Archive - Jul 5, 2011

The common belief is that long bond holders are suckers that always lose money. But there is no denying their raw total return generating power. Question 1: Total Return, various asset classes: How can the long bond outperform the other, more risky competitors here?

After one group of hackers broke into Fox's twitter account yesterday, today another group returned the favor by converting the president's campaign website to a 21 point summary of politics hosted by, as the Washington Examiner reports, an unnamed "Commy Obama." Among the points clarifying modern political life were the following pearls "1. Politicians and other public servants lie. 2. Politicians tell you what you want to hear and offer to provide things for 'free' to get votes. 3. When government buys, the people pay." And so forth. The full screen shot is below.

Just when one thinks news can't get any more... what's the right word here... here it comes. Per Reuters, Japan has decided to justify the credibility of its nukes, by, get this, performing stress tests. "Japan's trade minister Banri Kaieda said the government would conduct stress tests on all nuclear power reactors in Japan, Jiji news agency reported on Wednesday. The minister also said he would ensure there were no problems with power supplies, Jiji reported." Where does one start here: that the ECB is not the one conducting the tests - after all who has more expertise with stress tests... Or that the tests come after the biggest nuclear catastrophe since Chernobyl: after all what's the downside - one more Fukushima and Japan would convert into the Prypiat level from Call of Duty... Or that the tests will just accidentally forget to test for such 60 sigma events as earthquakes or tsunamis... Or that the announcement comes a day after the Japanese reconstruction minister quit after a week on the job... Or that the ECB will announce it will accept Japan's nukes as collateral until at least 10 major networks show footage of a mushroom cloud.... Or that ISDA will shortly determine that another nuclear explosion is not really a nuclear explosion and that all CDS against nuclear explosions will be null and void as soon as there is an actual explosion... Or that Tim Geithner is currently in Tokyo explaining there is nothing more credible than a stress tested nuke... Or that Basel VIIIXLC will find a NPP safe if its ratio of gamma to alpha radiation is more than 1 megaroentgen, promptly followed by Jamie Dimon bitching to BOJ president Shirakawa that 1 megaroentgen is too much to demand from Fukushima Street.... And it continues. Etc. Etc. Etc.

The CFTC has just released two new reports looking at volume in various commodity futures and confirming what most have already known, namely that under 10% of daily futures volume in the most popular products comes from Large Trader position changes. The balance or well over 90% in most cases, originates from "daytrading" accounts, or said simply, speculators dominate price formation on the margin for the bulk of products, which also means that longer-term equilibrium levels, those determined by supply and demand, are largely washed out when all the daytrading, and thus short-term pricing, mania is factored in. This also explains why moves such as the recent desperate SPR release by the IEA are generally doomed to failure. The CFTC's Gary Gensler said that "The data shows that, in many cases, less than 20 percent of average daily trading volume results in traders changing their net long or net short all-futures- combined positions. The balance of trading is due to day trading or trading in calendar spreads." This is bad news for the hedging departments of commodity firms which deal with actual physical, and thus try to hedge price swings, as long-term price expectations are largely moot when attempting to predict short and medium-term price fluctuations. In fact, bets, even correct ones, may ultimately add to price volatility if caught in a wrong-way position that faces collateral requirements. As to whether this new data will change the administration's approach to artificially setting prices on key political commodities such as oil and precious metal, all signs point to no. This also means that churning HFT parasites, which are part of the non-Large trader universe are likely the most determining marginal price determinants for the bulk of commodities,and yes, that includes ES and interest rate products as well.

Let’s not forget we are still in the fiat money vicious circle, and all is proceeding according to plan. European Core soon to come, followed by the US and a full blown Currency crisis. Long’s Chart from last year presented without further comments.

"I think that the prices will continue higher. I mean the amount of money printing is unbelievable. I just think you have to take that initial stand in terms of buying it. I use the James Turk analogy: just keep dollar averaging. We have gone up eleven years in a row, this year it looks like it will be no exception; I would certainly think next year will be no exception. If we ever have QE3 announced, I think gold and silver will just go absolutely bonkers here. And so I just think you have got to step in there and own it; we’ve had these fears all the way along. You know, $400, and $500 and $700 and $800 dollar gold, everyone was afraid it was a one-time thing. I don’t think it is a one-time thing, I think it is a secular thing. It’s going to carry on for quite a while here until we find some resolution of these problems. And the resolution probably will be some form of default where people just have to expunge debts that cannot be repaid. So, you have got to be in some asset which will not be affected by that." So predicts Eric Sprott, founder of Sprott Asset Management and famed investor. In this wide-ranging interview, he shares his insights on the precious metals markets - specifically what investors need to be aware of in terms of the way the markets are currently managed (manipulated), the macro outlook for the economy (grim) and the true value of gold and silver (very underpriced; particularly silver).

"General Motors Co. stocked Jim Ellis Chevrolet in Atlanta with plenty of Silverado full-size pickups in early 2011, part of a wager on a strong economic recovery. The strategy is backfiring. “We thought that this year would bring back the kind of economic activity that would translate into us selling more trucks,” Mark Frost, the dealership’s general manager, said in a phone interview. “It’s not happening.” Supply of Silverado has ballooned to 6 1/2 months worth at the dealership, a figure Frost, 52, calls “a little scary.” The Detroit-based automaker, 33 percent owned by the U.S. after its 2009 bankruptcy, has 280,000 Silverado and GMC Sierra pickups on dealers’ lots around the country. If sales continue at June’s rate, that would be enough to last until November." Thus begins a story just published by Business Week covering a topic that Zero Hedge has been pounding the table on since last December, and which just hit an all time record for fresh start Government Motors a few days ago - namely the firm's propensity to dump as much inventory as possible on dealer floors. Granted, many have been quick to mock, ridicule and ignore our glaringly obvious findings (especially since these come at a time when the light vehicle sales SAAR is back to a 10 month low, and likely to plunge once the long overdue inventory liquidation finally takes place), although now that the topic of General Motors' "strategy" of overfilling dealer inventory is front page news, it finally may get the overdue respect it deserves, especially since as Jefferies' Peter Nesvold cautions, this is nothing more than  new GM reverting to the habits of the old one (the one that filed and needed taxpayer bailouts for a few hundred thousand union workers).

Following the earlier news that government retirement accounts have been plundered by the most since the breach of the debt ceiling, it is only fitting that the teleprompter will shortly update the eager public with the latest on the debt reduction efforts. Perform a frontal lobotomy and watch live below.

As the chart below shows, while at the end of every quarter, the US Treasury is traditionally supposed to fund a quarterly payment into the various government retirement funds (previously discussed here), this time around, instead of putting in even one penny into G and CSRD Funds, Tim Geithner has decided to defraud government retirees by the most since the US debt ceiling was breached, or, specifically, since intragovernmental "holdings" became a mere plug to make room for marketable debt. So while the debt held by the public increased by $21 billion following the settlement of last week's auctions, in order to stay under the $14.294 billion ceiling, the Treasury was forced to "disinvest" another $20 billion from retirement funds. At this point the various funds that fall under this umbrella are underinvested by at least $120 billion and likely much more. Of course, this is not an event of default as per Geithner's fine print: as soon as the debt ceiling is hiked, these will be the first funds that are replenished. On the other hand, if there is no debt ceiling hike, and courtesy of marketable debt having priority to intragovernmental debt, government retirees are increasingly becoming the impaired class in what may be shaping up to be the world's biggest bankruptcy filing in history.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 05/07/11

The trouble with financial forecasting for Europe is that the biggest decisions are always made in the political arena, NOT economically.

We were too lazy to Shift-F7 that and change it to "whimper." The chart says it all. At this rate Wall Street firms will have to cut 120% of their headcount and replace everybody with the same Made in Taiwan Chinabots that are now responsible for ramping up the /ES courtesy of its 1.0000000 correlation with the EURUSD, which as is now well known, is solely purchased by the Beijing politburo.

Last night, the FT penned a rather curious, not to mention 2 month delayed, PR puff piece, discussing Paulson's success in investing in Lehman bonds, ostensibly to offset the firm's recent horrendous investing performance (Sino Forest, Bank of America and Premier Foods to name a few). While it is true that Paulson was one of the very first investors in Lehman bonds following the banks bankruptcy on September 15 some of the math in the FT piece is rather misleading. We will present a detailed analysis and a more objective version of Lehman bond trading history when we bring to our readers the complete breakdown of trading as disclosed in the Lehman 2019 ad hoc committee response (thank you Northwest airlines) that hit the Lehman docket on April 19. However, in the meantime we wanted to bring to both readers', and regulators' attention one rather peculiar piece of information that has emerged as a result of the trading disclosure provided by the firms in the Lehman ad hoc creditor committee, in this case Paulson and Taconic, which hold over $4 billion and just under $2 billion in face value of Lehman General Unsecured Claims. Specifically, it appears that when trading out of Lehman bonds, Paulson may have obtained highly preferential terms which were certainly not available to other hedge funds, beginning the question: were (are?) dealers willing to assume losses on transactions with Paulson (to the detriment of other market players), simply to be in the hedge fund manager's good books? We don't know. But here is the data.

China is slowly starting to face the consequences of its actions

We kid... We kid... Who the hell know what caused the surge in the Swissy. Maybe the fact that the Titanic just sank by another 5 feet. We'll confer with the violinists and let you know. In the meantime we fully expect the mean reversion algos to take over and reverse the correction overshooting by 2 std devs to the upside next.