "Egypt's new military rulers assured the nation on Thursday they would guard against what protesters have called a counter-revolution by associates of Hosni Mubarak, deposed nearly two weeks ago in an 18-day uprising. The Supreme Council of the Armed Forces said it noted the use of political expressions such as "the counter revolution" and denounced what it said were "attempts to create strife", saying it was taking all steps to meet the people's demands."  It is oddly ironic then that it is the very Supreme Council using threats of taboo "counter-revolution" suppression to get the people to finally understand that they deposed one dictator and replaced him with another.

Reuters is reporting that Nomura is "downsizing" its commodities trading desk, resulting in some "job losses" - that is a modest euphemism. According to an insider, virtually the entire London commodity desk at Nomura was shown the door over the past several days, with deep cuts globally. This process however did not start today, and has been going on for a few days. As a result market expectations emerged earlier that there are commodity-related liquidations originating at Nomura. These are now likely very much unfounded, yet per two traders, the weakness in commodities is driven on expectations there is an legacy position unwind bottleneck. To an extent this is true, and the main reason why the WTI-Brent spread collapsed yesterday was due to the unwind of opposing bets by Nomura. Said unwinds are however now said to be completed, with little if anything left for liquidation, and we expect that the spread will promptly revert to its recent historical level in the $14-18 range, as the oversupply issues at Cushing persist as evidenced by today's DOE update. Additionally, the technical overhang on crude will soon be lifted after trading desks realize the order flow from Nomura has ceased.

Today the government auctioned off a reopening of the 912828PX2 10 Year, which at $21 billion, priced at 3.499%, and a 3.32 Bid To Cover. The auction was decent, pricing inside of expectations of 3.535%, however it was nothing like last month's blowout 10 Year which saw the highest Indirect take down on record at 71.3%. This time around, foreign institutions supposedly bouth 53% of the full amount (at a 74.5% hit rate), with Primary Dealers responsible for 40.5% (a really low 17.7% hit rate). Direct bidders remerged after their complete disappearance last month, and were responsible for 6.5% of the take down. Since the auction process is now a farce, and really no longer matters as it is merely an intermediary step to fund PDs, who promptly flip bonds back to the Fed, we refuse to dig too deep into what if anything today's action means for bond demand. If Bill Gross is correct, it means that USTs are in for a lot of pain in the future.

Why wouldn't the average Japanese person, who is in the exact same boat, enjoy falling prices, too?
Well, as it turns out, they do! Though wages and asset prices have stagnated in Japan for decades now, the quality of life for the average Japanese has not massively deteriorated in the way you'd think if you blindly accepted what the Western media tell you. Sure, Japan has huge problems. The rapidly aging and shrinking population, a lack of political willingness to reform, and a huge government debt burden all pose enormous challenges. But, as far as I can see, what's usually portrayed as the biggest problem of all in Japan, deflation, only really hurts the government. And that's only because the "real" value of all the hundreds of trillions of yen that it owes (mostly to its own citizens) goes up every year.

As we expected in November after disclosures about the first several Chinese fraud companies first hit, a veritable "cottage industry" has developed in exposing Chinese companies that may (or may not) be full out corporate frauds. The list of companies to see their prices plunge on such comparable reports since then is too long to count, and we are confident that many more Chinese reverse-merger and other NYSE and Nasdaq promptly listed companies will continue rising to the surface. The latest potential casualty: Deer Consumer Products (Nasdaq: DEER), which according to investor Alfred Little, "conspired to defraud investors by exaggerating it revenue, profit margins, and income on its Chinese domestic sales of its low-end kitchen appliance products. Furthermore, DEER management misappropriated $11 million in company funds through a questionable recent land purchase and also failed to disclose direct competition and other serious conflicts of interest arising from certain unconsolidated related parties." While we have not confirmed any of the allegations in the report, we present it for informational purposes to those investors who may have rushed somewhat imprudently to buy the stock.

Here's why you see smart Zero Hedge posters saying things like "Trade against the 90% who lose money" ...

Nice job creating more terrorists, you morons ...

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 09/03/11