Archive - May 13, 2011

Wondering where the volatility went? Just look below. Countries now trade like microcap, 3x beta stocks. Thank you Federal Reserve. Oh, and while you are at it, please sell some FX vol Brian Sack. Below is a chart of the DXY constituents: everything getting creamed except for the JPY, showing the only currency not used to short the dollar against. We can't wait for today's CFTC Committment of Traders update to see how many specs got blown up by this move.

Don't worry, your "investment" is safely protected by "contractual arrangements..."

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

Update: 6th Halt

For anyone who is sitting by the terminal bored by the meltdown of the EURUSD, redirect your attention to RMBS please where the stock has crashed, either up or down, and has been halted not once, not twice, not three times... but five times in a row, an all time world record, and a confirmation that the morons at the SEC have taken a farce and converted it into a tragedy.

You just can't make this up: proving that Japan can outdo even the Russians when it comes to nuclear crisis "response", Dow Jones reports that the latest scheme to come out of TEPCO is to cover Fukushima with a giant tent. It is unclear if it will have a circus coloration yet. From DJ: "Giant polyester covers will soon be placed around the damaged reactor buildings at Japan's Fukushima nuclear complex to help contain the release of radioactive substances into the atmosphere, the plant operator said Friday. Tokyo Electric Power Co. (TEPCO) will install the first cover at the No. 1 reactor, the focus of recent stabilization efforts, starting next month." This probably means that Japan looked long and hard at the concrete shell option and realized it was impossible, which is true. The problem is that by now the melted cores are not in the complex, but deep beneath it and the radioactivity is actively seeping directly into the soil. And since the polyester tent idea is doomed to failure, it is only a matter of time before the Simpsons dome is firmly in place over a ragion with a radius of about 20 kilometers. Impossible you say? Just wait.

In his just released piece, Bob Janjuah's partner at Nomura, Kevin Gaynor, makes some quite profound and very contrarian observations on correlations, a topic discussed extensively on Zero Hedge in the past year. While the prevailing thought is that recently cross-asset correlations have actually dropped (in some cases to record levels), the truth is quite different: "While our colleagues in the Macro Strategy team have made a cogent case that price action in several markets reveals a more discerning behaviour and reduction in observed correlations, Bob and I have been coming around to a slightly different view. Many clients with whom we have spoken over recent weeks are becoming aware of the rather narrow sources of market drivers (two we would argue) and consequent similarities in terms of themes that have driven individual asset classes. It logically follows that anything changing the actual or expected state of those market drivers will have an impact on market returns across a range of risk types and geographies. More to the point, given the nature of those themes (mostly one way), we must be aware of the possibility for a non-linear response to linear changes in those market drivers. That's a fancy way of saying that correlation risk is actually rising in our opinion, as two themes appear to be dominating markets – western liquidity injections without leverage or EM FX appreciation and EM as the source of marginal final demand. These two potent forces have come to dominate the return environment. Consider leadership in DM equity indices since March 2009; it is basic materials and industrials and more lately oil and gas. Ex those sectors, western stock market returns would look rather more threadbare. But perhaps more the point in terms of the non-linearity issue is that the beta of the major indices to these sectors has naturally risen over the past 2 years. Whereas in the past, one had to broadly get financials correct to have a decent stab at calling equity returns (a gross oversimplification I know), it now seems to be the CRB sectors you need to get right." The follow through of all this, and it can be read below, is that the 30 year "great moderation" is rapidly ending and the inflationary threat is now very close, and would be EM driven. At that point none of the Fed's emergency tightening policies, no matter what Alan Blinder's textbook says, would have any impact whatsoever.

Today's Flash Smash visualization in the stock of Enstar is brought to you by Nanex: from $102 to $0.01 in just under a second. But fear not: William O'Brien, the CEO of Direct Edge, made infamous by Zero Hedge through the whole Flash trading frontrunning scandal, says "the most egregious aspects of the Flash Crash, such as a stock trading at $39 and then going to 1 penny and back up to $38 in a matter of minutes, can't happen again with the progress made the last year". Behold progress...

And so we get another example of government efficiency at work. The still taxpayer funded General Motors has just announced it will spend $109 million to keep and add 96 jobs. This amounts to $1.135 million per employee. That's right, a carmaker is about to spend on a per worker basis, roughly what an average Goldman worker makes in base+bonus... in the hub of wage expansion, Michigan.

And yes, a token eurotrash sipping the Red Bull was there. Also, does this mean Nevada's GDP will be up by 10% next month?

Because one chart is worth a thousand Fed Chairman press conferences...

In the last two years, one of the most accurate predictors of both long and short-term trends has been FX Concepts' John Taylor, whose April call for a EURUSD peak of 1.4925 was almost to the dot. Which is why he is either about to cheapen his predictive record by being wrong, or the days of the rally are ending. In a statement very comparable to that from Jeremy Grantham released a few days ago, Taylor tells Bloomberg that: "the rally in higher-yielding assets is coming to an end with Europe’s sovereign debt crisis resurfacing, growth sluggish and banking systems unsteady. “This is the end of the nice slow moving risk rally that has lulled us pleasantly to sleep since the first half of 2009,” Taylor, chairman of New York-based FX Concepts LLC, said in an interview. “This warning is worthy of a brass band and bright lights as the other side of this low volatility rally will most likely be a scary descent that will have a very negative impact on markets. Our statistical models say we are about at the end of the road for risk.” Taylor gives a deadline to his prediction: "Higher-risk assets, such as equities, the euro and emerging market currencies, have either peaked or will do so by end of July." If Taylor's previous predictive record is any indication, it may get volatile soon. On the other hand, his forte is FX not stocks, and many other forecasters have been burned (or should have been) at the stake of predicting capital markets in a time of central planning.

April consumer inflation rose 0.4% in April, in line with expectations, and 3.2% year over year. This is a modest drop in the monthly increase from 0.5% in March, while the Y/Y number was an increase from 2.7% to 3.2%. The energy index posted another increase in April as the gasoline index continued to rise, the latter accounting for almost half of the seasonally adjusted all items increase. For those who eat in addition to use energy, the BLS had this to say: "The food index increased as well in April, though the 0.5 percent rise in the food at home index was the smallest increase this year." Still: "Within the food at home component, the indexes for meats, poultry, fish, and eggs, for dairy and related products, and for nonalcoholic beverages all posted notable increases, though the fresh vegetables index did decline following recent advances." Core CPI rose for 0.2%: the third such increase in 4 months. Overall, CPI continues to be far less than indicated by the MIT BPP.

• Japan’s Most Important Banker Sees Only Bubbles (Bloomberg)
• China May Limit Rate Increases After Raising Bank Reserve Ratio (Bloomberg)
• Japan Approves Tepco Nuclear Claims Plan (Reuters)
• What Is The Purpose Of The Euro? (Forbes)
• Senior IMF Official: Asian Countries, Including China, Increasingly See Currency Rise Needed (WSJ)
• Suicide Bombing Kills At Least 69 in Pakistan (Reuters)
• U.S. Attorney Sends a Message to Wall Street (NYT)
• Mighty Determined Sellers (NYT)
• IMF Weighs Extending Greek Repayments (WSJ)
• Beef Buying Koreans Fuel Record U.S. Meat Rally (Bloomberg)

In the aftermath of the Shanghai exchange's margin hike and trading band increase reported previously, a pair of articles from Bloomberg and the FT looks at the trading of silver in China, where the mostly retail-traded metal continues to be seen as an inflation hedge. From Bloomberg: "Silver trading in Shanghai, which jumped 65 percent in terms of volume last month, will continue to increase on demand for a safe-haven investment, even as the government moves to curb volatility and speculation." And since China's inflationary concerns are unlikely to go away soon, it is only natural that domestic hedging, mixed in with some wild speculation, will continue: "“Chinese investors have piled into silver as one of the investment choices to hedge against rising inflation,” Shi Heqing, silver analyst at Beijing Antaike Information Development Co., said today. The government’s move to increase margins in an effort to curb volatility won’t affect buying interest in physical material, Shi said." Sure enough volume has exploded: "Volume on the Shanghai Gold Exchange rose to 33,293 metric tons in April, up from 20,206 tons the previous month, according to data from the exchange, the main bourse in China for trading silver." The FT provides another look at the unprecedented surge in silver trading in Shanghai: "At the same time, silver turnover on the Shanghai Gold Exchange, China’s main precious metals trading hub spiked, rising 2,837 per cent from the start of this year to a peak of 70m ounces on April 26, according to exchange data. The number of contracts outstanding, an indicator of investor exposure, doubled over the same period." In other words, while in the US it is mostly gold that is a pure inflation hedge at both the retail and institutional level, in China, where runaway inflation is running far higher than here, silver is the primary means to cut inflationary exposure. Therefore, nothing short of a full on deflationary episode in China will do much if anything to have a long-term impact on the price of silver.

Following last week's ECB very dovish conference, in which Trichet was believed to have put any tightening plans in the eurozone on hold for an indefinite amount of time, today's release of very strong core Eurozone data once again brings the specter of a rate hike to the fore, sending the EURUSD notably higher, and of course, leading to a weakening in the dollar. In addition, the already well known schism between Europe's core and periphery continues, following very weak data reported in the austere PIIGS countries, offset by consensus beating growth in Germany and France. From Bloomberg: "Euro-region economic growth accelerated to the fastest pace since the second quarter of 2010, powered by forecast-topping expansion in Germany and France that offset the impact of tougher austerity measures from Ireland to Spain. Gross domestic product in the 17-member euro area rose 0.8 percent from the fourth quarter, when it increased 0.3 percent, the European Union’s statistics office in Luxembourg said in a statement today. Economists had forecast the economy to expand 0.6 percent, according to the median of 31 estimates in a Bloomberg News survey. GDP rose 2.5 percent from a year ago." All of which once again proves that there is no possibility that Germany and France will ever allow a disintegration of the euro, and will continue to bail out all their troubled neighbors as the continued pegging of Germany's red hot economy to such weaklings as Greece is the only factor that matters for the country's export-led growth.