Archive - Aug 28, 2012

Regimes are shifting. Can you feel it? While at the surface, indices tumble along in small ranges and AAPL does its thing, asset-class movements and sector-rotations suggest something is afoot. Since the peak in the S&P 500 last week, we have seen a clear rotation from cyclicals to non-cyclicals, a major rotation from stocks into bonds, and a significant regime change in the relationship between Gold, the USD, and Treasury prices. One thing is clear - the heads-I-win, tails-you-lose high-beta strategy (on the ECB/Fed 'has your back' thesis) appears to be weakening a little (though in 100 milliseconds from now - who knows?)

A week ago everyone was convinced that in three days, Bernanke would reveal the second coming or whatever the equivalent biblical event is these days that would send the Dow to 36,000 in a heartbeat. We laughed at such naive suggestions. Then over the past five days the market has seen a profound transformation with what was initially a seed of doubt that the Chairman may in fact disappoint his stock buying disciples, having sprouted into a full blown weed of outright denial, fear and loathing. Which makes sense: in a world in which everything is jawboning, everyone's hope is always on the event just over the event horizon, but never on the one that is imminent: that way when the inevitable disappointment happens one can just say it was all premeditated and is coming "next time." However, in case the market has finally had enough of being led by the nose, lied to, and does throw a temper tantrum, there are way to take advantage of this. One bank that suggests just a way to do this without trading in that insane asset class known as stocks, where up is down, down is purple, and the triangle-square-square-circle killer combo sequence now works in reverse, is Credit Suisse, which suggests to put on a short bond position in anticipation of a major selloff which should inevitably accompany a disappointment from the Fed. Their suggestion: put on a $50K DV01 short at 1.64% and expect a steep selloff when the Fed disappoints, with a 1.75% target. If all works out according to plan, everyone involved should be $500,000 richer at market close on Friday with Bollingers all around.

Complicity reigns supreme as everyone benefiting from a scam keeps quiet about everyone else's skim lest their own share of the spoils fall under the harsh light of inquiry. Can an economy that has become dependent on lies, misrepresentation, "fudging" of numbers, fraud, embezzlement and a multitude of skimming and scamming operations escape the moral and financial black hole it has created? The self-evident answer is "no."

Droughts tend to produce vast yield variations. This week's ProFramer crop tour reaffirmed this tendency and as UBS notes, conditions declined with the expectations of low yields compounded by the harsher reality of poor quality - likely to be a major issue for corn feeders. Interestingly, Soybeans looked good from the road but up close (pod formation and beans/pod) were well below normal; and UBS adds to forget the CME for the moment - the cash market is now the attention grabber as they expect it to lead this rally in Ags higher - especially the July 2013s, raising an interesting question of if (or when) the US will restrict exports? Especially with no let-up in the drought conditions.

Moments ago the US Treasury auctioned off the latest monthly batch of 2 Year bonds, this time $35 billion, or toward the higher end of the issuance range, which was a bit of a dud. Pricing at 0.273%, this was a brisk move from July's record low 0.22%, a weakness which was substantiated by the expected pricing of 0.266% even though the When Issued traded at 0.275% coming into the auction, so technically there was no tail. That said, a very modest 9.01% was allotted at the high yield, implying the bulk of the action in the Dutch Auction was below the closing yield. Beneath the headline, the internals were not pretty either, with just 22.3% of the total bond taken down by Indirect bidders, well below the 32.78% TTM average, demanding an increase in both the Direct and Primary take downs, the former taking down 16.08% while the Dealers having to push 54.66% of the entire auction promptly into the tri-party repo market in exchange for cash to be used for much wiser purposes, such as buying Las Vegas REO real estate and converting it into rentals. Was the weakness of the auction a harbinger of disappointment from Jackson Hole - stay tuned for an opinion from Credit Suisse which says precisely this. And while the auction itself may have been unspectacular, there is a very historic aspect to this particular $35 billion bond issue, which we will reveal after market close.

Just because everyone is now a climate expert, here is the latest from the NHC:

RECONNAISSANCE DATA INDICATE ISAAC FINALLY ACHIEVES HURRICANE STATUS... ...U.S. Warnings in Effect...

"We accept the world as it is presented to us. If True American really wished to discover the truth, I would be unable to prevent him from doing so. But he is much happier in my artificial world than he would be in the real world. Since there are so many painful consequences to seeking the truth, he quite rightly prefers to live in my artificial world."

We noted yesterday that the mice of the European equities markets have tended to run when the credit cats are away; and sure enough, London comes back from a long-weekend and risk appetite disappears. European stocks gave back most of their gains from yesterday (and more in some cases) as Sovereign, corporate, and financial credit opened far less exuberantly and drifted wider for most of the day (with some slight US-open-driven strength into the close). Financials modestly outperformed as Sovereigns did not - with Spain now 48bps wider than last week's best levels, Italy 39bps wider, and seemingly forgotten (yet a total disaster) Portugal +52bps. Swiss 2Y rates have tumbled back lower in the last few days to -35bps. The standout was the OMX (Stockholm) which fell 2.3%, its biggest fall in 4 months, as Swedish banks stumbled.

With Draghi stepping aside, the headliner can shine and while Goldman does not expect Chairman Bernanke's speech on Friday morning, entitled "Monetary Policy Since the Crisis", to shed much additional light on the near-term tactics of monetary policy beyond last week's FOMC minutes; their main question is whether he breaks new ground regarding the Fed's longer-term strategy. An aggressive approach would be to signal that the committee is moving closer to the "unconventional unconventional" easing options that Goldman has been ever-so-generously advocating for months, although even they have to admit that expectations are that any moves in this direction will be gingerly.

It’s a safe statement to make that when Mitt Romney is finally crowned the GOP nominee for president during the Republican National Convention, any vestige of liberty will be firmly wiped away from the ballot box come this November.  For those who have followed his campaign in the United States, Congressman Ron Paul has been swindled out of the nomination through various underhanded tricks at state conventions.  The explanation is straightforward: Paul’s views are not comfortable within the Republican Party establishment.  Today’s GOP is a party of banker interests, imperialism, and clandestine state empowerment while claiming to represent small, limited government.  Romney embraces this platform while Paul’s decades-long voting record stands in opposition. For towing the party line, Romney has been anointed the “electable” candidate while Paul has been deemed an extremist.

Greece’s climb towards solvency is steep and the underlying question remains; can the country return to growth and reduce its debt before it’s too late?

It ain't safe no more???

The data out from Spain this morning should be one serious wake-up call for anyone exposed to Europe. The fourth largest economy in the Eurozone is getting hammered and for anyone that has doubted that they will need a full scale bailout; think again. The numbers are a disaster. One year ago the Central Bank of Spain was borrowing $71.53 billion from the European Central Bank. In the last figures available, July, the Central Bank of Spain was borrowing $530.8 billion (an increase of 86.5%) from the ECB either directly or through the Target2 funding which impacts the Bundesbank and Germany quite directly. In other words Germany is now at a huge risk which is not just their 22% ownership of the ECB but a direct and full risk of impairment or default by Spain in the Target2 funding provided by the Bundesbank.

The biggest even this week is Ben Bernanke’s Jackson Hole Speech which will take place on Friday August 31. It was at Jackson Hole in 2010 that Bernanke hinted at QE 2. With that in mind, many investors believe that the Fed is about to unveil or at least hint at a similar large-scale monetary program this Friday. We, at Phoenix Capital Research, disagree for three reasons. Number one, stocks are at or near four-year highs. With stocks at these levels, there is little reason for the Fed to use up any of its remaining ammunition.

With inflation expectations soaring and jobs plentiful relative to hard-to-get falling slightly, Consumer Confidence plunged its most in 10 months to a level not seen since November of last year. It seems that despite all the hopes and prayers priced into US equity market valuations, the US Consumer remains unimpressed, unhappy, and unemployed. Of course, the 'good is bad, bad is better' market has interpreted this as a clear QE-on flag (for this millisecond anyway).