Archive - Nov 2010 - Story

Even as economics has taken to back seat a geopolitics and a market uncharacteristically lacking in euphoria, Rosie once again provides the daily dose of must read economic summary sans the Kool Aid.

As we speculated two weeks ago, the key word that will be regurgitated by all pundits through the end of the year is "contagion". Sure enough, the bond vigilantes who are now fully awake and stretching have brought a mauling to Spanish bonds, where 10 Year yields are now at lifetime highs. The chart below shows what will happen to US bond prices sooner or later. Should the 10 Year experience such a move in a comparable time frame, the Federal Reserve's $56.3 billion in total capital will be exhausted about 4 times over, and Ben Bernanke will be presiding over an insolvent central bank, begging for intelligent life from Proxima Centauri to have departed about 4.27 years ago in direction earth, bringing with it an extra $1 quadrillion in Terra backstop capital.

While CNBC (well, Erin Burnett) is looking at the Kospi and is amazed how the index did not move after it had closed before the military exchange last night, the latest from Yonhap is that the tension in Korea is far from diffused: "North Korea threatened to continue "merciless" strikes on South Korea on Tuesday after the communist state launched a deadly artillery attack across their western sea border. In a statement carried by the official Korean Central News Agency, the North's top military command accused the South Korean military of initiating the exchange by shooting toward its side." Of course, South Korea refuses to demonstrate that it continues to be utterly toothless and issues the following statement: "President Lee Myung-bak ordered his military Tuesday to strike North
Korea's missile base around its coastline artillery positions if it
shows signs of additional provocation, his spokeswoman said." Luckily, Jim Cramer is now expecting both Koreas to sit down for a friendly turkey dinner in a few days in the mine field in the middle of the DMZ, and diffuse the situation.

It's amazing what a little reminder that an ever more fragile ponzi system is constantly on the verge of total collapse will do to the price of tungsten (or closest equivalent) flight to safety.

Some may recall how the very contentious topic of Greek deposit bank runs was arguably the key catalyst to push Greece (and its banks) to accept a bailout from Europe, after the country realized it had little cash left (and the associated SNAFU in which RBS proved it really has no clue about anything). Well, it is now Ireland turn, and as the below chart shows, the Irish bank run has already commenced, with locals not even bothering to wait until the December 7 coordinated "pull your money" pan-European D (for default)-Day. Bank of America brings attention to this issue, which will likely be the last liquidity event before not only a full bailout of Ireland has to be implemented, full terms be damned, but becomes the catalyst for ongoing CHF strength as European deposits once again rush to the relative safety of the last remaining relatively stable European currency (and of course gold). The result will be an ongoing squeeze in Switzerland, which we now believe may be one of the first countries from the core to feel the vigilantes' wrath shortly after Spain is bailed out, some time in Q1 2011.

• Goodbye reserve currency: Yuan begins trading against the rouble (China Daily) this is big news
• US has no good options over North Korean clash (FT)
• South Korea Prepared to Implement Market-Stability Measures After Shelling (Bloomberg)
• Focus Shifts to China as North Korea Tensions Escalate (Reuters)
• China Inflation `Volcano' May Prove Too Hot for Controls After Cash Surge (Bloomberg)
• Growth in Thailand, Malaysia Slows, Heralding Caution in Asian Rate Moves (Bloomberg)
• Irish PM Defiant as Coalition Cracks (FT)
• IMF urges cuts in Irish minimum wage and dole payments (Irish Times)

While running and hiding is easy for carbon-form based hedge funds, it may be a little more difficult for collocated servers: they tend to be welded to the ground. Yet running and hiding may be precisely what they need to do soon. After Manhattan US Attorney Preet Bharara is done disassembling SAC, his next target will be ZH's favorite topic: high frequency and prop trading. Which is sad - we may have to branch out into sports and pornography soon, as all the topics we had been covering for years are one by one tabled by the those whose job it is to fix the fraud in the markets. Joking aside, here is what the NYPost had to say: "Computer-driven trading shops and independent proprietary trading firms may be the next to feel the heat from watchdogs aiming to clean up Wall Street, source tell The Post. Federal agents, who have ratcheted up the heat on insider-trading rings linked to hedge funds and investment firms, are also are targeting firms that purport to offer individual investors specialty trading techniques employed by Wall Street powerhouses like Goldman Sachs, these sources said." We, for one, can't wait to listen to the Jon Stewart's Cash Cow upcoming interview from a NYPD holding cell.

The BEA has released its second revision to Q3 GDP: "Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.5 percent in the third quarter of 2010, (that is, from the second quarter to the third quarter), according to the "second" estimate released by the Bureau of Economic Analysis.  In the second quarter, real GDP increased 1.7 percent." Expectation was of 2.4%. The reason: inventories, inventories, inventories. "The acceleration in real GDP in the third quarter primarily reflected a sharp deceleration in imports and accelerations in private inventory investment and in PCE that were partly  offset by a downturn in residential fixed investment and decelerations in nonresidential fixed investment and in exports." As noted previously the $40-50 billion upcoming Q4 decline in inventories will likely push Q4 GDP flat to negative. In other news, US PCE Core (Q3 S) Q/Q 0.8% vs. Exp. 0.8% (Prev. 0.8%), while US Personal Consumption (Q3 S) Q/Q 2.8% vs. Exp. 2.5% (Prev. 2.6%).

Even as the world wakes up to a stunner out of Korea, things in Europe are getting worse. Here is a brief summary of all the events in the increasingly troubled continent.

• Asian shares traded down amid nervousness China may introduce further tightening.
• Billionaire Carlos Slim acquires stake in New York money Mmanager BlackRock
• BMW &Mercedes cut back on Christmas breaks as demand for new models booms
• China allows yuan to start trading against ruble.
• Eurozone consumer confidence improves to -9.5 in Nov from revised -10.9 in Oct.
• Irish PM said the government will resign after passing the country’s budget.
• SKorea scrambled fighter jets and returned fire after NKorea lobbed shells into its territory.

GDP revision, existing home sales, Richmond Fed, FOMC minutes, weekly confidence and micro TIPS POMO as the market prepares to wind down ahead of the holidays yet Korea is looking like last year's Dubai…

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 23/11/10

Update: South Korea has scrambled F-16 jets to its west coast.

It is time to see just how much WWIII is priced into this market. WSJ reports that the Koreas may have just crossed the line:"North Korea fired artillery at South Korea's Yeonpyeong island in the
Yellow Sea off the countries' west coast Tuesday afternoon, setting
houses on fire. South Korea returned fire, according to residents on the
island speaking on South Korea's YTN television network.  A spokesman for South Korea's joint chief of staff confirmed the
exchange but didn't have details except to say "scores of rounds" were
fired by the North." The response: S. Korean military says it is on highest non-wartime alert after the North's shelling of island.

Well, folks, it's official - mark November 22, 2010 in your calendars - today is the day the Ponzi starts in earnest. With today's $8.3 billion POMO monetization, the Fed's official holdings of US Treasury securities now amount to $891.3 billion, which is higher than the second largest holder of US debt: China, which as of September 30 held $884 billion, and Japan, with $864 billion. The purists will claim that the TIC data is as of September 30, and that as the weekly custodial account shows UST buying continues the data is likely not correct. They will be wrong: with the Fed now buying about $30 billion per week, or about $120 billion per month, for the foreseeable future and beyond, it would mean that China would need to buy a comparable amount to be in the standing. It won't. In other words, the Ponzi operation is now complete, and the Fed's monetization of US debt has made it not only the largest holder of such debt, but made external funding checks and balances in the guise of indirect auction bidding, irrelevant. For what tends to happen next in comparable case studies, please read the Dying of Money. And congratulations to China for finally not being the one having the most to lose on a DV01 basis on that day when the inevitable surge in interest rates finally happens. That honor is now strictly reserved for America's taxpayers.

As the trading year draws to a close, and as the QE2 driven melt up shows little sign of relenting (or breaching the 1,200 S&P level), the ever popular VIX, or "fear index" continues to plumb new depths. For many this is a superficial sign of complacency and lack of risk of any major moves within stocks. However, as BNY's Nicholas Colas demonstrates, this is far from the truth as to what is happening below the surface. While highlighting the grind lower in the VIX, Colas observes that "the options market has been busy pricing in higher levels of perceived risk across a variety of asset classes, most notably investment grade bonds, silver, and emerging markets. In fact, of the 20 asset classes and industrial sectors for which we track risk pricing in the options market, 15 show heightened levels of investor concern for the upcoming 30 day period." How does Colas explain this remarkable divergence? "I am tempted to say that the sector IVs are actually better representatives of the market’s take on future volatility, and the lower expected volatility of the market as a whole comes from macro investors who think the next month will be smooth sailing. Conversely, those traders who use sector ETFs and their options to hedge specific single stock positions see a different and potentially more volatile story developing." We tend to agree with the second explanation, which also leads to another surprising conclusion...