Archive - May 2011

And now for a contrarian view on the fate of crude, and the Obama administration, from Oil Price: "The nation has about eight months of supply of crude oil saved in salt domes, in what is called the Strategic Petroleum Reserve. There is more oil available in the Naval Petroleum Reserve, a set-aside of oil in the ground. Obama needs to say that we are going to start using this oil as soon as it can reach the refineries. He has to go the whole hog – to set the machinery of using our special reserves in motion. That will counter-spook the market and humble the traders." Alas, any article that discusses the price of oil and ignores the possibility of another trillion or so in free liquidity courtesy of the Fed, which will immediately make its way to crude and the entire commodity complex, is woefully inadequate in our view.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

There are those who are surprised by today's action in the EURUSD. We wonder why that is the case: had these people looked at our post from Saturday indicating the near record divergence between long EUR and short USD position, in which we speculated that the unwind would be fierce, today's Goldman call which we posted earlier, would be very much welcome. And yes, there was no margin hike in either EUR or USD spec contracts either last week or recently. We wonder why. So while we await the start of QE3 rumor reemergence, which will once again kill the dollar, and send the PM complex to the moon, here is what we said then...

More political theater out of DC:

• BOEHNER SAYS NO DEBT CEILING HIKE WITHOUT "REAL SPENDING CUTS AND BUDGET REFORMS"
• BOEHNER SAYS TIME TO TALK `ABOUT TRILLIONS' IN SPENDING CUTS
• BOEHNER SAYS `NOTHING OFF THE TABLE' EXCEPT 'RAISING TAXES'

So what exactly budget reform involves doing nothing to the revenue side of the income statement? Oh, the type that cuts spending, something Washington has not really succeeded in doing once in history? Good luck, in the meantime, we look forward to our new debt ceiling of $16.3 trillion to be announced in June or July at the latest, which will then have to be hiked to $18.5 trillion for capacity through March 2013.

Today seems like an opportune time to remind readers that as of March, margin debt, and specifically net leverage, were at near all time highs. Surely, selling off from a market that has more leverage now than almost ever, will lead to a perfectly orderly unwind.

It seems like yesterday that the LCH reduced Irish bond margins from 45% to 35% (it was actually 4 weeks ago). Since then, as the CME has demonstrated so well, when in need of some temporary price hike, best to just purge the "speculators." And to wit: after hiking margins back to 45%, LCH.Clearnet has for the first time raised Irish bond margins to over half, or 55%. Whether this will work as effectively in "normalizing" Irish bond prices, as it has so far "worked" with silver, remains unclear.

The liquidation wave has arrived, as the entire commodities complex, with an emphasis on silver and crude, continues to feel the wrath of a bipolar market which from inflation has suddenly realized that the underlying deflation needs to exhibit itself before the US Central Bank has a justification for more monetization. Elsewhere, the by bar biggest bubble in the world: the dollar short, is blowing up, with the EURUSD on route to post a 300 pip move in a few hours. Basically, the tit for tat repeat of 2010 in this Anno Domini 2011 continues.

After IPOing, with so much Bob Pisani fanfare, RenRen, has just forced the SEC to activate Short Sale Rule 201, having plunged from $22 yesterday to below $16 today, and just $2 away from its IPO price, which at this rate will be taken out shortly. Somehow we doubt the CME will hike "overvalued Chinese stock" margins today. Still, we wonder if the Chinese IPO bubble finally over? And as for RENN, who would have thought a company IPOing at 72x sales may be poised for a collapse. In other news, is the "market contingent" LBO of the NYSE by the Nasdaq now pulled?

"History does not repeat itself, but it rhymes."--Mark Twain

And even as Bernanke continues to believe he can take away inflation with a 15 minute wave of his magic wand, the downstream effect persist. The UN's Food and Agriculture Organization reported that April food prices rose once again, from 231 to 232.1, putting it at the second highest compared to the all time high peak hit in February. Bloomberg reports: "“There seems to be some easing for a lot of commodities, but whether this is demand rationing, we have to wait and see,” Abdolreza Abbassian, a senior economist at the FAO, said before the report. “If the weather is good, if plantings expand, I think we could see some relief in food prices." Granted, in April various food commodities have seen their prices drop: "Sugar prices slumped 18 percent in New York last month, while milk futures fell 1.8 percent in Chicago, U.S. wholesale beef prices dropped 3.4 percent and pork declined 2.2 percent. Wheat prices rose 5 percent in Chicago after falling the previous two months and corn jumped 9.1 percent." Yet the drop has not been uniform: "Corn has almost doubled in the past 12 months on speculation that more planting in the U.S., the world’s largest grower, won’t be sufficient to rebuild global stocks. Wheat surged 57 percent over the same period and soybeans gained 39 percent as flooding ruined crops in Canada and Australia and drought reduced harvests in Russia and Europe. Of the grains, corn “is the most worrisome,” Abbassian said in a statement. “We would need above-average, if not record, yields in the U.S.,” however, “plantings so far have been delayed considerably due to cool and wet conditions on the ground,” he said." On the other hand, as most know, a far bigger issue is that prices tend to be sticky on the upside once they begin rising. And a cursory check in local retail stores confirms that any price drop has yet to impact the US proper.

They're really just excuses made-up to explain why claims jumped to the ignorati...

Today's horrendous Initial Claims number was so bad that not even CNBC tried to spin it. In fact, as John Lohman points out, it was the second biggest miss to consensus in history! Of course, seeing how this is consensus and the BLS does not reveal any unknown information, we wonder just how difficult is it to factor in any special factors in determining project numbers, and if the answer is "very" then why do we need economists in the first place (that's rhetorical). And while Liesman is in Europe on some assignment, here is Goldman explaining why the historic miss was based entirely on special factors.

This does not sound like the sound of European consensus: "The leader of Finland’s euro-skeptic True Finns party, Timo Soini, said Europe’s crisis-handling mechanism “doesn’t work” and Greece will default on its debts as efforts to keep the country afloat have failed. He spoke today in a phone interview with Bloomberg Television." More like the sound of inevitability...We wonder how this will be spun by Trichet. In the meantime, things in carry land are getting worse and worse, as the USDJPY hit 79.60 overnight, a level at which the Japanese economy joins Europe and the US in full contraction mode. The summer of central bankers' discontent is coming fast and furious.

Trichet says:

• CPI rates likely to stay above 2% in coming months
• Risks on economy from Japan disaster
• Geopolitical tensions pose growth risks
• Paramount that rise in HICP inflation does not lead to second-round effects
• Risks to medium term inflation outlook are on upside
• Inflation expectations must remain firmly anchored
• Monetary analysis indicates underlying pace of monetary expansion picking up but moderate
• Confirm banks have continued to expand lending to private sector
• Governments need to achieve their fiscal consolidation targets in 2011

Most importantly: he says nothing about a June hike which was largely "priced in" by the Wall Street lemmingraty.

And scene: jobless claims explode to 474K, beyond the worst economist expectation, far above consensus of 410K, and well above the previous (upward revised of course) number of 431K. This is the worst claims number since Aigist 2010. Game over for the US "recovery."