Archive - Jun 2011

Who says Mutual Assured Destruction is to be used only by bankers: our military leaders appear to have mastered the strategy of getting what they want to warning about all hell breaking loose, just as effectively. Reuters reports that should Congress pursue a resolution to withdraw from the humanitarian Libyian oil liberation force, currently headed by Sarkozy, it would send
an "unhelpful message of disunity" to allies and foes alike. "Pentagon Press Secretary Geoff Morrell said that "once military forces are committed, such actions by Congress can have significant consequences," particularly on relations with members of the North Atlantic Treaty Organization. "It sends an unhelpful message of disunity and uncertainty to our troops, our allies and, most importantly, the Gaddafi regime," Morrell said in a statement in Singapore, where Defense Secretary Robert Gates arrived on Thursday to attend a security dialogue with Asian allies...Kucinich's measure would invoke the 1973 War Powers
Resolution to direct Obama to stop the U.S. participation in the
war. Kucinich says Obama violated the part of the law that
prohibits U.S. armed forces from being involved in military
actions for more than 60 days without congressional
authorization." Kucinich seems to forget that reminding a constitutional lawyer about constitutional abuses is actually racist. And more importantly, what excuse will those hundreds of billions in "defense spending" by the US government have if America's military is relegated to "bankster" status in terms of utility.

BP tries to blame shrimpers for all of the turtle deaths ...

And.... U-turn

• EU COMMISSION DENIES AGREEMENT ON NEW GREEK AID PLAN

There is no point in even commenting on the cannonade of unbelievable bullshit coming out of Europe at this moment.

The central planners have now officially lost their minds.

That famous Chinese fraudcap swatter Muddy Waters was overdue to take down another Chinese fraud is not a surprise. Indeed, as reported earlier, the fraud-focused shorter just initiated coverage on Sino-Forest Corporation (TRE.TO), which the firm "Like Madoff, TRE is one of the rare frauds that is committed by an established institution. In TRE’s case, its early start as an RTO fraud, luck, and deft  navigation enabled it to grow into an institution whose “quality management” consistently delivered on earnings growth." The rating, not surprisingly, is Strong Sell, and the estimated per share value is <$1.00. MW describes the fraud as follows: "TRE, which was probably conceived as another  short-lived Canadian-listed resources pump and dump, was aggressively committing fraud since its RTO in 1995. The foundation of TRE’s fraud is its convoluted structure whereby it runs most of its revenues through “authorized intermediaries” (“AI”). AIs supposedly process TRE’s tax payments, which ensures that TRE leaves its auditors far less of a paper trail. On the other side of its books, TRE massively exaggerates its assets. We present smoking gun evidence that TRE overstated its Yunnan timber investments by approximately $900 million. TRE relies on Jakko Poyry to produce reports that give it legitimacy. TRE provides fraudulent data to Poyry, which produces reports that do nothing to ensure that TRE is legitimate. TRE’s capital raising is a multi-billion dollar ponzi scheme, and accompanied by substantial theft." So far so good: as soon as the report came out the stock traded down from CAD$18 to $14, and was promptly halted. Once again, none of this is surprising. What is surprising, is that the biggest holder of the stock, with over 34 million shares, which amount to just under $650 million, is none other than stock picker extraordinaire John Paulson. And to think Zero Hedge has been warning everyone about the dangers of the fraudcap space for 8 months now. Oh well, one analyst learned the hard way today.

From Moodys, which now appears to have been hacked by Greece (in what may or may not be considered an act of war): "If the debt limit is raised and default avoided, the Aaa rating will be maintained. However, the rating outlook will depend on the outcome of negotiations on deficit reduction. A credible agreement on substantial deficit reduction would support a continued stable outlook; lack of such an agreement could prompt Moody's to change its outlook to negative on the Aaa rating....Although Moody's fully expected political wrangling prior to an increase
in the statutory debt limit, the degree of entrenchment into
conflicting positions has exceeded expectations. The heightened
polarization over the debt limit has increased the odds of a short-lived
default. If this situation remains unchanged in coming weeks, Moody's
will place the rating under review."  Translation: unless America promises to increase its total debt to 120% of GDP in one year, the current debt which is just under 100% will be downgraded.

Number 1 on the Banzai7 charts for one year and running...[Never before played on Zero Hedge]

These seem to be becoming quite popular lately: This particular one was titled: "Let them buy bonds." We are waiting to see how it will be revised following today's wonderful "Bailout #2" news.

The issue now is how far the Fed will let things collapse. When QE 1 ended in April 2010, stocks dived 15% before the Fed stepped in and began hinting at more QE. By today’s numbers this would mean the S&P 500 falling to 1,160 or so. However, given the extreme degree of danger in the world today (the European banking Crisis, the Middle East, China overheating and Japan’s nuclear disaster) there is plenty of room for surprises to the downside

Just out from Reuters:

• According to a source, programme will involve new international funding to mid-2014, apportionment yet to be agreed
• According to a source senior Eurozone officials agree in principle on new 3-year adjustment plan for Greece
• According to a source, private sector involvement will be limited to avoid a credit event

Congratulations Europe: you just screwed your taxpayers, but at least bought your insolvent banks 3 more years of bizarro world existence.

As I travel frequently and spend time in so many different countries, it’s becoming clear to me that there are essentially two categories in the world– police states that are running towards George Orwell’s view of the world in 1984, and countries where you can still feel like a free human being. Unfortunately, the police states are doing their best to corrupt the rest of the world. Homeland Security chief Janet Napolitano recently toured India and met with senior security officials there, undoubtedly trying to influence them to toughen security measures and join the Orwellian order. Back in the US, DHS recently announced its ever-expanding “If you see something, say something…” program, this time at the 2011 Indianapolis 500 race. If you’re not familiar, this is the program that encourages people across the country to become unpaid spies for the federal government and rat out friends and neighbors for anything ‘suspicious’. In eerie Big Brother fashion, Napolitano delivers this message from monitors perched throughout WalMart stores nationwide. The stated DHS purpose for the Indy 500 message this past weekend was to “help ensure the safety and security of fans, employees, and race crews by identifying and reporting suspicious activity” at the venue. Realistically, though, it’s just a precursor to having Homeland Security involved in public sporting events… in addition to airports, train stations, subway stations, bus stations, and eventually shopping malls.

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

Market Recaps to help improve your Trading and Global knowledge
Weakness in CAD evident after mixed Canadian economic data

Interested in a long-only stock index investment strategy that captures 65% of the upside when the index goes up and limits losses to 21% of the downside when the index goes down? $100 invested in the strategy back in May 1997 would be worth over $800 by early May 2011 compared to less than $300 if you bought and held the index (chart at right). Most investors would agree that $800 sounds a wee bit better than $268. We created a tactical asset allocation (TAA) strategy that outperforms a buy-and-hold policy in a back-test when standard performance metrics are considered . The chart on the left plots monthly Russell 2000 returns (x-axis) against strategy returns (y-axis). In our back-test of the strategy, we were able to capture 65% of upside equity moves on a monthly basis while only taking 21% of the downside. Additionally, the strategy can be extended for use with other equity alpha strategies and to achieve complementary portfolio goals like capital preservation.

The CME's decision to lower ES margins two days ago may enter trader folklore as the most incompetent decision ever made (and we won't get all tinfoily on them: after all we know the CME doesn't see to manipulate markets with margin moves: they told us so themselves). Which is why in order to keep up with the exchange's primary prerogative of "intense focus on risk management" it is now time to not only undo that decision but to actually hike ES margins. Because as the chart below shows, since the margin cut on May 31, realized vols have surged!

Nobel Laureate Robert Mundell and his followers have made some noise of late about the need to achieve a fixed exchange rate between the dollar and the euro. About their desire for an exchange rate fix they're certainly correct, though they're wildly incorrect in suggesting that inflation and deflation can be cured if the U.S. Treasury simply ties the dollar to the euro.

Not at all surprising, the entire commodity complex just swooned, supposedly on the latest DOE inventories data, which saw a surge to 2878K versus expectations of -1600K, up from 616K previously (same surge in gasoline inventories, which surged to 2553K on expectations of 900K). We say not surprising, because crude, and thus all the other uber-correlated commodities, needs to drop at least $10-15 from here before the Fed can then proceed to triple its price once the money from QE 3 start sloshing around. We expect significant more downside weakness in Crude as the realization that QE 3 is inevitable finally dawns on Wall Street. Remember the Catch 22: everything (commodities, stocks, etc) has to go far lower, before everything surges yet again post the next monetary easing episode.