Archive - Jun 17, 2011

It has not been Jim Caron's decade. The Morgan Stanley rates strategist, riding on the coattails of the always wrong Morgan Stanley economics team led by David Greenlaw, has been wrong in his annual rates call year after year after year. Which is unfortunate because while unable to see the forest for the trees, Caron does have a better grasp of rates than most other Wall Street penguins. That said, just like everyone else in the status quo, Caron has just come out with another short duration call (i.e. sell bonds), probably the 6th time in a row he has done that in the past 3 years. Perhaps 7th time will be the charm. Amusingly, Caron, terrified to be seen in the same camp as Bill Gross who is short bonds on fears that there will be nobody available to step in an buy the 80% of gross issuance that has been monetized by the Fed to date, make this very loud caveat on his short bond call: "To be sure, our shift toward short from neutral duration has nothing to do with the end of QE2 and related concerns that there will be a lack of demand to buy US Treasuries once the Fed stops buying them. As we have stated many times in the past, the outlook for the economy will be the main driver of yields, not the end of QE2." No, instead Caron believes that the sell off in bonds will be due to the same bullish economic growth call that he has been predicting over... and over... and over... and over... etc. More interesting is how he suggests the trade is implemented: in MS' view the best way to be bearish on rates is with a DV01 neutral 7s-10s flattener: "we continue to recommend being short 5s on the 2s5s10s fly. In line with the butterfly, and in order to express a more robust short duration position, we recommend a curve flattener on the UST 7s10s curve: · Sell $133.7mm OTR 7y Notes; · Buy $100mm OTR 10y Notes." Perhaps those who want to be short bonds, but for the right reason, that predicted by Zero Hedge and then Bill Gross, this may be one of the better ways to put the trade on.

This stuff is funny. Especially when google translated...

There's a 50% off sale in Research in Motion shares today! Why? Well, investors are still controlled by name brand marketing and past is prologue propaganda. The new open sourced business model has taken out Nokia (was #1 worldwide), RIM (was #2 worldwide) and guess whose #3. Yeah, I know. It'll never happen, you say [plug in your various fan boy reasons hear, ex. strong earnings growth - just like RIM, superior technology - just like Nokia, etc.) Just remember, our warning was a year ago and it was against the tide then as well.

Scrape away the Human Resource Department rah-rah about "our mission" and how much your loyalty is "valued," and what's left? A paycheck and a sucking sound. Let's state the heretical obvious: Corporate America, you suck. We could count the ways--subverting democracy via your lobbying and campaign contributions, your sabotage of competition via regulatory capture, and so on--but what really matters is how you treat your employees. We know: you really really care about your employees. Really. The propaganda would be laughable if it wasn't so bald-faced. Do corporate managers really believe in the Big Lie theory, that the bigger the lie, the easier it is to sell?

The latest quarterly slidedeck from Damien Cleusix' Global Tactical Asset Analysis is out and as always it is replete with insightful and exciting observations, outlooks and charts. His thesis summary: "Markets seems to be in the typically slow and frustrating cyclical top formation process. Our cyclical models are giving sell signals one after the other while leverage is reaching levels typical of cyclical market turns. It would be imprudent to bury the Bull too soon but It seems to be in bad hape. A contra-trend rally is to beexpected so on and the behavior of the markets (participants, internals) during this rebound should be carefully analyzed to decide if we can send the Bulls obituary (a waterfall decline without intermitting rebound would settle the case)."

Anything to me is sweeter--
Than to see this pompous pig faced PIIG sausage eater!

Here is a simple summary of the Greek bailout math explained with just 2 numbers. First, the country has to do the impossible. As Citi's Jurgen Michels summarizes: "Once the whole new cabinet is announced, parliamentary discussions ahead of the vote of confidence will probably  start on Sunday, with the vote actually taking place next week on Tuesday evening. Even if the new government manages to pass the vote of confidence, it will still have to submit to Parliament the new austerity package for approval, probably sometime later next week or the week thereafter. This will be key for the smooth disbursement of the next tranche of EU/IMF loans, of €12bn." In other words, the Greek government has to pass 2 near-Sysiphean tasks before it can even hope to sniff the IMF's €12 billion in rescue funding. That's number 1. Number 2 comes from the chart below, which shows the debt and interest payments through August. This number is €18.2 billion. This number does not include the billions in deficit spending that will also have to be funded somehow over and above debt paydown. Ergo, the math for a viable Greece is as follows: €12BN > €18.2BN  + X. Simply said, unless somehow Greece discovers how to tax its citizens and actually record net revenue in July, the best the ECB can hope for before it has to mark its tens of billions in Greek bonds to about 45 cents on the dollar, is one month. So will someone please explain to us why again the EUR is up today? Actually the only possible reason is that Europe is now pricing in the fact that China will be the de facto owner of at least 2 European countries by this time next year, however not in an Asset Purchase Transaction but Stock, whereby China also acquires the liabilities. Which in turn may explain why Russia's just announced minutes ago that China may turn into "zone of risk" for the global economy.

Bizarro time is here, now that we have another market surge based on another economic indicator miss, in this case the uber-irrelevant UMichigan confidence, which came at 71.8 on expectations of 74, and a drop from May's 74.3. Granted the only reason stocks are rising is not on any fundamentals, but purely due to the clobbering the USD just took, which sent the EUR surging, and pushed the Dow into triple digit territory. To whoever continues to trade this centrally planned farce, our condolences. The only relevant data in the index was that the 5 year inflation expectations jumped from 2.9% to 3.0%, the second highest in 2011, and only below March's 3.2%. Time for the Fed to panic once again, now that Operation Twist 2 is just matter of months if not weeks.

In what could be the oddest development in the precious metals market in a long time, the World Gold Council has just unveiled an initiative whose sole purpose if to combat "conflict gold." From the just released notice: "The World Gold Council today announces that, working together with its member companies and the leading gold refiners, it has produced a draft framework of standards designed to combat gold that enables, fuels or finances armed conflict. The draft standards represent a significant, industry-led response to this challenge and are designed to enable miners to produce a stream of newly-mined gold which is certified as ‘conflict free’ on a global basis." While we are confused what exactly is being pursued with this action, aside from the creation of a black market for gold of course, it does seem that the logical end result will be a decline in the total supply of "certified" gold. On the other hand, it will also afford the WGC or any prevailing authority the ability to brand any country it so chooses (Indonesia?) a sourcer of "conflict gold" and effectively clamp down on the production of the yellow metal. Additionally, what better way to deprive a gold sourcing country of massive export revenues than to effectively make their product unsellable in the "legitimate" market. Which then would lead to a surge in fair market value due to supply considerations. Which begs the question: is this the preparation for the "golden" endgame?

In the past we have repeatedly observed that in order to get an instantaneous appreciation of which direction all too critical Greek bank deposits held by the public are headed (hint: out), instead of waiting for delayed NBG data, one needs to only look at the EURCHF. As the chart below shows, the correlation between the two is essentially one. Which means that should this pair continue dropping to parity, in addition to making life for Swiss exporters a living hell and for Hungarian mortgage holders unbearable, that Greek banks will literally become hollow shells whose only lifeblood - depositor cash - is no longer there. And the more severe the lack of confidence in the outcome, the greater the outflow, the higher the likelihood of a disastrous bank run that wipes out the Greek banking system. Welcome to Catch 22 for the centrally planned, monetary union generation.

It is rare to find a market where the technical evidence is so compelling for a strong rally yet the fundamental basis for such a rally so lacking. Exactly where do Bulls think the growth and rising profits are going to come from? The answer for the past few years has been massive Federal Reserve/Federal intervention and stimulus, and a weakening U.S. dollar that boosted overseas profits via the legerdemaine of currency devaluation. But three years of these policies have accomplished nothing but load the taxpayer with staggering amounts of debt: none of the causes of the 2008 implosion have been fixed or even addressed. As Armstrong notes, the massive interventions did not shorten the crisis, they have prolonged it. This reality has filtered down to the political swamp, and now the politicos are hesitant to bet their own futures on additional trillions in stimulus and quantitative easing. For the first time in memory, the Federal Reserve is on the defensive. Simply put, its policies have failed to accomplish anything except prop up a rotten, insolvent banking sector that needs to be declared bankrupt and swept into the dustbin of history.

• And the truth keeps coming out: Evacuation urged for radioactive hot spots in Japan beyond 20km zone (Japan Times)
• Germany's Merkel: Europe and Euro Tightly Bound Together (WSJ)
• Hardline IMF forced Germany to guarantee Greek bailout (Guardian)
• Hunt for ‘Holy Grail’ Hunt Pits ECB Against Naked Banks (Bloomberg)
• Default by Greece ‘Almost Certain’: Greenspan (Bloomberg)
• SEC could file Civil Fraud charges against some Raters (Reuters)
• Merkel’s Greek Bondholder Gambit Tested as Sarkozy Visits Berlin (Bloomberg)
• Biggest banks face capital clampdown (FT)
• Too Big to Fail Ends With Wave of a Magic Wand (Bloomberg)
• Biden Talks Aimed at $4 Trillion in Cuts Over 10 Years (WSJ)
• California's Brown vetoes fellow Democrats' budget (Reuters)
• U.S. Confidence Out of Sync With Stock Gains (Bloomberg)

• Market talk that a new Greek aid package could be worth as much as EUR 150bln against a previous estimate of EUR 120bln
• German Chancellor Merkel and French President Sarkozy demonstrated a united front in their approach to tackle the Greek problem
• German chancellor Merkel said she wants involvement of private creditors on a voluntary basis, and wants to work with the ECB on investors’ role in Greece
• French President Sarkozy said that we have found an agreement on the private sector involvement on Greece, in line with the Vienna initiative

Congressman Ron Paul, the Republican presidential candidate who is chairman of the U.S. House Financial Services subcommittee and chairs the House's Subcommittee on Domestic Monetary Policy plans to question U.S. Treasury officials next Thursday (June 23) about the U.S. gold reserves and get them to testify regarding the authenticity of the nation’s gold reserves. This is an important question given the increasingly precarious state of the U.S.’ finances and is important to the gold market as the unaudited U.S. gold reserves are the largest holdings of gold bullion in the world. Paul has introduced legislation that would require an independent audit of the 5,000 plus tons of gold bullion that is believed to stored in the Fort Knox, Kentucky vault. The audit would include other U.S. gold reserves held in government facilities in Denver, West Point and the New York Federal Reserve Bank in lower Manhattan. Paul is also calling for some of the bars to be assayed and tested by a laboratory in order to prove that it is investment grade gold bullion as the U.S. Treasury Department says. There have been unconfirmed reports that the Chinese received a shipment of large gold bullion bars from the U.S. that contained tungsten. Last August Paul said that "if there was no question about the gold being there, you think they would be anxious to prove gold is there." He has been pressing the point since the early 1980s, when he was a member of the U.S. Gold Commission.

Today we get two very circular resonance amplifiers in the form of Consumer Sentiment and the Index of Leading Indicators. When markets go up, these go up, pushing the market higher. When the market goes down, these go down, and push the market lower. In other words, the only relevant thing, correlating at 1.000 and leading the market, will once again be the EURUSD which is the only chart one needs these days, while one can trace the critical fate of Greek bank deposits by looking at the EURCHF.