Archive - Jun 2011

In plain terms, we have not had a period in which the Fed wasn’t pumping tens of billions into the markets since 2007. Indeed, the only time the Fed wasn’t officially pumping its brains out was between the end of QE 1 (April 2010) and the announcement of QE lite (August 2010). So the notion that QE 2 will end and the stock market will stay afloat just fine is questionable to say the least

Greek cabinet reshuffle for Dummies/Idiots/Keynesians.

"Moody's Investors Service has today placed Italy's Aa2 local and foreign currency government bond ratings on review for possible downgrade, while affirming its short-term ratings at Prime-1. The main drivers that prompted the rating review are: (1) Economic growth challenges due to macroeconomic structural weaknesses and a likely rise in interest rates over time; (2) Implementation risks surrounding the fiscal consolidation plans that are required to reduce Italy's stock of debt and keep it at affordable levels; and (3) Risks posed by changing funding conditions for European sovereigns with high levels of debt." EURUSD slides on the news, which also pushes stocks far lower, courtesy of 100% correlation.

I bet you never thought there are wild cougars in Greenwich...

Spokes, meet stick. According to Reuters, Greece will seek approval from euro zone finance ministers on Sunday to agree to some changes in a mid-term austerity plan that parliament is expected to pass, the country's new finance minister said on Friday. And so the scramble for concessions begins. First Greece will demand a scrapping of all retirement age hike requirements, then public sector cuts, then everything else in the mid-term plan, until the second bailout is effectively without conditions. And now that Merkel has effectively thrown in the towel to her, and the CDU's, political reign by agreeing with the ECB's and France's demands, a move which will be brutalized by Der Spiegel in T minus 5 minutes, the fact that Europe blinked to Greece's bluff, just may mean that every demand out of Greece will be met. Or not. If the Troica tells Greece to go to hell, this could be the end of the bailout package.

Back in October we asked readers if they have "Ever heard of the oxides of Lanthanum, Cerium, Neodymium, Praseodymium and/or Samarium?" We added that "With price surges between 250% and 600% in one quarter, you may wish you have." As we further predicted, courtesy of Chinese attempts to corner the rare earth space, these oxides were due to explode much further, because as their name implies, these compounds are "rare", and happen to be mostly contained in one country: that's right China. Well, for those who decided to give it the good old speculative college try, you may now retire. As the chart below shows, the YTD moves in the oxides of Dysprosium, Europium, Neodymium, Lanthanum, and all the other ones, have not doubled, not tripled, but in same cases, seen their prices increase tenfold! And people ridicule the silver "bubble"... The extra benefit: the CME's "risk management" group is completely powerless to control the rate of ascent. And judging by the charts below, the rate is certainly worthy of escape velocity. What happens next is that plasma TV purchase one may have putting off for months could end up being costly, after TV producers are forced to double the prices of finished goods, not doing much to help hedonically adjusted core inflation.

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

Market Recaps to help improve your Trading and Global knowledge

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.