Archive - Mar 8, 2012

Japan's Trade and Current Account imbalances appear to be hitting some kind of terminal velocity and while neither JGBs nor CDS seem to reflect the ensuing chaotic recognition that perhaps the can that has been so faithfully kicked down the "Nishi-no-michi" or the West Road may have plunged over the lip of Mount Fuji (conjuring images of Mordor), FX markets recent and abrupt weakness brought on by yet more printing (a topic we discussed in great detail recently as the chosen heretical method du decade) may well be coming face to face with reality. We assume Azumi is faithfully watching these market moves but we wonder at what point the quasi-intentional weakening of local currencies flares into a full-blown currency war - and instead of merely encouraging simpleton FX-carry strategies chasing momentum and leverage - quickly becomes the hyperinflationary super nova that many have been waiting for over the last decade. Dismal demographics aside, we wonder how long before Koo prescribes yet more of the same medicine for this constant state of deflation and at what point does inverted-Apple-looking charts for Trade and Current Account balances become simply too hot to handle...

ETF fund flows have been a uniformly positive source of capital into U.S. risk markets in 2012. Looking a little deeper at the decidedly 'risk-on' flows, Nic Colas (of Convergex Group) notes perhaps their most provocative feature has been their high degree of net concentration.  When you look at the entire “ETF Ecosystem” of listed funds, just 6 funds represent all the net gains in assets over the past month ($5.4 billion in net inflows) – LQD, HYG and JNK in fixed income, VWO in emerging markets, VXX in risk, and GLD in commodities. With 1,433 different ETFs listed on U.S. markets now, Colas likens the comprehension of the $1.2 trillion in AUM across these ETFs to how well you know your spouse as we know ETF flows are important (just like a wedding anniversary date or what day the trash is picked up at home) but with their still-evolving proliferation it seems a daunting task to keep tabs on them. All in all, this brief analysis points to more of a pause in investor sentiment rather than the opening for a more full-blown correction in the coming weeks.

Topped off with Wall-Street-esque hype ... how refreshing, and so unlike the congressionally mucked-up USPS.

I think it is clear that extremists in an environment of despotism are in most cases people who refuse to abandon that which makes humanity whole.  We are, indeed, dangerous, but only to those who would do liberty harm.  A life of conformity is a life wasted, and a life of slavery is no life at all.  Whatever we may be called today, what we leave behind is ultimately what defines us.  Labels are irrelevant.  If I am an “extremist” because I refuse to participate in the delusion that is America in the new millennium, then so be it.  I am more than happy to join the long list of insurrectionaries who inhabit this nation today and who have been the legitimate makers of the world for generations.  Everything in history revolves not around governments, but rule-breakers.  They alone decide whether humanity will live tight in the fist of the authoritarian machine, or live free in the wilds of unbridled independence.

For a global economy that is "improving" we sure are getting a whole lot of records in the won't direction in the last two days. Yesterday it was Japan which printed a record current account deficit (yes, the most indebted country in the world was once upon a time supposed to export its way out of debt). Today, we learn that in February the US will report its largest budget deficit in history, as the Keynesian floodgates open full bore, and as Zero Hedge has noted repeatedly, tax revenues just refuse to come in at anything close to the pace of accelerated spending, forcing the US to borrow 54 cents for every dollar it spends (not the often cited 42 cent number which does not take into account tax refunds - see here). We would comment more on this, but frankly the chart speaks for itself. And now that the US has to fund an additional $100 billion due to the taxcut extension this means that things are only going to get worse, fast.

Exquisite.

While the general market mood is one of pre-default euphoria reminiscent of that in the pre-Lehman weekend, clouds may be brewing. As Reuters reports, "Some hedge funds have found a legal loophole they believe will force Greece to repay some of its debt in full, three sources close to the matter said on Thursday, in a move that would intensify the standoff between the country and its debtors." The loophole? A tiny €412.5 million bond issued by Hellenic Railways with a clause that "allows bondholders to argue that Greece is in default if it is trying to restructure or change the terms of its debt, the sources said. The creditors could already argue that Athens has defaulted, and if they buy up a quarter of that bond -- or enough of it not to be forced into the debt swap -- they can also then demand immediate repayment, a process known as acceleration." More: "The funds are now trying to buy up enough of the bond -- issued by state-owned Hellenic Railways and guaranteed by the government -- to force Greece to repay them in full, to the tune of some 400 million euros. If Greece refuses to do so, this may trigger similar provisions on other Greek railway bonds, potentially landing Athens with a bill of about 3 billion euros, with investors demanding immediate repayment, the sources said." Things could move very fast since the PSI results are due in 7 hours: "Sources close to Greece's negotiation fear the funds could already start the acceleration process by Friday, or next week, if they find they have a big enough majority."

A great piece of misdirection by the master of inaction...

Earlier today we reported that based on various sources, the chief topic of conversation between Obama and Netanyahu at this week's talk between the two leaders was the calendar for Operation Desert Glass and Operation Enduring Brent Freedom, just so the ensuing price surge in crude does not impair Obama's reelection chances. From that point on it was merely a countdown to the official denial from the US government, as the last thing the president needs is the perception that the fate of the US' top post is somehow in the hands of Israel, which in turn needs to be bribed with concrete penetrating presents of the GBU-XXX family to withhold from doing what it feels like doing. Sure enough...

"We, the people," are in deep trouble.  

Gasoline consumption in the United States has been dropping for years. In the last decade, vehicle fuel efficiency has improved by 20%, and the combination of that shift and a weak economy of late has pushed gasoline demand to its lowest level in a decade. At the same time, US oil production is at its highest level in a decade. Deepwater wells in the Gulf of Mexico and horizontal fracs in the Bakken shale have turned America's domestic oil production scene around. After 20 years of declining production, US crude output rates started to climb in 2008 and have increased every year since. With production up and demand down, the basics of supply and demand indicate that oil prices should be falling. Americans should be paying less at the pump. Instead, the average US price at the pump reached US$3.80 per gallon on March 5, after 27 consecutive days of gains. That's 26.7¢ above the old record for March 5, set last year. The price of gasoline has climbed 32¢ or 9.3% since February 1; analysts expect prices to continue rising, reaching a national average of something like US$4.25 per gallon. What gives? Is it all about Iran? Are speculators manipulating the market? Do any politicians have good ideas on how to "fix" the high cost of gasoline? And is there relief on the horizon?

Credit markets closed at their best levels of yesterday and traded in a very narrow (much less risk hungry mode) range as stocks zoomed 1% higher than yesterday's best levels on volumes considerably less than the year's average so far. With tonight's PSI 'news' unlikely to be a surprise (and certainly not unexpectedly bullish as CACs are enacted and likely to trigger CDS), overnight China inflation, and tomorrow's NFP print seemingly priced into the market for perfection, it is apparent the marginal equity trader is far more comfortable with uncertainty (remember participation does not mean agreement still) than the marginal credit trader. The usual suspects did well with Materials, Industrials, and Financials all outperforming (and the majors bouncing back) but we do note that the average contract size in ES (the e-mini S&P 500 futures contract) was its highest in five weeks (even if it was roll week). Treasuries melted slowly higher in yield all day continuing yesterday's trend to complete the largest two-day rise in 30Y yields in six weeks. This de-risking along with JPY weakness and AUD/EUR strength supported risk but we do note that CONTEXT (our broad risk asset proxy) lagged Equity's excitement all day even as it leaked higher. Commodities benefited from USD weakness with WTI managing to get back over $107 briefly and back to positive for the week, Gold getting above $1700 and a wild ride in Silver leaving it in line with Copper -2.5% on the week so far.

It must be a day ending in Y because Texas Instruments just cut its guidance again, or rather, as usual. The reason: "lower demand for Wireless products." Uhm, such as those that the company with the fruit logo makes?

While anyone (as we did) with an abacus and five-minutes of spare time from hitting the buy-button could have figured out that post-PSI 'new' GGBs would trade down hard, it is perhaps worth looking at some sensitivity analysis on both the shape of the Greek curve and the level (as well as the value of GDP warrants) before jumping on any bid from BNP in the grey. Of course, excitement over 80-90% participation rate rumors are somewhat irrelevant as CACs are as inevitable as hearing the phrase 'money-on-the-sidelines' on CNBC every day and whether its 77% or 97% is largely irrelevant - despite our equity market's ebullience. Morgan Stanley provides some color on the new GGBs, which they expect to trade at least 200bps wide of Portugal and with an inverted curve expecting prices to stabilize in the mid-20s (with technicals in the short-term pushing prices below 20). The GDP warrants are estimated at a fair-value around 1c and if the Argentine framework is any evidence, this will be heavily discounted (read ignored) by the market. All-in-all, not exactly positive but still buy stocks because 90% sounds like a good number!