Archive - Apr 26, 2011

While the state pretends to protect its people from external threats, it is in fact the perpetrator thereof, the more so the larger the state is. Which is to say, the state does not provide security. Rather, it creates the need for security on a scale that would not otherwise exist, assuring that the more it spends, the more liberties must be sacrificed on the altar of “national defense.” Why else would the American people, for example, find themselves in something approaching lockdown status, despite the fact that their government constitutes nearly half of all military spending worldwide?

With stock volatility having morphed over the past year to FX and commodities, along the lines of what had been expected, some of those trading various ags (and other commodities) have had to literally suffer through days of gutwrenching market halts when a given product hits its daily limit for the day. And over the past two months it has been a veritable limit-a-palooza. Which is why we were not surprised to learn that having appreciated the severity of this artificial "limit" rule, the CME is now considering its revision. From Reuters: "The CME Group Inc is considering widening the daily trading limit in Chicago Board of Trade corn futures to 50 cents per bushel, from the current 30 cents, a spokesman for the exchange said Tuesday...The exchange last expanded the daily limit in corn in March 2008, to 30 cents from 20 cents. At that time, front-month CBOT corn futures were trading at $5.60 a bushel and were on their way to a then-record high of $7.65 in June 2008." And since, pretty soon the new, wider range will likely be filled on a daily basis when the market goes all bid or offered, we expect the CME to do away with position limits entirely: a progression diametrically opposed to what the SEC is doing to halt market crashes in regular equity markets. It is almost as if the CME is inviting more volatility into a market (where the exchange makes the bulk of its money based on daily traded vol). But is there more here than meets the eye?

Oops?

This week all eyes are on the Federal Open Market Committee (FOMC) and Federal Reserve Chairman Ben Bernanke. The FOMC must decide whether to stop monetizing the federal debt issued by the Treasury, which is what the U.S. central bank calls “quantitative easing.” Americans continue to believe — and hope — that the Fed can save us from our collective idiocy when it comes to debt, both public and private. While there are growing signs that the Fed’s zero interest rate policy, or “ZIRP,” is greatly damaging individuals and financial institutions alike, we also need to question whether the Fed can let rates rise without provoking another financial assets collapse. In effect, the Fed and other global central banks are all caught in a “Catch-22? situation, to borrow the phrase from the 1961 novel by Joseph Heller. The Fed’s aggressive easing of interest rates and purchases of trillions of dollars in Treasury debt and other assets has stabilized and even raised the price of financial assets, but in other respects the Fed’s policy of reflation has failed — especially compared with past interest rate cycles.

Next time you hear a tree-hugging hippie tell you SUV's are destroying the Planet, remind them their VW Bus with the tiny 4-cylinder engine produces more emissions, but only goes half as fast as a Cadillac Escalade, all while using the same amount of fuel. Technology FTW!

Gold and silver dip modestly from near all time highs and the momentum chasing brigade is screaming it's the end of the world and all ___bugs should take cover. At such a point it is useful to reanalyze the fundamentals that have brought the two key precious metals to such astronomic heights. Attached, we present a 40 pages special report from Reuters, summarizing all the recent developments in the area, for all those who still may be unsure about the alternatives provided by the metal to the traditional fiat-based monetary system.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 26/04/11

There has been a lot of talk about the excessive loose monetary policy coming out of the Federal Reserve. However, most of the arguments concerning the implications take the form of generalizations as opposed to quantifiable relationships. Our objective here is to show, through the historical relationship between short-term interest rates and the economy, that the Fed has been overly generous. Moreover, we will see that the data call for much higher industrial commodity prices before this cycle runs its course. In retrospect, they will make today’s elevated levels look benign by comparison. There are two inescapable conclusions from this data. The first is that interest rates and commodities are headed much higher. The second is that the Libyan no fly zone needs to be extended to include Ben Bernanke’s helicopter.

A company with already razor thin margins comes out and while it beats revenues, reporting $9.86 billion in sales on expectations of $9.54 billion, it literally shits the bed on the bottom line, reporting $0.44 EPS on expectations of $0.61, proving that this mythical "margin collapse" thing is actually really real. And the icing on the cake: it provides an operating income guidance range for Q2 of $95 million to $245 million. Expectations? $369.5 million. Can you spell Timber? Market sure can.

To think, just as stocks had started to demonstrate some semblance of normalcy we get... today. Whether it is due to some unfounded rumor that Bernanke will say something surprising tomorrow, or disclose something that he is unprepared to disclose, we are seeing another carry fueled binge resulting in a total divergence (or technically convergence) between the two traditionally inversely correlating asset classes: stocks and bonds. As the chart below demonstrates, while the two had been trending in perfect unison yesterday, today we are seeing a substantial decoupling between the 2s10s30s butterfly, which is also indicative of bidding interest focused on the 10 year, and thus is an indicator of a smoothing of the treasury curve: something traditionally associated with stock market weakness. But not today. Which is why at this point a compression trade seems warranted with an up to 40 ES equivalent point pick up.

Today's three ring circus...

There has been a LOT of talk recently on the rising price of gasoline at the pump, so much so, that Obama has now jumped in with both feet admonishing the "evil speculators" for causing such a burden upon the American public. Well, that and to promote a clean energy policy that is ill conceived, ineffective and grossly misunderstood...mostly by him. However, as in the famous words of Bill Clinton, "What is...IS" and what "is" right now is that gasoline is rapidly approaching, and has achieved in some states already, $4 a gallon. Therefore, that is what should be concerned with right now and when that additional drain on the discretionary income of the average American translates into the next economic recession.

Krag Gregory's derivative trading desk has had its share of success over the past several years which is why we present the latest compilation packet by the Goldman Derivative traders. While it is not surprising that this particular silo of Goldman is alligned with the prevalent theme at GS, which is S&P500 at 1,500 or bust, which obviously would imply ongoing declines in vol (with or without the assistance of the Fed), there are some obseravtions that deserve to be highlighted...

Please list the banks and other entities and individuals which own the Federal Reserve, and their percentage of ownership.

Since I’ve identified four major rationales for our impending doom, I’ve decided to write a four part series that can be read in small doses, rather than one enormous article. I don’t want anyone to miss tonight’s episode of Dancing With the Stars, get distracted from the Royal Wedding preparations, or skip the best reality TV show ever – Ben Bernanke’s press conference, while reading an 8,000 word article about the end of America. The four part series will have a Clint Eastwood theme. For a Few Dollars More will address the Baby Boomer impact on America’s decline. A Fistful of Dollars will examine how the creation of the Federal Reserve and the income tax in 1913 set us on a path to ruin. Outlaw Josey Wales will scrutinize the looting of America by a small group of powerful, connected, super rich men lurking in the shadows, but pulling the strings on our puppet politicians. Lastly, Unforgiven will detail the impending collapse of our economic system and the retribution that will be handed out to the guilty.