Archive - Aug 2011

Some investment and trading tidbits about the Squid that somehow have miracurously escaped both the pop media and sell side Wall Street... Hmmm....

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Courtesy of Morgan Stanley's Huw van Steenis, we present the only chart one needs to see to understand what is going on in Europe.

Can we all just fast forward to Tim Geithner making apocalyptic threats if he doesn't get TARP 2 to bail out Bank of America (which in turn will "help" Rick Perry) please?

And so we return to that point when the most engaging, yet useless, topic of discussion is what Bernanke will say or the Fed will do, in this case this coming Friday at the 2011 edition of the Jackson Hole Fed meeting, and specifically Ben's keynote speech. By now we have seen endless iterations of what pundits expect will happen: from nothing to another round of QE. Today, we present SocGen's take which is that while an outright third round of monetization is unlikely for now, the Fed may well proceed with a lite version of QE in the form of "sterilized" operations, or curve targeting, aka Operation Twist, as was noted here some time ago. One thing we certainly agree with SocGen on: "If markets remain under pressure, Bernanke could be forced to commit to something next week." The market obviously knows this, in which case if the market case is for QE3 or bust (and remember: Wall Street is still stuck in beta levered world where the only P&L comes courtesy of the Fed this will be most welcome) today's latest vapor rally will be promptly nullified by Wall Street which has only 4 days left to send a very loud message to the Chairsatan.

I warned to get defensive several weeks ago. That warning is even more important now. I would avoid stocks and Treasuries as neither are particularly safe. I’d have increased exposure to cash and PHYSICAL bullion (Gold and Silver). If you have to remain long stocks shift into large-caps and companies that will exist a year from now (brands and industries people will need regardless of how bad the economy gets).

(But yes, @Nouriel, we need central banks, and moral hazard and FRB did not exist before 1913...Q.E.D., right?)

Following last week's €22 billion in secondary market bond purchases, this week we get a new total of €14.291 billion in settled Italian and Spanish bonds monetized: the third highest weekly total ever, bringing the cumulative total E110 billion. This follows on the heels of the BOJ intervening (or not) in the JPY market and the SNB buying 1 month CHF futures (leverage, leverage, leverage). What can one say but free, efficient, and central-bank free markets as far as they eye can see. Also guess what will happen when political pressures push the ECB to stop monetizing: all the moves tighter will be unwound in a manner of nanoseconds, and then a whole lot of "some."

The bounce has started (again), but don't get overly bullish.....

We were wondering how long it would be before Germany, following in the footsteps of such luminaries as Hank Paulson and Tim Geithner, would formally announce to the world that with it now openly calling the shots in Europe, it would be its way or the mutual assured destruction way. We just got our answer courtesy of the just released August Outlook from the Bundesbank, in which the German national bank lays out the framework of the upcoming European anschluss play by play, as Germany prepares to roll out the Fourth Reich welcome mat without ever spilling a drop of blood. After all: why injure the soon to be millions of debt slaves? To wit from the report: "Unless and until a fundamental change of regime occurs involving an extensive surrender of national fiscal sovereignty, it is imperative that the no bail-out rule that is still enshrined in the treaties and the associated disciplining function of the capital markets be strengthened, and not fatally weakened." Translation: "we will gladly help everyone out... in exchange for a little of that vastly overrated fiscal sovereignty... Did we say a little? We meant all of it..."

Well, stock futures have already had a decently volatile session.  From a low of 1112 all the way back to 1142, with a couple of 10 point moves in between.  Broken.  I think credit markets are telling you that this is a great second chance to short stocks if you didn't last time.  MAIN is basically unchanged.  SOVX is 4 wider, back to 292.  More concerning, since the crisis has been infiltrating the banks is that SocGen is 15 wider at 320, and BAC is 5 wider even while their stocks are trading up.  Those all seem like pretty solid warning signs that stocks so far are ignoring.

• Majority of Swiss Polled Back SNB Currency Operations (Bloomberg)
• Merkel, Van Rompuy Caution Against Euro Bonds (Bloomberg)
• Italy’s Debt May Swell as Austerity Chokes Growth (Bloomberg)
• Jackson Hole Build Up (FT)
• China Previews Rising Leadership (WSJ)
• Gaddafi Regime Collapsing (FT)
• Prosecutor to drop Strauss-Kahn case: report (Reuters)
• Inflation a danger for safe havens (FT)

WTI and Brent crude futures traded under pressure in the early European session weighed upon by the news that Libyan rebels have taken control of most of capital Tripoli and increasing prospects that the ongoing civil war may come to an end soon. However, as the session progressed, prices came off their earlier lows with a weakening USD-Index. News from Libya also supported the oil & gas sector in the hope that companies may resume their business in the country, which also helped European equities to trade higher. Equities received additional strength on the back of early market talk of asset re-allocation from fixed income into equities, which exerted downward pressure on Bunds. Elsewhere, weakness in the USD-Index underpinned the strength in EUR/USD, GBP/USD and commodity-linked currencies, however CHF weakened across the board partly on the back of market talk that the SNB was active in one-month forward market. In other forex news, a sharp uptick was observed in USD/JPY overnight, however there was no confirmation of any forex intervention by Japan. Moving into the North American open, the economic calendar remains thin, however the Chicago Fed report from the US is scheduled for later in the session. In fixed income, another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Nov'21-Aug'41, with a purchase target of USD 0.5-1bln is also due later.

The dumb money continues to warn that gold and silver are bubbles. Their simplistic bubble thesis is based almost exclusively on the nominal US dollar price and recent price movements and on the assumption that (to paraphrase) ‘gold has gone up in price a lot - therefore it is a bubble’. There is a continuing failure to look at the important supply and demand fundamentals of the gold and silver markets which leads to unsound reasoning and irrational conclusions. There is also a failure to adjust for inflation. There is little knowledge of the very small size of the physical bullion markets vis-à-vis the stock, bond, currency and other markets. There is also very little knowledge of financial, economic and monetary history and a continuing ignorance regarding ‘investment 101’ which is diversification.

There are no notable economic events today so just like Noda, we will be watching, watching, watching those headlines and pretending to intervene if the world does not go our way. If that fails, we will spread rumors and demand that the US assist us in weakening reality whose moves have become too one-sided.