Archive - Apr 11, 2011

Wondering what just took the carpet from under the commodity complex? Heeeeeere's Goldman.

As we discussed extensively last week, the Repo-Excess Reserve is now officially dead: the O/N GC rate just printed at a ludicrously low rate of 2 bps confirming that the Fed's future attempts to normalize the short end will be very entertaining to watch. A bigger problem is that now banks which previously had this "free money" trade to rely on for guaranteed Fed-funded profits are now straight out of luck. Which means that the only carry trade is the tried and true FX funding trade: short crap currencies where there is no chance of a rate hike for years (such as the dollar and Yen) and go long currencies of growing developing countries whose central banks are tightening.

Not even a full hour of trading can pass anymore without a fresh Chinese fraud getting exposed. Today's plunge target: China Biotics.

Another day, another circuit breaker triggered. But this time not in some cheap Chinese fraud, but in "legit" hospital company Community Health Services, which is plummeting following the announcement of a lawsuit filed by Tenet "claiming the rival hospital operator improperly admitted patients to overbill insurers including Medicare." The stock has now been halted not once... not twice... but three times. And every time it is opened, freefall resumes. The chart says it all: and yes, not even the brilliant SEC contraption of circuit breakers can't do much if anything to prevent reality finally meeting anti-gravity.

Who can forget the frenzied all out bashing of Toyota on all government propaganda stations after the brake pedal got stuck just at a time when GM was emerging from bankruptcy, and before it was forced to engage in stuffing dealers with its bloated inventory. Yet very little if anything has been said about the curious case of the Chevy Cruze... and the falling steering wheel. The WSJ writes: "Imagine turning your car’s steering wheel, or giving it a gentle tug, and having it break away from the steering column. Now you’re speeding along holding the suddenly useless wheel. It sounds like a vision from a cartoon, or every driver’s nightmare. And it happened to at least one driver of a 2011 Chevrolet Cruze compact car last month, and General Motors Corp. is recalling 2,100 of the cars as a result." Because in Soviet Amerika, working steering wheel is an accessory. Phil Lebeau: insert Chuck Norris joke here.... Phil... Phil?

The Fed now has to choose between two bad options: either keep pushing down the dollar and let oil's inevitable rise trigger a recession, or let the dollar recover and watch stocks crater as the "risk trades" reverse. If the dollar Bears have to cover their short bets, the ensuing rally in the dollar might well be explosive and self-reinforcing. If the Fed lets the dollar depreciate in an uncontrolled fashion, then we may well end up with the hyper-inflation (loss of faith) that many expect. My question remains: what course of action will benefit those issuing the whispered orders to their lackeys and toadies on the Fed and in Congress? Will a disorderly and disruptive collapse of the dollar serve the Financial Power Elites' best interests? I don't see how it would. Rather, I see it wreaking great damage on their holdings. Thus it wouldn't surprise me in the least were the Fed to shock the markets with a "surprise" rate increase within the next few weeks or months. Destroying the real economy to maintain the "risk trades" is a foolhardy way to close down a lose-lose position.

This is the beginning of the end for Chinese reverse mergers. Alas, after having been the single most profitable trade in the market for the past 5 months when Chinese reverse merger frauds would guarantee up to 50% gains in the span of hours after people refusing to drink the kool aid and actually do their homework would expose one after another of these abortions which the flailing domestic exchanges (NYSE and NASDAQ) would gladly list in exchange for much needed fees, the party is coming to an end. Interactive Brokers has just announced that it will hike margin requirements from 50% to 100% over the next 3 days on virtually every single Chinese reverse merger name. Shortly, everyone else will follow through with a comparable increase. Timber ahead... and time to find the next "sure money" shorting scheme.

After years of being the primary supplier of funding to the US credit-money shell game, one more ex-PBoC member wakes up from the "great normalization" acid trip, and in a Caixin editorial says what virtually everyone now understands all too well: the Treasury market is one "giant Ponzi scheme." Oh, and it wasn't obvious when China was the biggest holder of debt for years (until the Fed became the biggest monetizer of US Treasuries late in 2010)? Sounds like a rather serious case of buyers remorse is creeping into the buying mindset of America's formerly primary enabler. The $64 trillion question now, as always, is whether China, whose holdings have been flat for a year will follow in Pimco's footsteps and actually commence selling longer-dated paper. If so, and with QE3 now expected to end even if temporarily, the aftermath will not be what Congress wants to see.

And like that, we now have one less conflict. From Reuters "French special forces have detained Ivory Coast's Laurent Gbagbo and handed him to leaders of the rebel opposition, after French tanks forced their way into his residence, a Gbagbo adviser in France said. "Gbagbo has been arrested by French special forces in his residence and has been handed over to the rebel leaders," Toussaint Alain told Reuters." We would prefer not to visualize what happens to Gbagbo in the hands of his news captors. Importantly, considering the primary determinant in cocoa prices YTD has been the ongoing civil war in the African country, the promise of an end to hostilities sends Cocoa prices plunging, dropping the 10 metric ton contract by nearly $100 in the span of seconds.

With politics suddenly taking a key role in daily market gyrations, and robots most certainly not accustomed to trading off D.C. headlines, here is the upcoming week's key events out of the Beltway.

Silver's nearly 3% surge in trading in Asia may indicate that the long expected short squeeze may be underway. Bullion banks with very large concentrated short positions may be being forced to buy back their short positions – propelling silver higher. This could see silver surge over the record nominal high of $50.35/oz in short order. At the same time caution is merited as silver has risen nearly 10% in April so far and over 33% year to date. Speculators need to be very cautious as margin requirements may be increased again and profit taking could lead to sharp falls in price. Leveraged speculation is extremely high risk and should be avoided by investors and savers. Proof of the lack of animal spirits in the silver marker is seen in the data which shows that speculative sentiment on the COMEX (as seen in the Commitment of Traders/ COT data – see chart below) is subdued. While the total silver ETF holdings increased to a record, they are not far above the levels seen in December 2010 (see chart above). Importantly, even at $41.30/oz the dollar value of the total silver ETF holdings remains very small at just over $20.5 billion. To put that number in perspective, today bankers put a prospective value of around $60 billion on Glencore, one of the world’s largest commodity trading companies. BP has set up a fund worth $20 billion to cover legal claims from the oil spill disaster.

The last time Bill Dudley hosted a Q&A on inflation, he made the now legendary phase, noted here, that people should just eat iPads and let their betters worry about such trivial problems as "transitory" inflation. Today Jan Hatzius' predecessor and Goldman's plant at the New York Fed continues his Titans of Taste (substitution) world tour, speaking in Tokyo, Japan, where he is experiencing one after another aftershock while discussing "Regulatory Reform of the Global Financial System." Select highlights from the speech: US economy in better shape than last summer; QE2 is partially responsible for recent rebound although the US economy has lost momentum in past few months due to oil prices; oil prices are negative to economic outlook; big focus for Fed is inflation expectations; expectations have not become anchored; CPI rise in US may be more modest than other countries as US starting at lower base; "it is important to not to overreact to rise in headline inflation as its likely to be temporary", there is more slack in the US economy than in Europe; "there should not be too much enthusiasm about tightening monetary policy too early", and many other such dovish rambling which once again confirm that Hatzius and Dudley are laying the groundwork for additional QEasing.

• Obama Push to Seize Budget Initiative (FT)
• China gives all clear on bond issuance bubble: Government Boosts the Bond Markets (China Daily)
• You mean they can't use 200% debt financing? Nasdaq OMX Needs Shareholders to Embrace Rejected Bid (Bloomberg)
• Complacent Europe Must Realise Spain Will be Next (FT)
• Japan's seismic nerve center (Japan Times)
• Kan’s DPJ Suffers Election Setback One Month After Japan Quake (Bloomberg)
• Edano Says Japan Doesn't Need BOJ to Help Fund Post-Quake Disaster Relief (Bloomberg)
• State Prosecutor Summons Mubarak (FT)
• US Doubts Air Power Can Turn Libyan Tide (FT)

A must read comment on comparing risk across pension funds...

According to the latest Lundberg survey the average price for a gallon of gasoline in the United States has moved closer to $4, jumping more than 19 cents since mid-March to a level less than 10 percent below its all-time high. And it's not even peak driving season, which typically sees a seasonal jump of at least 15-20% from early spring levels. Per Reuters: " The Lundberg Survey said the national average price of self-serve, regular unleaded gas was $3.765 on Friday, up from $3.573 on March 18, and up 91.3 cents from $2.852 a year ago. Prices in several western U.S. cities are already above $4 per gallon, led by San Francisco at $4.13. Chicago was close behind at $4.11 a gallon, the survey said." What is not surprising is that demand saturation is starting to set in, meaning refinery margins are now going through the window: " The national average would have been higher had refiners and retailers not resisted passing on rising crude oil prices as customers grow less willing to pay what it takes to fill their gas tanks, analyst Trilby Lundberg said in an interview. "Demand has been falling at these prices," she said."