Archive - Jun 2011

It's that time of the day when Brian Sack is holding the ES flat or rising even as his increasingly depleted arsenal to push other risk assets higher causes the RISK basket to decline. The latest: the ES-RISK (commodities, FX carry and rates) spread has just blown out to a 7 ES point equivalent. In the past 2 months the divergence has not failed to close upon emergence within 48 hours. Those with discount window access and wishing to take on the Fed in this relatively low risk pair trade, now that the Fed is about to step out of overt market manipulation (and just be stuck the covert one... and with the fiber optic cable to 131 South Dearborn Street) are as usual advised to take a long, hard look at a compression trade at these levels.

We all know special interests own the U.S. Congress and the Federal machinery of governance (i.e. regulatory capture). How much would it cost the American citizenry to buy back their Congress? The goal in buying our Congress back from the banking cartel et al. would not be to compete with the special interests for congressional favors--it would be to elect a Congress which would eradicate their power and influence altogether. A tall order, perhaps, but certainly not impossible, if we're willing to spend the money to not just match special interest contributions to campaigns but steamroll them. A seat in the U.S. Senate is a pricey little lever of power, so we better be ready to spend $50 million per seat. Seats in smaller states will be less, but seats in the big states will cost more, but this is a pretty good average. That's $5 billion to buy the Senate.

But as far as the credibility of at least one $30+ billion (?) hedge fund, he sure as hell is.

According to CNBC's Kate Kelly, Paulson has given up on his $30 price target on Bank of America by the end of 2011, and instead has dumped a "substantial stake" in its holdings of the bank's stock. And so, the claims that the hedge fund which has now become the butt of all due diligence jokes, is about to eat more crow, especially as other objective skeptics have long been warning that the bank is massively underreserved for what is about to become a legal fee freeforall following the just announced non-settlement with the BlackRock, Pimco, New York Fed group, and thus a ticking timebomb. But no, Paulson is in it, so it must be a Buy, Buy, Buy. Idiots. Incidentally the market is only slowly getting to realize that the "settlement" announced a few days ago is actually horrendous news for the bank (but confirms that monkey throwing feces move the marginal money) as we said first upon hearing the news.

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

This is an ugly story.

Exhibit A.

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

Corn traders, especially of a bullish persuasion, are being carted off trading floors feet first after a report by the USDA crushed expectations that there is a supply shortage. Reuters reports: "Corn futures plummeted more than 10 percent in early trading on Thursday after a U.S. government report said farmers were able to seed far more corn acres this spring than many analysts expected and that supplies are not as tight as many thought." And while the front month dropped by the maximum allowed limit, that did not stop the July contract, which has entered the delivery period and is trading without limits, to plunge by a whopping 70 cents. "The declines leave corn with the biggest monthly fall since June 2009." This is one time when those listening to Goldman would have been a well-advised action. From Damien Courvalin's note released yesterday: "We expect corn and cotton acreage will be higher than projected by the June WASDE, to the detriment of soybeans."

A new interventionist, activist approach by governments towards the energy space. If the IEA’s strategy works, and prices stay down 10% over time, this would inject $300 billion into the world economy. Howls of leaked information and insider trading. . Traders may bet against the national interest, but now do so at their peril. This is the first real attempt by the consuming nations to eliminate the oil risk premium, estimated at up to $50 a barrel. Cutting Brent prices by a whacking great $30 a barrel. Is this QE3 in black?

Goodbye net monetization of US debt. Going forward the Fed will only roll maturing debt, as per QE Lite announced in early August, and due to the fact that it will be roughly one fifth the notional periodic impact of QE2, is not what so many erroneously classify as QE2.5 (a topic beaten to death previously). The biggest question of who will buy bonds now that Primary Dealers will be unable to roll debt to the Fed remains, judging by today's carnage in bonds, completely unanswered. And confirming that PDs always and only cared about flipping the On The Run bond, is the just concluded last POMO, which out of $4.909 billion bonds monetized, saw a vast majority, or $4.405 billion in the form of Cusip QT7: the 7 year just auctioned off yesterday! In other words, Dealers held the On The Run for less than 22 hours before flipping it back to the Fed!!! Well, those days are now over.

The ever-recurring and oh so critical rhetorical Bill Gross Treasury question, which the head of PIMCO retweeted earlier this morning for emphasis, is starting to demand answers. And once today's window dressing exercise in stocks is over (which alas will not do much for most hedge funds which continue to underperform their benchmarks by a wide margin), and when the world wakes up to the realization that crude prices are rapidly heading back to triple digit levels, not to mention the dramatic rise in interest rates, vacuum tubes and momos will need to think hard and long about what the next upside catalyst will be.

We have a very tough time understanding those bearish arguments against silver. We look at the real silver market, and based on the supply and demand data coming from the real, physical markets for silver, the fundamentals are only getting stronger. And yet there exists another silver market, which as we’ve shown, is not very connected to the physical realm at all. And though silver investors have for decades suffered the tyranny of a rigged paper monopoly over silver price discovery, it appears to us that the tides are turning. In the age of QE to infinity, investors are being more scrupulous with their capital and as such they are demanding physical silver in quantity. With more and more dollars flowing into the silver markets and a finite supply of physical to meet that demand, the theoretical losses for the paper silver short-sellers are near infinite. And with such a skewed and obvious risk/reward payoff vastly favoring the longs, we pose the following question. Who is most at risk in the silver markets: the buyers of a scarce and real asset that serves a growing multitude of purposes, or the sellers, who are short a quantity of silver which may very well not even be obtainable at anywhere near current prices? Let the Seller Beware!

... I would tend to believe that from here, things are more double sided than before, and risk-reward much less interesting than it used to be, because there are now external factors like government intervention which can kick the can, and screw valuations for a long time.

No TARP version 1-style surprises allowed:

PAPANDREOU HAS VOTES TO WIN SECOND BUDGET BILL; VOTING ONGOING

The Hamptons will be crowded this weekend. Keep an eye out for photoshopped receipts where hedge funds supposedly hold $100 million in accounts which only have $100,000 in FDIC insurance.