Archive - Feb 10, 2012

And the winner is...

• BERNANKE: HOUSING MAY NO LONGER BE VIEWED AS SECURE INVESTMENT

That's right. He just said that. And with that, a Lewis Black moment is coming on...

Just over three years ago, Zero Hedge first pointed out some dramatically meaningless inconsistencies in one of the world's most important numbers (which also happens to be "self-reported" and without any checks and balances) - the London Interbank Offered Rate, better known as LIBOR, which is the reference rate of a rather large market. Following that, we made a stronger case that the Libor, should really be abbreviated to LiEbor in "On the Uselessness of Libor" from June 2009, which alleged that this number is essentially manipulated, potentially with malicious intent. That alone got us a very unhappy retort from the British Banker Association (BBA) which is the banker-owned entity set to "determine" what the daily Libor fixing is based on how banks themselves tell us their liquidity conditions are. Well, as has been getting more and more obvious over the past two years, our allegations were 100% correct, and have now manifested in a series of articles digging through the dirt, manipulation and outright crime behind this completely fabricated number. And yet this should be the most aggravated offence in the capital markets, because LIBOR just so happens is the primary driver in determining implicit risk as a reference rate for $350 trillion worth of financial products. That's right - that one little number, now thoroughly discredited, has downtstream effects on $350,000,000,000,000.00 worth of notional assets. That's a lot. And while we are confident that nobody will ever go to prison for LIBOR fraud, which has explicitly been leading investors and speculators alike to believe that risk is far lower than where it truly is, what one should ask if the LIBOR rate is manipulated, and with is the entire floating and interest rate derivative market, not to mention CDS which are also driven off a Libor benchmark, what is there to say about the minuscule in comparison global equity market? In other words, does anyone honestly think that with the entire fixed income market pushed around by individuals with ulterior motives, that stocks are ... safe for manipulation?

If the U.S. and Israel sponsor terrorism, then Jimmy Carter’s National Security Adviser was correct when he told the Senate in 2007: the war on terror is “a mythical historical narrative”.

It's 12:57 AM February 11, 2012 Hong Kong Time: Let the BANZAI7 QE Valentine countdown begin...

We have been warning of the bearish divergence in European credit markets all week and today saw that trend continue as the best-performers of the year-to-date become the biggest losers on the week. Financials and high-yield (crossover) credit have dramatically underperformed this week (with XOver +50bps touching 600bps once again) as credit overall trades considerably wider than before the NFP-print jump. Investment grade is wider but diverging a little today as decompression trades are laid back out and up-in-quality trades are reconsidered - and away from financials which have seen their senior unsecured credit spreads jump from under 190bps to almost 220bps on the week. Broad equity markets in Europe also saw their worst week of the year but are lagging the credit sell-off for now and sit (for context) right around the pre-NFP jump levels. Sovereigns were mixed on the week with the last couple of days seeing notable deterioration. Spanish spreads are +33bps, Italian spreads are -9bps on the week but are 25-30bps off their tights but it appears Portugal was the darling of the ECB this week as it managed an impressive 100bps compression (10Y now almost 500bps off its wides on 1/30) but this impressive tightening only gets the peripheral nation back to 1050bps (and mid-January levels - still triple the level of risk of a year ago).

You know times are hard when you can't even give your distressed assets away!!!

Recent times have been particularly hard on young adults. As we look around the world at Europe and the Middle-East, it is all too often the youth that are leading the social unrest as they again and again are the hardest hit by the global deleveraging (and admittedly most socially connected). The US is not insulated from this (though perhaps more Xanax-subdued) as youth unemployment is around 20% (with 16-19 year-olds around 25%). As Pew Research Center notes though, that fully 55% of those aged 18-24 (and 4% of 25-34 year olds) say young adults are having the toughest time in today's economy. The day-to-day realities of economic hard times are somewhat shocking for a country supposedly so far up the developed spectrum as roughly a quarter of adults aged 18 to 34 (24%) say that, due to economic conditions, they have moved back in with their parents in recent years after living on their own. In the 25 to 29 age range a shocking 34% have moved back home with mom and pop (hardly likely to help with the huge shadow housing inventory overhang we discussed yesterday) Finding a job, saving for the future, paying for college, and buying a home are seen as dramatically harder for today's young adults compared to their parent's generation while Facebook saves the day as staying in touch with friends/family is the only stand out aspect of life that is 'easier' for today's youth. As these increasingly disenfranchised young adults make some of life's biggest transitions (or not as the case seems to be), we wonder just how long it will be before Al-Jazeera is reporting on the Yankee-Spring and showing video of young hoody-wearing Americans throwing their 'Vans' at 80 inch plasma TVs; or maybe the BLS will decide to redefine basement-dwelling (or rioting) as a full-time job.

The cost of oil has declined sharply from mid-2008, yet consumption has tanked from 54.8 MGD in July 2008 to 42.4 MGD in July 2011. That's a hefty 21% decline. What other plausible explanation is there for the decline from 42.4 MGD in July 2011 to 30.9 MGD in November 2011 other than a dramatic decline in discretionary driving? That 27% drop in a few months in unprecedented, except in times of war or sharp economic contraction, i.e. recession. If we stipulate that vehicles and fuel consumption are essential proxies for the U.S. economy, then we can expect a steep decline in economic activity to register in other metrics within the next few months. Such a sharp drop would of course be "unexpected" given the positive employment data of the past few months. But as the data above shows, employment isn't tightly correlated to gasoline consumption: gasoline consumption reflects recession and growth. In other words, look out below.

Following the market's "sudden" realization in December that the ECB had been quietly pumping $800 billion, or more than the entire QE2, into the market (sterilized? yeah right - when one lends out cash in exchange for worthless crap nobody else wants, and certainly not the Bundesbank, it is not sterilized), it became all too clear that the market's response in 2012 would be a deja vu of 2011, if only for a while. Sure enough 2012 has been a tic-for-tic transposition of the market move in 2011. The only question is how far it would go, before, like back in 2011 again, it rolled over. To get a sense of one of the best indicators of an overextended rally, we go to the NYSE whose short interest update confirms that the rally, at least based on ongoing short squeeze dynamics (which as we said in mid-January has been the best strategy for a bizarro market) is now over. Sure enough, according to the latest data, short interest has collapsed from a multi-year high in September of 16 billion shorts, which coincided with the market lows, to essentially the lowest print seen in the past 4 years at 12.5 billion shares, a level which has not been breached once in the New Normal phase of market central planning. In other words, those who look at short interest and covering as a market inflection point, the time has come to take advantage of the short mauling, and bet on the market rolling over. That said, all it takes is for a central bank chairman somewhere to sneeze the wrong way, and this best laid plan will promptly collapse.

Did Pelosi and Bachus draw straws about who was going to be subject to a congressional ethics investiation based on their insider trading?

Chart Update as Market is ready for a Correction.

As Brent and WTI prices ebb and flow from local and global fundamentals and risk premia, Morgan Stanley notes that to be bullish from here, one would need to believe a supply disruption is coming. Considering conflict with Iran, sustained Middle East tensions, and the potential for sustained supply disruption their flowchart of price expectations notes that prices follow inventories and that as price rises, fundamentals will weaken (as without an OPEC production cut, inventories would balloon by 2Q12) and therefore to maintain current prices across the curve, supply risk premia must continue to grow. They raise their estimate for 2012 average Brent price to $105/bbl from $100/bbl which leaves them bearish given the forward curve priced around $115/bbl, as their base case adjusts to a belief that Middle East tensions persist but a conflict with Iran does not occur as they address QE3 expectations and EM inflation/hard landing concerns.

As the headlines from Europe become more and more realistic (and ironically more and more Onion-worthy), Reuters notes one of the more interesting examples of just how the Greek people are feeling. The Federation of Greek Police have accused EU/IMF officials, in a formal letter, of "...blackmail, covertly abolishing or eroding democracy and national sovereignty". While violence erupts among the largely unemployed youth, the supposedly 'grown-up and responsible' segment of the Greek society, which for now at least appears not to be on strike, is recognizing the wholesale destruction of their society (as 22% cuts in minimum wage for instance are thrust upon them). The Greek police, who have stood against the protesters and done their jobs facing threats and anger, are seemingly expressing solidarity with the antagonists as they call out ECB, European Commission, and IMF leaders for their destructive policies. At what point do the police throw down their riot shields and follow the Greek people into their 'Bastille'?

A graph is worth a thousand words.  Here's three grand worth:

Say what you will about the tenets of Chinese economic slowdown assumptions and what not (despite inflation obviously continuing to be a rather pesky issue), at least its steadfast determination to have the world's largest crude oil stockpile is an ethos. At 23.4k metric tons of imports in January, China just imported the most crude in its history, despite the traditionally slow period around the Chinese new year. The trendline is unmissable - at this rate China will become the world's largest importer of Crude in a few short years, surpassing the US easily with its 28K metric tons of imports in a couple of years. Oh, and anyone who thinks that China will volunteer to lose Iran as a primary source of crude imports as its oil is "liberated" by Western powers as the country is obviously en route to having the world's largest crude stockpile (as to why this may be the case, read here), we have a bridge to Isfahan to sell you.