Archive - Apr 11, 2011

It’s a scam folks, it’s nothing but a huge scam and it’s destroying the US economy as well as the entire global economy but no one complains because they are "only" stealing about $1.50 per gallon from each individual person in the industrialized world.

Alcoa misses revenue, which prints at $5.96 billion: a $100 million miss to consensus. EPS in line with GAAP expectations of $0.28. EBITDA (cash flow proxy) of $955 million misses by a major $60 million. CapEx of $204MM is massively lower than consensus of $475MM (granted from one analyst): capital spending continues to be latent.

What is very clear to me is the the "American Sanzarus" are either in a state of psychotic denial (possible) or are serial liars.

With everyone transfixed by the relentless move higher in silver, stories, myths and virtually anything is used a catalyst to explain any move lower in the precious metal. While earlier there already were two rumors that the COMEX would imminently hike gold and silver margins again (so for untrue) what is true, and what many are attributing the move in silver to, is what according to some is an outsized option bet that SLV will drop 37% by July. Bloomberg reports: "A trader’s almost $1 million bet that an exchange-traded fund tracking silver will plunge 37 percent by July was today’s biggest single options trade on U.S. exchanges as futures on the metal reached a 31-year high. The 100,000 options to buy 100 shares each of the iShares Silver Trust (SLV) at $25 by July changed hands at the ask price of about 10 cents and exceeded the open interest of 6,054 outstanding contracts before today, indicating that a buyer of a new bearish position initiated the transaction. The ETF rose to the highest intraday level since trading began five years ago, $40.33, before erasing gains. It fell 0.5 percent to $39.67 at 12:54 p.m. It hasn’t closed below $25 since November."

And some more bad news for rice farmers in Japan, who were already told that planting of this key crop would be banned in contaminated soil ahead of the rice planting season which begins in April and May. The problem so far has been the nobody really knows how to classify contaminated soil, and how far it spreads. Now a new study from Hiroshima and Kyoto Universities has found that the radioactive content of soil samples beyond the 30 km semi-evacuation zone is as much as 400 times the normal. From Asahi: "The predicted changes in the level of radiation at the ground surface were calculated after analyzing the amounts of eight kinds of radioactive materials found in the soil and taking into consideration the half-lives of each material. The study results are considered more accurate than the study conducted by the science ministry, which only released information concerning two types of radioactive material. [Scholars] collected soil samples from five locations in the village at depths of five centimeters. All the locations were outside the 30-km radius and were by roadways in various hamlets. The study found cesium-137 at levels between about 590,000 and 2.19 million becquerels per cubic meter." Comparing this to Chernobyl: "After the Chernobyl nuclear accident in the former Soviet Union in 1986, residents who lived in areas where cesium-137 levels exceeded 555,000 becquerels were forced to move elsewhere. The amounts of cesium-137 found in Iitate were at most four times the figure from Chernobyl." Which begs the questions: just who will be allowed to plant rice, who will have faith that the rice they are eating is not contaminated, and how soon before rice prices surge? And how long before the fully impaired disaster zone, which could possibly spread as far as 50 km away from Fukushima, be told about the inherent risks to their lives?

Recently there has been a meme spreading in the internet that the Fed does not really need to do QE3 as the central bank can maintain bid interest at sufficiently high levels by merely rolling and extending maturing debt, a form of QE Lite Version 2, where the Fed's balance sheet is kept constant even as MBS are prepaid and Treasuries mature. The argument goes that based on some "logic" and lots of estimates it is "reasonable" to assume that $750 billion in MBS prepays and Treasury maturities will depart the Fed's balance sheet and need to be repurchased in the open market in keeping with a pro forma QE Lite V2.0 mandate. This is false. Here's why.

Here are some quick hits of economic data that have been reported in the past several days. I am convinced that "something is still happening" in that we are seeing continuing signs of improvements in most major categories of economic data (excluding the real estate markets) and we would be foolish to ignore the trend. But ...

As a reminder, on April 6 the Fed completed the auction of $1.3 billion in face value Maiden Lane II (AIG) assets. When we reported on this we commented: "Since there is another $38 billion in ML2 assets left, look for many more such Bid Lists over the next several months until the market crashes and yield chasing finally ends." Sure enough...

First we had FRBNY Dove Bill Dudley talking up the Goldman party line that QE3 may, just may, be necessary (recall Goldman initially asked for $2 trillion in QE), and now the dove from the west coast makes news as San Fran Fed (also known as the Captain Obvious academy) president Janet Yellen basically says that rising commodity prices don't warrant policy shift. And by policy shift she means a change to the current easing regime. Some other dovish statements: "it would be difficult to get a sustained increase in inflation as long as growth in nominal wages remains low" which is wrong - how many billions do American consumers "save" by not paying their mortgages; "structural explanations cannot account for bulk of rise in unemployment during the recessions" ... so why do we need economic "explanations"? "structural explanations cannot account for bulk of rise in unemployment during the recessions" - yup: Captain Obvious class 101; "long-term inflation expectations remain well-anchored despite jump in short term expectations" - anchored to what - the Rudy von Havenstein inflation projection wall chart?  "decline in jobless rate reflects in part drop in labor force participation" - advance topics In Captain Obviousness; "real consumer spending slowed around turn of the year after brisk gains in autumn, consumer sentiment weaker in March" - but CNBC just spent all of last week telling us how strong the consumer was in March; and most importantly: "accommodative monetary policy stance still appropriate because unemployment too high, underlying inflation too low" and "inflation effects from higher commodity prices likely to be transitory but must watch inflation expectations" uhh, what happened to well-anchored? To rephrase: the QE lunacy will continue until morale (and hyperinflation) improves.

Bernanke and pals believe that if they can make the stock market rise, people will feel richer and will start spending money again, insuring that the US economy (which is 70% based on the consumer) will come roaring back to life. This sort of thinking is that it’s so superficial as to be laughable, especially for those claiming to have an advanced education from a top university. Indeed, the fact that the S&P 500 goes from 1,000 to 1,330 DOESN’T mean that those who own stocks are that much wealthier. This is because the nominal price of stocks (what the S&P 500 is priced at) IS NOT the same as the PURCHASING POWER of stocks.

OK, so the JPM vault that contains a whopping 30,844 ounces of silver (about two hours worth, given the torrid pace at which JPM delivers) was just approved by the COMEX in March. JPM’s probably got lots of silver stashed all over the place, right? Maybe, maybe not. One thing is for sure, JPMs customer(s) are some of the worst investors the world has ever seen. After selling almost 5 million ounces in the first three months of 2011, they’re buying now. That’s right, in March alone they delivered 374 contracts (@ 5000 ounces each) and bought…..zero. So far in April, they’ve bought 92 contracts and sold, you guessed it….the goose egg. And yes, they are indeed buying at new highs (See here and here). How bad would it suck if we learned that this clueless market participant was in fact the US government?

We are entering an inflationary death spiral. YES, we might have another round of debt deflation, but the flight from the US Dollar is already beginning worldwide. Saudi Arabia has sent representatives to China and Russia to strengthen trade ties (an obvious move away from pricing Oil in Dollars). China and Russia have agreed to begin trading in their own currencies rather than Dollars. And in some emerging markets people don’t even want to accept Dollars in business transactions anymore.

Trader therapists everywhere are rejoicing at the bumper crop business CYH longs are about to provide them with. Because the almost 50% plunge in the stock earlier has certainly driven quite a few of the stock bulls to the edge. So just who are the biggest losers? Well, mutual funds of course. But who cares: slow money knows it is there to be raped by the ultra fast churners and packet stuffers on Wall Street so we will not shed many tears of them. On the other hand quite a few hedge funds not only are among the biggest holders of the stock but appear to have been adding quite aggressively. The biggest losers: TPG Axon with over $46 million in losses, Trilogy Capital with over $23 million and York Capital, down $20 million on the day. Alas, the latest attempt to do the old hedge fund gang up on the stock, in which all three hedge funds added massively in the Q4 2010 quarter appears to have been an abysmal failure and whoever presented CYH at whatever idea lunch or dinner was shared among these three funds is about to be black listed from the hedge fund community for a long time. Keep in mind these are stale numbers: the latest holdings update will not come until mid May when Q1 holdings numbers are released. We wouldn't be surprised to see today's totally traumatized troica to have added quite a bit more to their holdings.