Archive - Apr 2011

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.

After a weekend full of empty (or not) Chinese posturing, Marketwatch's Brent Arends has an interesting tidbit to add to the China vs US debate. "The International Monetary Fund has just dropped a bombshell, and nobody noticed. For the first time, the international organization has set a date for the moment when the “Age of America” will end and the U.S. economy will be overtaken by that of China." The year? 2016. So perhaps having a 5 year head start in selling the bonds of what will soon be even an official former superpower is not such a bad idea. "It provides a painful context for the budget wrangling taking place in Washington, D.C., right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world’s hegemonic power." And here's why pretty soon America may be left without presidential candidates: "According to the IMF forecast, whoever is elected U.S. president next year — Obama? Mitt Romney? Donald Trump? — will be the last to preside over the world’s largest economy." Oh well, it was fun while it lasted.

• Bill Gross Battles Dealers on Outlook as Treasuries Gain (Bloomberg)
• Jim Saft chimes in: Triumph of gold, the anti-investment (Reuters)
• Fed Searches for Next Step - New Focus on Interest-Rate Plan as Controversial Bond-Buying Strategy Winds Up (WSJ)
• Iran says it has detected second cyber attack (Reuters)
• ECB-forced 'run on our banks' led to bailout (Independent)
• OPEC unlikely to change output in June (Retuers)
• China consumer prices likely to rise 4.5 pct in 2011 (Xinhua)
• China must watch for rising U.S. Treasury yields: researcher (Reuters)
• Tanks in Syria's Deraa city, bodies in street -witness (Reuters)

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 25/04/11

New home sales expected to rebound from record lows. Dallas Fed at 10:30 should confirm the Q2 economic contraction (expect Goldman to downgrade Q2 GDP if Dallas Fed comes under 10). After a one day absence, POMO is back, though today all Primary Dealer proceeds will likely go to fund margin calls.

Over the past few years, mainstream analysts have shown a tenacious blind faith in the U.S. economy and the dollar that goes far beyond religion to the point of mindless cultism, so, when even they begin to question the future of American finance (as has been occurring more and more everyday), you know its time to worry. For those that have been following my work since 2007, the events of the past few months have not been a surprise at all, however, for those just waking up to the ongoing implosion of our fiscal infrastructure, the bubbling inflationary meltdown just over the horizon and the nightmare unfolding around our national debt is rather shocking. Living through a full spectrum catastrophe is, to say the least, confusing, especially when you have no idea where the whole thing began. Until now, the mainstream media has provided nothing but economic fantasy for the masses. They have satiated the public with what amounts to financial toddler talk for helpless preschool minds averse to any research beyond their daily 15 minute sippy cup of New York Times, CNN, MSNBC or FOX cable news sound bites. I mean, have you ever actually stopped and read a Paul Krugman article more than once? Or listened carefully to an MSNBC economic piece? It’s like being violently accosted by a band of slobbering mental deficients with securitized ARM mortgages stuffed in their pants. Of course, fewer and fewer people are now buying what these hucksters are selling. With gasoline nearing $5 a gallon, grain prices doubling, and shelf prices beginning to skyrocket, it’s hard for even the most ignorant suburban schlep to remain oblivious to the problem anymore. We are no longer on the edge of the abyss; we have fallen into it head first…

I expect the silver bears to proclaim this recent huge move as a "blow-off" top that marks the inevitable bursting of the silver bubble. My take? Let’s wait until silver reaches the mid-triple digit range before we realistically start talking about a silver bubble.

You didn't think they'd forget did you. We predicted last week that the exchange would imminently hike silver margins. Well, our prediction was just a little off (and far more spot on than all those speculations about a weekend Greek restructuring and/or Chinese revaluation). As expected, the Shanghai Gold Exchange just announced it had raised the level of deposit required for its silver forward contract by 3 percent and may roll out further measures to curb excessive speculation and manage price volatility. According to the SGE, margins on its silver [Ag (T+D)] forward contract would be raised to 15 percent from April 25 compared with the previous 12 percent, according to a notice posted on its website. Silver did not even pretend to react on the news. And the upcoming silver hike by the COMEX will have absolutely the same effect.