Archive - Mar 2011

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 02/03/11

US Defense Secretary Gates says establishing no-fly zone for Libya would require an attack on Libya

As a result, the entire crude complex levitated higher as if HFTed by the Fed's POMO desk.

Update:Fresh Libyan air strike in Brega, bomb explodes next to oil engineering university about 2KM from oil terminal - witness

WTI spikes by $0.70 following reports that a Libya plane has fired two missiles on the town of Brega, which contains a critical oil facility. The fact that Libya is now apparently willing to gamble with its oil infrastructure is precisely the worst case scenario that many have predicted. Stocks, of course, jump on the news too.

One of the most popular feuds against an allegedly fraudulent Chinese company continues as Muddy Waters just raises the bar by several notches: "Muddy Waters, LLC has amassed irrefutable evidence that China MediaExpress Holdings, Inc. (“CCME”) is a substantial fraud, and that management is engaging in a cover-up replete with further dissemination of fraudulent information. In light of the nature of the evidence, we believe that a de-listing from NASDAQ is not improbable; further, we believe that management stands to lose additional credibility. We therefore reduce our estimated value by one-third to $3.54."

Call it central planning's Pavlovian reaction: the Chairsatan is speaking, which leads to an immediate plunge in the dollar. And as the flight to safety trade now means dump the dollar, nominal assets benefit from the Bernank's third mandate: Russell 2,000 to 20,000, at about the same time as there are 20,000 representatives left of the US middle class.

At this point I can’t help wondering if China and GM should form a strategic alliance to attain truly “miraculous” growth. China could build dealerships, let GM fill them with cars, then blow them up only to build a NEW dealer to which GM could deliver a new load of cars, thus insuring record sales for GM and record GDP for China.

In advance of the completion of today's POMO we have just one question: will the Fed do its taxpayer fiduciary duty and monetize the cheapest bond (PM6 or the 2.125% of 12/31/2015), which trades 0.7 bps cheap to the sector, or, instead, bend over to Jamie Dimon et al again and instead buy the bond most profitable to flip by the Primary Dealers the just issued QJ2 (2.125% of 2/29/2016), which is actually 0.2 bps rich. Tune in at 11 am to find out.

Barney Frank quizzing Ben Bernanke has got to be the funniest thing one can see today. So here is your chance to laugh. While not expected to say much if anything of note, using the same testimony as yesterday, Bernanke may engage in a few Freudian slips before the Frank, who has already asked the key question - should the Fed engage in more bond buying in light of the oil price spike. Don't expect a response. From C-Span: "Today, the House
Financial Services Committee can expect to hear more of the same from
 Bernanke as he appears before lawmakers for the second time this week.
They will likely question the Fed Chief on what the Central Bank is
doing to jolt the economy into increased recovery. Committee members
will also want to continue yesterday's line of questioning on how the
Fed is reacting to oil prices that have been going up up up in the wake
of unrest in the Mideast and North Africa."

During his presentation to the Senate yesterday (to be followed promptly by another presentation before Congress shortly), Bernanke discussed the impact of the $61 billion spending cut on GDP. In doing so he referenced a report published by Goldman strategists Jan Hatzius and Alec Phillips. He did so incorrectly. And the first thing Hatzius did this morning is to correct the Chairman: "Some have wondered—e.g. in the Q&A portion of Fed Chairman Bernanke’s monetary policy testimony on Tuesday—how such seemingly small cuts could have such a noticeable impact.  But it is important to remember that we are talking about a hit to the quarter-on-quarter annualized growth rate of spending here, not about a hit to the level of GDP.  For illustration, it is useful to go through a simplified version of the calculation underlying our estimates for the House-passed spending cut." Hatzius clarifies further: "We estimate that the $25bn cut in our budget projections reduces growth in Q2 by around 1 percentage point (annualized); this effect is already incorporated in our forecast that real GDP will grow 4% (annualized).  In addition, we estimated that the $61bn cut passed by the House would reduce growth in Q2 and Q3 by 1½-2 percentage point (annualized) in Q2 and Q3.  (In other words, relative to the assumptions currently embedded in our forecast, the House-passed package would imply an additional ½-1 percentage point drag on growth in Q2 and an additional 1½-2 percentage point drag in Q3.)  Spending would then be maintained at that lower level thereafter, and the effect on GDP growth would dissipate quickly in Q4 and would be essentially neutral by 2012 Q1." So perhaps the Chairman will keep this in mind as this report is surely reference once again today.

The scramble for non-dilutable currencies hits a frenzy as silver just touches on a fresh 31 year high of $34.90. To commemorate this historic event, the US Mint has halted American Eagle silver coing production, in addition to its ongoing halt of American Buffalo coins: "because of the continued demand for American Eagle Silver Bullion
Coins, 2010-dated American Eagle Silver Uncirculated Coins will not be
produced. The United States Mint will resume production of American Eagle Silver
Uncirculated Coins once sufficient inventories of silver bullion blanks
can be acquired to meet market demand for all three American Eagle
Silver Coin products."

After serving as the inspiration for the Chairsatan's latest appellation with his February missive, Bill Gross now goes for the jugular with the $64,000 question: with "nearly 70% of the annualized issuance since the beginning of QE II
has been purchased by the Fed, with the balance absorbed by those old
standbys – the Chinese, Japanese and other reserve surplus sovereigns.
Basically, the recent game plan is as simple as the Ohio State Buckeyes’
“three yards and a cloud of dust” in the 1960s. When applied to the
Treasury market it translates to this: The Treasury issues bonds and the
Fed buys them. What could be simpler, and who’s to worry? This Sammy
Scheme as I’ve described it in recent Outlooks is as foolproof
as Ponzi and Madoff until… until… well, until it isn’t. Because like at
the end of a typical chain letter, the legitimate corollary question is –
Who will buy Treasuries when the Fed doesn’t?" Bingo, we have a winner. This is precisely the issue that Zero Hedge has been exposing over the past 6 months, and is the reason why the Fed is now locked in a QEasing corner from which there is no exit. To his credit, Gross attempts to provide an answer: "Someone
will buy them, and we at PIMCO may even be among them. The question
really is at what yield and what are the price repercussions if the
adjustments are significant... What I
would point out is that Treasury yields are perhaps 150 basis points or
1½% too low when viewed on a historical context and when compared with
expected nominal GDP growth of 5%." And the stunner: "Bond yields and stock prices are
resting on an artificial foundation of QE II credit that may or may not
lead to a successful private market handoff and stability in currency
and financial markets. 15% gratuities may lie ahead, but more than
likely there is a negative two-bit or even eight-bit tip lying on the
investment table. Like I did 45 years ago, PIMCO’s not sticking around
to see the waitress’s reaction." Translation: Pimco just issued a "sell" rating on everything.

If after years of explanations, and cartoons with bears, readers still have not quite gotten the grasp of how QE should work in theory (in practice the only thing about QE is how dramatically its intended and realized goals have diverged) perhaps this animation from the AP will finally put all doubts to rest. So for those still confused by terms such as "money printing", "open market operations", "outright monetization", and "Weimar hyperinflation", this brief and concise clip is for you. And once you see it, forget everything, because what QE2 has done has been precisely the opposite: rates have gone up, but the Fed does not care - as everyone now knows, the Fed's only true goal was to provide Primary Dealers with the capital to bid up stocks. End of story. Lastly, keep in mind, that the Fed is now implicitly funding the US deficit: as it purchases more and more bonds, the interest that is owed to the Fed is subsequently remitted to the Treasury as an actual revenue item, completing the world's most unprecedented Ponzi scheme constructed since the days of Rudolf von Havenstein.

This has to be one of the biggest "I Told Ya So's" of the year! JP Morgan is forced to come clean on the legal liabilities that I have been pounding the table about for two years as Wall Streets sell side coterie and JPM management have managed to underplay for about as long. Now, it looks as if the chickens are coming home to roost...

Gold’s all time record nominal high yesterday was barely reported in most of the mainstream business and financial press today - slightly more online but there was little or no coverage in print. This is an indication that gold and silver remain far from the “bubbles” that some have suggested. Speculative manias and bubbles are characterised by mass participation and widespread enthusiasm and “irrational exuberance” by all sectors of society including the media and particularly the retail investor and the “man in the street”. The majority of investors and savers in the western world do not know what gold bullion is and could not tell you the price of an ounce of gold or silver in dollars – let alone in pounds, euros or other local currencies. The majority are unaware of the huge developments in the gold markets (only reported by specialist financial press) such as China’s emergence as one of the largest buyers of gold in the world (see news and our video below) and the fact that central banks and astute hedge funds are some of the largest buyers of gold in the world today.

The February ADP private payroll number came as usual above expectations, printing at 217,000 on consensus of 180,000, with the January number revised up from 187,000 to 189,000. The reason why the market appears to have not only ignored the better than expected data, but traded against it is the following line: "The recent pattern of rising employment gains since the middle of last year was reinforced by today’s report, as the average gain from December through February (217,000) is well above the average gain over the prior six months (63,000)." Alas, checking in with NFP data validates the complete lack of ADP data credibility, which now joins NAR housing data, various diffusion indices and of course consumer confidence data on the trash heap of busted economic indicators.