Archive - Mar 18, 2015

What can strike a balance between the opposing forces operating on the euro-dollar exchange rate? No one can say for sure, but one thing is certain: Whereas the profits from playing transatlantic interest-rate differentials may run to 1% or 2% per year, investors can easily lose that amount in a single day – or even an hour – by buying the wrong currency when the trend turns. As we know from decades of Japanese and Swiss experience, selling a low-interest-rate currency simply to chase higher US yields is often a costly mistake.

Dear Greek readers: the writing is now on the wall, and it is in very clear 48-point, double bold, and underlined font: when the ECB "leaks" that it is modelling a Grexit, something Draghi lied about over and over in 2012 and directly in our face too, take it seriously, because it is time to start planning about what happens on "the day after." And incidentally to all those curious what the fair value of peripheral European bonds is excluding ECB backstops, the ECB has a handy back of the envelope calculation: a 95% loss.

Despite the constant blather of how cheap European stocks are (they are not) and how Draghi's QE will create something positive (priced in?), the last 2 days have seen Italian, Spanish, and Portuguese bond risk explode higher. The 20%-plus surge in bond spreads is the biggest since the beginning of the EU crisis in 2011 as Grexit fears (and redenonimation risks) continue to spread.

Talk of raising interest rates introduces a new Fed conundrum. Over the last few months, Federal Reserve Board members have maintained a less dovish tone which implies the eventuality of rate hikes despite economic data which has been slowing rapidly.... A case can be made that, excluding 2008, the economy is weaker now than prior to the announcement of the previous QE actions and Operation Twist. Further confounding the Fed stance is inflation, which as measured by CPI is running lower than at any time since 2009. Additionally the strong dollar and global deflationary trends point to lower inflation and possibly deflation in the coming months.

"The debt borne by the oil and gas sector has increased two and a half times over, from roughly $1 trillion in 2006 to around $2.5 trillion in 2014. As the price of oil is a proxy for the value of the underlying assets that underpin that debt, its recent decline may have caused significant financial strains and induced retrenchment by the sector as a whole. If the adjustment takes the form of increased current or future sales of oil, it may amplify the fall in the oil price.

Utilities have always been attractive yield plays for conservative investors, but natural gas prices are low and margins are not that great for the industry.

Borrowing in USD was risk-on; buying USD is risk-off. As the real global economy slips into recession, risk-on trades in USD-denominated debt are blowing up and those seeking risk-off liquidity and safe yields are scrambling for USD-denominated assets. Add all this up and we have to conclude that, in terms of demand for USD--you ain't seen nuthin' yet.

There have been countless previews of the FOMC statement at 2pm today, all of them largely worthless and regurgitating the same exact stuff. The only one that matters, as it is the only one with the explicit blessing of the Fed (see "On The New York Fed's Editorial Influence Over The WSJ") in its attempt to manage expectations: that "drafted" by Jon Hilsenrath. And if what the WSJ economist writes in "Fed to Markets: No More Promises" is accurate, then fasten your seat belts, ladies and gentlemen, because we are about to enter some turbulence. "The Federal Reserve is about to inject uncertainty back into financial markets after spending years trying to calm investors’ nerves with explicit assurances that interest rates would remain low."

Documented Corruption In Law Enforcement

We thought private tech company valuations looked ridiculous, but as the VC world will patiently explain to you, things like cash flow and operating costs actually don't matter, and "valuation" doesn't mean what you thought it meant. 

This is why the Greek debt crisis continues without end. The minute Greek bondholders have to take a REAL haircut, the wheels come off the EU and the $100 trillion bond bubble finally blows up.

Following last night's massive 10.5mm barrel build (according to API), this morning's DOE inventories data was highly anticipated (with an expectation of just over 5 million barrels). It did not disappoint... printing at 9.622 million barrel inventory build, this is now the fastest inventory build on record... with record total inventory and record Supplies at Cushing. Storage concerns are growing. But, despite the collapse in rig counts, high-grading and cash-flow deparation remains as crude production also hit a new record high.

WTI is now down over $2 from the massive API inventory build last nihgt and is testing down to a $41 handle. The latest leg is not halped by Saudi officials' comments that it "will not interfere with the oil market," and that "the oil market will fix itself," as they continue the line taken at the last OPEC meeting and pressure US Shale even further.

We suspect any second now, one (or all) of the exchanges will break as VIX just flash-crashed from 16 to 13.69...

Draghi, we have a problem. Despite the omnipotent buying power of the all-knowing ECB, peripheral European bond spreads are blowing out again (and stocks dropping) as Grexit fears start to spread contagiously across the continent. As Greece's cash crunch looms ever closer (with capital controls looming) and bulls "throw in the towel" on the "nuts" Greeks, the IMF has come out and rubbed Mediterranean salt into that wound by telling the Eurogroup that Greece is the most unhelpful country the organization has dealt with in its 70-year history. As Bloomberg reports, in a short and bad-tempered conference call on Tuesday, officials from the 'Troika' complained that Greek officials aren’t adhering to a bailout extension deal leaving Dijsselbloem hinting at Cypriot templates for Greece.