Archive - May 18, 2011

Take a moment and conduct a mini thought experiment. Imagine that you're from the future many hundreds of years from now, researching what life was like in the early 21st century. You pull up an archive of newspaper headlines from the year 2011 and read the following...

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

And just like that, without rhyme or reason (well, technically the draw down in crude was substantial with crude inventories dropping by 3.8MM barrels, on expectations of a 1.7MM build, not to mention gasoline dropping from 1.275MM to 119K) the entire commodity complex explodes, after the market tired of today's 3 hours of contractionary speculation and rotates the dial from Max deflation to Max inflation, bypassing anything in the middle. Expect the ramp to continue until the robots, which have now made commodities their latest stomping ground, tire of lifting every offer and go into full sell off mode, since it appears that once again nobody knows how to trade the end of QE2 and/or start of QE3. In the meantime, silver is up about 5% since yesterday. "Price Stability."

While the jury is still out on whether David Rosenberg went bullish on equities just as the market topped out (Rosenberg certainly denies it), it is without doubt that in his note today to premium subscribers, in addition to some traditionally cautious and correct observations on the economy, the former Merrill strategist has "just said no" to silver. It remains to be seen if there will be another clarification note following this one should silver (and/or gold) resume the gradual roll higher (especially since with just 90 contracts traded on the HKMerx, the brand spanking new contract may need to lower margins to attract participation). Quote Rosie: "for now I think it is time to step back and adopt a more defensive and cautious posture towards the group...I would not recommend being aggressive in the commodity space until many of the clouds that have recently surfaced begin to part."

Last night, I spent an interesting time with the esteemed and world reknown macro economist, entrepreneur, NYU professor and strategist, Dr. Nouriel Roubini. Nouriel is a very, very bright guy. He has to be, he agrees with many of my viewpoints :-) On a more serious note, this article is the first installment of the valuation of real world, real assets and properties that are actually up for sale. I plan to walk my readers through the potential absurdity that is investing in a bubble that has not finished popping.

While the causal connections between the decline of community and TV, the Internet, two-earner households, suburban sprawl and long commutes, etc., are visible in a common-sense fashion, they miss the primary unspoken causal factor: the growing domination of the Central "Savior" State in every aspect of the economy and society. From an anthropological or natural-selection point of view--i.e. one informed by sociobiology-- community and marriage alike are at root highly advantageous survival techniques: a group has far more resources than a similar number of isolated individuals, and offspring are more likely to survive and prosper if two parents are devoting resources to their upbringing rather than only one adult is carrying that burden. In nations dominated by Savior States, there is less reason to invest in community or self-reliance, because the government handles everything.

Now that the NYSE no longer has to concern itself with various overeager acquirers procuring highly confident letters from the likes of Jefferies that it can procure 10x Debt/EBITDA B2/B- HY bonds to purchase every single public exchange in the world, it can focus on doing what it does best: busting flash smash trades, and taking away the profits of those who are lucky enough to spot an algo gone apeshit and trade against it. Earlier this morning the stock of Strategic Hotels and Resorts 8.25% Cumulative Preferred Shares (BEE.PR.C) traded from $29 to $2,600 in just about a second. Thank you NYSE, SEC and fair and efficient markets. Or, according to Mary Schapiro, Waddell & Reed. Naturally none of this is any consolation to those who may have prudently been hoping that some idiot robot will take the stock into the stratosphere and had a $2,600 sell limit: all trades (all 15,900 of them) above $29.74 were cancelled. Thank you fair and efficient SkyNet.

Yesterday when we broke the news that DSK was housed in Rikers Island "West Facility" reserved for inmates with infectious diseases, we speculated, jokingly we hoped, that this may be due to his affliction with a certain sexually transmitted disease. Alas, if what the the NY Post reports this morning ends up being true, the situation may be substantially more serious: "Dominique Strauss-Kahn may have more to worry about than a possible prison sentence. The IMF chief's alleged sex-assault victim lives in a Bronx apartment rented exclusively for adults with HIV or AIDS, The Post has learned. The hotel maid, a West African immigrant, has occupied the fourth-floor High Bridge pad with her 15-year-old daughter since January -- and before that, lived in another Bronx apartment set aside by Harlem Community AIDS United strictly for adults with the virus and their families." Oops.

A former CDO manager and investor says the "case" against Goldman is nowhere near as strong as Taibbi claims. Nowhere close...

In a report released yesterday titled "Multipolarity: The New Global Economy", that other "bailout" organization, the World Bank, says that due to the developing world's pronounced greater growth curve through 2025 (expected to grow at 4.7% compared to 2.3% for the developed countries), the outcome will be that "The balance of global growth and investment will shift to developing or emerging economies." More importantly, as the FT summarized, a "different international monetary system will gradually evolve, wiping out the US dollar’s position as the world’s main reserve currency." As a result of these "inevitabilities" (which will be interested to see how they are attained considering according to a recent report, the world will need to double its debt to double it GDP, so where all this new debt will come from we don't really know), there are three potential scenarios: i) A status quo centered on the US dollar, ii) A system with the Special Drawing Rights (SDR) as the main international currency, iii) A multicurrency system. And while this obviously covers every possible outcome so absolutely no value added there, the WB is focused on outcome iii and believes that the dollar will gradually shift away from its current position of reserve currency prominence. This is not surprising: after all it is none other than World Bank president Robert Zoellick who recently predicted a return to the gold standard and an end to USD hegemony. Our advice to Bob: stay away from penthouse suites at the Sofitel.

Following the risk aversion rally in bonds over the past month, as a result of the increasingly jittery outlook on stocks, many dealers have had to realign their positioning in the rates arena. And while some who have an outright short exposure on the fixed income market such as Pimco attempt to downplay their bearishness for fears of how LPs will react, others like Goldman are becoming increasingly more vocal in their bearish bias to fixed income. In a note released overnight Goldman's Francesco Garzarelli repeats that the firm which does god's work continues to be negatively inclined toward the treasury prices, reiterating its 10 year forecast (3.50% and 3.75% for 10-yr USTs by end-June and end-December), although not due to structural considerations such as the US being technical insolvent if not practically so (for the time being the US is more than capable of paying its interest expense out of collected tax revenue) but due to the ongoing false impression that the economy is improving. In short, due to still strong (and soon to be revised lower) forecasts on US GDP, coupled with increasing inflation expectations, Goldman urges clients to be short here: "Consistently, we would treat a further decline in intermediate to longer-dated yields as an opportunity to recommend short positions again." So while in the long-run Goldman is likely correct, it is for the wrong reasons. The right one, naturally, continues to be the latent threat of fixed income rumblings manifesting themselves via the latent bond vigilantes finally moving away from Europe and shifting their attention to the insolvent US. With the Fed shifting away from its position of structural support in the fixed income market following June 30's end of QE2, the economy will once again be in uncharted territory especially with a record amount of bonds needing to find willing buyers over the next 12 months. On the other hand, with GS clients urged to sell bonds, that means that as usual Goldman is buying, so take the typical reverse psychology approach to any Goldman call with a grain of salt.

• Al Qaeda names Egyptian militant Adel as interim chief - Al Jazeera (Reuters)
• Geithner: U.S. must deal with budget woes or pay more (Reuters)
• Pressure mounts on Strauss-Kahn to quit (FT)
• IMF issues stark warning to Greece on fiscal goals (Reuters)
• Europe Aims to Keep IMF Job After Strauss-Kahn (Bloomberg)
• The eurozone after Strauss-Kahn (Martin Wolf, FT)
• U.S. mulls White House aide Lipton for IMF No. 2 job (Reuters)
• Could Greece be the next Lehman Brothers? Yes – and potentially even worse (Guardian)
• Moody's Cuts Rating of Four Major Australian Banks (WSJ)
• Fed seeks annual US bank stress tests (FT)
• Mideast peace bid needed more than ever (Reuters)
• World Bank sees end to dollar’s hegemony (FT)

Zero Hedge was the first to observe the curious phenomenon of the collapse in the General Collateral-IOER carry trade following the implementation of the FDIC assessment rate back in early April (discussed in depth here) which continues to force repo rates far below where they would ordinarily be (and is generating an undue amount of stress on short end rates, impacting money markets, repo, and other shadow economy components, and also substantially complicating an unwind by the Fed if and when one occurs). But that's not all. As Barclays' Joseph Abate points out, another consequence, which is rapidly becoming appreciate by repo market players, is that up to a third of all Treasury repo volume now trades at sub zero rates, making life for money markets a living hell, which perhaps that was the goal all along... And while the fails rates for the time being has not picked up substantially (liquidity is still ample although if the Fed continues to pummel the market with its foolhardy sale of Maiden Lane II securities this may change, more on this later), it does present a complication for the Fed, should Bernanke decided to halt securities reinvestment. Granted it appears this will not be a major worry at a time when some believe QE3 is a given, and others believe QE2 Lite will be precisely the ineffectual, yet critical reinvestment of maturity securities.

The only thing on today's light economic calendar is the FOMC’s April 26-27 meeting minutes, as the Fed proceeds to monetize bonds now that the debt ceiling has been reached. And meanwhile in Washington we get a debt limit discussion, two securitization-related events, and another energy vote that is expected to fail...