Archive - Jun 2011

Done and Done. PAULSON & CO. SELLS ALL OF ITS SINO-FOREST HOLDINGS.

The world's smartest investor just capitulated, confirming he has fallen pray to the oldest trick in the stock fraud world. And so much for careful "due diligence" underlying each and every decision at the fabled fund.

Rough estimate of loss on his stock and bond holdings: $750 million+.

Well, technically they peaked some time ago (contrary to mainstream media propaganda), but we were waiting for another quarter to confirm our findings. For the sake of recreating our results, courtesy of CapitalIQ, we ran an analysis for all S&P 500 companies excluding companies that belong to the S&P Financials Sector Index, ending up with a universe of 418 companies. Then we looked at the last 3 years of gross profit margins on a quarterly basis (13 data points), and did a simple average, simple median, and trimmed mean (excluding top and bottom 15%), and got the following result.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 20/06/11

Some very disturbing revelations from CLSA's Chris Wood who in his latest Greed and Fear note discusses an event that may be all to prevalent within the central banking community: the less than overt lending out of central bank gold to "other entities" in return for picking up nickels in front of a steamroller. In this case, the central bank of governmentless Belgium, which had 41% of its gold out at the end of 2010 on loan. Naturally, the lent out gold is being used by some other key entity, potentially to mask its own inventory deficit, in exchange for the paltry sum of 0.3% on the total loan. Wood's conclusion: "This is a reminder that the paper gold market is significantly larger
than the physical market. Just like a run on a bank in a fractional
banking system, GREED & fear suspects it will be very hard to settle
all the paper claims to gold physically in a real scramble for the
metal. This is why in a parabolic spike physical gold is likely to trade
at a significant premium to paper claims." We couldn't have said it better ourselves.

Virtually all other times when stock volume was as pathetic as today's in recent history, were holidays. The chart below speaks for itself.

An accident waiting to happen ...

When we said over two weeks ago that the second Greek bailout is Dead On Arrival, we were, as sometimes happens, just a little ahead of the curve. S&P has just confirmed that a "voluntary debt restructuring" would be characterized as an event of default from the rating agency's point of view, which is the most disastrous outcome, as it would impair the collateral held by the ECB and be the true catalyst for a liquidity freeze, while anything ISDA decides on whether Greek CDS is triggered and if a rating agency default is an ISDA determination Event Of Default, is almost completely irrelevant, as discussed in our CDS myth debunking post over the weekend.

One look at the MVOLNYE stock volume chart below should explain to everyone involved why there is yet another entirely algorithmic driven melt up in stocks. With less than an hour of trading left, today is shaping up to be the lowest trading volume day of the year!

When we provided our advance look at today's dual POMO day we said that: "while we expect Dealers to go balls to the wall in flipping the just auctioned off 10 Year reopening in the form of Cusip QN3, their interest in flipping the recently auctioned off QS2 will be far more muted." As a reminder, this is predicated by our interpretation of Bill Gross' tweet from last Monday, that "QE3 [is] likely to take form of "extended period" language or interest rate caps on 2-3 year Treasuries [sic]" and a result Dealers who believe Gross' prediction will hold off on flipping On The Run just issued bonds, a practice widely espoused across the curve up until the date of Gross tweet. Indeed, we already saw that during last week's 2 Year POMO not a single OTR was flipped back to the Fed, an outcome which at the time puzzled us (we had not noticed Gross' tweet). Well, the results are in... and we were half right. As we predicted, there was not a single OTR 3 Year bond (the QS2 Cusip) sold to the Fed by the dealer community during the just concluded 2:00 pm $4.6 billion POMO: a development in stark contrast to events as recent as 2 weeks ago, when the then 3 Year On The Run QM3 was massively flipped back to the Fed, just a week ahead of Gross tweet. Yet we were also half wrong: we expected that guided by Gross' expectation that the upcoming "Operation Twist 2" would focus on the front end (2-3 Years), would mean major flipping of the OTR 10 Year, as per the first POMO today. Wrong. In fact, just as during the 3 Year POMO, not a single 10 Year OTR (Cusip: QN3) was sold to Brian Sack. It appears that Dealers are now virtually certain the Fed will proceed with some form of Operation Twist, but are simply unsure whether the Fed will focus on the 2-3 Year Space, or go all the way to the 10 Year: the point that David Rosenberg predicted would be the threshold for interest rate caps. That this is happening despite a substantial drop in yields, and thus profit, for all the Dealers who hold the OTRs since auction day (both the QN3 and QE2) makes the case all that stronger. The FOMC announcement this Wednesday just got very interesting as there appears to be a substantial pricing in of an interest rate cap disclosure in some format, just as Bill Gross has predicted. Translation: that would be the start of QE3, and would explain the paradoxical strength of the Euro in the face of simply horrendous news out of Europe over the past week.

With industrial production falling, the likelihood of an economic recovery seems farther and farther away for Messrs. Bernanke and Obama. The way I look at the data, the US economy continues its slide into stagnation. This isn't a "double-dip" -- we never did recover from the '08 Crash -- but a consequence of monetary and fiscal stimulus.

Late last week, Thomas James Ball reached his breaking point. Driven to desperation by a system that bankrupted him and destroyed his family, Ball walked up to the main door of the Keene County, New Hampshire courthouse, doused himself with gasoline, and lit himself ablaze. Hardly anyone seems to have noticed. Conversely, when a 26-year old Tunisian man lit himself on fire a few months ago after police confiscated the fruits and vegetables he had been selling without a proper permit, it launched a wave of revolution across the Middle East. People were shocked into taking action… protests and riots swept the region and one regime after another crumbled. Rather than sparking an “American spring” and shocking US citizens into taking their country back, though, Mr. Ball’s act of self-immolation seems to have been largely ignored. There has been scant coverage (and scant is being extremely generous) of Mr. Ball in the mainstream media, and what little coverage there is generally discredits the man as a troublemaker.

Ron Paul, who over the weekend won the straw vote at the Republican Leadership Conference held in New Orleans, with 40% of the vote, has just released a list of 4 points that will frame his budget priorities if elected president. As Jesse Benton, Paul campaign chairman says “The American people want and deserve someone who will tell them the truth, tell them what needs to be done, and who has an untouchable record of consistency to back it up." Whether everyone will agree with the proposed framework is unclear. However, what is true is that Paul, of all politicians on either side of center, has been the most steadfast in his message over the years, and the fringe benefit, naturally, will be the gradual elimination of Paul's arch-nemesis: the Federal Reserve.

PIMCO Scott Mather has released a fascinating Q&A in which the key topic of discussion is the artificial push to keep rates low in developed economies, also known as central bank hubris to maintain the "great moderation" in which he clearly explains i) what this means for global fund flow dynamics (using developed country reserves and purchasing EM bonds) and ii) for the future of a system held together with glue and crutches. To wit: "Financial repression is any public policy
that is designed to influence the market price of financing government
debts, either through government bonds or the nation’s currency. Direct
methods of repression include things like setting target interest rates,
monetizing government debt or implementing interest rate caps. Indirect
methods include polices designed to change the amount of debt or
currency at a given price. Examples include requirements to hold minimum
amounts of government debt on bank balance sheets or establishing
minimum requirements for government bonds in pension funds." Just in case anyone is confused why central planning is a bad idea: "Governments may take these steps to improve their ability to
finance public debt and forestall more painful adjustment processes,
though there can be other motives, and because these methods are less
transparent, and thus less controversial, than direct tax hikes or
spending cuts. Investors should be wary of financial repression because
it is primarily a tool to redistribute wealth from creditors (citizens)
to debtors (governments) to the detriment of creditors, fixed income
investors and savers." Needless to say, central planning always fails: "It is important to realize these methods as practiced are only
partially effective and cannot go on forever, as advanced economies
continue to add significantly to their public debts despite low
financing costs. Some intensification of financial repression, fiscal
austerity, or stronger growth must occur to lower the likelihood of a
future debt crisis." Bottom line: "kicking the can" can only go on for so long before EMs (read why below) provide a natural counterbalance to an artificial market created by developed world central banks. PIMCO's advice: get out of balance sheet risky DM bonds ahead of central planning failure, and buy up every EM bond possible, or bypass paper and just buy EM currencies as "EM policymakers who have resisted appreciation will
eventually allow more appreciation over the next three to five years as
they nurture domestic consumption and their economies become less
dependent on export demand." We expect to see much more on this topic as the MSM realizes the implications of this new risk regime change.

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

Market Recaps to help improve your Trading and Global knowledge

For all those who believed that it was only JP Morgan who is manipulating the Brent-WTI spread, we regretfully have to inform you that the squid is once again front and center, having now been caught red-handed by none other than the ICE exchange, aka the home of Brent trading. From a just disclosed complaint: "On 28 January 2011 the Exchange’s monitoring detected six notable “price spikes” in the April11 Brent/WTI spread, between 14:26 hours and 14:31 hours UK time. These were investigated and found to be the result of a limit order and several large market orders placed in quick succession by a GSF trader...In relation to the events described above, the Exchange alleged that GSF had breached the following Rule: "It shall be an offence for a trader or Member to engage in disorderly trading whether by high or low ticking, aggressive bidding or offering, or otherwise." The Exchange recommended to the Committee that summary disciplinary proceedings be commenced in regard to the above mentioned allegations. The Committee subsequently considered the matter in accordance with Summary Enforcement Rule E.7...The Committee considered the behaviour of GSF and its client to be a clear case of disorderly trading, in that the  distorting price impact of the placement of such large orders in close proximity was not considered." But don't worry: the ICE naturally had to sugar coat its findings: "Having examined the instant messenger logs of the communication between the GSF trader and their client, the Committee found no evidence of intentional manipulation of the market; nevertheless it considered the breach to be of a serious nature." Well, thank god that all market manipulation occurs via perpetually recorded instant messaging. It would be inconceivable that Goldman and its "client" may have found a different way to hatch plans to defraud investors than one which involves on the record messages.. Simply inconceivable... And preposterous.