Archive - May 31, 2011

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Well, that took all of 8 days. To all who bought the shares from the bankers and primary allocators who wasted exactly 10 milliseconds to flip this flaming dog turd to the greatest momo fools out there with an E-trade account and $10k in discretionary cash (now well less), our condolences.

One of the benefits of living in a developing country is discovering that pretty much nothing is ever as it seems. The latest news out of the Telegraph confirms that, by reporting on a crack down in a massive stolen-car scam which has seen the country's millionaires abandon their supercars, among them Bentleys and Aston Martins, literally on the streets of New Delhi in droves: up to 400 cars are suspected of being part of the tax-scam and theft ring. It turns out that these same cars, which were sold to top Bollywood film stars, and a couple of Indian international cricket players, were stolen from around the world, then resold by the top car dealer as second hand and falsely claimed the cars were being supplied tax-free to diplomats in order to avoid India's double taxation of luxury vehicles. "More than 40 cars are now impounded in a government car park. Models parked in the lot include Porsche Panameras, sold in India for £250,000, a Bentley Continental Supersport, costing £350,000, several Aston Martin Rapides, with a price tag of £290,000 and a Maserati, costing £170,000." But while the dealers were merely providing an unmet, if illegal, service, the ultimate enabler of this behavior is naturally the Indian Central Bank, which despite attempts to cool inflation, has created massive pockets of wealth in a society that only compares to China (and the US of course), in the schism between the few uberwealthy, and the masses of less than privileged lower classes.

The big picture here concerns the US Dollar which had already fallen to test its 50-DMA. If the US Dollar breaks below this line and fails to reclaim it then the US Dollar rally is over. The technical pattern here is a falling wedge pattern. As the below chart shows we hit right up against upper descending trendline. We’re likely to test the lower trendline now which is around 72 or so.

What the smart money is saying ...

One of the more interesting correlations (not causations) to have emerged following the surge in corporate profit margins is that of the inverse relationship between now record corporate profit margins, and net exports & services originating from the US. While we certainly will not imply one is a cause of the other or vice versa, we would be remiss to not point out the irony of what would happen should this correlation preserve itself in an environment in which US exports end up being curbed due to a surge in the US dollar once the frailty of the Eurozone no longer allows the EUR to appreciate on desperate one-time (if recurring) rescue measures. And with China largely ignoring US demands to revalue its currency and import more US goods and services (no laughing), is it safe to say that this chart is the one most direct confirmation that the weak dollar policy adopted by the Fed has had it most proximal impact nowhere else than on surging corporate profit levels (and Wall Street bonuses of course).

U-G-L-Y ...

Man bites nature. Nature bites man back.

Just out from the only economist at JP Morgan who is even remotely credible, Michael Ferolli, responding to the question if QE 3 is coming. "Our answer is: no. We think it is very, very unlikely. In a nutshell, we don't think the inflation or inflation expectations data are near the point where the Fed would consider further large-scale asset purchases, and even if the inflation data were to start to move in that direction the potential political fall-out is so great that the Fed would be extremely reluctant to purchase more assets....The recent economic activity data has been decidedly disappointing. By some broad measures such as GDP, it could well be the case that the first half of this year will look even worse than the second and third quarters of last year -- the quarters leading up to the FOMC's decision to purchases another $600 billion of assets. While the growth data may look similar, a crucial difference thus far has been inflation...Even if we are wrong on a second half rebound, we still believe the political hurdle for further asset purchases is tremendously high. The backlash from Capitol Hill after last Fall's decision probably took the Fed off-guard, and the political impact was not a prominent factor debated in the lead-up to the November decision....As such, it appears that without taking significant political risks there is little the Fed is able to do to support the recovery if growth fails to rebound as anticipated next quarter." So... everyone feel convinced now?

Two of our preferred commentators, Jim Grant, of Grant's Interest Rate Observer, and James Turk, of the GoldMoney Foundation, sat down earlier today to discuss the history and mission of the Fed, how mission creep has taken it wildly beyond its initial purpose into the territory of QE, ZIRP and other fiat currency experiments. While not breaking ground on any notably new concepts, they talk about "who benefit from zero interest rates and how savers are penalized by this easy money policy. They explain that the US have been off the gold standard since 1913, Bretton Woods being only a shadow of the classical gold standard." The two also discuss the fiscal profligacy of the US government. Alas, they conclude that every paper currency in history has eventually gone to zero (see earlier piece on Roman hyperinflation). James and Jim also talk about ZIRP and the absence of the bond vigilantes after over 30 years of bull market in bonds. How traders no longer care about fundamentals, like balance sheets, but rather focus on very short time horizons and the spreads between funding costs and yields. How this situation is unsustainable. They see gold still as a very under-owned, misunderstood and marginal asset still shunned by institutional investors, with a few notable exceptions which indicate that the tide could be turning. They see a gold standard in the future, although timing is always uncertain. At the end they talk about the history of US post civil war specie resumption and parallels to a return to the gold standard in the future.

All work and no play, makes Juncker a dull EURO boy...

It is no secret that to a deflationist like David Rosenberg bond yields have to go lower... Much lower. With the 10 Year flirting with a 2 handle one would think he would be content. Alas no. In fact, as he suggests in his piece from today, Rosie is convinced that the next iteration of QE will be nothing short of a redux of the 1961 initiative to kill the then gold exodus known as "Operation Twist" (recently dissected by the San Fran Fed). Incidentally it was the same Fed that compared QE2 to Operation Twist. It is only logical that Rosie would then suggest that QE3 would be nothing short of a complete clearing of the 10 Year bond in the market via the Fed in order to anchor expectations that the 10 Year rate would never go up (or reasonably "never") in the biggest gamble of all: that the Fed will attempt to both control its balance sheet and target Long-Term interest rates, a mission doomed to fail...But not like that will prevent the Fed from setting off on such a mission, especially following today's official confirmation of the Housing Double Dip (someone page Jim Cramer). As Rosie says: "Now it is doubtful that the Fed would ever target the long bond. In fact, the Fed may even want it to be higher in yield to ease the pressure on radically underfunded pension funds. While the Fed can either target its balance sheet, which it has been doing with these QE measures, or target interest rates, it cannot do both at the same time. So the next 'QE' will not be called 'QE' but rather something else — maybe Operation Twist 2 (OT2 — you heard it here first). The Fed would buy up all the 10-year notes needed to clear the market at the target "price" (yield). So depending on supply conditions and demand from the private sector, the Fed would basically lose control of its balance sheet, but if in return this policy is the one that blazes the trail for a turnaround in the housing sector and a durable revival in the economy, so be it." And keeping in mind that the true unspoken reason for Operation Twist 1 was to terminate the outflow of gold from the US to foreign bank vaults, we find ourselves agreeing with Rosie that an insane idea such as OT2 is precisely what the Fed would do to avoid a recurrence of the 1961 gold exodus (and attempt to give housing one last failed boost). As many birds would be killed with one stone, the only downside, that of a complete balance sheet implosion following OT2, certainly seems quite acceptable to a central bank now officially run by sociopaths.

While Americans are apparently able to pay infinite amounts of money for gas, we still can't find a price they are willing to pay for homes as this morning's Case-Shiller Survey shows home prices in the 20-city index falling ANOTHER 3.6% from March to a brand new 8-year low.

Just because mega-radioactive water leakage was not enough. From Xinhua: "Operator of the troubled Fukushima No. 1 nuclear power plant found that oil has been leaking into the sea close to the facility, the Kyodo News reported Tuesday. The operator Tokyo Electric Power Co. (TEPCO) said the oil leaks were possibly from nearby oil tanks that may have been damaged in the March earthquake and tsunami, and it would set up oil fences to prevent the liquid from pouring into the Pacific Ocean." Oh, but they only discovered this now? Odd how it took nearly 3 months for those oil tanks to rupture and start spilling into the water. So in other words, not only is Godzilla coming, he will be more greased up than the Situation.

While the transitory (see, we can use that word too) surge in the EURUSD (and thus the S&P) may have already peaked, with the FX pair now at overnight lows, and likely soon to retrace the entire "bailout #2 rumor" spike, the one question few are asking is just how big of an impact is Germany's alleged (we have yet to see official confirmation that the WSJ story is correct) concession to a less dire Greek bailout #2 on the one instrument it is supposedly focused on, i.e., Greek 10 Year bonds. The chart below answers that question. From a high just over 16%, the 6.25% GGBs of 6/19/2020 have seen a "massive" plunge... of 32 bps. As of today, pricing in Bailout #2, the market is so antsy to get into Greek bonds that the 10 year is down to a whopping 15.843%. But at least the true focus on the "Greek bailout", the DAX and the RUT, are doing their thing.