Archive - Jul 25, 2011

In a posting on his blog, Boehner just managed to snag any progress in the debt ceiling negotiation, saying that the president "is trying to set up a no-win situation for taxpayers: either he gets his $2.4 trillion blank check, or America defaults", generatinged much despised PTSD visions of Hank Paulson' staccato threats in Congress, and in doing so making any compromise he may have been pursuing with the Tea Party virtually impossibly and certainly nearly unpracticable with just 3 days before the absolute legal deadline this Thursday. Perhaps that is just the reason why bonds suddenly ripped. Remember: bonds will be bought if sendng is curtailed and no incremental debt will be layered... to a point. Should the US default, buying will turn to selling, first very slowly, then very fast.

Only now, after three years of roller coaster markets, epic debates, and gnashing of teeth, are mainstream financial pundits finally starting to get it. At least some of them, anyway. Precious metals have continued to perform relentlessly since 2008, crushing all naysayer predictions and defying all the musings of so called “experts”, while at the same time maintaining and protecting the investment savings of those people smart enough to jump on the train while prices were at historic lows (historic as in ‘the past 5000 years’)....Those who instead listened to the alternative media from 2007 on have now tripled the value of their investments, and are likely to double them yet again in the coming months as PM’s and other commodities continue to outperform paper securities and stocks. After enduring so much hardship, criticism, and grief over our positions on gold and silver, it’s about time for us to say “we told you so”. Not to gloat (ok, maybe a little), but to solidify the necessity of metals investment for every American today. Yes, we were right, the skeptics were wrong, and they continue to be wrong. Even now, with gold surpassing the $1600 an ounce mark, and silver edging back towards its $50 per ounce highs, there is still time for those who missed the boat to shield their nest eggs from expanding economic insanity. The fact is, precious metals values are nowhere near their peak. Here are some reasons why…

Ah, it sure is good to have good old Mr. Pink back "The budget is not the only thing in deficit today, as a paucity of leadership has left the country without a stable framework in which businesses can conduct business, investors can invest, and consumers can consume without a high degree of uncertainty and fear. Politically charged statements and brinkmanship have served to deepen divisiveness between the parties and led to confusion and fear among citizens. There has been much said about who is allegedly the "adult in the room," but President Obama has yet to speak to Americans as adults, insisting instead on his preferred technique - stirring up class warfare. Scaring senior citizens about the possibility of not receiving their Social Security and Medicare checks, lambasting the corporate jet industry, and calling for higher taxes on managers of private partnerships is not a constructive approach to handling a complex multi-trillion dollar problem that will have a multi-generational impact." Read on below.

Intesa may be halted for trading on the MIB, but that sure doesn't mean that Goldman's Sigma X clients are prohibited from dumping their shares on the hedge fund's dark pool, which incidentally is always happy to accept and match client orders. Sure enough, as the puke fest in European banks resumes (and both Italy and German CDS are now materially wider on the day, the Italian 2-Year Note yield rising 30 bps to 3.95%, and the 10-Year up 20 to 5.60%), the top traded names on Goldman's dark pool once again is the who's who of insolvent European banks, starting with Italy, passing through the UK and rounding up the top 5 with Germany. But, but, the second European bailout was supposed to work? What happened? 

While there is nothing new in the just released Jim Rogers interview with the WSJ, it is always refreshing to hear him tell the truth, which is, of course that "the US has already lost its AAA status. Who cares what Moody's say." As for the response: "The market looks ahead: this is not the first time that the market has dealt with the fact that the US is bankrupt." As for his proclivity to buy long term US debt: "I wouldn't lend money to the US in US dollars for 30 years at 3%, or 4%, or 5% or you name the interest rate.... I shorted it June 10. I am short the US bond market as we speak." Great stuff as usual.

For those confused by the cornucopia of assorted debt ceiling "plans" out in circulation, Citi's Amitabh Arora has released the definitive guide for what plan does what in terms of proposed deficit reduction, probability of passage of the Congress, Senate and the President, and likely outcome to the US rating. As table 1 below shows, UBS' prescient call from last Thursday that a US downgrade is inevitable, was spot on. It also explains why the entire sellside industry, and media, have been in damage control over what now appears to be an inevitable AA rating of the world's reserve currency. Alas, just like with Lehman, nobody really has any idea what will happen to capital markets once the Poor Standards or Moody's headline of a AA cut hits the tape: one thing is certain - there are trillions in US invested money market funds, structured finance debt and munis that have rating mandates and demand a super secure (AAA) threshold, and especially an A-1+ short-term rating. Should there be a massive flow out of these securities and into other asset classes, the outcome is absolutely unpredictable. More importantly, Citi touches on a topic that has not seen prominent mention anywhere else: namely the acceleration of the GSEs status from conservatorship to receivership should there be no prompt resolution on the debt ceiling. For agency paper holders this may be a topic that merits much more diligence.

• Spain Will Require Regions to Curb Deficits, Its Finance Minister Says (WSJ)
• Obama cancels fundraising appearances amid stalled debt talks (CNN)
• Toying With Default: The President isn't serious about real spending cuts (WSJ Editorial)
• QE2 is coming to the UK: Cable Appeals for New Dose of Easing (FT)
• Lawmakers Still Divided as Debt Deadline Looms (Reuters)
• Rail Stocks Tumble in China, Hong Kong (Bloomberg)
• Clinton Assures China on U.S. Debt-Ceiling (Bloomberg)
• Messing With Medicare (Paul Krugman)

Despite frantic efforts to reach an agreement to raise the US debt ceiling, no concrete measures emerged during the weekend, which allied with Moody's downgrade of Greece's sovereign rating by three notches today, promoted risk-aversion in the market. European equities traded under pressure, weighed upon by financials, which in turn provided support to Bunds, whereas the Eurozone peripheral 10-year government bond yield spreads widened across the board. Particular widening was observed in the Belgian/German spread leading up to the bond auctions from Belgium, however the spread narrowed somewhat after they went through successfully. Elsewhere, CHF and JPY emerged as major beneficiaries of the risk-averse trade, whereas commodity-linked currencies traded lower. Moving into the North American open, the economic calendar remains thin, however Chicago Fed National Activity and Dallas Fed Manufacturing reports are scheduled for later in the session. Also, Texas Instruments, and Anadarko Petroleum are among some of the companies reporting their corporate earnings today.

Goldman performs the now traditional compilation of key global events and catalysts in the week ahead although there is really just one day that everyone is focusing on: Thursday: "House takes up Senate package, and potentially alters it. Under its rules, the House normally requires a bill to be publicly available for three days before voting on it, but might be able to bend the rules given the deadline. If support is lacking for the McConnell-Reid plan, as appears possible, the House may vote on an alternative package that pairs $300-$500bn in spending cuts with a debt limit increase of the same size. If it becomes clear during the Senate debate early next week that the Senate approach will not gain adequate Republican support in the House, House Republican leaders might move preemptively to pass a shorter extension rather than waiting to receive the Senate bill." Today the market did not crash, which foiled Obama's shock and awe plans (thank you Bernanke Put). However, if there is nothing by Thursday, then even the meanreversionbots will be powerless to just sit back and observe the massive carnage.

We posted this on Friday, but with the Norway news and all the headline distractions from Congress, many may have missed it, so here it is again. Stone McCarthy (one of the very best rates shops on Wall Street) has compiled the daily projected cash flow balances for the US Treasury. Here it is.

Gold surged 1.4% ($23) from $1,600.90/oz to a new record nominal of $1,624.07/oz within an hour of the open in Asia. Gold reached new highs due to continuing uncertainty and theatre regarding the debt ceiling negotiations in Washington. Gold is higher in all currencies except the Swiss franc as the Swiss currency is also continuing to see flows. Silver surged 2% on the open from $39.69/oz to $40.48/oz and is higher in all currencies including the Swissie. There was some unusual selling in the electronic market prior to the open which saw prices fall from the close on Friday at $40.05/oz to $39.69/oz prior to the surge on the open. Asian indices fell with the Chinese indices in particular down sharply (CSI 300 -3.25%) on the U.S. debt impasse concerns. The high speed train crash may have contributed to the larger losses in China but there are also growing concerns about the Chinese financial system and economy. European indices have recovered from an initial sell off and peripheral Eurozone debt markets have seen some selling. Markets are spooked by the political theatre which continued in Washington over the weekend. An eleventh-hour solution is expected before next Tuesday’s August 2 deadline when the U.S. Treasury has said that it would not be able to borrow any more funds. At the same time, investors have cut their exposure to risky assets and the appalling fiscal situation in the U.S. is positive for gold and silver – whether the politicians come to an agreement or not.

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

The perfect storm in risk off continues, as not only have European peripheral spreads once again commenced their trek wider, but FX flight to Swiss safety has resumed with a vengeance, with the USDCHF tumbling to a new all time low just above the 79 handle. The EURCHF is just above lows set a week earlier, following Moody's cutting Greece to Ca from Caa1, with a developing outlook, and the resulting final outcome of which will be a default of some nature. Also weaker are various peripheral spreads with Spanish, Portuguese and Italian Bund spreads and CDS pushing wider this morning. Another notable development is that Austria has decided to skip its August auction supposedly as "funding has been advanced already" although we all know what the real reason is. In Asia, markets closed broadly lower and the USDJPY continues to trade near all time lows, save for the flash crash plunge from March 17. According to Lee Hardman of BOTM-UFJ, "verbal jawboning by Japanese authorities of concerns over yen strength unlikely to be backed up by actions to weaken yen." Any attempt likely to be unsuccessful at present, he adds. The bottom line, which incidentally is always cash, and in this case the amount of it held in Greek banks can be seen by the chart below. We fully expect Greek bank deposit to decline by another €5 billion in the most recent period when the data is released.

I call super B.S.