Archive - Apr 2011

With all eyes on Europe today, where the BOE just announced it is keeping rates at 0.50% as expected, the events in the US are jobless claims and February consumer credit.

As destructive as the Japanese tsunami has been, it may have left some investment pearls in its wake. It has suddenly made available some of the country’s best of breed, world beating companies available at throw away prices. But this is going to be an investment for longer term money, not a trade, as some patients may be required for a payday.

Thanks for looking out Strade.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 07/04/11

The price of corn has moved up sharply higher during the last couple of trading days. This time around, the newest USDA figures were giving (short) traders headaches over U.S. corn inventories. And there’s more where that came from…

There are two problems with the consumerist paradise that is the foundation of the U.S. economy. One is that people slowly awaken to the realization they don't really need additional goods and services, as their attention becomes focused on preserving their access to those they suddenly value, such as shelter, food and electricity. In moving (out of a foreclosed house or on to another job, etc.) they suddenly feel the great freedom of no longer being enslaved to all their stuff; they realize it owned them, not the other way round. In having to come face to face with their mountains of "cute blouses," old electronic toys, busted Ikea furniture, bicycles nobody rides, etc., then they slowly realize the return gained from buying all that stuff was increasingly marginal. They might also awaken to the reality that partly why they have no capital or assets is that they squandered much of their income on instant gratification and marginal-return toys of various sizes and shapes, and costly "experiences" such as fine dining and cruises.

It appears that the Standard Operating Procedure following the Fukushima fallout so far has been: 1) deny, 2), deny 3) deny, 4) raise safety limit, 5) collapse in a sniveling heap of guilt. Korea seems to be between step 1 and 2. As the following animation from ZAMG demonstrates, courtesy of Northeastern winds, a major cloud of radioactive Iodine 131 is currently passing right over South Korea. Making matters worse is the fact that it is currently drizzling in the lucklocked nation, putting people on edge. Yet one cursory look at Korean press, in this case Arirang, demonstrates that absolutely nothing has changed in how governments, ready to sacrifice everything at the altar of mass panic, interact with their population when it comes to sensitive issues such as radioactive rain. "Meanwhile unlike many have anticipated the Korea Meteorological Administration assured that the seasonal winds accompanied by rain approaching from Japan will have almost no impact on Korea." Well, there's spin and there's facts. And for what it's worth the animation shows the facts. This way at least some people will have the choice of making an informed decision. Others may just wake up with superhuman powers soon enough.

It's as clear as mud

"Dear Dr. Paul...There are serious questions about the legality of Quantitative Easing. You are among the few who are well-qualified and well-placed to get to the bottom of it. Most people believe, and the media confirm them in that belief, that the Fed can legally create dollars ‘out of the thin air’ in any quantity, and can do with them as it pleases. This may well be the pipe dream of Dr. Bernanke who is quoted as saying that the U.S. government has given the Fed a tool, the printing press, to stop deflation — but it hardly corresponds to the truth. The Fed can create new dollars only if some stringent legal conditions are satisfied, and then, it can only dispose of them in certain ways prescribed by law." Antal Fekete

As gasoline prices continue to surge day after day (and with WTI touching $109 today this will continue for a long time), the peasantry is getting restless. Not only that but it is getting nosy. In fact today some plebs had the temerity to seek answers from the teleprompter over the festering question of just how long will Bernanke, pardon, UK stagflation, pardon, default Portugal, pardon, healthy worldwide demand keep pushing gas prices to $4, then $5, then $6, and eventually to the price paid in Europe: about $9. The response was straight out of Charlie Munger's (non-frontrunning) playbook: "I'm just going to be honest with you. There's not much we can do next week or two weeks from now," the president told workers at a wind turbine plant (one operated by Spanish company Gamesa). "Gas prices? They're going to still fluctuate until we can start making
these broader changes, and that's going to take a couple of years to
have serious effect." And we doubt Obama's hard core union electorate will be happy at the following stab at Channel Stuffing Motors: "If you're complaining about the price of gas and you're only getting 8
miles a gallon, you know," Obama said laughingly. "You might want to
think about a trade-in." Let's hope the people don't get the same idea about the presidential office two years from now, even after the $1 billion spent on TV ads. As to the core question, we were surprised Bill Dudley was not present at Obama's side explaining how deluded complainers should just have a chilled glass of unleaded 98 Octane with their main course of deflationary iPad 2.

But please don't show these statistics to anyone that is feeling depressed or that has just lost a job - it might push such a person over the edge.

With Portugal about to enter the warm embrace of the EFSF, even though nobody still knows just what the constantly updated and revised EFSF actually is, and the IMF (read America) is far more likely to end up footing the cost of the latest European bailout, it makes sense to find out just what the status of the latest incarnation of the EFSF is, or as Peter Tchir of TF Market Advisors calls it, the EFSF V1.5. This is especially important as in 14 hours, Jean Claude Trichet will most likely announce a 25 basis point increase in the ECB funds rate, even as more and more of the European periphery is struggling with solvency and liquidity access. That tightening by the Central Bank will either make life for the PIGS even more complicated or make their lock out from traditional capital markets complete. On the other hand the ECB has no choice with inflation in Europe surging, and Trichet forced to do something, anything. Therefore, courtesy of the EFSF, Europe will quite literally have its cake and eat it too: it will have a QE-like debt monetization instrument in the form of a €400 billion monster CDO, while at the same time it will be removing market liquidity: this is supposed to achieve one goal and one goal only - keep cheap liquidity flowing for the insolvent part of Europe and slow down growth in the healthy part, read Germany. This has never been tried before, and nobody is willing to risk their career with a statement that it will work. On the other hand, this set up provides some perspective on how Bernanke may proceed in the future: he may be forced to tighten even as he continues to monetize various pieces of debt. Although by the time such a "solution" is implemented, there will be enough precedent to determine if the latest European experiment has been a complete or just partial failure.

As Bespoke points out, bearish sentiment as calculated by Investors Intelligence in the past week plunged by a whopping 32 from 23.1% to 15.7%. This is the most bullish since late 2009. Empirically speaking, this is bad news for the market, as there are virtually no contrarians left and everyone is on the same side of the boat. As John Lohman demonstrates, the returns 1, 3, 5 and 10 weeks following a more than 25% drop in bearish sentiment are as follows: -0.92%, -2.07%, -1.99%, and -1.95%, respectively. Yet of all these, only the drop in November 2009 was actually executed in an environment of central planning such as the one that continues through today: and in that one the market actually rose 0.01%, 1.38% and 3.22% in the 1, 3, and 5 weeks following (and dropped 1.6% ten weeks later). Will the current shift in sentiment revert to the average, or will the market continue to price in aggressive Fed central planning? Stay tuned and find out.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 06/04/11

The Fed has just announced that of the 52 Maiden Lane II CUSIPs offered as part of a Bid List circulated on April 4, the Fed has just sold 42 of these CUSIPs, for a total face value (not price paid) of $1.3 billion. The actual cash exchanged is likely about 50% of this amount, as the Fed has kept the OID it used when purchasing the full $39.3 billion back in October 31, 2008 for $20.5 billion pretty much flat. The list of auction winner(s) will be made available shortly, as will the actual amount of proceeds received by the Fed and the IRR on the transaction. Since there is another $38 billion in ML2 assets left, look for many more such Bid Lists over the next several months until the market crashes and yield chasing finally ends.