Archive - Mar 2012

As the rumor (and denial) of the potential release of the SPR washed out Crude and Brent prices last week, only to recover within 24 hours, we wonder if this was all the bang for the buck that these kind of pre-announcements will get. With the majority of crude reserves based in the US and product reserves based in Europe and spare capacity falling as OPEC picks up production even as Iran backs off, Morgan Stanley notes that the maximum stocks drawdown of the SPR in month 1 could average 14.4mmb/d (10.4mmb/d  of crude and 4.0mmb/d of products) which is enough to mitigate flows passing through the Strait of Hormuz (according to the IEA). However with only 90 days of cover at these rates, it is hardly the 'solution' to even the briefest of geopolitical disruptions. This perhaps explains the price action of previous SPR announcements, which varies by crude benchmark, but holds prices lower for a maximum of two weeks. Most notably, the greatest price drops on the SPR announcement tend to occur in the first 2-3 days at which point the term structure starts to increase once again. Louisiana Light tends to be hit the most followed by Brent and then WTI but the rebound is just as aggressive and we wonder if last week's rumor was merely a strawman to see just what impact was possible (we dropped 2-3% or so) and recovered rapidly compared to the 4-5% drop in June during the Arab Spring release (which was the largest release in the last 20 years).

Earlier this morning, there have been some completely unfounded speculation of a Chinese coup. And this is all. To get some additional color, we go to Chinese macro expert Andy Lees, who incidentally has have left the churn factory known as UBS, and is now at AML Macro Ideas. Here is his take.

All you need to read.

The next country that could follow Greece out of Valhalla and down to meet Poseidon at Hades gates is Portugal. They trod the path once before but look likely to be headed out on a second journey. The country’s private and household debt are approximately 300% of the total GDP of Portugal and their economy is contracting; around 4.00% by some estimates. While the European Commission estimates a debt to GDP ratio of 111% for this year; the actual data tells another story. Further aggravating a future restructuring are the CDS contracts with a net position of $5.2 billion and a gross amount of $67.30 billion which is about twice the amount of the net exposure for Greece.

There are two main news updates dominating early newsflow: the first comes from BHP Billiton, after the world's largest miner raised concerns about the possibility of a sharp slowdown in demand from top metals consumer China. Per Reuters: "There is a slowing trend in China ... moving increasingly away from the growth model that they have had, which may be a little less metals intensive. This is not new, but recognition by big mining companies would have had an effect." Australian iron ore miners, key beneficiaries of China's modern-day industrial revolution, signaled on Tuesday demand growth was finally slowing in response to Beijing's moves to cool its economy. BHP Billiton said it was seeing signs of "flattening" iron ore demand from China, though for now it was pushing ahead with ambitious plans to expand production." That this comes just on the tail of JP Morgan warning of a hard landing in China is curious, and one wonder if the Federal Reserve Bank of JP Morgan is not fully intent on telegraphing that the next big center of QE will be the PBOC. The other news is that the perpetual crude "upside capacity" strawman Saudi Arabia 'has pledged to take action to lower the high price of oil, which has risen to around $125 a barrel, with laden supertankers set to arrive in the US in the coming weeks. ... Saudi Arabia said yesterday it will work "individually" and with the other petrol-rich Gulf states to return prices to "fair" levels. The country indicated earlier this year that $100 a barrel was the ideal oil price." There is one problem with this as expected Saudi attempt to help Obama's reelection campaign: as pointed out yesterday, it is very unlikely that Saudi Arabia has any realistic ability to do much if anything to push the price of crude lower, especially if and when the middle east hostilities flare up.

Heading into the North American open, EU stocks are seen lower across the board as market participants reacted to cautious comments from Moody’s rating agency on Spain, which noted that Spain’s fiscal outlook remains challenging despite easier targets. Still, the ratings agency further commented that easier targets do not affect Spain’s A3 government bond rating with a negative outlook. Separately to this, a BHP Billiton executive said that Chinese demand for iron ore is flattening, while according to China's state-backed auto association, China's vehicles sales this year will probably miss their growth forecasts. As a result, basic materials sector has been the worst performing sector today, while auto related stocks such as Daimler and VW also posted significant losses. The ONS reported that inflation in the UK fell to 3.4% in February, down from 3.6% in January. However, higher alcohol prices stopped the rate declining further. Going forward, the latter half of the session sees the release of the latest US housing data, as well as the weekly API report.

Jewelers in India are protesting the tax hike on gold imports and plan to keep their shops closed for two more days. This is India’s first nationwide strike in seven years and shows how important the gold industry is in India. The excise duty hike is expected to lead to less demand however Indian demand may again prove to be robust despite tax increases. PDR Gold Trust, the world's largest gold-backed ETF, said its gold holdings remained unchanged at 1,293.268 metric tonnes for the 5th straight session on Monday, despite the drop in prices last week. Gold will have a “sharp” rally as the U.S. boosts monetary stimulus because of a faltering economy in the coming months, Societe Generale said in a report that was picked up by Bloomberg. Data on U.S. gross domestic product in the first and second quarters will “surprise dramatically to the downside,” the bank said today in a report. Meanwhile, ANZ has said that central bank gold buying may lead to a nominal gold record price in 2012 and prices to average $1,744/oz from $1,571/oz in 2011.

• BHP Billiton sees China iron ore demand flattening (Reuters)
• Australia Passes 30% Tax on Iron-Ore, Coal Mining Profits (Bloomberg)
• State Capitalism in China Will Fade: Zhang (Bloomberg)
• Venizelos quits to start election campaign (FT)
• Fed’s Dudley Says U.S. Isn’t ‘Out of the Woods’ (Bloomberg)
• China Is Leading Foreign Investor in Germany (WSJ)
• Fed undecided on more easing: Dudley (Reuters)
• Martin Wolf: What is the real rate of interest telling us? (FT)

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While it has no chance of passage, the GOP 2013 budget, details of which have been leaked by the WSJ, proposes slashing corporate and individual tax rates, collapsing the current six tax bracket system into just two tiers (10% and 25%), lowering top corporate tax rate to 25% and scrapping the anachronism that is the AMT, or Alternative Minimum Tax. Finally, the proposed plan would nearly eliminate U.S. taxes on American corporations' earnings from overseas operations: something which companies with foreign cash would be rather happy to hear. Needless to say, Democrats will promptly dead end this budget in the Senate: "The proposal, to be offered by Rep. Paul Ryan (R., Wis.), who has become the Republicans' leading figure on budget issues, has little chance of becoming law soon. While likely to be welcomed by House GOP rank-and-file members, it would be rejected by the Democratic-controlled Senate."

Animals Are Getting Fatter, Too …

While the college debt bubble has been extensively discussed on Zero Hedge (here, here and here) and elsewhere, the reality is that without college student loans, as cheap as they may be, the vast majority of students would not be able to afford going to college, untenable (and non-dischargeable) post-graduation leverage be damned. Please ignore for a second the reflexivity of this symbiotic relationship - that college is so expensive only because college debt is so easily obtainable (and as noted here, between car loans and student debt, is the primary source of consumer debt in the past year)... That said there are two sides to every story: on one hand students are conditioned to believe that they need college to survive in the current world (with statistics such as these floating out there: drop outs since 2002 have "cost" the nation $3.8 billion in lost income and over $700 million in lost taxes), while on the other hand, the burden of a massive debt load, even if with manageable interest expenses, leave the student burdened with principal amortization which alone has a crippling effect on the individual psychology. Is it time to reevaluate higher education? Look at this infographic from OnlineCollege, which summarizes the side effects of soaring college costs, and decide for yourselves.

A Special Banzai7 in Depth Report...[WARNING: The line between parody and truth is often very difficult to discern]

When it comes to rescuing an insolvent country, continent, or entire financial system, at the end of the day it is a simple question of maths: is "doing it" cheaper than the alternative. Recall that the IIF was heaping fire and brimstone on bondholders and threatening the world with $1+ trillion in losses if bondholders did not comply. That nobody has any clue just what said costs, and opportunity costs, are, does not matter: the status quo must be preserved at all costs. And the status quo is one of avoiding private losses at the expense of taxpayer capital. Enter Credit Suisse with its back of the envelope analysis of the cost of not bailing out Europe's insolvent PIIGS, and the (taxpayer) cost to "save" them.