Archive - Apr 2011

Remember when we said that "stagflation" would be the word of 2011? We were only kidding. The true word of the year can only be one. Er three. And all credit goes to Goldman Sachs. The firm which always finds a way to call a spade an excavator, has released a note on the Greek "liability management exercise" - yes: restructuring is now such an ugly word it is to be henceforth omitted when discussing what insolvent European vassal states are about to do. In the note - Francesco Garzarelli also confirms another thing about Goldman: why use another three words, namely "we don't know", instead of 10+ long paragraphs which have effectively the same effect. So cutting to the chase, here is Goldman's summary on why a Greek restructuring, pardon, "liability management exercise" would be good, no bad... no good, or unknown: "any transaction would need to be designed extremely carefully and give consideration to the impact on domestic institutions, with the ECB fully on board continuing to extend funding assistance. Further uncertainties relate to ‘second round effects’ and potential exposure of non-bank financials (estimated to amount up to EUR50bn). Funds diverted from repaying foreign creditors in full and on time, be it through debt exchanges or haircuts, could be used to further bolster the capital base of the Greek institutions." So anyway, Goldman also provides another somewhat factual note which lays out the total risk exposure to Greece, and of PIIGS in general: not surprisingly, the countries most exposed (in addition to Greece itself of course), would be Germany, France and Benelux. Here's to hoping banks in these countries have enough excess capital to absorb the massive MTM losses to come.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 21/04/11

Original piece here.

As if a dollar in freefall was not enough, surging oil is about to hit the turbo boost, decimating what is left of the US (and global) consumer. Xinhua, via Energy Daily, brings this stunner: " Chinese oil giant Sinopec has stopped exporting oil products to maintain domestic supplies amid disruption concerns caused by Middle East unrest and Japan's earthquake, a report said Wednesday. The state-run Xinhua news agency did not say how long the suspension would last but it reported that the firm had said it also would take steps to step up output "to maintain domestic market supplies of refined oil products". Oh but don't worry, those good Saudi folks are seeing a massive drop in demand... for their Kool aid perhaps. "Sinopec would ensure supplies met  the "basic needs" of the southern Chinese special regions of Hong Kong and Macao, but they also should expect an unspecified drop in supply, Xinhua quoted an unnamed company official as saying." Now... does anyone remember the 1970s?

At this rate the Hunt Brothers all time high to be taken out within a week...or a day, right about the time the dollar suffers terminal implosion. The DXY is now below 74.

As competition for food supplies increases, food prices are going to go up. In fact, at some point they are going to go way up.

Grant Williams shares: "I had been reading about gold as an investment but more importantly as a hedge against money-printing for some time and had dabbled in ETFs while I told myself that I would DEFINITELY buy some gold – real gold. Physical gold. Shiny, yellow, heavy gold. But of course, I didn’t. It was all too hard, frankly. Why go to all the trouble of researching, finding a bullion dealer, choosing between bars and coins and then plunking down your cash in return for a lump of gold when you could sit at home in front of your computer, click your mouse a few times and be the proud owner of some unallocated claim on a pool of gold that may or may not be there but that gives you exposure to any move in the gold price? You can buy exposure to gold during the commercial break of Grey’s Anatomy. Easy. The trouble with doing that, is that you then end up with a position. It becomes a number that you trade into and out of based on extraneous factors that may or may not have an effect on the underlying price. There aren’t many people who have taken a position in GLD (or SLV for that matter) who haven’t either been chased out of their position in a big down-move, or failed to pull the trigger on a buy-order because they felt the price had run too far."

And once again Goldman takes the lead (well technically the far more credible Stone McCarthy was first) in being the first bulge sellside economic team to acknowledge that following a very weak economic performance in Q1, with consensus GDP now just barely above 1.5%, Q2 GDP will have to contend with a Japanese supply shock, which contrary to expectations will actually subtract from the current quarter's GDP. How much? As much as 1% according to Goldman's Andrew Tilton. To wit: "Reasonable parameters suggest a potential impact on Q2 annualized
real GDP growth from one-quarter point to as much as a full point.
Although there could be some additional impact in other sectors of the
economy, this seems likely to be quite small." And when all is said and done we expect this number to double. Recall that none of this factors for what appears to be an oil price fixed well north of $110 (and $120 for everyone not in the US). Remove another 1% from Q2 consensus GDP for that, and what do you get? 1% at best... if very lucky. And some more bad news for US automakers (that's right Government Motors, we are looking at you and you "no impact from Japan" BS): "We think a reasonable “optimistic” scenario is only a 5% cut in US
vehicle production, whereas a reasonable worst-case scenario would be
something like a 20% cut in Q2." Time to retain GETCO for another "no sub $30 print in GM" assignment. Oh yes, and for those looking for deflation under rock and tree, more bad news: "As a hypothetical example of how this would affect consumer prices, a
3% increase in new vehicle prices that carried through to the used car
market as well would be worth 19 basis points on the headline Consumer
Price Index (where vehicles have a weight of slightly over 6%) and 25
basis points on the core."

A few days ago Jim Rogers prudently warned that silver had entered parabolic mode and the the only case which would not lead to a collapse in silver prices (once silver hit $100 that is) is if the Federal Reserve note, or the liability to all those uber-valuable Fed assets known as Treasury Bonds (and of course Agencies, thank you QE1) became "confetti." Well, confetti is what we have. As of tonight, the dollar has just taken out the 2009 lows, and only the extreme carry trade which sustained the overall market into the biggest market crash ever, back in 2008 is now a lower point in the DXY index. In other words only a complete market wipe out, or an exogenous external event such as war, now that the market does not even blink at such black swans as civil wars, bankrupt European countries, nuclear catastrophes, and record earthquakes, can lead to some restoration in the purchasing power of the US currency. Incidentally, as the long term DXYchart below shows, the current dollar cash is by now means the most pronounced one. A far bigger one occurred in the mid 80s, when the dollar was cut in half from over 160 to 80, in a move that, as everyone who was alive back then and not merely some derivative of gaseous gallium metal and arsenic trichloride, recalls culminated with Black Friday. Oh yes, gold just hit another record high.

Something interesting appeared in the daily NYMEX report of its silver warehouse stockpile data: Canada's largest bullion depository (and one of five total) reclassified a whopping 5.2 million ounces of silver from Registered to Eligible status. In order to get a sense of how big this amount is, which amounts to just under $238 million at today's fixing price, it represents just over 25% of the total silver stored at Scotia Mocatta, and about 5% of the total silver held across all depositories. The reason for this substantial shift is given as follows: "due to a reporting reclassification, 5,287,142 t oz was moved from Registered to Eligible." That's a pretty substantial reporting reclassification. Of course it could well be nothing but that, although one would imagine that a fat finger is somewhat unlikely when it comes to such a material amount. On the other hand, as those who follow the NYMEX data know too well, registered silver is actual physical Comex silver. Eligible on the other hand is sometimes called "someone else's silver" as it does not go through assays on exit/selling events. In other words, this is silver that can not be used to make delivery under a futures contract. As a result of this reclass, total registered silver dropped by 13% from 41.0 million ounces to 35.8 million. Assuming one does not have full faith in the simple error story, does this mean that deliverable silver just dropped by 13% overnight (this event occurred yesterday, but was reported as usual with a 24 hour delay). And if so, is this effective transformation of physical to semi-paper silver indicative of what we may expect from other depositories in the next few days as the delivery notices start coming in?

Headlines will crow of the strength in equities and credit today. However, the lack of high beta participation in credit, the underperformance of financials, and the clear continuation of the somewhat more risk-averse up-in-quality trade in credit and equity markets remains a concern.

It took less than 48 hours for the market to completely shrug off S&P's warning about America's credit rating, even as the dollar: that prima facie indicator of US stability and viability, has just hit a fresh 16 month low. And while nothing anyone says has much of a chance to impact the market, which continues to move with a negative 1 correlation to the now default carry funding currency, the following is the press release that S&P should issue if it wants to truly bring attention to the US debt crisis.

One of the more interesting "war zones" that most have never heard of is not in North Africe, nor in the Middle East, but in Greece. Meet Keratea, a small city of 15,000 people located close to Athens, where after over 100 days of struggle between authorities and the broder population, the riot police has officially decided to abdicate the city to its fate in what is the first popular mini-revolution in the developed world. From the Independent: "As explosions boom, the town's loudspeakers blare: "Attention! Attention! We are under attack!" Air-raid sirens wail through the streets, mingling with the frantic clanging of church bells. Clouds of tear gas waft between houses as helmeted riot police move in to push back the rebels. This isn't a war zone, but a small town just outside Athens. And while its fight is about a rubbish dump, it captures Greece's angry mood over its devastated economy. As unemployment rises and austerity bites ever harder, tempers seem to fray faster in Greece, with citizens of all stripes thumbing their noses at authority. Some refuse to pay increased highway tolls and public transport tickets. There has been a rise in politicians being heckled and even assaulted. Yesterday, in Thessalonika, scores of activists were arrested after violent clashes with police." Meet the new and improved face of austerity: now in a small town in Greece, which is about to default all over again, and soon in many other places in the increasingly more insolvent European periphery.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 20/04/11

Has anything really improved?