Archive - May 2011

Germany's Der Spiegel seems hell bent on getting sued to hell and back by Greece. After a few weeks ago it "broke" the news of a secret meeting that would consider the expulsion of the country from the Eurozone, it is once again stirring passions with an article claiming that Greece has missed all fiscal targets agreed under its bailout plan, according to a mission from an international inspection team, putting further funding for Athens at risk, Reuters summarizes. "The troika (aka the International Monetary Fund, the European Commission and the European Central Bank) asserts in its report to be presented next week that Greece had missed all its agreed fiscal targets," weekly Spiegel magazine reported in a prerelease. In other words, this could be the political game over for Greece, whose fate as has been disclosed recently, is intimately tied with the perception that it is following the troika's demands for fiscal change. If the three key bailout institutions are already leaking that Greece is done, next week could well be the beginning of the end for the €. In about 48 hours, even as America is enjoying a Monday off (or precisely because to that, to avoid a market panic), the European market could be digesting a very bitter pill of testing just how well pre-provisioned all those German, French and Dutch banks really are.

You read his weekly articles on Zero Hedge, now here if your chance to listen to Mike Krieger interviewed by Future Money Trends. Among the now topical issues discussed are the debt ceiling, QE3, geopolitical instability, US and global economies, $100 silver (as well as the recenty take down of the metal), market manipulation and much more, as well s Krieger's several proposed scenarios for the future.

The name Judd Gregg is not new to Zero Hedge readers. Back in the 2009-2010 battle for Fed transparency, which continues to be only fractionally on the way to being won, Gregg, who then served as the top Republican on the Budget Committee and a member of the Banking Committee, said that "opponents of Federal Reserve Chairman Ben Bernanke's second term are
guilty of "pandering populism"." Odd that these populism panderers, of which Zero Hedge was a proud member, ultimately succeeded in not only getting a one time Fed audit, but also won the legal case initiated by Mark Pittman to expose the Fed's dirty laundry, without which we would not know that not only did the Fed bail out primarily foreign investment banks during the financial crisis, but also that the biggest user of the Fed's somewhat secret Short Term Open Market Operations facility, also known as a 0.01% subsidy, was none other than Goldman Sachs, contrary to the firm's sworn statements that it did not really need bailing out. Gregg continued: "There's a lot of populism going on in this country right now, and I'm tired of it." Gregg warned that the growing tide of populism would threaten some of the most central institutions to the economy's recovery. "What it's going to do is burn down some of the institutions which are critical to us as a nation and as an economy to recover and create jobs," he warned." It was therefore only a matter of time that Gregg, following the end of his political career, has decided to step down, and work for one of these "central institutions to the economy's recovery" - Goldman Sachs. As such we present the list of companies that courtesy of their "top contributor" status with the senator over the years, are about to get preferential treatment from Goldman's sell side analysts, and see a prompt upgrade to Buy and/or Conviction Buy list in the near term. After all there is no such thing as squid-pro-zero in a world controlled by Wall Street's institutions "central to the economy's recovery."

The latest observations the spread of gold's popularity comes from none other than BRIC expert, Goldman's Jim O'Neill, who advises clients in his latest letter that it may be prudent that in addition to China and India as a source of ever increasing demand for gold, it may be time to also add the Middle East to the ever increasing list of investors (typically quite wealthy) who believe in the yellow metal. "Not because of this particular anecdote, but the Middle East being what it is, my meetings involved more discussion about Gold prices than is usually the case in other parts of the world. While the gold bar machine anecdote adds to all the other colourful stories I pick up, the recent remarkable resilience of gold, despite what has happened to silver and other commodities, is rather impressive. This gold price strength may perhaps be just a simple function of both the extremely low level of G7 real interest rates and the prospect that they might not rise anytime soon. I got the impression that there a quite a few bulls of Gold in the Middle East."

The mechanics of social proof, while somewhat complex, are pretty easy to understand. Simplistically, we humans have a strong tendency to glance over at other members of the herd in an attempt to gauge the correct action or reaction to take in any given circumstance. While this tendency can be useful in identifying the right bread plate to use at a fancy dinner party, it can also have devastating consequences. In one of the most notorious examples of the downside of social proof, in 1964 Kitty Genovese was slowly murdered on a New York sidewalk over the course of about 30 minutes, despite 40 or so witnesses, none of whom took action. They figured someone else would. In any event, understanding the concept of social proof – and its close cousin “social convention” – seems to me to be of fundamental importance to us as members of the human race, and as investors. As far as the former is concerned, if you ever find yourself doing the same thing as everyone else, it should concern you. Stop and ask whether you are doing the thing because you want to or because you think it is the right thing to do – or are you doing it just because it’s what everyone else does? As for the latter, if you rely on the cues coming from the mainstream financial media and officialdom, you would likely believe the country has exited the latest economic crisis and will now steadily make progress towards a return to normalcy. The seeming disconnect between the true state of the world’s economy and the public reaction is actually not a particularly bad thing for those who have their eyes open. After all, anyone who can see what’s coming, while the masses do not, has the opportunity to get positioned in investments that will do well when the truth of the situation becomes evident to all. But there are matters much more important in this life than money-making.

Two days ago, we presented Dylan Grice's latest thoughts on the substantial futility of trading the news cycle. Yet as Grice readily pointed out, and as even Taleb would glumly admit, what humans lose in the noise factor by avoiding the constant blasting of news, they make up for in entertainment value. And therein lies the rub: more than anything, people (or at least the vast majority)want to be entertained, ostensibly even more than the desire to make money on actionable, and properly filtered, ideas. The human brain has gotten accustomed to an information barrage of 140 letter updates, often times on a second by second basis, which in turn has crippled the ability to filter out the important from the irrelevant. Grant Williams of "Things that make you go hmmm" takes the idea one step further, and makes the claim that ever since the emergence of the 24 Hour newscycle, from its inception by CNN (also known as the CNN Effect), and currently peaking with each and every major news network having its own business new channel, accompanied by dramatic "breaking news" music, the net effect has been the substantial stupefaction of the broader global population: "Somewhere between the early 1990s and today, however, the 24-hour news cycle has, in your humble scribe’s opinion at least, become largely responsible for the ‘dumbing-down’ of the masses." Elsewhere this is also known as the "keep your eyes off the ball" effect, so well manipulated by those in control to mask what is really important with the repeated blasting of that which is truly irrelevant. Yet in another example of self-referential, deprecating and allegoric prose fit for TS Eliot (who pushed the premise of contextual and voluntary hyperlinking 70 years before the invention of the Internet), Williams makes his piece "entertaining" by presenting that number one construct of modern media: Captain Obvious. "In the investment world, this tear in the headspace/time continuum has meant that investors are unable to focus on all the issues brought to their attention and consequently they tend to suffer bouts of panic or euphoria over a certain subject before being distracted by the next piece of  news and moving on (remember Fukushima? It’s still not completely under control in case you were wondering). This strange situation in turn led to the spectacular resurgence in recent years of a Superhero – a man who, for years, has been omniscient in playgrounds the world over but has now become a fixture in more adult environs. Ladies and gentlemen, I give you Captain Obvious." In case it is not obvious where this is headed, read on...

It only took Goldman less than 5 months to roundtrip on its latest S&P 500 forecast (from January 7, "We are raising both our 2011 and 2012 S&P 500 earnings estimates by $2 per share to $96 and $106...we are raising our year-end 2011 price-target to 1500") - much better than the 3 weeks it took the firm to flip flop on oil. Just out from Goldman's David Kostin, who has finally started his retreat, which we believe will end at 1,250 before QE3 is formally announced: "We have reduced our S&P 500 2012 EPS estimate to $104 from $106 and lowered our 2011 year-end price target to 1450 from 1500. We now expect S&P margins to peak in 2011 and decline slightly in 2012. Those changes reflect forecast revisions for lower global GDP growth, higher oil prices and more inflation. At the sector level we recommend overweight positions in Energy and Consumer Staples and underweight in Consumer Discretionary and Utilities. We expect stocks with strong revenue growth to outperform those relying on margin expansion to grow earnings and recommend buying our High Revenue Growth basket."

I confess to be more than a little surprised when yesterday's morning reading turned up the following headline, from Bloomberg's Bob Ivry: "Fed Gave Banks Crisis Gains on Secretive Loans Low as 0.01%"

You won't believe how many billions public pensions are pouring into hedge funds. Is this positive or sowing the seeds of the next crisis?

Commerce is the lifeblood of a nation. Without the free flow of trade, without financial adaptability, without intuitive markets driven by the natural currents of supply, demand, and innovation, cultures stagnate, countries whither, and one generation after the next finds itself deeper in the somber doldrums of economic disintegration. In an environment of transparency, honesty, and the absence of monopoly (government or corporate), on the rare occasions in history that these conditions are actually present in one place at one time, we often see an explosion of prosperity and true wealth creation. When local, decentralized markets are given precedence over subversive elitist leviathans like mercantilism or globalism, a wellspring of abundance bursts forward. Free people, building true free markets that serve the specific needs of individual communities and insulating the overall economy from systemic collapse; this has always been the wave of the future. Not “integration”, “harmonization”, or some fantastical nonsensical “global village” administrated by a faceless unaccountable transnational entity like the IMF, infested with sociopathic maid raping euro-trolls. Unfortunately, average Americans today have grown far too accustomed to having their commerce, and thus their livelihoods, micromanaged for them. The bottom line is, if the daily fiscal life of the average American were to deviate from today’s norm even slightly, the results would be devastating. There is no flexibility in our current system. All is rigid and fragile. There is no backup plan.

In a glowering example of humanist magnanimity, the tax expert, who also on occasion pens missives describing in detail the destruction that would ensue should dealers be hindered from perpetuating the US Treasury ponzy, known as Tim Geithner, just advised China that its low exchange rate impairs China's ability to curb inflation. This, coming from the man under whose watch the dollar has gotten pounded eight ways to Sunday. The announcement came as part of the semi-annual report issued to congress, which was due originally back in April, yet which as everyone knew was delayed for no other reason that more theatrics. And just to confirm how utterly toothless US game theory bluffs have become, Geithner, contrary to much bristling rhetoric to the contrary, decided not to name China a currency manipulator, a move that is sure to require the CME to promptly issued five margin hikes of Chuck Schumer's blood pressure. But lest someone accuse Tiny Tim of being not only a tax fraud, and a liar, but also a coward, he did add that the Yuan is "substantially undervalued." And so the USDCNY revaluation debate has been pushed back for at least one more year. And to those who experience a feeling of deja vu upon reading this, worry not: Geithner had exactly the same conclusion 3 months ago. Bottom line: China 2; US 0.

The most recent CFTC data is out and the results are in: momentum chasing FX speculators continue to retrench to exit positions, as the Euro long orgy, which as recently as May 3 hit a multi year record at 99.5k net long non-commercial contracts. Fast forward 4 weeks, and the recent plunge in the EURUSD has brought the exposure to just 19.1K contracts, the lowest since January 18, and a level prevalent in October and November of 2010. The 4 week drop is the biggest one month drop, as the momentum to the downside accelerates. Although it may still have a ways to go: the recent "support" is around -50k contracts. At this rate it will be hit in about 3 weeks. In the other camp we have the USD which saw short covering bring it to net non-spec exposure climb from -1,270 to 2,485, the first net positive exposure since January 2011. That said, with the EURUSD on the verge of breaching of 1.43, it seems that the great unwind is now over. A complete historical chart of non-commercial specs, and several other products, can be seen below.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 27/05/11

Earlier today SocGen came out with a report that is a must read for everyone who has an even passing fancy in global monetary policy, as the currently rampant inflation in China, and the approaches ushered to deal with it, threatens to derail the global "recovery" (although not sure in what: printing of credit money - yes; economy - no) which according to Morgan Stanley is "too young to fail." To be sure, SocGen discusses the first of three dominoes that will or already have, fallen, as part of the increasingly popular domino theory of Chinese inflation. SocGen explains: "Quite simply, the domino theory of 2011 is that when China comes under the influence of inflation, the surrounding countries, those with the most immediate trade ties, would also fall to inflation. It will only be a matter of time till those economies with the greatest trade ties; indeed the entire world has succumbed to the great inflation cascade emanating from China." And the first domino, which SocGen claims to already  have fallen is the following: "The first domino is China creating  autonomous structural inflation: China’s domestic inflation accelerated at an unprecedented pace at the end of 2010 and policy makers remain well behind the curve. As China engineers its economy to a more domestically focused one, its demand curve is shifting outwards and the global supply curve has been inelastic in response. That domino has already fallen and is the focus of this paper." And while we respect SocGen's opinion on China, most recently referenced to debunk a BCG report on imminent US-Chinese worker wage parity, in this case we wonder if SocGen has simply gotten on the boat of conventional wisdom a little too fast. What we mean is that "structural" inflation may not be all that "structural"especially if one considers a flip to a traditional Stalin saying: "no man - no problem".... in this case "no electricity - no inflation." Bernstein's Michael Parker explains...

2 Young 2 Die and other important matters on yet another Friday afternoon before the shit could hit the fan three day weekend...