Archive - Jul 6, 2011

At this point we refuse to even recall whether Goldman is long or short oil. Probably so does Goldman, whose Brent recos have become the same laughing stock as Tom Stolper's EURUSD "strategic" price targets in 2010. Yet Jeffrey Currie has found a new way of dealing with appearing idiosyncratically idiotic. Instead of focusing on any one product, the firm has just upgraded (or rather, maintained its buy) the entire commodity space wholesale: "Progress in dealing with the Greek budget crisis and better economic data have improved sentiment around cyclical assets in recent days. We continue to expect further increases in commodity returns later this year and into 2012. We maintain our overweight recommendation for commodities on a 3-, 6- and 12-month horizon and our 20% 12-month commodity returns forecast." Um, yeah, this comes less than two weeks since the last flip flopping on the matter: "The International Energy Agency announced today that its member countries have agreed to release 60 million barrels of oil from their emergency stocks over a period of 30 days. The IEA has coordinated this release, only the third in its history, in response to the ongoing loss of Libyan light sweet crude oil production and the impact that the resulting higher crude oil prices are having on the world economy. We estimate that a 60 million barrel release by the end of July has the potential to reduce our 3-month Brent crude oil price target by $10-12/bbl, to $105-107/bbl. 125/bbl." Way to preserve street cred there Jeffrey. Of course, the aforementioned flipflopping does not prevent Goldman from mocking the IEA's ridiculous SPR release decision, as well as reiterating its upside expectation in the metals space, with an emphasis on gold, copper and zinc. As a reminder, if Jeffrey says "buy", run, Forest, run.

SocGen has published a fantastic, must read big picture report, which compares the world in the 1980/1985-2000/2005 time period and juxtaposes it to what the author, Veronique Riches-Flores predicts will happen over the next two decades years, the period from 2005/2010 to 2025/2030. Unlike other very narrow and short-sighted projections, this one is based not on trivial and grossly simplified assumptions such as perpetual growth rates, but on a holistic demographic approach to perceiving the world. At its core, SocGen compares the period that just ended, one in which world growth was driven by an expansion in supply, to one that will be shaped by an explosion of demand. And, unfortunately, the transformation from the Supply-driven to the Demand-driven world will not be pretty. Summarizing this outlook: "Over the last three decades strong growth in the working-aged population across Asia and the opening-up of world trade have led to considerable expansion in global production capacities. These factors created a highly competitive and disinflationary environment of plentiful supply, which was characterised by low interest rates, a credit boom and, in the financial markets, exuberant appetite for risky assets. As the demographic cycle progresses, we are seeing the emergence of an aging population, which is less favourable to productive investment. Meanwhile the rise in living standards among the emerging population heralds an unprecedented level of growth in demand. The world supply/demand balance is dramatically changing against a backdrop of resource shortages which are likely to favour shorter cycles, increased government intervention in economic affairs and inflation." In other words, contrary to what you may have read elsewhere, the future is about to get ugly. And topping it all off is a Kondratieff cycle chart: what's not to like. Read on.

What do Hu Jintao, David Cameron, Warren Buffett, Dominique Strauss-Kahn, Alan Greenspan, Robert Shiller, Joseph Stiglitz, Robert Reich and Mark Thoma - and both conservatives and liberals - all agree on?

What one shipper thinks might happen next.

If there was ever a setting where you would think risk is properly appreciated it would be in European banks. Look at total return on senior-sub financial European financials since 2004. On a total return basis, European senior bank debt has outperformed subordinate debt. As a matter of fact, you’ve lost money if you own a portfolio that replicates the BarCap sub debt index going back to late 2004. Question: Why is sub such a persistent loser in times of crisis, precisely when people should be demanding compensating return for the risk?

Who Framed Greece?

As was previously disclosed, as part of the SPR's auctioning off of 30 million barrels of light sweet crude, bids for a total of 30.64 million barrels of oil at an average bid of $107.20/barrell were submitted by various parties. The only thing unknown was the identity of the parties, which however has now been all cleared up following the release of the complete bid list from the DOE. Probably the most notable (if not completely expected) discovery is that JPM, that FDIC-insured depositor bank, has requested 1.5 million barrels at a price of $105.33 for a total of $158 million. We wonder just what JPM plans on doing with this crude, which as predicted, will be transported by vessel, and offloaded at such time as JPM sees fit, probably well after the product is trading at a substantial premium to the purchase price. Other potential buyers include Valero, Vitol, Shell, Conoco, Plains and various other E&P companies. Ironically, JPM wants more crude than Sunoco and Tesoro: so next time one tries to gas up their car, we suggest looking for the JP Morgan gas station. But by far the most important news is that 80% of the bid are based on a vessel-based distribution, meaning it will be weeks if not months before the SPR disposed crude finally makes it into circulation, if at all, and has an actual supply-side benefit. Complete bid list is attached.

For those of us who are awake, and for those who are on the verge of understanding, certain rules come into play that strengthen our stance and shield us from folly. Liberty is not a self perpetuating social condition. It requires guidelines, and effort, and sacrifice. Liberty will not survive without our willingness to maintain it. If you are not ready and willing to fight for your own independence, then you are not truly free. Let’s examine some of the inherent laws and guidelines of free will and free action that will allow us to not only win back our self determination, but to keep it for generations to come. You want liberty? This is what it takes…

LPS, which together with MERS, has long been at the heart of the fraudclosure scandal courtesy of loan appraisals which even the FDIC claims were/are fraudulent, just fired a big red warning sign about its continued existence as a going concern after the CEO, Jeffrey Carbiener, just announced he is resigning "due to health concerns." Well, everyone knows what that means. From Reuters: "Lender Processing Services Inc (LPS.N) said its Chief Executive Jeffrey Carbiener resigned due to medical reasons and would be replaced in the interim by Lee Kennedy, its executive chairman. The mortgage processing services provider said its board had established a committee to search for a replacement. Kennedy, who was the executive chairman and CEO of LPS's former parent Fidelity National Information Services, will remain the executive chairman, the company said in a statement." Somehow we doubt the market will be too happy with this development, which could well be the beginning of the end for the $1.7 billion company.

According to Oxford Analytica, there are fifteen "Global Stress Points" ranging from medium to extreme high impact to the entire world. And hate to disappoint China Bears, it seems whatever problems China has, it is not the one that'll tank the world like the Dollar and Euro.

Don't sell those corn futures just yet. Despite last week's surprising announcement by the USDA that there has been much more expansive planting of corn, and other crops, than expected, which in turn set the price of corn tumbling by the most in years, one thing the USDA did not specify is whether said plantings are currently underwater. And if not now, how about in a week or two. Because according to the National Oceanic and Atmospheric Administration (NOAA) the floods America has experienced so far are nothing compared to what may be coming. "Many rivers in the upper Midwest and northern Plains remain above flood stage, and the threat for more flooding will continue through the summer, forecasters at NOAA’s National Weather Service said today. With rivers running high and soils completely saturated, just a small amount of rain could trigger more flooding, including areas that have already seen major to record flooding. NOAA’s Climate Prediction Center is forecasting above-normal rain in most of these vulnerable areas in the next two weeks, and above-normal rainfall in much of the region in the one- and three-month outlooks. Adding to the flood threat will be the rising temperatures over the Rockies, which will release the water from the remaining snowpack. “The sponge is fully saturated – there is nowhere for any additional water to go,” said Jack Hayes, Ph.D., director of NOAA’s National Weather Service. “While unusual for this time of year, all signs point to the flood threat continuing through summer. Forecasters say this season could rival the Great Flood of 1993, when the upper Midwest endured persistent, record-breaking floods from April through August, impacting nine states and causing more than $25 billion in damages (adjusted for inflation)." If indeed this occurs, look for corn, and other softs, to surge to few all time highs, just in time for the much anticipated collapse in food prices to never happen.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 06/07/11

Industrial commodity bulls may be advised to steer clear of the latest quarterly commodities update by Global Tactical Asset Allocation's Damien Cleusix whose conclusion is that "Most commodities remain deeply overvalued." Specifically, "As with other assets it does not really matter in the short-term (as long as the trend is positive) but it is paramount for longer-term projections. We have little doubts that commodity long-only who buy to hold are going to experience a > 50% drawdown (from current levels) on their industrial metals, crude oil and agricultural positions sometimes in the next 12-18 months." The catalyst: China. "Demand has been artificially boosted by China strategic reserve building, infrastructure intensive fiscal stimulus, booming demand from the rest of emerging economies and, as the trend persisted, by trend followers and money managers new attraction to the sector (you know it is not correlated so you should buy them to diversify your portfolio... sorry it WAS not correlated...). The introduction of physically-based ETFs is not helping in this matter as it represents a big short-term increase in marginal demand especially when the Fed was still busy implementing QE2." Agree or not, the cases for both the up and downside are compelling and well researched, with lots of supporting facts. Much more in the full presentation.

Consider that $10 billion of Fed money today is worth just over half (62%) the market gains of $10 billion in Fed money back in 2009. Put another way, every new injection of $10 billion from the Fed is producing less and less results. If we step back and look at this plainly, we will see that reality does not in any way match the view that the Fed’s liquidity will solve the financial world’s problems. In fact, we see that each Fed move is having a smaller and smaller impact on the financial markets. Extend this idea out a bit further and you find that we will reach a point at which the Fed will no longer have any control over the financial markets.

By now we have heard every worthless Wall Street economist expound on the bull case for the economy courtesy of a ultrashort-term dip in oil and gas as a result of the moronic IEA decision to tap strategic reserves. And while short-term gyrations are largely irrelevant when as we presented yesterday, and as the FT confirmed, the bulk of volume and price formation comes from speculative daytraders, the longer-term dynamics for crude point in only one direction. Up. Here is UBS Andy Lees to explain why despite the brief jump in crude (which will likely never make it into the system courtesy of banks taking the purchased light sweet crude and storing it in tankers) supplies, we are facing a substantial supply-side crunch as soon as a few months from now.