Archive - Aug 2011

Relevant News by www.thetrader.se

Debt Deal Puts U.S. on Austerity Path as Economy Falters (Bloomberg)
Short-term US Funding Highly Restricted (FT)
China Halts Offshore Yuan Borrowing to Tighten Policy (Reuters)
Fed Confronts Limited Tools to Stir Economy (Hilsenrath)
Australia Leaves Key Rate Unchanged (WSJ)
N.Z. Second-Quarter Wages Rise at Faster Pace, Adding to Inflation Signs (Bloomberg)
China’s Expanding Naval Reach Worries Japan Over Routing Warship Presence (Bloomberg)
Geithner Says Debt-Limit Deal Good for Economy in the Long Term (BusinessWeek)
UK borrowing costs brush close to record low (FT)

Markets witnessed a risk-averse sentiment today on the back of contagion fears in the Eurozone, with particular focus on Italy, together with growing signs of a faltering global economic recovery. This resulted in weakness in European equities, led by peripheral indices, which provided support to Bunds and Gilts, whereas a general widening was observed in the Eurozone peripheral 10-year government bond yield spreads. The USD-Index traded higher throughout the session, which in turn weighed on EUR/USD and GBP/USD, however GBP/USD did receive some strength following higher than expected construction PMI data from the UK. In other forex news, some market players mentioned the possibility of a JPY intervention, although Japanese officials declined to comment. Moving into the North American open, markets look ahead to a slew of economic data from the US in the form of personal income/spending, PCE report, as well vehicle sales figures. Today is also the deadline for the US to raise its debt ceiling, and following an approval of the bill from the House last night, the Senate is expected to vote at 1700BST, and if successful, it will be signed by President Obama.

Today we get Personal Income and Outlays, i.e., the savings rate, car sales (watch for GM dealer inventory), and the debt ceiling drama concludes in the Senate.

The last time we checked on the top 5 portfolio holdings of Mr. Pink's Third Point, we noticed that gold had surprisingly dropped to third position, behind Delphi and El Paso. Less surprising is that the fund, which has outperformed the S&P in July, returning 0.3%, and which increased in AUM by a whopping $800 million or well over 10%, has followed gold's surge to fresh all time highs, by once again making gold its top position. So in addition to the Bank of Korea, it appears that one of the key members of the hedge fund "think tank" is once again back and buying. If all of the $800 million in new capital went into gold, it tells you all you need to know about the ability to generate stock alpha in this market. Incidentally, how long before China, and its paltry gold reserves, finally gets the memo?

Further confirmation in the continuing stealth accumulation of bullion by central banks came overnight with confirmation that South Korea's central bank bought 25 tonnes of gold over the past two months. The gold is worth $1.24 billion and resulted in a 17 fold increase in their gold reserves. Thailand’s gold reserves rose by 15.5% in the two months and rose to about 4.07 million ounces in June, from about 3.523 million ounces in May, according to figures on the Bank of Thailand’s website accessed by Bloomberg this morning. South Korea is the world’s seventh-biggest foreign-exchange reserve holder and 64% of its reserves are in U.S. dollars. The bank said that it also holds euros and other assets and the move was about achieving diversification. The BOK’s reserves, stored in London in the vaults of the Bank of England, increased 25 tonnes to 39.4 tonnes (from 14.4 tonnes) but remain meager when compared to the size of their foreign exchange reserves. BOK's gold holdings, at today’s market prices, account for 0.7% of its reserves, up from 0.2% prior to the purchase. The BOK reserves were at a record high of $311.03 billion at the end of July which puts this $1.25 billion gold purchase in perspective. Their gold reserves and those of other Asian central banks, particularly the People’s Bank of China, remain meager when compared to those of western central banks and the U.S.

Despite Congress passing the debt ceiling hike, the market's reaction has been swift, brutal and vicious as ever more attention is being paid to Italy and the unforgiving European crisis. As both Spanish and Italian spreads hit new all time records, while CDS are at all time wides for the two countries plus France, the vigilantes are once again preparing to attack and test the ECB's resolve to keep the Euro alive: at this point it is obviously a losing game although expanding the EFSFS to $2 trillion is inevitable (at which point the reaction to German spreads will be swift). In the meantime the scramble for safety is at 2011 highs, with gold on the verge of another record, while the 10 Year US Treasury touching a low of 2.685%, and UK Gilts touching record lows: remember - this is all to make QE3 more palatable when it does begin. Lastly, Bloomberg's TJ Marta summarizes all the market indicators of a day in which sentiment has truly crumbled and in which we expect Italian bank stocks to be halted at least 3 times before market close.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge.

This is the fun stuff about politics. Basically our politicians are being forced to do something they don’t want to do and our job is to cut through the obfuscation to see how they are doing exactly the opposite of what they say they are doing. It is fairly obvious that despite what they are saying publicly, they aren’t making significant cuts to the budget.

The economy has been stagnating as we had forecast early last year. In our opinion this stagnation is not a "soft patch." The debt from the huge malinvestment in real estate during the boom cycle is resolved, we believe the economy will continue to stagnate, despite whatever steps the Fed or the government take.

While Washington is baffling everyone with male cow manure, presenting 7-slide powerpoints full of talking points and empty of actual actionable cost-cutting proposals, while draping the melodrama in ever more evanescent haute couture of "emperor's clothing" du jour, the one true solution to all our problems is so simple that it is perfectly logical that it would have been avoided like the plague by D.C. In a nutshell: do to the government, what the privates sector has done to itself in the past 3 years, and fire 15% of the federal government workforce. After all everyone, even the government, complains about the bloat in the system. Here is the chance to fix it. And the benefits, unlike the back-end loaded and extremely loose "bipartisan plan", which happens to invoke such pseudo-totalitarian constructs as the "Super Congress", can be quantified immediately, with the applicable savings made abundantly clear to all from day one. In this case - slimming the US government ever so modestly, by just 15%, would generate savings of $117.4 billion a year, of $1.4 trillion over the next 10 years. And no, these are not reductions in future spendings: these are real actionable cuts from the day they are enacted, with fungible cash able to be used for any other, much more needed purposes, up to and including economically stimulative projects, which actually generate jobs for the private sector.

The debt debate has been going on all summer, a 2 months and running theatrical experience of court jesters parading about while the United States economy teeters on the edge. On both sides of the aisle have been ridiculous solutions that are showing the world daily, America is willing to sacrifice its citizens for the profits of the corporations. The problem is, why will the rest of the world continue to support American multi-nationals, when they have their own. As dollar supremacy begins to wane, and oil prices rise as the dollar’s value descends, maybe it is time to talk about the horrendous policy decisions of these politicians in hopes it opens up a way to point us in the correct direction. Otherwise, when August 2nd comes and the deal is passed anyway, cause it has all just been a “watch this hand” moment, we might find ourselves not understanding why the Social Security check seems meager compared to before.

Anyone who thinks that the crisis is over for the market has another thing coming.

What I’m trying to say with all of this is that the US welfare state, or the notion of politicians dishing out handouts in exchange for votes, is soon coming to an end. Social security, Medicare and many other government spending programs will be cut in the coming years. Regardless of your feelings regarding these programs, they are not funded and with tax receipts falling (and will fall further as the Depression deepens) the US will simply not have the money to pay for these programs.

Great job by this band... It is way past time for some protest songs just like in the 60's and 70's...