Archive - May 1, 2013

Those who have been following the barren wasteland that is the precious metals retail market know that not only is it virtually impossible to get any silver for less than a $3-4 premium per ounce over spot, but it has become next to impossible to find any physical, period. So the fact that Apmex is now selling silver at just a $1.79 over spot - a bargain even in the days when JPM wasn't about to run out of commercial gold (incidentally no change in the gold held at the firm's 1 CMP vault as of yesterday's close), and certainly a blue light special at a time when the entire world is scrambling for anything shiny. There is however one minor catch. Maybe not so minor. Because while most PM afficionados are used to buying silver by the ounce, or at most bar, the Apmex offer involves a very generous dollop of Silver Koala. 1 Kilogram's worth of generous.

Terrorism Is a Real Threat … But the Threat to the U.S. from Muslim Terrorists Has Been Exaggerated

Today was a non-POMO day; a day when the Federal Reserve did not actively inject a couple billion dollars into bank reserves. The last 7 POMO days have been wonderfully green for the cash equity session. Today, no POMO, no MOMO, no new highs. What was different? Europe was closed (so we didn;t get the ubiquitous surge post EU close), we had poor data (bad has been good for weeks now), bonds outperformed (equities haven't cared at all for weeks), and the USD weakness 'should' have been equity positive (if correlations held). But it didn't. Trannies were monkey-hammered with their second-biggest drop in almost six months but the S&P, Dow, and Nasdaq are clung together down around 1% (biggest drop in 2 weeks).  FX markets were 'sporadic' with periods of silence punctuated by chaos (around the FOMC) - JPY's last 5 days now equal the biggest rally in two years as it tested up to 97 and pulled back. The worst first-day-of-the-month since June of last year for stocks seems to signify a Great Un-rotation as Treasuries were well bid (yields down 4-5bps to new 2013 lows).

With the Fed now openly warning that there may actually come a time when the 'flow' stops; the most recent Treasury Borrowing Advisory Committee (TBAC) report has some concerning statistics for those change-ridden hopers who see a smooth Fed exit, deficit-reduction, and blue skies ahead.  While they are careful not shout 'sell' in a crowded bond market; hidden deep in the 126 page presentation are two charts that bear significant attention. The first shows what TBAC expects (given the market's expectations) to happen to interest rates in the US as the Fed 'exits' its QE program (taper, unwind, hold) - the result, the weighted-average cost of financing for the US government will almost triple from around 1.6% to around 4.3% over the next ten years. But more problematic is that even with CBO's rather conservative estimates of the growth in US debt over the next decade the USD cost of financing will explode from around $205bn (based on TBAC data) to over $855bn. Still convinced the Fed can exit smoothly?

Goldman Sachs saw no major surprises in the May FOMC statement, which, as we noted in the redline, was very little changed from the March statement. The most notable change, however, introduced additional flexibility around purchases, noting that "the Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes." The slightly more aggressive nod towards fiscal policy "restraining" growth as opposed to "becoming restrictive" is perhaps yet another plea for some help from Washington - for, as we noted earlier, "the ability of a central bank, exclusively, without the rest of Washington doing any bit of the task, to turn an economy from a modest recovery to a robust one is an experiment that is untested - and will not prove to be successful."

Stanley Fischer, who cost his central bank a lot of money with his ill-timed bet to invest billions of the Bank of Israel's foreign  currency reserves on names such as Apple last year, has demonstrated that Einstein's definition of insanity is alive and well when it comes to central-planners, has just decided to double down on stocks. Alas, this is not a joke. Bloomberg reports that "The Bank of Israel plans to almost double equity holdings by the end of the year after falling bond yields prompted the central bank to invest in European shares for the first time. The bank will increase its stock holdings to as much as 6 percent of foreign-exchange reserves, or about $4.5 billion, from 3 percent at the end of 2012, according to Yossi Saadon, a Bank of Israel spokesman. Investments in shares rose to about 4.5 percent of assets in the first four months of 2013 as the institution made a “small allocation” to European equities in addition to its U.S. funds, he said." Well, if the BOI's investment in AAPL was the beginning of the end for that company, one can start shorting Europe - an academic Keynesian just called the top.

For the first 15 minutes or so after the Fed's statement, the market was largely unimpressed. EURUSD saw some squirliness but it was silver (and gold and oil) that was moving higher quickest. Bonds sold off modestly and stocks rose a point.That trend persisted into the T+30 minute mark but since then bonds and stocks are basically unchanged while Oil, Gold, Silver, and Copper are rising. EURUSD remains very gappy. VIX is modestly lower as pre-FOMC hedges are lofted but that is not supporting buying for now.

T+45: ES 1583 +1, 10Y 1.63% +1bps, Gold $1456 +$6, WTI $91.12 +$0.45, EUR 1.3208 +8

Central Bank governor now admits Irish banks need more capital. As the truth seeps slowly into the mainstream media, who do you believe - Reggie or the Central Bank of Ireland?

With the equity market dropping rather notedly into the release of the FOMC decision, chatter was that the 'early release' button had been hit, but...

• *FED SAYS LABOR MARKET HAS SHOWN SOME IMPROVEMENT
• *FED SEES `DOWNSIDE RISKS' TO ECONOMIC OUTLOOK
• *FED SAYS IT'S `PREPARED TO INCREASE OR REDUCE' PURCHASES

Which suggests some management of expectations... but more of the same and no big surprise. The only real difference from the March statement, as shown below, is the following sentence added in the fourth paragraph:

The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.

While some might scoff, there appears little the European leaders will not swoop to when it comes to papering over cracks and changing rules, we suspect that when they find out that by the mere waive of the May Day holiday they could increase output across the euro area (the majority of which is on holiday today) by an impressive $22.9 billion. Germany and France alone lose $11 billion of output for this holiday, according to Bloomberg Briefs. So is the next 'growth-and-austerity' plan to ban public holidays and boost GDP...

Curious where the always elusive "wealth effect" is going? It's going here:

PORSCHE REPORTS BEST SALES MONTH IN HISTORY; DELIVERIES UP 29%

At the very crux of the financial crisis, former Fed governor Kevin Warsh notes, "experimental extreme monetary policy," had the "right risk-reward", but, he warns, in this excellent (and somewhat chilling) discussion at the Milken Institute, "we left a financial crisis more than for years ago." and since then the Fed has "over-promised and under-delivered." The Fed has "enabled" Washington to do nothing, since the politicians expect the same "rabbit out of the hat" rescue that occurred in the darkest days of the financial crisis. This means no growth strategies ("the mix of policies has to be right") will occur. Since the financial crisis, Washington has done its level best to focus on GDP in the next quarter, or perhaps the election, and precious little beyond that short-term horizon. Warsh concludes, "There Is No Plan B." The Fed has fewer degrees of freedom and the rest of Washington is not coming to the rescue; and furthermore "the ability of a central bank, exclusively, without the rest of Washington doing any bit of the task, to turn an economy from a modest recovery to a robust one is an experiment that is untested - and will not prove to be successful."

The goal of capitalism is communism....-Timothy Trotski

Monday's income and spending (and implicitly 'saving') data provided plenty of fodder at the headline level for any and every opinion. We explained in great detail just how weak the data really was (here and here). But the following two charts suggest that any optimism of organic consumption-led exuberance is completely misplaced. Retail sales of clothing is growing at the slowest pace since 2010; but while major store sales are about to drop negative YoY for the first time in over 3 years, the utter collapse in general merchandise sales is worse that at the peak of the last recession at -5%. It seems tough to see how a nation with an economy built on 70% consumption is not in a recessionary environment. And while this alone is a dismal signal for the discretionary upside of the US economy/consumer; as Gluskin Sheff's David Rosenberg points out real personal income net of transfer receipts plunged at a stunning 5.8% annual rate in Q1. The other seven times we have seen such a collapse, the economy was either in recession of just coming out of one. But apart from that, everything is fine...