Archive - Aug 2012

Will the Peasants Go Medieval?

There has been much confusion over last week's remarks by Mario Draghi, with the prevailing narrative being that the market first got what Draghi meant wrong (when it plunged), then right (when it soared). The confusion is further granulated by attempts to explain what was merely a desperate attempt at delaying a decision for action, which was inevitable considering the now open opposition by Buba's Weidmann, into a formal and planned plotline: "Inverse Twist" or other such technical jargon is what we have seen floating around. The reality is that, just like all other central bankers, Draghi did what he does best: use big words and threats of action in hope it will buy him a few extra days of time. The reality is also that, just like when the LTRO was announced, the market did get it right initially, when peripheral bonds plunged, and got it wrong over the subsequent 3 months when bond prices rose, only to collapse to new lows (and in the case of Spain - record high yields as of two weeks ago). Back then, the ECB merely bought a few months time with its transitory intervention. This time it has at best bought a few days with the lack of any actual action. And yet, Draghi did leave a way out, for at least another brief respite (where unless Europe expands the available bailout machinery yet again, the respite will have an even briefer half life than that from the LTROs). The way out is simple, and in order to avoid any confusion, we will use an allegory from the movie Batman: Spain and Italy can be saved. But first they must be destroyed.

Kirk Sorensen, NASA-trained engineer, is a man on a mission to open minds to the tremendous promise that thorium, a near-valueless element in today's marketplace, may offer in meeting future world energy demand. Compared to Uranium-238-based nuclear reactors currently in use today, a liquid flouride thorium reactor (LTFR) would be:

• Much safer - no risk of environmental radiation contamination or plant explosion (e.g. Chernobyl, Fukushima, Three-Mile Island)
• Much more efficient at producing energy - over 90% of the input fuel would be tapped for energy; vs <1% in today's reactors
• Less waste-generating - most of the radioactive by-products would take days/weeks to degrade to safe levels, vs centuries
• Much cheaper - reactor footprints and infrastructure would be much smaller, and could be constructed in modular fashion
• More plentiful - LFTR reactors do not need to be located next to large water supplies, as current plants do
• Less controversial - the byproducts of the thorium reaction are pretty useless for weaponization
• Longer-lived - thorium is much more plentiful than uranium and treated as valueless today. There is virtually no danger of running out of it given LFTR plant efficiency 

Most of the know-how and technology to build and maintain LFTR reactors exists today. If made a priority, the US could have its first fully-operational LFTR plant running at commercial scale in under a decade.

Some odds and ends, plus a very scary report on China

A few days ago we wrote that "Greece Runs Out Of Money. Again" because it did. The country, which is permanently locked out of the bond markets, would be down to a negative cash balance as soon as its August bond payment to the ECB was made. The reason is that the Troika continues to delay its decision. whether or not to hand over Greece its next monthly allowance. So with the country threatening to once again be on the front page as math rears its ugly head, the ECB has decided to take the bold step and admit that in lieu of even remotely credible collateral pledged and repledged in the ponzi repo system, the ECB has no choice but to expand the universe of eligible "collateral" against which it will provide cash. From Reuters: "The ECB's Governing Council agreed at its meeting on Thursday to increase the upper limit for the amount of Greek short-term loans the Bank of Greece can accept in exchange for emergency loans, the newspaper said in an advance copy of the article due to appear in its Saturday edition."

Here in Britain, we hear the word competition a lot. Since Margaret Thatcher, there has been a general trend — in the name of competition — toward the selling-off of utilities such as water, railway, electricity and telecoms providers. More recently, there has been a trend toward government services being provided by private companies, such as the bungled Olympic security arrangements contracted out to multinational security giant G4S, as well as work capability assessments contracted out to French IT consultancy ATOS, and the contracting-out of some medical services. The way this works is that the government provides the funding for services, which private sector companies then bid to undertake. This is also the way in which defence contractors have historically competed for defence contracts, a sector which is renowned worldwide for its profligacy, waste and inefficiency. This is a bizarre arrangement. Competing for government contracts is nothing like the free market. In a true market environment businesses compete for the custom of individuals based on their ability to provide the best products and services.

If the political tsunami underway in Maine is any indicator, the November 2012 election will be fascinating and unpredictable

It’s Not Just The “London Whale”

"If we confront this crisis without also confronting the deficits that helped cause it, we risk sinking into another crisis down the road as our interest payments rise, our obligations come due, confidence in our economy erodes and our children and grandchildren are unable to pursue their dreams because they are saddled with our debts. That's why today I am pledging to cut the deficit we inherited by half by the end of my first term in office... That means taking responsibility right now in this administration, for getting our spending under control."

It was fun (not really) while it lasted, but America's habitual gamblers have finally grown tired of the theta sucking monsters known as uberlevered ETFs. End result: Direxion is announcing it is closing nine 3X levered ETFs. The casualties are: Direxion Daily Agribusiness Bull 3X Shares (COWL), Direxion Daily Agribusiness Bear 3X Shares (COWS), Direxion Daily Basic Materials Bear 3X Shares (MATS), Direxion Daily BRIC Bull 3X Shares (BRIL), Direxion Daily BRIC Bear 3X Shares (BRIS), Direxion Daily Healthcare Bear 3X Shares (SICK), Direxion Daily India Bear 3X Shares (INDZ), Direxion Daily Latin America Bear 3X Shares (LHB) and Direxion Daily Retail Bear 3X Shares (RETS).

James McShirley of Ohio who has documented numerous repetitive market activities which could never occur time and time again in a freely traded market. Just this past week gold completed its 2% up, 1% up, sideways, down hard pattern, which is only one of many trading anomalies James has tracked.

By now even 5 year olds know that the one asset class driving the general stock market is the highly leverageable EURUSD: where the core pair goes, everything else follows, especially if the direction is up (when the EURUSD slides lately it is assumed to be a confirmation that the ECB will print; when it goes up, the agreed upon explanation is that more Fed easing is imminent). As such a key variable has been the amount of net shorts in the pair, as exposed every week by the CFTC in its COT report. And where two months ago, the net short position in the EUR hit an all time record, north of -200K contracts, in the interim this number has contracted by over a third, and as of minutes ago was revealed to be "just" 139K in the week ending July 31, a 10% drop in shorts in one week. Why is this important? Because while short covering rallies have long been yet another narrative to keep shorts on the sidelines, the probability of such an event has declined dramatically now that the bulk of the weak hands have been kicked out, and the net exposure is back to January 2012 levels. In other words, 8 months later we have completed one full shorting circle when it comes to the euro., which however now is 700 pips lower than where it was back then. The Jack in the Box potential of further squeezing is rapidly declining with every move such as today's when no news and mere rumor drives the pair up by 200 pips (only to be faded of course).

It is late in the afternoon on a Friday, which means one thing: it is time to dump all left over bad news under the rug. Sure enough, here comes S&P. From Bloomberg:

• S&P CUTS RATINGS ON 15 ITALIAN FINL INSTITUTIONS
• S&P TAKES RATING ACTIONS ON 32 ITALIAN FINL INSTITUTIONS
• BANCA MONTE DEI PASCHI DI SIENA SPA CUT TO BBB-/NEGATIVE/A-3
• BANCA POPOLARE DI MILANO SCRL CUT TO BB+/NEGATIVE/B BY S&P
• S&P SAYS ITALY FACES POTENTIAL DEEPER RECESSION THAN IT THOUGHT

What a difference a revisionist market rally makes. Remember when everyone was involved in Libor manipulation? No? Curious what a few hundred DJIA points will do especially when the corporate revenues and supporting them simply are not there, and one goes all in on multiple expansion. One entity which, however, has not forgotten about Lieborgate is Pimco parent and Europe's largest insurance firm, Allianz. And they are not happy: "Europe's biggest insurer, Allianz, is worried about the role central banks may have played in an interest rate rigging scandal that has enveloped some leading international lenders, the insurer's chief financial officer said on Friday. "We do not find it funny, what has happened, in particular the arising implication that it is not just the banks but central banks being involved in this," Oliver Baete told a conference call with analysts. "That really gives us cause for concern," Baete added." Of course, neither the ECB nor the FED could care much, considering that Allianz would be immediately insolvent if the same central banks who manipulated Libor stopped manipulating interest rates... which is implicitly what Allianz is unhappy about.

Knight's credit line expires in 90 minutes. All day it has been a dark box, with virtually no trades coming in or leaving. The company is scrambling, so what happens: some much needed good news finally hits the tape following a TD Ameritrade announcement it has resumed trading with KCG. Will others piggyback as the credit lifeline that is keeping Knight alive expires at the end of the day, and the liquidity runs out, or will firms who explicitly are Knight's competitors in a market which has ever less volume leave it out to hang in hopes of picking up its business on the cheap. A 90 minute difference between life and death for a firm in desperate need of many more such press releases.