Archive - Jun 2011

A beige book and a bond auction.

Yesterday Reuters reported that a troubling, yet potentially inevitable development may be imminent: the default of the US, granted, a short-lived one (though we are not sure just how the world's "reserve" currency will be backed by a national that is technically insolvent). Luckily for the US, everyone else (except China) is just as bankrupt. Yet if there is one thing pushing Lehman into competitive bankruptcy just so that Goldman would have a monopoly in the US fixed income sales and trading market, it is that any such action will have massive downstream consequences, and in the pyramid of "unpredictable downstream effects", the insolvency of the US is at the very top. And just to make it clear, now that a default is becoming a palpable option, China announced that the United States is "playing with fire" if it opts to briefly default on its debt, which could undermine the dollar, Li Daokui, an adviser to China's central bank said on Wednesday. Yet the statement could very well backfire after Li, speaking on the sidelines of a forum, said China needs to dissuade the United States from defaulting on its debt, but he believed China may hang on to its investment in U.S. Treasuries in any case. This is precisely the case made by Stanley Druckenmiller: in fact, should there be a technical default, US bonds will become a true safe haven investment as America will for the first time take a step to indicate that it believes the relentless abuse of its fiscal situation is coming to an end.

What happens if energy and food prices keep going up? Can we be sure that this won’t happen? No of course not so these markets are far too complacent in my view and are not pricing enough risk premium. I am not even convinced that a lot of higher input prices have been passed on yet so the consumer will either face higher prices or the producer will see margins collapse and neither is good for equities. Europe is in a mess and it looks increasingly likely that a restructuring WILL happen somewhere at some point, whilst Trichet seems determined to jack up rates on principle. Don’t forget that even though European politicians want to help for fear of the consequences, ultimately the outcome will be decided by backbench politicians in PM Papandreou's parliamentary party. If austerity measures are not approved by parliament on Jun 28, then all hell could break loose. And just look at the EUR; what’s it doing up here? There is little risk priced here it seems and yet the risks are huge. Central banks are sucking volatility from these markets in a bid to create a false sense of security. This covert intervention is very clever as it’s tough to fight. Without doubt G20 is behind this and the accord is strong. They need a stable equity markets and stable FX markets to help buy time. Very clever.

Gold and silver are lower today despite European equities falling for a sixth day on sovereign debt and economic growth concerns. Bernanke’s failure to even suggest that the Federal Reserve will embark on further stimulus and QE3, after QE1 and QE2 failed to kick start the US economy, has markets jittery. Moody’s warned that the UK was at risk of losing its AAA rating if growth remained weak and the government failed to meet its budget deficit reduction targets. This is almost certain as the UK is now seeing a new bout of weakness in the housing market, and stagflation. Gold remains near record highs in sterling (£949.82/oz) and looks well both fundamentally (given the risks posed to the UK economy and sterling) and technically. Gold looks well supported above £900/oz and may be consolidating over £900/oz prior to a move to £1,000/oz.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

I’m not sure what prompted me to consider this subject on my commute this morning, but it probably has to do with my reflecting on Memorial Day just passed. That and the fact that crude oil continues to trade around $100/bbl and the implications for energy prices going forward—for the consumer and the countries who supply them. One of those countries is Russia which produces 12% of the world’s oil. As one whose company sometimes does business with Russian firms, I’ve found it helpful to understand their mind-set as I do any foreign customer whose worldview originates from a different vantage point than my own. And one thing I have learned is that the Russian historical narrative of World War II is far different than ours. I must say that when it comes to what they once referred to as “The Great Patriotic War” their memories are more accurate in my view.

While not relevant to financial markets, our beloved friend and member of the financial community, Sachan Sapra, needs everyone's support. Sachan is taking part in a 160KM bike ride* for Oakville Hopsital's Palliative Care Unit. Palliative Care is a type of care that's given to patients when they are near the end to relieve and prevent suffering. It is the kind of healthcare that is overlooked and underfunded, but is very important as society ages. Sachan needs to raise a minimum of $1500 for this. But let's all unite and help him be the top fund-raiser.

http://www.thehealingcycle.ca/Rider/2049/

India's stock market about to tank?

While not making any specific recommendations (or precisely because of), and since it is not the product of some major conflicted sell-side "advisory" desk, the BNY/Economist's just released report on the "Search for Growth" is possibly one of the best and most insightful pieces of research into the prevailing popular opinion about the opportunities and risks in capital markets we have read recently. From the survey: "The search for growth remains challenging and unpredictable. For every indicator that points to a more sustainable recovery, there are others that suggest the emergence of new problems. Although it is not easy to make decisions about how and where to invest in this difficult economic and market environment, it does help to understand how peers from around the world are responding. Our survey of 800 respondents tackles a broad range of themes, including the prospects for growth across sectors, regions and asset classes. At its heart is a set of scenarios; we asked respondents to indicate how likely they thought each scenario was, and then asked them to tell us what impact it might have on their portfolio. The results provide a fascinating insight into the current mindset of investors and executives around the world."

Courtesy of ex-SAC portfolio manager Noah Freeman's cooperating witness testimony, we now know just what it takes to be a star trader under Stevie Cohen: i) trade on inside information at least 6 times, ii) run around San Francisco, in your underwear, high on shrooms, and iii) bang a hooker at a Taiwan bar called the Red Horse. And that's about all you need to make 1.3 million a year while in the employment of one SAC Capital.

Starting at 9pm Eastern, something lit up a fire under the Japanese Yen, sending all pairs, but specifically the USDJPY and EURJPY down sharply for no apparent reason. At last check the Dollar Yen was back under 79.85, the level at which the BOJ 3 months ago had to run like a petulant, crying child to its pedophile uncles from the G-7, begging for a rescue. The only mildly related news came out just prior when it was announced that China's net purchases of Japan debt hit a new record in April. From Bloomberg: "China’s net purchases of Japan’s long-term debt reached a record as the larger nation seeks to diversify the world’s biggest currency reserves. China bought a net 1.33 trillion yen ($16.6 billion) in Japanese long-term bonds in April, the biggest amount since records began in January 2005, according to data released today in Tokyo by Japan’s Ministry of Finance. The nation sold a net 1.47 trillion yen of short-term debt, the data shows. “As China tries to diversify its assets with its huge foreign-exchange reserves, it probably wants to have yen- denominated assets to some extent” in the longer term, said Tetsuya Inoue, chief researcher for financial markets for Tokyo- based Nomura Research Institute Ltd. “China has a strong trading relationship with Japan." If anything this would be dollar negative, not so much Yen positive... We will follow and update if anything is noted.

Two and a half years ago, Christina Romer, then still employed by the Obama administration in the position of Chair of the Council of Economic Advisers penned "The Job Impact of the American Recovery and Reinvestment Plan" - a report predicting the impact of a fiscal "stimulus" that took out $787 billion from the pocket of American Taxpayers (subsequently discovered to cost even more) and put that money...somewhere. We are not sure where, because according to a chart now made legendary for its complete failure to predict the future, it sure did not go into creating jobs. Below we present the original chart that made the January 10, 2009 presentation, and superimpose upon it the reality of the past two and a half years. It is simply stunning. And while we are here, and discussing the abysmal failure of QE2 (the impending arrival of QE3 notwithstanding), it is amusing to hear the whimpering of the likes of one Richard Koo, who is now claiming that all along the money from the Fed's monetary stimulus should have been invested in the form of a fiscal one. Well, Dick, below is the impact of your fiscal stimulus....AND it also includes the impact of $2 trillion in incremental monetary stimulus. Combined, both fiscal and monetary stimulus has now missed the worst case projection for US unemployment for 30 months running. Here is the simple truth: both monetary and fiscal stimuli are abysmal failures, when the economy is mean reverting to a state where it was hijacked from courtesy of 30 years of "great moderation" - and there is nothing that can be done to stop it. Correction: there is one thing - the Fed can destroy the dollar in its attempt to disprove simple physics. And, ultimately, it will.

Thomas Jefferson would have approved ...

Following the earlier note on the "irrational exuberance of QE3" at current conditions, Goldman does a one-two to the face of the long-only slow money crowd which are about to realize that what goes up the escalator, will go down the elevator, repeating that the next round of monetary easing "would require a notable further deterioration in the outlook to be considered seriously." As a reminder the only "outlook" the Fed keeps an eye out on is the 50 DMA of the Russell 2000.