Archive - Jul 2011

Idiots ...

Even as the Congressional Budget Office has just released its score of the proposed Boehner plan, the president's spokesman Jay Carney was out earlier hemming and hewing for about 9 minutes in front of reports before it was made clear that Obama does not even have an actual plan to paper which the CBO can score. Yet surprisingly enough, as the National Review Online presents, even without actually having any plan, Obama is still happy to announce he will veto Boehner's plan. It is one thing to veto one plan over another, if one believe the "another" is better. But vetoing something on purely ideological grounds, in the complete absence of "another"... well that we have no idea how it can possible be spun aside from pure ideological demagoguery.

Morgan Stanley has released its comprehensive quarterly metals outlook update for Q3, which while traditionally furiously wrong in its price targets for the assorted metals under consideration, represents one of the best reference materials for the underlying fundamentals behind each hard asset including base and precious metals, steel and bulk commodities, mined energy, rare earths, even such arcania as zircon and titanium dioxide. We suggest readers avoid the conclusion by Morgan Stanley which ultimately will be based on the firm's prop trading bias, and instead focus on the key supply/demand mechanics in any given product. For the sake of reference, we break down MS' outlook on gold, silver due to the special place these hold in the modern geo-political and voodoo economic discussions.

Some points on skew, vol and it's implications by www.thetrader.se

You have seen it before in action, first in nat gas, then in crude (with some caveats), now see it morphing to plain vanilla products... like stocks. Observe the stock chart below: it shows the trading in the stock of one of the most insolvent companies in the world: the National Bank of Greece. The pattern should be familiar. It is the very comparable "fractal" algo pattern that we have grown to love and miss. Granted, as Nanex points out to Zero Hedge, the underlying dynamics are different from those observed before, although the end game is obvious: hunt for loss triggers on both the up and the downside, and hope to precipitate a stop loss collapse or surge. How the underlying engine generating the trading pattern is positioned in parallel to the underlying, certainly via options, is unclear, although it is obvious that the ulterior motive is to generate some very dramatic short-term liquidity. Not surprisingly, after it completed two quick cycles, the algo disappeared and was not  seen from again. Expect to see it migrating through other less liquid stocks as it continues its prowl for stop loss triggers.

Aside from a brief dip at the beginning of July, the US monetary base continues its near vertical trajectory, which tells us that the Fed continues to print money despite QE 2 ending. It’s not much of a surprise, the Fed knows how to do one thing only: print money. However, the fact the Dollar is showing so poorly while Europe is taking a hit is a major warning that all is not well with the greenback.

Complexity works beautifully as self-preservation, because it actually expands the bureaucratic power of fiefdoms and widens the moat protecting cartels. Once the fiefdom expands to manage all those new rules, only a handful of corporations can possibly afford the regulatory reporting burdens. They are thus free to exploit the populace as an informal cartel. Put another way: in the competition with the private sector for scarce capital, the State and corruption always win. That's why kleptocracies and banana republics are characterized by bloated, unaccountable State bureaucracies and systemic corruption: sweetheart deals, no-bid contracts, shadow banking, shadow governance by Elites, inefficient workforces that cannot be fired or held accountable, and so on...The single goal is preserving the revenue and reach of concentrated power centers: State fiefdoms with large constituencies and headcounts, and cartels with no competition and stupendous profits. The two are hand in glove. But complexity does have an eventual cost: collapse. Keep adding decks to the ship and eventually it capsizes and sinks. One the ship is sufficiently top-heavy, all it takes is a small wave.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 26/07/11

While it is unclear if something said in the Paul-Hoenig hearing is what spooked the market, one thing is clear: something spooked the market. As of a few minutes ago, with an increasing average block size, the ES has just slid to fresh lows after levitating almost in the green earlier. Oddly enough the sell off in stocks is not being replicated anywhere else, as both the DXY, the 10 Year and Crude are all at levels last seen at the start of the sell off. Are stocks, with just 2 days to go until Thursday, finally starting to get tired of pretending that all is well with America? And while the dump accelerates we are awaiting the inevitable headline from Boehner in which he will make it all too clear that he refuses to compromise with a president who has threatened a preemptive veto on his "debt ceiling" plan. The soap opera is once again up front and center.

Things changing faster than I can write.

The Auditor General of Canada dropped the ball on this "Special Examination"....

Watch Kansas Fed's (non-voting) Hoenig, long the only sane and dissenting voice at the Fed, discuss Fed monetary policy live at the House Financial Services subcommittee chaired by Ron Paul (and this time the audio actually works).

Just because we needed some fireworks, here is Obama, providing the catalyst. Watch for a very indignant Boehner TV appearance in T minus 5...4...3... And yes, this will not help the consensus-building effort.

Earlier today, while discussing the implications of a US debt downgrade on a SIFMA call, JPM head of fixed-income Terry Belton told listeners that a US downgrade could cost the US an additional 60-70 bps in incremental interest. That's per year. He also added that US asset managers are unlikely to sell Treasurys on a downgrade, but that's irrelevant. Nobody can predict what all the knock off events from a US downgrade would be, as the Citi presentation from yesterday indicated. Should there be a downgrade, investors may not sell Treasurys, but they sure will be forced to sell other lower rated instruments to keep the overall rating distribution of their portfolio in line with mandated rating requirements. Which in turn, following margin calls, will result in, you guessed it, selling of Treasurys. Yet this debate is the topic of another post. What is more important is that on the same call, Belton said that a 70 bps increase in interest would result in an incremental $100 billion in interest expense each year. As a reminder, this is roughly the amount that the NPV of a realistic deficit reduction plan over 10 years would chop off from the US deficit on a yearly basis. Simply said: the US downgrade alone, now virtually taken for granted by everyone, will offset any beneficial impact from any deficit reduction that will have to happen for the debt ceiling to be increased. And that, ladies and gentlemen, is why cash flows matters.

And away goes trouble down the drain...