Archive - May 25, 2011

About a month ago Belgium's biggest bank, and as is now well known one of the most active borrowers at the Fed's discount window in the days following the Lehman crisis, issued €3.2 billion in FRNs with a two year maturity that had an odd feature: an ultra short term put feature (as the Bloomberg screen shows below, puttable June 26, 2011 at par) which can be exercised up to 33 days ahead of the put day (underwritten by Barclays, Citi and MS) or in other words, today. Well, as our source has told us, following recent downgrades of virtually all banks with Greek exposure (a topic further pursed by the below IFR article), the two largest investors in the bond: Blackrock, which owns the bulk or about €2.6 billion, and Barclays (among others) have exercised their put option. The speculation is that "either someone knows something or had a very rapid change of heart" and concludes that "this should make the whole funding thing relevant again" especially since banks continue to rely on the ECB exclusively for short-term liquidity needs. Also possible a jump in Fed Discount Window borrowings if the ECB is unable or unwilling to cross-collateralize even more Greek debt exposure. The advice: "start watching Libor/Euribor and the Forwards basis" for some near-term volatility. If this is confirmed, look for any/all other comparable short-term put deals to suddenly spring the investor option to pull their capital, and the domino avalanche to set off in earnest.

CNBC's Mark Haines has passed away. He was 65. May he rest in peace.

Cracks are not spreading on the façade, real estate sales are not falling, and that the economic engine is not starting to sputter. China has literally been building a Rome a day. But 160 million are expected to move from the hinterlands to urban areas, enough to soak up this excess. The country’s real challenge arises when its demographic pyramid starts to invert in about five years. When that happened in Japan, a 21 year bear market followed. (FXI), (CYB).

You’d think that the world’s largest economy (and home of the world’s reserve currency) exceeding its debt limits would be big time news. But we’ve yet to hear a peep about it from the mainstream financial media. It’s even stranger that we haven’t heard mention of the fact that the US is in fact RAIDING pension funds to continue to fund its debt.

The loudest warning to date. From Reuters:

• EU Commissioner Damanaki says Greece's Eurozone membership is at risk
• EU Commissioner Damanaki says Greece must agree on tough measures or return to Drachma, according to state news agency

Incidentally, Greece would like nothing more than to return to the Drachma. And here are the next steps...

We knew it was only a matter of time before Albert Edwards would follow up to Russell Napier's call for S&P 400 with his own rejoinder. Sure enough, the SocGen strategist (who previously called for an S&P target in the same neighborhood) has just released the following: "Let me re-emphasise our 400 S&P forecast with sub-2% US bond yields" in which he says: "Amid the equity market enjoying yet another Fed induced mega-rally, many commentators have been left grasping (gasping?) for explanations for the continued low level of global bond yields despite the ruination of the public sector balance sheet. Most have latched onto QE2 as the explanation and hence expect a sharp rise in yields from June onwards as the Fed’s buying programme ends. We expect new lows in bond yields." The reason for that per Edwards, is an imminent bout of deflation, which is precisely what the Fed is hoping to create, in order to get the green light for the Jim Grant defined "QE 3 - QE N". Edwards, naturally recognizes this too: "Despite fully acknowledging the ruination of the government balance sheets as years of excess private sector debt are transferred to the public sector, we still expect to suffer another deflationary bust that will take government bond yields to new lows BEFORE government profligacy and the Fed's printing presses take us back to both double-digit inflation and bond yields. For now, we remain heavily overweight government bonds." In other words, just as we have been claiming for a long time courtesy of the Fed's so predictable Pavlovian reaction to always print more in response to deflation, enjoy 2% bond yields... just before they hit 20%.

Without giving away trade secrets or getting too option wonky, we’ll just say a few things. How does Mr. Kass know it is a single buyer? This is a dangerous and sensationalist thing to say as if it were fact. It is a mistake to assume that unless you have empirical evidence or at least do some work to back up your statement. For our own part we are pretty sure it is a single buyer. How did we come to this conclusion? We did the math. We studied and saw the orders as they hit the markets. We noted how all other gold options behaved in their respective venues. We looked at how the order was placed, the volumes, the timing, the times of day, and the total volumes traded on the day. In short, we read the tape and gathered intel.. And still we are not 100% sure it is a single buyer. It may be a single executor for multiple buyers. How did Mr. Kass come to this conclusion, we don’t know. But like other things he says, we can cover them all with this quote, “You have eyes, plagiarize!”- Ed Young

At this point there is no need to even highlight the stagflationary crunch the US economy has entered, although the just released Durable Goods number seals the deal: -3.6% on expectations of -2.5%, an 8% revised swing M/M! Ex transportation -1.5% with consensus of +0.5% (down from 1.3%). Q2 GDP now trending sub 2%. Absent the BOJ flooding the market with trillions of fresh Yen, QE3 is now inevitable.

In the boardrooms of corporate America, profits aren't everything - they are the only thing. A JPMorgan research report concludes that the current corporate profit recovery is more dependent on falling unit-labor costs than during any previous expansion. At some level, corporate executives are aware that they are lowering workers' living standards, but their decisions are neither coordinated nor intentionally harmful. Call it the "paradox of profitability." Executives are acting in their own and their shareholders' best interest: maximizing profit margins in the face of weak demand by extensive layoffs and pay cuts. But what has been good for every company's income statement has been a disaster for working families and their communities. Obama's lopsided recovery also reflects lopsided government intervention. Apart from all the talk about jobs, the Obama administration never supported a concrete employment plan. The stimulus provided relief, but it was too small and did not focus on job creation.

• France's Lagarde launches IMF bid, BRICs complain (Reuters)
• Greek assets could go to ‘fund of experts’ (FT)... and gold "could" go to central banks
• U.K. Economy Grew 0.5% in First Quarter (Bloomberg)
• OECD cuts Japan GDP forecast again, urges easy monetary policy (Reuters)
• Kan targets structural issues after quake (FT)
• Shanghai Composite down 10% in six weeks, officially enters correction territory (FT)
• Banks Face $17 Billion in Suits Over Foreclosures (WSJ)
• EU Juncker: Still In Favor Of 'Reprofiling' Greek Sovereign Debt (WSJ)

Only important data point today is the durable goods number which, will be another material drop, and merely the latest confirmation that US economic growth is coming to a complete halt.

Wonder why Europe is pressing so hard for Greece (and soon the other PIIGS) to collateralize its pre-petition loans on a Debtor in Possession basis? Here is your answer: "Yesterday’s unanimous agreement by the European Parliament’s Committee
on Economic and Monetary Affairs (ECON) to allow central counterparties
to accept gold as collateral, under the European Market Infrastructure
Regulation (EMIR), is further recognition of gold’s growing relevance as
a high quality liquid asset. This vote reinforces market demand for a greater choice of assets that can be used as collateral to meet margin liabilities." Luckily for Greece, it has 111.5 tons of gold in storage (somewhere at the New York Fed most likely). Looking down the road, Portugal has 382.5 tons, Spain 281.6, and Italy leads the pack with 2,451.8 tons.

Europe’s debt crisis has seen gold prices climb to new record highs in euros and British pounds at EUR 1,087.80/oz and GBP 944.93/oz respectively. Contagion concerns are mounting due to the failure of the ECB, the IMF and respective governments to tackle the sovereign debt crisis.
The scale of the debt crisis effecting Greece, Ireland, Italy, Belgium, Portugal and Spain is leading to growing concerns of a knock on deleterious impact on European banks and the global banking system. Gold should also be supported today by the OECD’s warning regarding the U.S. and Japan’s very poor fiscal situations and their lack of credible plans to tackle high and spiraling budget deficits. Silver’s fundamentals remain even stronger than gold’s and the recent paper driven sell off due to a series of margin calls and heavy selling on the COMEX appears to be over.

Nobody could have seen this coming: Production in the US motor vehicle sector has fallen by nearly 10% since the beginning of the quarter, reflecting the impact of supply chain disruptions in Japan following the natural disasters there. The setback in vehicle output is likely to shave approximately 4 points off the growth rate of industrial production in Q2. We also think it will take a bit more than 1/2 point off real GDP growth for the quarter, and are lowering our Q2 growth forecast to 3.0%

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