Archive - Apr 25, 2011

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 25/04/11

Recently there has been lots of goalseeked speculation by sellside research about what the impact of QE2 will be. Considering that the biggest force in bond buying (PIMCO) disagreed with virtually everyone else, it is safe to say that nobody has any idea what will happen on July 1 (of course unless the Fed also actually stop its off-balance sheet curve vol selling, in which case the imminent collapse in the bond market is guaranteed). Naturally, after the private sector has come out defending its respective books, here come the Admirals of the Obvious from the San Fran Fed to voice in on just how good and wise QE2 was especially when compared to such a "monster" as 1961's $8.8 billion Operation Twist. According to the Fed, Operation Twist, which was truly a curve "twisting" operation instead of an outright debt monetization and deficit funding operation, succeeded in reducing rates by 0.15%. It is this delusion that fostered QE2, which is merely a continuation of QE1 and a contributor to the Fed's soon to be $2.9 trillion balance sheet, as the Fed was obviously trying to recreate history. Little did it realize that Twist was not about the implosion of a shadow banking bubble but all about removing rate arbitrage opportunities. Curiously enough, it was the rush of gold from the US To Europe, to express this arbitrage, that forced the US to engage in Operation Twist. Only later was the gold backing of the dollar completely removed thereby eliminating this arb opportunity. Of course, it is now deja vu all over again: the Fed has to do all it can to prevent the transfer of fiat into gold, albeit at non-fixed rates, or as some have called it, a non-central bank instituted gold standard. Yet oddly enough, despite all time record nominal prices, the demand for gold is only increasing, a result that the Fed had not anticipated at all and is forced to scramble to reverse. And now that QE2 has been a complete failure, the only option is to back track on everything and admit the Fed has failed, or pursue more QE, sending gold offerless. Your call Ben.

Hmmmmmm...

I dreamt I dwelt in marble halls,--And each damp thing that creeps and crawls--Went wobble-wobble on the walls.

More BKTV.

With the US Mint forced to cut down dramatically on its Silver American Eagle sales, for some reason various timid elements considered the drop in monthly sales as indicative of a wane in investor interest (record prices aside). Perhaps the following note from Ampex: one of the otherwise "deepest" silver vendors in the market, may restore some balance to the (supply/demand) force.

The SHTFPlan's Mac Slavo brings us the story of one Bill Cramer who decided to cash in on his silver profits after a nearly decade holding period (under the assumption he was receiving warehousing services considering he was paying storage fees), confident that he could simply receive the metal he held with a broker, until he heard the following 5 very disturbing words: "Sorry, delivery is not possible."

You only get to shop at the store WE tell you to, and you only get to buy what WE decide you need!

There is a great disturbance in the world's financial Force. Many sense it as a storm on the horizon, something not yet visible but telegraphed by a rising, swirling wind and a new electric scent in the air. I don't claim to have a complete narrative that accounts for all the points of friction wearing down the moving parts, nor do I claim a "solution." But a few observations might help inform our awareness of the disturbance....The Fed is busily destroying the village, suposedly to save it--only it's the global village. But the Fed isn't the only player with a stake in its game, and the other players, notably China, are tipping their hand that they will have to act, and soon, to protect their own domestic economies from the Fed's destructive policies.

And following the continuing plunge in new homes for sale reported earlier, we get the second validation of the theory that the Q2 GDP is about to get the rug pulled from underneath it. The April Dallas manufacturing number came precisely at the borderline we expected earlier would mean an outright downgrade of Q2 economic data by Goldman, or 10.5%. Of note: The production index, a key measure of state manufacturing conditions, moved down from 24 to 8, suggesting slower growth in output." We thing the proper word is "plunged." This is as expected considering our long held assumption that the Japanese economic collapse is already impacting the US. In addition to production, other indicators that saw a collapse were volume of shipments, down 10.9 and the average employee workweeks, which tumbled by over 13. But at least Bernanke is getting his hyperinflation wet dream on: average wages increased by 4. Probably the most important index: prices paid, barely budged, printing at 56.6 compared to 57.2 last month. We are confident that Hatzius will have some very unpleasant words when commenting on this latest contractionary data point. As for the respondents, they confirmed that the bulk of the broader inflation is about to hit, as manufacturers can no longer internalize plunging margins. To wit: "From a cost
standpoint, commodity prices continue to increase, negatively impacting
material and delivery costs. As a result, we are in the process of
taking a price increase to the market, which should occur in May" and "Our sales are up,
but our cost of goods sold and the cost of diesel are keeping our
margins at record lows" and, FTW: "Rapidly increasing costs and fuel costs have
shocked the consumer away from any nonmandatory spending." Pretty much says it all.

The world is now moving away from the US Dollar in a rapid pace. Russia and China are no longer using the US Dollar for trade between each other. Saudi Arabia is sending representatives to China and Russia to strengthen trade ties (which hints that oil may not be priced in Dollars in the coming years). And the BRICS (Brazil, Russia, India, China and now South Africa) recently staged a conference in southern China to discuss trading in their domestic currencies rather than the US Dollar.

Summary: Right now there is a war in Gold options. It is between the May 1520 longs, who most likely are unhedged, and their short option counterparts, who most likely are hedged. One would think the longs intend to sell futures at some point, perhaps 1520, perhaps 1540 we do not know. It is also possible that they intend to take delivery, but that is unknowable for the moment. The shorts are probably delta hedgers and have no desire to see this market go above 1520, much less move at all.

What do you think would do the most damage, the default of three EU nations or the collapse of Lehman Brothers? This may very well be a trick questions since the default of EU nations may very well bring on a banking collapse in and of itself.

According to the census department, new home sales printed at 300,000 in March (annualized; actual number sold was a whopping 29,000, of which 59% were not even built yet), a modest beat of  expectations of 280,000. The February number was revised from 250K to 270K. Therefore this was a 11.1% increase from what were virtually record lows. Refuting the better than expected headline, the underlying data was not too pretty: "The median sales price of new houses sold in March 2011 was $213,800; the average sales price was $246,800. The seasonally adjusted estimate of new houses for sale at the end of March was 183,000. This represents a supply of 7.3 months at the current sales rate" compared to 8.2 months in February. Additionally there was 1,000 or less house sold between $400,000 and $499.999, 1,000 or less houses sold between $500,000 and $749,000 and (Z) or less than 500 units sold under $750,000. And the kicker: the number of houses for sale at the end of March, 182,000 was the lowest since 1967. Welcome to the (recoveryless) recovery.

Maybe it’s all the rain lately but my funny bone is tingling. This week the FOMC conducts a two day meeting whereby Fed officials will clarify intentions regarding the perceived closure (or not) of QE2 and the policy body will also address growing concerns (or not) about inflation. To mark a new era in Fed communications, Chairman Bernanke will hold a press conference at the conclusion of the FOMC on Wednesday. This conference has all the makings of its predecessor, historically volatile semi-annual Humphrey Hawkins testimonies on monetary policy in front of Congress. It’s a good thing since in the past month alone sixteen different Fed policymakers (did you know there were that many?) have given more than forty formal addresses, in addition to television, newspaper and newswire interviews. And Congress isn’t in this week.