Archive - Sep 7, 2011

Morgan Stanley is currently holding a call in which the firm's strategists, led by Adam Parker and Greg Peters, will be presenting their latest investment case for global equities. Sure enough, coming from Morgan Stanley the call will have a decidedly bullish tone to it, but maybe, just maybe, the firm will finally realize that as the 30 year "Great Moderation" winds down and reverts to its mean, there are other, less favorable outcomes on the horizon. Then again, this being Morgan Stanley, we doubt it. Regardless, the 52 page accompanying presentation is attached, and those who wish to dial in should just drop a line to their favorite Morgan Stanley snake oil salesman.

An already ubercynical Art Cashin chimes in on Obama's much anticipated, and very controversial (recall the latest Boehner flap on the issue) speech tomorrow and comes out sounding even more jaded than usual. In a word: don't expect any imminent rise in Obama's already record low popularity rating as a result of this speech, which if recent history is an indication, will likely generate even further class animosity within US society, now well on its way to confirming some of the more violent teleological theories postulated by Karl Marx.

...Taking a step back, we are looking at potential Nations defaulting, plus augmenting further austerity measures to try and reduce debt (which will stifle any growth for years to come), the spiral of banks coming close to nationalisation across the developed world, consumer deleveraging, rising unemployment, falling house prices and a rising loss of faith with government along with discontent and civil unrest. Why on earth would you sell gold when the outlets for safe havens are being radically reduced since the SNB move and the threat from Japan to intervene? Plus the fact that currencies offer less in the form of stores of value also. A massive shift from currency investment to precious metals could take place. Currency wars will exacerbate this and whilst the SNB move is from a small nation, what happens if one of the big boys like Japan join in? Carnage basically and trade wars and border issues will ignite and G20 could implode. Just what the world is ill-prepared for but it looks like it is brewing. Civil unrest and regime changes around the world will add to the soup.

Presenting the chart of Greek 1 Year bonds. Looking at this alone, one might get the feeling that not all that much is fixed in Europe, whose weakest link is about to file for bankruptcy any minute.

As bizarre as it is to say, but yesterday felt like a short squeeze in the US. In spite of SPX finishing down 9 points, the price action felt like shorts getting squeezed. How can that make sense? Well, anyone who set a short ahead of Jackson Hole or just after the speech, likely set it in the 1130-1160 range. The memory of stocks rallying up to 1228 is too fresh in everyone's mind, so shorts were nervous, and longs may have been set too, as hope remained that Obama, Bernanke, Trichet, and Merkel would say or do things to support the market. I believe yesterday's bounce from the lows, then late day 10 point down and back up swing cleaned up a lot of shorts, so the market is much more balanced at 1175 than it was at 1175 at Jackson Hole time. This gives us a lot more ability to trade lower. Maybe it is too bizarre to believe that we can have a short squeeze on a massively down day, but it felt like that, and it feels like people are positioned less bearish than they feel. With nothing resolved in Europe, and some signs of continued deterioration, the market is more vulnerable to a sell-off. My favorite spin yesterday was that the US will muddle along even if Europe is in trouble. Wasn't it just a few months ago that analysts were saying it is okay if the US does poorly, because over half of S&P 500 profits come from overseas? Weren't profits being enhanced because companies were selling things in Europe and translating those profits back into dollars at favorable exchange rates? Is that story gone and now globalization doesn't matter?

Tullett Prebon has been recently making headlines due to its extremely stark, objective and realistic Project Armageddon, in which it "Thinks the Unthinkable" where it reached the conclusion "that Britain’s debts are unsupportable without sustained economic growth, and that the economy, as currently configured, is aligned against growth. Radical solutions are required if a debt disaster is to be averted. All macroeconomic options have been tried, and have failed. The only remaining options lie in the field of supply-side reform. Unfortunately, public opinion may be inimical to the scale of reform that is required." Needless to say, Keynesians around the world are not happy: after all it takes away from their voodoo punch that just doing more of the same insane things over and over should eventually help. Because if not, then all the BS that is taught in Ivy League is just that... BS. Today, none other than the CEO of Tullett Prebon takes such floundering voodoo economists as Ed Balls, Samuel Brittan, Paul Krugman, George Magnus and Barack Obama, and Keynesianism in general, to task by finally saying what we have been claiming for years: Keynesianism, as applied in modern soceity, is ultimately doomed to failure, but not before we transform from an FX war to a trade war to its final state - shooting war. Because there is nothing like spilling human blood in the name of a false economic religion in its last hurrah before it is finally wiped out from the face of the world.

• German Court Upholds Bailouts (WSJ)
• Obama Said to Seek $300 Billion Jobs Package (Bloomberg)
• Euro Woes Stir Currency Fears (WSJ)
• Hilsenrath: Bernanke Takes On a Balancing Act (Hilsenrath)
• ‘Helicopter Ben’ risks destroying credit creation (Bill Gross)
• China Likely to Ease Money Policy, Journal Says (Bloomberg)
• Krugman explains why the  price of gold going down is due to deflation, and why it going up is due to... deflation (NYT)
• Bernanke: US Banks' Exposure to Europe Is 'Manageable' (CNBC)
• Greece Pledges to Accelerate Austerity (Bloomberg)

• The German Constitutional Court rejected lawsuits aimed at blocking Germany's participation in the Eurozone bailouts; however said that the ruling is not a blank cheque for further bailouts
• A Eurozone source said that the IMF has agreed to substantially lower the initial estimate for the European banking sector's capital needs
• According to an article in the Irish Times, private sector participation in the Greek debt swap has so far reached the 75% mark
• Higher than expected German industrial production data rendered support to EUR, however GBP came under pressure following worse than expected industrial production data from the UK

Relatively quiet, rainy day punctuated by the JOLTS report, the Fed's Beige Book and speeches from Fed officials. Headline news will again dominate market momentum.

A mystery to me. My conclusion is that more government intervention in the oil market about to happen.

Gold closed in New York at $1,870.70/oz yesterday and then traded sideways prior to sharp selling in Asian trading saw gold fall 2.3% or nearly $50 in minutes ($1,871/oz at 0514 GMT to a low of $1,827/oz at 0523 GMT). The price fall was odd as there was no breaking news or ostensible reasons for the sell off and other markets were unchanged at the time. Speculation was that the falls were technical in nature after stop losses were triggered. However, Asian traders spoke of some 4,000 lots of gold being ‘dumped’ on the COMEX and of a “large sell order”. This would suggest that the sellers may not have been profit motivated and official selling may have been involved. After the Swiss franc intervention and currency debasement yesterday, market participants are wary of further official government and central bank intervention. With further gains for the Swiss franc artificially capped (at least in the short term), it would be naïve to exclude the possibility of intervention in the gold market and a continuing strategic capping of the price. “The start of full-on currency wars has started in earnest,” said Maurice Pomery, chief executive at Strategic Alpha, quoted in the front page of the Financial Times today. “After currency wars come trade wars and as we see the exporting world pressured as the developed world contracts, tensions will rise.” Central banks, from the SNB to the Bank of Japan, are openly intervening in the currency markets and devaluing their currencies and therefore may be surreptitiously intervening in the gold market.

As widely expected, the Bundesverfassungsgericht (Germany's Federal Constitutional Court) ruled in favor the German government and did not overturn the EFSF bailouts. Of course, this does not greenlight the safety of each and every profligate spending peripheral and core country at the expense of the German taxpayer. The court continued on its path of demanding more from the Bundestag with regard to the strict adherence of conditions, as the budget committee must approve any new guarantees, and this ruling is not a blank check.

All you need to read.