Archive - May 2011

Equity underperformed credit as HY put in its worst close-to-close widening in two weeks and filled the gappy gamma-driven chasm from last week. CMBX activity starting to signal systemic fears perhaps and a pick up in vol skews (downside protection bid) remain worrisome as so many under-currents indicate less than stellar confidence.

Remember when earlier we said the CME had hiked silver margins for the 4th time in 8 days? We lied. In fact, what the CME did was to hike margins for the 4th (effective May 5) AND 5th times (effective May 9). That's right, dear reader, in one release, the CME has performed two concurrent margin hikes, which means today's action is the 5th margin hike in 8 days, a previously unheard of event! As of May 9th, the initial margin is $21,600, or 11% of the contract value, while the maintenance is $16,000. This is nothing short of sheer panic at the CME. At this point we can only wonder if the FDR-style precious metals confiscation executive order will come by way of the CME or the FBI. And for everyone asking, below is the chart of recent CME margin hikes in silver.

Nobody could have foreseen this. Nobody. At this point there is nothing left to comment on what is a concerted action to "mitigate" any and all risk in the commodity market but could as well be classified as executive order 6102.5. While we were joking before that soon one will have to post more cash than an silver contract is worth, we are now forced to reevaluate this sarcasm.

As the U.S. economy fails on a systemic level, it is pushing individuals into a deep sense of failure. Feelings that one has failed one's family and oneself can feed a despair profound enough to trigger thoughts of suicide, and for many vulnerable people, thoughts lead to action. In a terrible irony, those who do take their own lives are often those with the highest sense of responsibility and highest personal standards; their sense of failure is crushing in ways that less responsible, more laissez-faire people cannot imagine. The systemic failure of the U.S. economy is pushing many to the brink of despair, as they interpret their own financial failures as personal rather than as the result of a system-wide decline stretching back decades. The need to explain this systemic failure is part of what drives me to write this blog day after day, month after month, year after year--to help people understand the roots of our national and global failings.

This is about as close as we are going to get an admission from Goldman that growth is about to fall off a cliff. The full announcement will come within the next couple of weeks (assuming Goldman is unsuccessful in its 4th upcoming crude Sell recommendation). "If sustained, the recent oil price increase could thus shave around ½pt off growth for the next two years. Moreover, we showed that further increases from current levels could have increasingly detrimental effects on growth, as “nonlinear” effects might set in as oil prices reach new multi-year highs." And "In particular, the simulations suggest that growth in the second half of this year and the first half of 2012 would only range between 2½% and 3%, well below our forecast of 3½-4%. The implied effect on Q2, however, is small given the lags involved, and the gas price drag weakens notably in the second half of 2012." Must. Not. Cut. Q2. GDP.

Unless we, as a Country, decide to "go Luddite" that is...

"One photo shows a computer cable and what looks like a child's plastic green and orange water pistol lying under the right shoulder of one of the dead men." [graphic]

And as of today...

There is a reason Zero Hedge has been on GM's derriere over the past year in disclosing the firm's not so covert channel stuffing mandate. Just released is the validation:

• GM MAY REDUCE PICKUP PRODUCTION, REUSS SAYS
  
• GM TRUCK INVENTORIES ROSE TO MORE THAN 275,000 AT END OF APRIL

Translation: more furloughs, less tax receipts by Tim Jeethner.

Most of the clearly evident financial problems that surround us today stem from one cause - Debt Saturation. Most, intuitively, sense this to be a correct assessment but few can either prove it or articulate it to the less sophisticated. Let me arm you to be the "Nostradamus" amongst your friends and colleagues in explaining the problem and what the future therefore foretells. However, let me make it very clear, this will not make you popular. Smart maybe, but highly likely to make you unwanted at the social gatherings of the genteel.... In your new role as 'Nostradamus' to your friends you can safely predict a decade ahead to be a secular bear market in financial assets, in real terms. Nominal values may not show this clearly but it will be very evident in the reduced standard of living most Americans will experience. You are going to have to work harder and harder, for less and less to survive at a lower and lower standard of living. This will all be required to support the annual $9T debt bondage we have assumed as our politicos add additional 'stimulus' to a suffocating and debt saturated global economy.

Do you think Banzai7 is going to let this issue disappear like everything else that's not nailed to Bernie Madoff's Ponzi ass?

What comes next should be no surprise to anyone. What we have been discussing for the better part of 2011: namely that this year is a spitting image of 2010, to the debt ceiling debate, to the Q1 market spike and subsequent drop, to an insolvent Europe, to the various allegations of bank impropriety, to the debt monetization, and pretty much to the dot, is captured best by SocGen's Albert Edwards who shows that various leading indicators have now rolled over, and absent some "exogenous" push (wink wink Chairsatan), the rollover now, just like a year ago, means the fun for the Hamptons crew is over for now, absent some very heated discussions between Hatzius and Dudley at the Pound and Pence.

One again, the seemingly immortal David Bianco, who for some odd reason constantly evokes allusions to the green sock puppet from the Muppets, is once again forced to be sacrificed at the altar of credibility, having just released a report hiking his S&P500 estimates. To wit: "We raise our 2011 and 2012 S&P 500 EPS estimates to $97 and $104 from $95 and $102 respectively. Despite a moderation in overall US GDP growth, S&P 1Q EPS is coming in significantly higher than expected on stronger manufacturing activity and business spending, higher foreign profits and commodity prices,and a weaker dollar. Half of the increase in our 2011 EPS is from higher 1Q EPS, which we expect to come in at $23.50 (Table 2). Mid-$90s annualized EPS in the seasonally light 1Q supports a more robust EPS outlook." This comes just in time for the economy to take a confirmed dip lower following recent consistently lower economic releases capped with today's Services ISM. And why Immortal? We hearken back to the following Bloomberg article from November 2007: "None of that swayed Cohen, Trennert and Bianco. They say low equity valuations, overseas growth and the prospect that the Federal Reserve will cut its interest rate target for overnight loans between banks can lift the S&P 500 to a record 1,600 this year." This never happened, and in fact Bianco top ticked the market to the dot. How he still has a job is beyond anyone with half a working frontal lobe.

First and foremost, China and Russia agreed late last year to begin trading with one another in their own currencies, NOT the US Dollar. In that step alone, two of the largest emerging markets (and economies) in the world moved away from the US Dollar. Add to this the fact that China just agreed to expedite trade relations with Brazil and you’ve got the beginnings of a flight from the US Dollar and the end of the Dollar’s reserve currency status.