Archive - May 9, 2011

The China customs bureau just released its April trade data, which came at a surprisingly strong $11.4 billion, a $11.3 billion jump over March, well over consensus of a $3.2 billion surplus, and was the highest trade surplus posted by China in 2011. Net exports to both the EU and US, the traditionally biggest export partners for China, increased M/M from $9.5 billion to $10.3 billion, and from $13.0 billion to $15.1 billion, respectively. Overall, the key trading partners did not see a major change, and the marginal variable appears to have been the Rest of the World category which in April jumped from a trade surplus of $8.0 billion from $2.9 billion the month before. Of course, with even Europe now disclosing openly it is lying in disseminating data, it would be foolish to assume any of this data is even remotely realistic, and is likely nothing more than a politically palatable smoke screen for the ongoing Strategic and Economic Dialogue (discussed earlier), and will be used to indicate that even as Chinese exports once again pick up, Geithner can not really blame it on the USDCNY, which hit a new record high of 6.4950. No matter the data, this most recent jump in exports, will surely force the peanut gallery to renew squawks for unpegging the currency.

Is the pension gap about to explode?

As an attempt to refute the previously disclosed plunge in speculative positions, some have made the claim that it is really retail holders causing the spike in silver via such synthetic CDOs as SLV. While this argument is beyond laughable (although there is some credibility to the claim that there is a feedback loop to ETF buys leading to underlying gains and vice versa, although we expect SLV's silver holdings disclosed tomorrow to once again gain thus ending the selling cycle) and we look forward to debunking it thoroughly when the latest 13F is released sometime on Friday, we did want to point out something just as amusing: the holdings of JPM compared to the price of SLV (incidentally, JPM is the third largest holder of SLV with 5.1 million shares, just behind BofA with 6.8 million shares and Morgan Stanley with 7.2 million). Which begs these questions three: retail or really institutional buying was the primary force behind the move in SLV? Was this merely a case of uber-leveraged tail wagging the dog (since CFTC indicates there was nothing at all bubbly about non-commercial spec contracts)? And, three, if so, why...

A rather controversial perspective on "reverse labor mobility" has recently seen a revival following the release of BCG's analysis: "Made in the USA, Again: Manufacturing Is Expected to Return to America as China’s Rising Labor Costs Erase Most Savings from Offshoring" which claims that "within the next five years, the United States is expected to experience a manufacturing renaissance as the wage gap with China shrinks and certain U.S. states become some of the cheapest locations for manufacturing in the developed world." While this topic, as we will shortly see courtesy of SocGen is far from taken for granted, could be the deus ex machina that could provide the historic jobs boost to Obama's second presidential campaign (should he get that far), it could also explain the eagerness of the Fed to continue exporting US inflation to China. If the latter is indeed the case, it would mean that the Fed will do everything to continue flooding the world with excess liquidity if for no other reason than to see Chinese inflation reach an out of control state, and wages explode, in an outcome that would ultimately undo the great manufacturing job outsourcing phase that marked the 1990s and 2000s. If successful, it would indeed lead to a second US renaissance in manufacturing jobs. However, will China allow its economy to lose the competitive wage advantage it has held for decades over the US, an outcome which would culminate in riots, as unemployment in the billion + nation goes parabolic. Of course, the conspiratorially minded can imagine a scenario in which the inflationary transference plan concocted by the Chairman has one goal and one goal only: to cause labor cost parity between the US and China in the shortest amount of time. The only two question in this case are: how long until China realizes what is going on, and how will it react?

“Gold today is no longer related to the normal economic cycle of supply and demand, jewelry, Indian wedding seasons, rain in the Middle ast. All those things are passé, forget about them. Gold is driven today by one overriding and I am afraid, at least in my opinion, an irresistible and irreversible trend. A fundamental, global and growing insecurity… A fundamental, global and growing lack of confidence of the world in everything they were brought up to believe. Institutions, insurance companies, banks, issuers of mortgages, ratings agencies, equities, sovereign debt, Federal Reserve Banks. Portugal and Iceland. Greece and Spain. Currencies. What is left? What is left?” – Peter Munk, Chairman, Barrick Gold

Lately, everyone and their grandmother speaks with 100% conviction that over the past week what happened in the silver market was nothing but a speculative bubble popping. After all, 5 consecutive margin hikes would mean that uber-levered terrorist speculators must have been scrambling with the urgency of an E-trade baby checking his voicemail and getting 99 margin call messages. So certain seems to be conventional wisdom in this allegation that nobody appears to have even checked the facts. Well, we did. For that we went to the usual place that provides a definitive breakdown of speculative indications: the CFTC's Commitment of Traders report, and specifically the non-commercial specs which after netting shorts from longs would be expected to be at some parabolically unseen level ever in the history of the CFTC. Much to our surprise we found this...

All of the man made physical reality that surrounds us began in our mind, in our inner consciousness, and only after we imagined it did we form it into a physical presence. Yet we rarely question what ‘real’ and ‘reality’ actually is.

So much for all the conspiracy theories that Bill Gross was capitulating in his short position against US debt even as he continued to bash US fiscal and monetary policy. According to just released April data for the flagship Pimco $240 billion Total Return Fund (which saw a $4.2 billion increase in AUM in the month), Bill Gross actually added to his short position against US government debt, bringing total market value exposure to 4% of AUM or ($10) billion. More amazing is that on a Duration Weighted Exposure basis, the firm's Treasury short is 23%, read that again, 23%! So much for that change in outlook. Additionally, Gross also sold another $8.3 billion in mortgage securities, bringing the April total to a nominal $57.8 billion. Spring cleaning at casa de Bill continued across all fixed corporate income as well, dropping the firm's exposure to IG by $1.6 billion and to HY by $2.1 billion. The only two securities which saw a token increase was in Non-US developed markets and Emerging Markets, to $14.4 billion and $26.5 billion, respectively. Yet the biggest shocker of all, is that Gross has now brought his cash position to an all time unprecedented high of $89.1 billion! That's right, PIMCO is charging a substantial asset management fee when 37% of all assets are in cash. One would think the mattress would cost far less. Either Gross is expecting a huge collapse in the bond market (so contrary to prevailing though), or this could well be the bet that buries the Allianz subsidiary.

Odds and ends for a Monday.

Some brilliant Chicago-based exchange apparatchik just ask himself this simple question: "If it worked so well with silver, why not do it with crude?" The answer is here: the CME, as we predicted last week, just hiked initial and maintenance margins on Crude and Brent by 25%, as well as FX, and other petrochemicals. And, oh yes, this is prudent risk management, because while the CME kept margins flat when WTI was at $115, the massive spike from $97 to $102 is unbearably destabilizing. At this point one can only stand back and watch as the CME proceeds with hike after hike, in an absolute vacuum from the administration, which certainly had nothing to do with this decision. And really who cares: free capital markets died on March 18, 2009.

While DC may continue playing its debt ceiling soap opera, crunch time for the Treasury is approaching as the first of three auctions is on deck: the first one for $32 billion in 3 Year Notes. The total raised will be $72 billion without any offsets from maturities. Elsewhere, the Treasury will catch a $16 billion break after it settles $100 billion in Bill maturities offset by $84 billion in new issuance, yet still the net total of $56 billion in new debt seems to be a slight problem since as of Friday, there was just $23 billion in total capacity under the debt ceiling. Granted, the Treasury has already announced it is commencing the tapering off of other debt programs such as the State and Local Government (SLGs) which however will have at most $5-10 billion in favorable impact per month. It is also cutting its debt issuance forecast in half, likely due to an expectation of maturing old Bills without rolling these, a feat which will consume all if not more of the $108.9 billion in total cash available at the Treasury. So that's the math, and now back to the theater, where Politico reports speaker John Boehner "will call on Congress to offset a debt ceiling hike with spending cuts of a greater amount, an ambitious proposal that puts House Republicans on a collision course with Democrats who want much more modest spending restrictions attached to the vote."

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 09/05/11

Now that HFTs are scrambling to find something, anything to replace the rebate-collection piggy bank that was Citi between $4 and $5, so far unsuccessfully, we get a glimpse of just how critical to the overal market HFT non-volume has been. In the first day of Citi trading post-split, total NYSE volume has now plunged to the second lowest level of all of 2011, eclipsing even low volume semi-holidays. And since none of the Citi "volume" was real volume but merely rebate collection churn, the broader public will finally understand what a complete sham "participation" in this centrally planned market has become. And for all those looking for some surprising pick up in commission revenue for the big banks, below is a chart of the inverse.

The whole "hopey change" thing has fizzled ... time for a new (ancient) playbook.

This weekend’s not so secret meeting was the first step towards what could be a rapid end game of Greek debt restructuring. The lenders are unlikely to give Greece the exact same terms as Portugal and seem intent on demanding collateral against future loans. Greece must resist providing collateral since it now realizes it will not be able to pay back all the debt. Greece will push hard for better terms, but if collateral is required, it will be in Greece’s best interest to restructure sooner rather than later. Since the sovereign restructuring process is a negotiation without much ability to use the courts, Greece will find a way to minimize the damage to itself and its citizens while creating a debt structure that is sustainable. This will all be done while retaining the Euro as its currency. Greece may be looking at re-introducing new Drachmas, but this round of restructuring will still be in Euros.