Archive - Apr 2013

These are certainly days of miracle and wonder. Well, of absurd and extraordinary financial experimentation, at any rate. Last week, for example, saw the Bank of Japan abandon any last pretense of restraint and topple headfirst into a gigantic pile of monetary cocaine. It would be difficult to overstate the drama of this monetary stimulus (although we favour the word debauchery). Yet as the Japanese monetary authorities declare a holy war against deflation, it would only be fair to draw attention to the colossal opportunity being presented as the antidote to monetary intemperance, namely gold and gold miners. There is a clear mismatch between the prices of gold and silver mining shares and spot prices of gold and silver. But as to why the miners are trading so poorly relative to the physical is unclear to us.

The rattling of sabres grows louder as missile launchers are turned to the sky and launch-pads moved across North and South Korea. It appears the previous missile test-launch did not go so well...

The troubles in Cyprus have set off a new examination of the health of the eurozone, with a particular focus on which country might be next in line for a bailout and the extent to which shareholders and depositors will take losses when banks fail (bail-ins). As UK think-tank, OpenEurope notes, much of the attention has settled on two countries. Portugal, which has been propelled back into the headlines, with the country’s constitutional court recently ruling against some of the government’s EU-mandated budget cuts. Secondly, Slovenia, which is facing a massive banking crisis, in turn providing another potential testing ground for the eurozone’s vaguely defined ‘bail-in’ plans. OpenEurope provides a quick run-down of the key points to watch in each country.

A new twist in the neverending battle between Icahn and Ackman over the true value of Herbalife emerged moments ago when while reading from the criminal complaint filed against the charged former KPMG auditor Scott London, CNBC's Jane Wells cited an email from London to his "client" that "Herbalife was going to go private." Supposedly this means that Icahn is not just sitting there and twiddling his thumbs waiting for Ackman to be crushed under the weight of JCPenney, but that he, or someone else, is preparing an imminent LBO, if at least the data KPMG had until its resignation as HLF's auditor is credible.  Why, however, an auditor would know what an equity investor's plans for the company are, remains unclear.

The money printing of the Federal Reserve with no anchor to gold has allowed the welfare state to grow to immense proportions. It has allowed politicians to buy votes by spending taxpayer dollars on multi-million dollar Keynesian zero return albatrosses. It has allowed politicians to enslave black people on a welfare plantation of entitlements. Bernanke and his cronies reward mal-investment through their policies. They reward bad behavior (borrowing & spending), while punishing good behavior (saving and investing). West Philly is a testament to failed economic policies, government waste, lack of personal responsibility, corrupt politicians, excessive union costs, and the delusional belief that government can create economic growth. The 30 Blocks of Squalor is descending further into squalor and it will accelerate as Bernanke’s policies further destroy what remains of capitalism in this country.

Following much anticipation that today's 30 Year would go off like gangbusters, and with the When Issued ripping to 2.990% at 1 PM, the final result was essentially a dud, with the high yield pricing at 2.998%, leading to a rather substantial tail of 0.8 bps. The internals were rather poor as well, with the Bid to Cover coming in well below the 12 TTM average of 2.62 at 2.49, the Directs taking down 19.2%, Dealers left with their usual average of 49.3%, but with Indirects, which is precisely where the Japanese bid would have materialized, ending with just 31.4% of the take down, well below the 42% in March, below the TTM of 35.4% and the lowest since October's 26.5%. So what gives? And was the surge in the USDJPY ahead of the auction unwarranted? It would appear so. But where are the Japanese FI outflows going then? Simple - it seems that at least one group of buyers has ignored Pimco and BlackRock's advice, and instead has allocated all their "rotating" cash into high yielding Italian and Spanish bonds to capitalize on the EURJPY carry trade. What can possibly go wrong? We will let Mr. Jon Corzine explain that to Mrs. Watanabe...

Mainstream Media Awakens to the fact that Fukushima Is Still a Total Mess

Don't touch those delicate instruments!

Disparities, bailouts, and a slow-motion blowup.

The 'most shorted' names in the Russell 3000 are up a remarkable 1.4% today compared to 0.45% in the index itself. The short-squeeze off the NFP gap-down lows is impressive indeed. From the open last Friday, the 'most short' names are up 6.6% against the index up only 3.5% as the dash for trash continues in the face of increasingly dismal data. The last 2 times that the 'most short' index was this squeezed relative to the index was late-December (before the equity dip) and mid-Fed (before the equity dip). Just as we warned here and here, the inexorable flow of easy money means the dash-for-trash (as remarkably ridiculous as it seems - though as now know nothing is allowed to fail ever again) has been the winning trade; though as we note below, there is a limit to the 'squeezability' and we appear to be there in the short term.

Manipulation and carefully crafted distortion erode trust, not just in the individuals employed to repeat the lies but in the institutions that issue them. The ruthless pursuit of self-interest is now the norm; truth is a terribly risky disruptor that must be hidden, masked or countered with plausible lies. There can be no trust if there is no truth. How can we trust people who lie to us constantly, who issue one self-serving justification after another for their own parasitic predation? We cannot. The premium in America has shifted from truth to self-serving distortion, and from trust to manipulation. This spiritual and moral rot will end gloriously, have no doubt, for the stock market's permanent ascendancy dissolves all other narratives.

The Japanese government bond market has been cataclysmicly volatile in the last few days since the BoJ shifted from words to action - with an average daily range 8-times normal. But, as a rather famous rates desk trader recently noted, if there is a real "Japan Panic" trade, it will make itself evident at 1pm ET today. His reasoning is impeccable. The BoJ has embarked on a program where it will be buying 'more' long-maturity bonds than the government issues (at around $80bn equivalent per month, ad infinitum, in a nation, that we pointed out here, has a GDP that is 40% of the US.) This surge in liquidity, which as is well known across the G-7 is completely fungible (within and across all bank balance sheets), has to leak somewhere, and the 30Y US Treasury bond is now the highest-yielding 'safe asset'. However, the Fed is monetizing vast amounts of US Treasuries indirectly and so the only way for a large Japanese investor to buy enough to make a difference is at the auctions. And so, if the 30Y auction today prints with a large "negative tail" - inside of the WI - then it would go a long way to confirm the "Japan Panic" trade is on.

The bond king is pissed:

GROSS: Fed’s secret Email list bothers no one it seems.I’ll give up my rant but remember it please.

— PIMCO (@PIMCO) April 11, 2013

We don't want the Irish authorities moving faster than the US, do we? Anyone (read subordinate bondholders, shareholders) who lost money in these banks should not have to be pushed to make a move, should they?