Archive - Sep 3, 2013

Fusion nuclear energy has been described as both the ‘Hail Mary pass’ and ‘Holy Grail’ of renewable energy sources. Fusion, the process that powers the sun by fusing together light atoms at extremely high temperatures, offers almost unlimited potential. The fuel is practically inexhaustible, the production process emits no greenhouse gasses and it is inherently safe from many of the safety concerns that have tarnished the reputation of fission nuclear energy. Finally, unlike most renewable energy sources under development, fusion nuclear energy could serve as a base load power source, providing huge amounts of energy around the clock relatively efficiently. ITER portends to be the next step on the path to scaling up the process to commercial proportions. However, the ambitious project may be critically handicapped by its European-politicis-inspired organizational structure. The most apt metaphor may be a fumbled Hail Mary pass.

If the direct result of today's surprising and unannounced Israeli missile test was to provoke a response by Russia, the Allies have succeeded. ITAR TASS reports that Russia’s Black and Baltic Sea Fleets’ Ropucha-class landing ships Novocherkassk (150 marines on board) and Minsk (225 marines) have sailed off for the Mediterranean Sea. What was not reported is that the destination of the two marine carrying ships is the sensitive area around Syria already staked out by the US navy. It is implied.

Markets started the day in exuberant mood. Investors were greatly rotating away from bonds into stocks, "war-off" premia were holding up and oil prices were not shooting higher. Then the macro data hit - better-than-expected - and things got a little anxious in equity land (and bond yields pushed higher in Taper-on mode). Then Boehner et al. showed their support for Obama and stocks started to crumble. Commodities had already risen back above Friday's close (dismissing any de-escalation) and while stocks stalled on their collapse lower at Sunday's futures open, they inevitably dumped back to unchanged from Friday. VIX jumped back above 17.25% and the curve flattened and bonds (slow to start) saw yields dump back lower. A late-day pure algo run to VWAP saved the day and closed us green in stocks buy Trannies are not happy as WTI closes back above $108.50.

Syrian Government tells French Parliament in letter that "we can work together to reach a diplomatic solution"

— Sky News Newsdesk (@SkyNewsBreak) September 3, 2013

Now that the All Time High (ATH) in the S&P is a distant memory (at least until the Syrian war becomes a widespread conflict involving all global powers and the US suddenly has to issue, and monetize, a few extra trillion) there are those momentum chasers who have an itch to BTFATH. To all of them we have a message: don't despair, and merely set your sights a little lower, on the globe that is, to Venezuela where the local stock market keeps crushing every upside resistance level and hitting new all time highs day after day after day, resulting in a YTD return of nearly 200%!

The petrodollar regime - that oil is bought and sold globally in U.S. dollars - is easy to understand. It boils down to these two principles: 1. Petroleum is the lifeblood of the global economy; and 2. Any nation that can print its own currency and trade the conjured money for oil has an extraordinary advantage over nations that cannot trade freshly created money for oil. This is why many analysts trace much of America's foreign policy back to defending the petrodollar regime. America's energy boom is creating consequences for the value of the dollar.

"The Big Three" will take the stage in front of the US Senate Committee on Foreign Relations to make the case for "the authorization of the use of force in Syria." Given the volume of 'supportive' leadership comments this morning already, it seems that John Kerry (Secretary of State), Chuck Hagel (Secretary of Defense), and General Martin Dempsey (Chairman of the Joint Chiefs of Staff) will not get too much push-back though earlier comments that the scope of the strike "was too narrow" may become a sticking point.

Spot gold prices have surged over $40 from Sunday's knee-jerk lows as once again lower prices have encouraged demand. Gold had shfted back to unchanged from Friday's close before Boehner spoke but since then has accelerated over $20 higher. Gold shorts in the futures and options markets have dropped for 6 of the last 7 weeks. The 60% drop in the non-commercial short position represents a massive 81,700 contracts (8,170,000 ounces or ~$10.6 billion worth of notional 'paper' gold). Gold's 21% rise from the lows in the last 2 months is among the fastest rises since 1999; and GLD holdings have risen for the last 6 days in a row.

It seems that the reason why Obama has been such a staunch supporter of a Syrian campaign without a land component, is because US-armed and trained Qatari mercenaries, also known elsewhere in the media as "rebels", are about to take to the battlefield (ignoring for a moment prior reports that American, Israeli and other troops have already long operated on Syrian territory). The Telegraph reports that "the first cell of Syrian rebels trained and armed by the CIA is making its way to the battlefield, President Barack Obama has reportedly told senators. During a meeting at the White House, the president assured Senator John McCain that after months of delay the US was meeting its commitment to back moderate elements of the opposition. Mr Obama said that a 50-man cell, believed to have been trained by US special forces in Jordan."

It was overall a fairly dismal month for most assets as Deutsche's Jim Reid notes sentiment was weighed down by a) ongoing tapering fears, b) a further shakeup in EM assets and currencies, and later during the month c) the escalating tension in Syria. Clearly returns in fixed income and the broader emerging market space were tapered down further by tapering concerns but DM equities were also not immune to the softer risk backdrop. The biggest loser in August were EM bonds, followed by Wheat and the S&P 500. The biggest gainer in Auguest was Silver followed by Brent crude and Chinese stocks.

While gold, silver, and crude oil prices had already recovered their initial knee-jerk losses from the "war-off" moves Sunday night, US equities were sticking to their BTFD guns until Boehner, Pelosi, Cantor, and Levin came out behind President Obama's Syria strike plan. S&P futures slumped to Sunday night's open, vacillated, then the Dow dumped over 120 points from its pre-ISM highs to break red (followed by Trannies and the S&P). Treasuries have been slow to react; holding on to losses (30Y +12bps) until the decision was clear from stocks, and then yields fell more significantly as investors greatly rotated back to safety. The USD is not moving much but JPY strength (carry-off) is driving it modestly lower. VIX is back over 17%.

With utmost firmness I condemn the use of chemical weapons.

— Pope Francis (@Pontifex) September 3, 2013

On a purely humanitarian basis, Syria’s tragedy is exceeded by many conflicts that the US abstained from participating in. So when thinking about civil wars and how the US defines its national interest, one has to ask why Syria would qualify for direct intervention while others conflicts did not.

If you were a totally bankrupt European Government relying on the promise of additional funds from Germany to stay in power and your options were A) start cranking out better data now with the promise of future bailouts from Germany or B) having to deal with a German Chancellor who wants out of the Euro… which would you choose?

It is not a good time for Janet Yellen. The one time Bernanke-replacement favorite who many were confident would be the next Fed chair, and whose odds in the initial stages of the Fed race were 75%, is so far out of the running one can almost ignore her candidacy. At least if the market makers behind Paddy Power, and the Fed Chair market betting participants have it right. As of today, her odds have slumped to the lowest in the life of the contract, or 29.4%, below the 36.4% from mid August. The leader by an even greater margin: Larry Summers whose 2/5 odds, or 70%, mean that absent a material change in rhetoric, will be the person Obama announces as Fed chairman replacement over the next month.