Archive - May 2011

And crude jumps to pre-margin hike levels. But please don't be too hard on the CME Herr President (in keeping with the whole "Weimar" theme). After all, it took them 5 consecutive tries to kill silver. We expect at least the same number before we get crude back to a price where China can wave it all in for pennies on the dollar.

Last week it was Ireland, where bond margins rose to over half, or 55%. Now it is Portugal's turn, where following the glowing success of silver speculative destruction (and crude, not so much), LCH.Clearnet has now hiked bond margins from 35% to 45%. Soon everything in the world will trade cash only... except for stocks of course. Stock margin debt is close to an all time high. But nobody is bothered by that particular speculative element. Ever.

“The courts of Florida belong to the people of Florida. The people of Florida are entitled to know what takes place in the courts of this state. No crisis justified the administrative suspension of the strong legal presumption that the state court proceedings are open to the public.” Charles T. Canady, Chief Justice of the Supreme Court of Florida

Forgotten all about the civil war in Libya, and NATO's so far rather disastrous air, and at times naval, superiority campaign which has merely managed to get the rebels out of provisions faster than expected? Luckily, courtesy of the Pentagon Channel, NATO will provide an update on the Libyan situation in several minutes, to coincide with the end of today's $5-7 (more like $7 judging by the stock action) billion POMO. Perhaps NATO can provide some information on yesterday's crude moving rumor that it has started Naval bombardment of Libya, and also when it will finally send in the troops.

With so much of the attention once again focused on Europe's periphery (which somehow the efficient market could not be bothered with for about 4 months, even though it was all there, staring people in the face all along), it may be time to recall the Europe's core is just as troubled as everything else. Some may recall that back on December 14, S&P came out with a bit of a stunner (which in retrospect looks rather tame following the now forgotten warning on the US Debt): "And so European contagion is back as S&P, now clearly with a mandate
to remind that Europe is in a heap of trouble every month or so, puts Belgium on Outlook negative, saying that it is basically just a matter of time before the country loses its AA+ rating. The bogey: 6 months, which likely means that around May of next year, just like a year prior, we will see the same fireworks out of Europe, only this time not from Greece, but from the very heart of what is left of a solvent continent. "If Belgium fails to form a government soon, a downgrade could occur, potentially within six months.  Should a government be formed but is, in our opinion, ineffective in its fiscal stance or devolution, we are likely to consider rating action within two years." Well, it is now 6 months later, and Belgium still has no government. Time to pull the switch?

"America Realist!" I really like the ring of that:-) Yesterday, I bluntly called out the European state of economic affairs as I saw them in “Liar, Liar, European Pants on Fire!” Today, I present the article published by Property EU, one of the leading real estate publications in Europe which illustrates much of my thoughts on the topic of how and why Europe is nowhere near out of its economic malaise, and more importantly how this may pull the value of real estate down. Well, you can use your imagination for the Lehman like results…

The $6.5 trillion lost in the bursting of the housing bubble is not a "paper loss," it is tragically real. Is anyone surprised that housing continues to slide? According to this report, Home Market Takes a Tumble: Turnaround More Distant After 3% Drop, Steepest Quarterly Decline Since 2008, housing has declined in value for 57 straight months, almost 5 years. Since the housing bubble topped in most areas in 2006, and it's now 2011, that makes sense: 2006 + 5 = 2011. American homeowners have lost $6.5 trillion in equity in those 57 months.

SocGen provides a very informative chart on the dramatic dislocation between the EURUSD and PIIGS risk levels, as demonstrated by Greek CDS prices. Whereas in the past the two correlated very strongly, since early 2011, the pair has diverged dramatically, leading many to speculate that just like in the case of Japan, the G-7 did another coordinate intervention to push the EUR higher in 2011 at the expense of the USD and other currencies. Is it time for a "correlated" snapback? SocGen muses: "After reaching a 17-month historical high of 1.4940 last Wednesday, the EUR/USD fell towards 1.4250. The risk of a further drop cannot be excluded short term given today’s climate, even though the 1.4250 support zone appears solid (50-day moving average) and breaking through this level would open the door to a rate of 1.4000."

And once again inflation refuses to accept it is transitory. April Import Price Index was reported up 2.2%, following a revised 2.6% increase in March (previously +2.7%). Notably, the core of the action was in petroleum and food prices. From the release: "Foods, feeds, and beverages prices advanced 1.8 percent in April after a 4.2 percent rise in March. The April increase was driven by a 22.8 percent jump in coffee prices....The price index for nonfuel industrial supplies and materials rose 1.7 percent in April following a 2.0 percent rise the previous month. Both increases were led by higher chemical and unfinished metals prices, which increased 2.4 percent and 1.7 percent, respectively, in April. The rise in chemical prices was driven by a 6.6 percent advance in plastics prices, and the largest contributors to the rise in unfinished metals prices were prices for gold and other precious metals." In a nutshell, the 12-month advance in April was the largest year-over-year increase since an 11.2 percent gain between April 2009 and April 2010.

Zero Sum trading (in which the banks make money and taxpayers lose it) continues: following previous reports of trading perfection at both D-grade trading "powerhouse" Bank of Countrywide Lynch, and FRBNY-lite JP Morgan, Goldman craps the bad by being the only big bank so far to post a trading loss day in Q1 (even if it was for $0-25 million). This is unacceptable. As a result SLP latencies will be cut from 0 nanoseconds to -10, as Goldman will proceed to a Tachyon based trading infrastructure. In beta tests, such "frontrunning to the future" trading has already posted solid results: in addition to the humiliating trading day loss, GS had 32 days with profits of ">$100 million." And it still failed to impress... Now that HFT "girl around the block" Citi is no longer there for the taking by anyone with a growing liquidity rebate itch, this number will plunge.

Goldman on Greece: "We do not see a ‘haircut’ as a viable solution, particularly at this juncture, for a number of reasons: 1. The risk of potential financial ramifications (‘domino effects’) seem too large; 2. the level of debt that is sustainable will be guesswork until growth has stabilized and a primary surplus achieved; 3. the incentives for pursuing adjustment (in Greece and elsewhere) may wane if the debt stock is aggressively reduced; 4. finally, private-sector funding is unlikely to flow back at sustainable levels any earlier than under the current approach of conditional financial support....We still do not expect to see sovereign liability management exercises in Ireland and Portugal. Bonds in these two sovereigns will, however, likely remain subject to higher volatility, reflecting decisions taken on Greece in coming weeks, in addition to local events (e.g., the Portuguese elections, approval of the support package, etc.)."

• Eurozone gesteht Athen weitere Milliarden zu (Handelsblatt) always remember: German is the official language of the Weimar Republic
• Japan's Prime Minister to give up salary until nuclear crisis over (CNN), while Tim Geithner will give up nothing until debt ceiling crisis solved
• Mississippi crests in Memphis at nearly 48 feet (AP)
• New Greek Deal Possible by June (WSJ)
• Merkel Says No Aid Decisions Until Greek Assessment Reports (Bloomberg)
• Japan Unlikely to Get In Yen's Way (WSJ)
• Pressure Put on Pakistan Army (FT)
• Trouble in Syria Sets off Alarm in Tehran (FT)
• Military Draws Up Afghan Exit Plan (WSJ)

Contrary to very popular opinion, buying U.S. Treasuries could be one of the best investments of 2011. Few times in history has an investor been able to invest with a major price trend and simultaneously be a contrarian. When these opportunities arise, they must not be overlooked.

One of the most pronounced self-reinforcing features of the silver drop from the last two days, was the outright drop in silver holdings in the SLV ETF, which in the span of 5 days, from May 2 to May 6, lost 760 tonnes of silver. The sheer momentum of this move, as some claim, was the biggest factor facilitating the record rout in silver. Well, as of yesterday this trend has reversed itself, and as of close yesterday SLV has disclosed that it added 311 tonnes of silver, or nearly half the underlying amount lost in the selloff. Nonetheless, the overreaction within the SLV complex was massive, as while silver spot remained well above 2011 lows, the SLV ETF holdings actually plunged to a 2011 low level which had last been seen in November 2010. And with silver rising fast again this morning, printing at $38.50 as we type, look for the downward momentum, which so many eagerly pointed to to indicate the relentless nature of the rout, to reverse itself. Add to this the fact that non-commercial specs are at multi year lows, and very soon the only possible argument for the bubble claimants will be that all silver has merely rotated out of very weak hands into truly strong ones.