Archive - Mar 2011

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 07/03/11

Silver is blasting through all barriers, topping $36.5 this morning! The white bullion market is tight, and the short squeeze in the futures market is exerting a constant upward pressure on the price. If current trends persist, the all-time high of $49.45/ounce will be reached in the near future...Given the still gigantic short positions on the silver futures market, this short squeeze could persist for some time. Increasing price volatility as the squeeze continues is likely. But the all-time high of just under $50 per ounce could, if the current pace of appreciation persists, be broken this year.

A week ago we presented the suddenly surprising inverse correlation between stocks and crude, commenting that: "the last time WTI to Stocks hit a correlation of -0.5 is just after the market peaked in late 2007, early 2008, as the market had started its decline which culminated with the global sell off of everything not nailed down, bringing the S&P to 666. The correlation between the two assets is again -0.5. If Brent confirms the WTI correlation, it may be time to run." Subsequently every chartist jumped on this observation, yet it is today's update that is material significance: as of a few hours ago, the inverse correlation between the Brent front month has just passed the lows recorded in 2008, just before the market tumbled, when increases in oil prices no longer produced increasing stock prices (i.e., market topping). In other words, "it is now time to run" as we have just surpassed that level. And in fact, a longer term chart shows that we are just off the all time lows in the MSCI-Brent correlation. If this series continues dropping a correction is virtually assured.

A secondary reason for Silver outperformance is its pricing: at $36 per ounce, buying Silver is much more affordable than Gold which costs $1,400 per ounce. Consequently, Silver is a kind of “poor man’s” inflation hedge and so is profiting from an influx of orders from those who are growing increasingly worried about inflation but cannot afford to buy an ounce of Gold.

In recent weeks we have been arguing that tail risk remains and is unusually realistic given the potential sources of shocks. We have also found that in many cases clients are reluctant to buy into these fat tail scenarios (actually 'reject' may more accurate than ' are reluctant' ). The argument is basically that they have heard it many times before in the last two years and asset markets have continued to flourish. We would argue that the correct approach is to ask whether the macro risks looking ahead are those that can be dealt with using the policy tools at hand. Consider the obvious potential risks: an oil shock, commodity prices and advancing headline inflation in the context of growing concerns about social and political disruption. We would make the case that the risk is high that if any of these shocks were to move to centre stage, it would be harder for policy makers to deal with them because printing and spending money is not quite the solution to these problems that it was to the financial shock of late 2008 and early 2009...which brings us back to Black Swan fatigue. When we see currency vols so cheap in a world that appears to be so risky and in which policymakers do not hold a terribly strong hand, it makes a strong case for hedging tail risk, even if FX price action is apparently indicating otherwise.

The shift in risk perception is on. While stock are not quite feeling it yet (they will), today's fulcrum security appears to be high yield debt, as tracked by the JNK ETF. A quick look at the most active options classes page shows something surprising: as of 2:30pm Eastern roughly 4250 puts had trade, compared to.... 4 calls. Yet while investors have certainly turned sour on junk very rapidly, they should be far more bearish on stocks. Not only have stocks outperformaed bonds far more during the QE2 rally (as expected), but a simple correlation model accounting for empirical beta confirms that the SPY is almost 12% rich to fair value as implied by the JNK. Which means that if investors are really bearish on high yield to the tune of 4250 to 4, they should be far more bearish on the stock market.

"You can't help that. We're all mad here." Cheshire Cat

As Credit Suisse points out, today the Gold/Copper ratio is up by over 4% to 3.32, which happens to be the biggest one day move since June 29, and confirms that not only the copper run may be over, but that derisking and the flight to safety trade is truly back on. Although one hardly needed to see this chart to come to that conclusion: even as the market continues to expect an announcement from Bernanke that CTRL-P Central (f/k/a the Marriner Eccles building) will start printing crude any minute, the wait may end up being quite protracted. And while gold has not been touched yet, and in fact continues to trade at all time highs, we wish to repeat our warning that should the crunch in the S&P continue (even if it is modest by historic amounts), it is very likely we may see liquidations in HF precious metals holdings considering the HF margin debt position is at virtually all time highs, meaning the toxic spiral of plunging prices and broad deleveraging in advance of margin calls, will lead to a sell off in anything and everything that is not nailed down.

Retailers in the UK release the Motorola Xoom at competitive prices and Sam's Club announces pre-orders for the muscular Xoom at $60 BELOW the price of the iPad 2. Apple's flagship mobile product has not even been released yet and its being undercut by more technically more capable competitor, and there are dozens more competitors on tap. Margin compression is inevitable for ALL players involved as this becomes a pricing bloodbath to the benefit of tech consumer.

All the Koolaid drinkers who bought the government propaganda and Phil Lebeau's breathless praises of the world's worst automaker (and best channel stuffer) are certainly watching today's inexplicable plunge in GM shares with horror and pure terror. Now that GETCO is out of the picture, having failed to churn the crap out of the $33 IPO price, and keep it at support, ongoing realistic price discovery will soon send shares far, far lower, on both plunging Chinese car demand and dealer "channel stuffing."

Well, it's one way to start a deficit cutting scramble. Washington Times reports that the preliminary number for the February deficit, which will formally be released by the FMS shortly, is $223 billion: this is the largest single month deficit in history! So much for prudent budgets and all that. At least the number can only get better from here. Unless, of course, it gets much, much worse, and rates continue creeping higher, resulting in 30% of total revenues being dedicated to paying gross interest, as was previously discussed on Zero Hedge. Then 40%. Then 50%... One gets the picture.

Earlier, we reported that Obama mentioned that NATO is currently evaluating military options against Libya. Now, White House spokesman Carney adds some additional color on what Operation "Nobel Peace Prize", aka the invasion of Libya, will look like. From Reuters: "White House says no option removed from table on Libya response but use of ground troops not at top of list."Does that mean air force intervention is at the top? Luckily Zero Hedge readers know very well that the USS Enterprise is now peacefully sailing in the Mediterranean, awaiting for its moment in the sun. And on the use of the SPR: "White House says no specific price point would trigger the use of oil reserve; the issue is oil supply disruption." But what supply disruption: wasn't the spin up to now that Libya is largely irrelevant for the US from a supply perspective?

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 07/03/11

Oaktree's Howard Marks has just released his "year in review" letter, which like any letter by Marks is a must read, as the Oaktree manager has proven his presence in the pantheon of asset managers is well-deserved. Not surprising, and as we had repeatedly highlighted, when we pointed out the near record implied correlation between all asset classes, 2010 was a year of "correlations" which we believe may be just as appropriate a word to describe last year's market as "austerity" (which has so far completely missed the US). Quote Marks: "The word for 2010 was “correlation,” meaning macro trends dominated performance within asset classes. Thus most securities performed in line with their market benchmarks and the returns to security selection were limited. It wasn’t easy to outperform benchmarks."All this and much more on the firm's performance below.

While rumors that certain banks and exchanges may or may not be experiencing a dramatic run on physical silver are propagating across the blogosphere, we won't know for sure until we see Blythe Masters resignation letter. In the meantime Alexander Gloy of Lighthouse Investment reminds us of something very much indisputable: the physical premium over paper silver has just hit 20%, or an all time record. For all those who claim (oddly enough) that silver is really ubiquitous and one kicks around discarded bars of silver just walking down the street, should most certainly bet on this spread collapsing. Everyone else (presumably those who have been long physical silver for months if not years) are advised to sit tight.