Archive - Mar 2012

Earlier today, Al Arabiya made waves in the energy market following reports that a Russian ship carrying special forces had arrived in the Syrian port of Tartus, previously demonstrated here to be a key strategic asset in the Mediterranean. This news was promptly denied by RIA, which said that "there were no Russian military ships off Syria coast" and that the Iman ship is a tanker which is merely conducting resource support functions. Furthermore, according to the Russian Ministry of Defense, the crew of Iman consists solely of "civilian personnel, which is being guarded." That may or may not be the case, but has not stopped ABC from blasting, minutes ago, a headline that "Russian anti-terror troops arrive in Syria" a development that a "United Nations Security Council source told ABC News was "a bomb" certain to have serious repercussions." Which begs the question: is everyone now dead set on having war in Syria, and by proxy, Iran?

"Whocouldanode?" that Apple would do something like pay a de minimus dividend and begin a modest buyback program? Indeed, initial reactions for the stock seemed to be 'sell the news' but of course, it wouldn't be a day ending in 'y' if Apple didn't close green and sure enough, with seconds to spare, Apple managed to close over $600 for the first time. BofA, not so much. After pinging $10 (a healthy double of recent lows), chatter of a secondary began the process of 'normalizing' its recent behavior (the stock is still up 17% post JPM-divi/Stress test news, a whopping 10% better than any of its peers in that 4 day period). The leak in financials dragged on the S&P which limped back lower to close almost perfectly at its VWAP as NYSE trading volumes (after almost record-breaking high levels on Friday OPEX hedge removal day) dropped back to near their lows . Credit outperformed equities today but its a very 'technical' day for credit in general with the CDS/index rolls tomorrow (meaning the major credit indices will move to new maturities and new components) though HYG staggered notably early in the day. USD and Treasury weakness were the headlines of the day (aside from AAPL of course - which apparently has a great new screen) which of course helped commodities rally with high-beta Silver the best on the day +1.2% from Friday and WTI breaking $108 as Gold limped higher (tortoise-like) over $1660 at the end. VIX rose once again and the term structure flattened a little but once again post-OPEX and futures roll, there are some more difficult apples-to-camels comparisons there. Finally we note average trade size in ES today was its largest since 7/1/11.

Will the summer of 2012 be another stormy session?

No conclusions here, just a simple chart showing monthly Saudi Arabia crude oil production based on OPEC data, which has been rangebound in a tight 8,000 - 9750 tb/d range, superimposed with Brent prices over the past decade. The last time Brent soared to record highs back in the summer of 2008, Saudi production peaked at 9,522 tb/d (despite similar promises for spikes in crude production and exports). During last spring's spike, Saudi produced around 9,000 tb/d. In the past two months, production has been at record highs, even as oil keeps setting new highs, entirely due to liquidity, but not because speculators are evil incarnate as Nancy Pelosi will want her brainwashed fans to believe, but simply because for the most part they are Primary Dealers, and other entities attached at the hip to the Fed, who serve as Ben Bernanke's transmission mechanism of record liquidity being dumped into the system. Our advice: if anyone is hoping that Saudi Arabia can pump the 12,500 tb/d needed if Iran truly goes offline, buy a bike, as failure from Saudi to satisfy lofty demands will promptly send unleaded to new all time highs. Couple that with the Treasury debt ceiling fiasco in 5-6 months, and those Obama InTrade reelection contracts may seem a tad rich.

It is no surprise, given the baying for blood from bond bears, that mortgage rates will come under close scrutiny - especially given the supposed reasoning for much of the various LSAPs has been to keep rates low to 'aid' homeowners (as opposed to flush nominal prices to the moon in every risk asset based on the risk premia-reducing duration-crushing portfolio-rebalancing effect). The effects on various asset classes from the announcement and inception of Operation Twist have been varied with Equities (and until the last month high-yield credit) benefiting the most (nominally). What few have noticed was that mortgage spreads actually raced to record tights and were outperforming (on a beta-adjusted basis) stocks and bonds  into the end of January. Since then, Treasury yields have crept higher and mortgage spreads have leaked wider. The last week or so of dramatic decompression in Treasury yields has seen only a small compression in mortgage spreads leading the all-important (apparently) mortgage rates to rise significantly (now at almost 5-month highs). While the relationship between mortgage applications and rates has become tenuous at best, we suspect the velocity of the rise in the mortgage rate will conversely see a rise in applications in the short-term but obviously over time will only prove to stunt any nascent recovery that the NAHB/NAR believes is in place (and perhaps the weaker than expected Fed data is already showing that). For now, it seems evident that mortgage spreads remain a major outperformer - still relatively narrow on expectations of future QE and being short mortgage rates and long Treasuries (generically) seems as  low cost a way to play disappointment for QE3 as any here.

The muppets must buy. Tangentially, one wonders if it was Goldman's advice that a now post-Jobs AAPL followed to do what the banks did post "Stress test"... or if it was JP Morgan's. One can also hope this report from Boy Genius on the NEW iPad occassionally overheating has nothing to do with anything.

A "little" inflation will destroy capital, rob you of your savings, disrupt all of your long-term financial planning, create market instability, and leave you unprepared for retirement. You can protect yourself and you must. Here's how.

While stocks are surging in nominal terms, the options markets are increasingly pricing in greater and greater downside risk concerns. Currently, we are at record levels for this so-called Skew (meaning the price of downside protection outweighs the cost of upside protection by the most ever). Trade accordingly.

The market is ripping. That much is obvious. What some may have forgotten however, is that it ripped in the beginning of 2011... and in the beginning of 2010: in other words, what we are getting is not just deja vu (all on the back of massive central bank intervention time after time), but double deja vu. The end results, however, by year end in both those cases was less than spectacular. In fact, in an attempt to convince readers that this time it is different, Reuters came out yesterday with an article titled, you guessed it, "This Time It's Different" which contains the following verbiage: "bursts of optimism have sown false hope before... Today there is a cautious hope that perhaps this time it's different." (this article was penned by the inhouse spin master, Stella Dawson, who had a rather prominent appearance here.) So the trillions in excess electronic liquidity provided by everyone but the Fed (constrained in an election year) is different than the liquidity provided by the Fed? Got it. Of course, there are those who will bite, and buy the propaganda, and stocks. For everyone else, here is a rundown from David Rosenberg explaining why stocks continue to move near-vertically higher, and what the latent risks continue to be.

As the S&P 500 reaches new multi-year highs and VIX touches multi-year lows, there is one rather large and risk-appetite-proxying market out there that is not as excited. The high-yield bond market has seen record in-flows dropping off recently and for the last four-to-six weeks high-yield spreads, yields, and bond prices have been very flat as stocks have surged ahead. Despite US earnings yields at near-record highs relative to high-yield bond yields, we see little pick-up in LBO chatter suggesting a notable preference for higher-quality junk credit (and/or lack of belief in sustainability of earnings yields) and the recent 'dramatic' outperformance in investment grade credit is a notable up-in-quality rotation (as well as early spread-compression reaction to Treasury weakness recently) that strongly suggests less risk appetite among real money managers (given how 'cheap' high-yield appears across asset classes). Lastly, the ratio of HY bond prices to VIX is near its extreme once again, something we saw occur before the risk flares of 2010 and 2011 surrounding the end of the Fed's QE sessions.

Courtesy of Jalopnik comes a slightly different perspective on what Apple could do with its $100 billion (and over by now) cash horde. Obviously due to the publication's automotive bent, the emphasis is on uses of funds that tend to be related to the 'horsepower' space. In short, the consumer company, which is now far bigger than the entire US retail sector as noted before, could purchase 435,113 Ferrari 458 Italia's and/or some permutation of the other options indicated below. That said, while it is well-known what conventional wisdom says about any gentlemen who feels the need to redirect attention to his red blazing sport car from other, ahem, issues, we wonder what would be said about an entity that feels the urge to procure not one, but 435,113 Ferraris (or 41,667 Bugatti Veyrons for that matter)...

If you were head of Central Planning (howdy, Ben!) and were tasked with crippling the real estate market, here's what you would recommend.

1. Choke the market and banking sector with zombie banks.
2. Have the central bank (the Federal Reserve) buy up $1 trillion in toxic, impaired mortgages.
3. Lower the rate that banks can borrow from the Fed to zero, and then pay the banks interest on all funds deposited at the Fed.
4. Try to prop up the housing market by giving poor credit risk buyers loans with only 3% down.
5. Load young people up with the equivalent of a mortgage in student loans.

OK,let's see how our Organs of Central Planning are doing: check, check, check, check, check: a perfect score! they're doing everything possible to cripple the real estate market. Do they care? Of course not; the only goal is to keep the zombie banks alive, regardless of the cost to the nation. Great work, Ben, Barack, Timmy and the rest of the gang at Central Planning: thanks to your policies, the real estate market will never clear and therefore it can never be restored to health.

Watching your debates and speeches of late, it is clear that you are all (with possibly the exception of Ron Paul) missing the point and only continuing to widen the gap between the US Government and the American people.