Archive - Aug 2011

And while stocks continue to blissfully exist in some parallel universe, the rout in financials has just entered overdrive, of particular note Bank of America, which has just passed it all time wides on the offered side. When the mid-market is north of 400, probably in about 2-3 hours, it may be time to cue the Lento from Chopin Piano Sonata, No. 2 in B-flat minor, Op. 35.

In an improvised pop quiz, we present two charts and ask readers to tell us which one is Bank of America's, and which is Goldman's...

UBS have raised their 3 month forecast for silver sharply from $30/oz to $50/oz. They suggest that investors are too nervous to short gold and may be preferring to buy silver instead. Silver remains more than 16% below the record nominal high seen in late April 2011 and in January 1980. While gold at $1,888 is now 120% above its nominal 1980 high of $850/oz. The inflation adjusted high for silver is over $130/oz and those who understand the fundamentals of the silver market are positioning themselves for the possibility of a move to these levels in the coming months. Speculative fever in the silver futures market remains muted with COT data showing net longs well below the records seen in April. Silver is volatile but in the current climate what isn’t? Recently, there has been huge volatility in currency and bond markets and entire equity indices have been as volatile as silver. While silver is volatile, what makes silver valuable is the fact that like gold it has no counterparty liability or risk (with silver coins, bars or allocated storage) and therefore cannot go bankrupt unlike banks and sovereign governments. Media coverage of silver remains minimal with big brother gold getting some of the limelight recently.

Two economic data points today - New home sales and the Richmond Fed index. Since LaVorgna just hiked his Richmond Fed estimate, leading the consensus to rise from -7 to -5, we would be particularly concerned about this number missing by a mile. Also, Treasury issues $95 billion in new 4 week, 52 week and 2 year debt, for net new cash of $46 billion.

• Bernanke to aid recovery with gradual boost in dosage (Reuters)
• China factory output cools in August: HSBC (Reuters)
• German court to rule on Sept 7 on euro, Greek bailouts (Reuters)
• European Banks Must Pay Up to Borrow $100B (Bloomberg)
• A ‘no-growth’ boom will follow 2012 global crash (Market Watch)
• Merkel and Sarkozy Relationship Betrays Europe Crisis (Bloomberg)
• White House to Scale Back Regulations on Businesses (WSJ)

Just like yesterday we have the makings of a perfectly schizophrenic day. While stock futures are rapidly higher to begin with, as on Monday, on news of a slightly better than expected PMI out of China, we are very concerned whether this algo induced ramp can be sustained. The reason is that earlier today we got an absolutely abysmal German ZEW investor confidence number which dropped to -37.6 from -26, a doubling of the previous -15.1, and the lowest since December 2008. This epic collapse can only be compared with the stunner out of the Philly Fed last week. The biggest component of the ZEW, the current situation, imploded from 90.6 to 53.5, trouncing (to the downside) expectations of 85.0. Additionally, the eurozone economic sentiment dropped to -40 from -7.0. So what is the immediate impact? Well, as we said equity futures are completely ignoring that Europe's growth dynamo is now confirmed to be in a double dip recession. However, not debt: as Bloomberg reports, "the cost of insuring European bank debt against default rose to a record as German investor confidence fell to the lowest 2 1/2 yrs+ on concern the region’s debt crisis will curb growth." Specifically, iTraxx Fin soared to record 255 bps, +5 overnight, while SovX (the sovereign CDS index) was 5 bps wider to 302, just off the record 206 form July 18. We give stocks, which are once again soaring on renewed expectations of a QE3, a few hours before they realize that the news is actually i) very bad and ii) as has been said countless times, stocks have to drop far more, before LSAP resumes for the third time.

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About a month ago we penned an article titled (and asking) "Is Brian Lin The Next Incarnation Of Joe Cassano?" in which we sought to demonstrate just on what flimsy ground Bank of America has based its litigation reserve assumptions: a topic that since then has become the biggest sticking point in the BAC bull thesis. Considering that since then, Bank of America default risk has exploded by over 150% and the stock price has plummeted by half, at least some have grasped the severity of a situation when incremental flawed assumptions are magnified level after level, until we finally get what, as Manal Mehta terms it, is a Bank of America "Subprime CDO." Since this issue is extremely important to the future of the financial system (a bankruptcy of Bank of America would be hundreds of times more severe than Lehman's), below we present in visual, and thus easy to comprehend, format what we previously explaining in a narrative and which once again brings us to our question: will the man behind the BAC litigation reserve fraud be responsible for the next iteration of an AIG-type implosion?

The debate over whether or not continued deficit spending should be pursued is often characterized as a choice between the short term beneficial effect of Keynesian stimulus as against the long term growing, and ultimately unsustainable, government debt to which continued stimulus would contribute.This view assumes there to be a reliable relationship connecting increases in aggregate spending to increases in employment. The absence of such causality, however, would undermine the case for deficit spending.

The latest update in this news-heavy night is that Japan's unpopular Prime Minister is out, after tellng his cabinet ministers that they have about one more week before packing up and looking  for new jobs. As Reuters reports "The ruling Democratic Party of Japan is planning to pick a new leader on Aug. 29, setting the stage for parliamentary confirmation of a new premier and the selection of a new cabinet." We hope for the sake of the G7 that there is no massive crisis in the next 10 days, as a leaderless Japan will hardly provide confidence that any crisis can be circumvented. As for the Yen, it is hardly troubled and at last check was trading at 76.75 to the dollar. Not an all time record... but pretty close.

This is a rather odd turn of events… a former Fed official urges the Fed to step in and buy the stock market… just three hours before the markets mysteriously reverses and rallies hard on no real news of note.

Following years of pandering to client demands, and assigning trillions of dollars in fixed income securities with whatever rating money bought (among other things, a factor to the credit bubble and its subsequent implosion) S&P finally tried to do the right thing and tell the truth. However in this case it picked if not the worst, then certainly the most hypocriticial credit in the world to expose - the US itself. Sure enough two weeks after the downgrade, someone made the phone call and the CEO Deven Sharma is no more. As for the kick square in the gonads: Sherma will be replaced with the COO of...you know it... the bank which demanded tens of billions in secret Fed bailout loans itself, Citibank. The only question left in this entire farce is how long before S&P issues the following upgrade of the US: "Great service, AAA+++ rating, immediate payment, would do business again!!!"

Comrade, you won't need a night-light for a LONG time ... you'll be able to read by your healthy communist glow