Archive - Mar 2011

It is one of those days when the flight to new reserve currency is on, with gold and silver trading near overnight highs, same for the oil complex, yet futures are also at the highs of the premarket session, purely on the ongoing monkeyhammering in the dollar, which has now completely given up the ghost as the reserve currency on yet another bout of QE3 concerns, following last night's very cautious note from Jan Hatzius. At last check the DXY was at 76.135 and plunging. As for why oil will continue whacking bits and pieces of Q1 GDP, and why Goldman will have no choice but to push for another round of dollar rape, here is Reuters with the skinny: "Brent crude rose to $118 a barrel and U.S. oil hit the highest since September 2008 on Monday as fighting in Libya disrupted its supplies and renewed concern of wider disruptions in the Middle East. While the Libyan crisis has cut supply from a country that normally provides almost 2 percent of world output, the prospect of unrest spreading to larger producers such as Saudi Arabia is a far more bullish scenario for oil markets. "The major risk remains the prospect of the political unrest spreading to the Gulf producing region," said Caroline Bain, economist at the Economist Intelligence Unit. "However, even if there is civil unrest in Saudi Arabia, it is not a given that oil production will be affected." Wrong: it is a given.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 07/03/11

EURUSD continues its consistent medium term uptrend at the same time retail traders are consistently increasing their short position to 65.97%. The big news event of the day is CAD Building Permits 08:30 EST other than that Trichet speaks at 07:00 EST, most other events of the day are relatively minor in historical effect.

In the fall of 2010, there was no shortage of news regarding faulty foreclosure processes, aka "robo-signing." Bank stocks took a hit and the threat of a nationwide foreclosure moratorium appeared imminent. Then came the concept of put back risk to the big banks claiming violations of reps and warranty agreements or pooling and servicing agreements (PSAs). Since that time the media has gone rather quiet on the subject and the price action in the bank stocks would imply all is well. BAC settled for pennies on the dollar with one of the GSEs and the stock rocketed that very day as investors were no longer "worried about the uncertainty." The story may have gone cold but the lawsuits, court rulings, class actions, investigations have only heated up and continue to grow. In fact they have grown to the point where keeping up with all of it was next to impossible. Banks have tried to downplay any of these threats in their most recent earnings releases and conference calls but suddenly things seem to have changed. Recent SEC filings by JPM, earnings restatements by BAC, a quick departure of Howard Atkins from WFC and regulators investigating CDO transactions by C have begun to turn the spotlight back to the banks and the balance sheet risk they face.

One of our key predictions from early this year has been that Goldman Sachs' formerly crack economic team (and now considered by some to be nothing but a propaganda team on crack) will in the coming weeks and months materially downward revise its dramatic economic upgrade from early December (just coincidentally coinciding with the minute the Fed released previously secret bank bailout records), which ended the firm's skeptical stance on the US economy, and launched it into all out Kool-Aid mode on nothing but one-time adjustments courtesy of a last gasp attempt at fiscal stimulus. While we are still scratching our heads why Hatzius would totally discredit himself by doing nothing more than what momentum traders do at an inflection point, and calling for a paradigm shift in his outlook when the most recent bout of gains is not driven by any recurring fundamental improvements, frankly we don't care. What we do know is when Goldman turns outright bearish again, some time in late March, early April, it will be time to buy QE3 with both hands, following a dinner or two between Hatzius and Bill Dudley at the Pound and Pence. Tonight, Hatzius issued his first and very vague intro to the coming mea culpa: "The increase in oil prices is emerging as a more meaningful downside risk to growth later in the year.  At this point, we emphasize that this is just a risk, not a change in the forecast, as our commodity strategists expect part of the near-term price increase to reverse if the situation in the Middle East stabilizes.  But we are now clearly moving into riskier territory" and "eventually, fiscal policy will need to tighten anyway because the current structural deficit is much too large to be sustained over the longer term.  But if this tightening occurs more quickly than expected, that would likely weigh on near-term growth and, in turn, reduce the likelihood of tighter monetary policy." We are certain that today's note is the first whisper to those who read between the lines on what is coming from Goldman as soon as a few weeks from today, perfectly in line with Zero Hedge expectations. To be certain, it wouldn't be a Goldman report without the now traditional comic interlude: "Going forward, we expect employment to continue growing at a healthy clip, but participation is likely to flatten out and may rebound a bit, as word about the improvement in labor demand gets around more widely." Come again? Goldman is blaming the lack of propaganda media penetration for what will be a rise in unemployment? Frontal lobe hemorrhage to commence in T minus 5...4...3...

Remember when Egypt said that March 6 is the latest, guaranteed stock market reopen, or else? Well, the day has come and gone, and no Egypt stock market (all those who have been buying the EGPT ETF are forgiven for feeling like total idiots right about now). What however is trading are Egyptian bonds, which have plunged as a result of the ongoing total and complete chaos in the revolutionary country, which is now seeing a second wave of reactionary violence as fighting escalates between the police and protesters in Alexandria. As BusinessWeek reports: "Egypt’s borrowing costs are rising to the highest in more than two years
and stocks listed overseas are tumbling as the Cairo exchange’s
five-week shutdown and new rules on shareholder disclosure keep
investors away. The Ministry of Finance sold 3 billion pounds ($509 million) of bonds
yesterday, 1.5 billion pounds less than planned, as yields on 266-day
notes climbed 31 basis points from the last auction to 12.47 percent,
data compiled by Bloomberg show. Global depositary receipts of
Commercial International Bank Egypt SAE sank 15 percent in London last
week to the lowest level since July. Orascom Telecom Holding SAE traded
5.2 percent below its Jan. 27 close, when the Egyptian Exchange shut
down." Our advice: don't expect Egypt to reopen any time soon, and certainly not before the situation in Libya is under control, which won't be for a long time. In the meantime the flight to safety trade (read gold, silver and crude) is raging overnight. And if and when it reopens, look for nothing less than freefall: "The EGX30 may drop another 10 percent when it eventually reopens, said
Slim Feriani, London-based chief executive officer of Advance Emerging
Capital Ltd., which manages $750 million in frontier and developing
nation stocks including Egyptian shares."

In his latest edition of the Privateer newsletter, Bill Buckler confirms that he is one of the premier politco-economic commentators, with one of the most devastating expositions on how America, once the land of the brave and the home of the free, and truly a beacon of freedom for the rest of the world, has entered the death spiral of its cilivizational curve, which "beginning of the end" started in 1913 with the introduction of the income tax and the ascent of the Federal Reserve, and now, a century later, has morphed into what can poetically be called the "ending of the end." Recent events in the Middle East and Africa only underscore how rapidly the sun is setting on the world's once undisputed superpower. That China is merely biding its time before it disconnects its mutual life support system to the US (which contrary to conventional wisdom, is far more important to the US than vice versa, now that the Fed is by the far the biggest owner of US debt), and ends its symbiosis with US fiscal and monetary policy, should not be a reason for optimism to anyone. With each passing day, Chinese superiority is becoming ever more palpable (even despite the massive loan bubble currently in process in China), even as desperate US attempts to cling to the last trace of its former superpower status are getting increasingly ignored by virtually everyone. If Buckler is correct, the final nail in the US superpower status coffin could come as soon as the unwind of events in MENA, where the people have made it all too clear the US is no longer welcome. What happens next will indicate just how rapidly the complete fall from grace for the US will transpire: "The Middle East is again in strife. This time, the conflict is between
the regimes which have been installed and supported by the US government
in their march to empire and the people who those same regimes have
ruled with an iron fist. To these people, the US is not looked upon as
an “exemplar” of anything - except political AND economic repression."

A recent debate between Rick Santelli of CNBC and James Bullard, the St. Louis Fed, inspired this analysis - Would the US economy be doing better without the QE2 initiative?

As the world continues to burn, gold hits a new all time high of $1,437 as silver is en route to pass $36. Whatever shorts did not cover on Friday night are strongly urged to postpone their "market top" speculation until another day. Elsewhere Bernanke is still confused by what the relentless march to daily all time highs in gold means...

I wanted to give an overview of how the markets can look good but not actually BE good. It’s important to get the perspective of the WHOLE economy – not just the part that we swim around in.

The key running theme this weekend is "the flood", specifically that soon to be left in the wake of the Federal Reserve, which is now facing the last days of its ignoble existence. Previously, Egon von Greyerz shared his outlook on why the Pompadour-esque cliche will soon lead to a complete destruction of the dollar, and all other paper currencies. Now, it is the turn turn of Diapason's Sean Corrigan, who in his note from Thursday shares his view on the Fed's "reprehensible policy": "When the Chuck Prince Charleston suddenly stopped in 2008, the initial impact was just as dramatic on the market for machine tools, ceramic magnets, and silicon wafers as it was on lumber, carpets, and dishwashers and, so, the shock hit the surplus nations every bit as hard as the deficit ones as they all realised, to their horror, that they had all become nothing more than imprudent, Rueffian tailors. Since then, of course, the game has been replayed at an even more frantic pace, with governments largely taking pole position as the drivers of deficits, the media of monetization and, hence, the inflamers of inflation...By the time this last blunder works its way through the system, it will not just be the world's tinpot tyrants and biddable client kings who will pay the price for the Fed's reprehensible policy of 'apres moi le deluge', but it will be the ordinary man and woman who will have occasion to rue a programme so replete with intellectual arrogance, power-worship, and a wilful blindness to its awful, unintended consequences that only a Krugman could approve of it."

"Happy days are here again! Stock markets are strong, company profits are up, bankers are making record profits and bonuses, unemployment is declining, and inflation is non-existent. Obama and Bernanke are the dream team making the US into the Superpower it once was. Yes, it is amazing the castles in the air that can be built with paper money and deceitful manipulation of all economic data. And Madame Bernanke de Pompadour will do anything to keep King Louis XV Obama happy, including flooding markets with unlimited amounts of printed money. They both know that, in their holy alliance, they are committing a cardinal sin. But clinging to power is more important than the good of the country. An economic and social disaster is imminent for the US and a major part of the world and Bernanke de Pompadour and Louis XV Obama are praying that it won’t happen during their reign: “Après nous le déluge”. (Warm thanks to my good friend the artist Leo Lein)." Matterhorn Asset Management

I was stunned by several comments yesterday showing that many people still don't know the BASIC facts. Do you know the facts?

With nobody having any clue how the MENA situation will play out (and those who tell you otherwise can be immediately dismissed as full of feces to be ridiculed in perpetuity by everyone but CNBC where they will have a guaranteed contributor slot), and as crude has promptly become the most volatile asset class (as Zero Hedge predicted last summer when we lamented the death of equities) recently experiencing an unprecedented 7 Sigma move which likely led to the liquidation of at least one asset manager, there are two main charts which matter for the oil. On one hand, the Crude Oil non-commercial net specs are at an all time high: well over 100% more than during the oil time highs in crude in 2008. This means that speculators are anticipating an even more powerful move higher than that seen in the summer of 2008 when Crude hit $150 (it also presents the possibility of an unprecedented plunge in oil should the speculative thesis not be realized). Just as important, the performance of energy as a subsegment of all commodities is currently materially underperforming all other commodities, with Previous, Agircultural and Industrial commodity classes all doing far better than crude and its peers. Should there be a rotation out of other commodities into the energy complex, look for crude to surge far beyond $125 in the next few weeks. All it would take is one Saudi geopolitical spark.

We're Just Gonna Inflate Our Way Out If It!...Oh really? I don't think so, Scooter. In a recent discussion we mentioned the fact that lately former Fed member Larry Lindsey has been talking up the idea of a potential fiscal trap for the US. To be honest, we believe this idea has already played itself out in Japan and day by day is coming to a Euro theater near you in terms of individual country experience. The whole idea of a fiscal trap involves the combination of sovereign debt levels with manipulated domestic interest rate levels. Japan has been a poster child example of this simple concept. By artificially holding its domestic interest rates at the theoretical zero bound, it has allowed the government to lever up in a magnitude that most likely never could have happened had free market forces set domestic interest rate levels. Japan has enjoyed an artificial depressant on nominal dollar (in this case Yen) interest costs that has made incredible sovereign debt expansion feel relatively benign from an ongoing debt servicing cost perspective relative to what has been up to this point the magnitude of ongoing sovereign revenue collection.