Archive - Nov 2010 - Story

Looking at the CFTC Commitment of Traders data for the past week confirms that the momentum unwind continues. In Treasury's net spec positions in both the 2 and 5 Year tumbled (from -11,125 to -35,142, and from 152,782 to 102,885 respectively) even as bets that prices on the 10 Year would jump almost doubled (from 58,661 to 97,346). After chasing curve steepening, specs are now going all in on a major 2-10 flattening. The same thing is evident in commodities, where spec bets on five key categories all declined week over week. Lastly, the unwind in dollar shorts, and everything else longs is accelerating: dollar net spec increase from 6,315 to 10,827 as all other FX (except the GBP) saw spec bullish interest decline.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 19/11/10

Is Max Keiser's attempt to put JP Morgan out of business working following the mother of all silver physical squeezes? The price of silver has been stable in the past few days, but if the US official precious metal seller is to be trusted, this will not last long. According to the US Mint, sales of 1-ounce American Eagle silver coins are headed for the strongest month since at least May, Bloomberg reports. More details: about 3,175,000 of the coins have been sold this month, compared with 3,633,500 in May, according to data on the Mint website. Silver futures in New York touched a 30-year high of $29.34 an ounce on Nov. 9. American Eagle coins also are available in gold and platinum. The Mint said 62,500 ounces of gold Eagles have been sold in November. What is interesting is that sales of the coins continue at an astronomic pace despite the nearly 10% premium one has to pay over spot. What is more interesting, is that the Mint has not run out yet. Yet the refreshing thing, is that instead of buying paper certficates promising that one's presumed purchases of gold is held by the DTCC, Americans are once again going straight into physical. Here is hoping Keiser's plan ultimately unravels whatever the RICO suit against JPM and HSBC leaves untouched.

Now that RINO is on its deathbed following the Muddy Waters report that started it all, it is time to give the specialized research shop some kudos...And move on to their next (or technically previous) target - Orient Paper. With RINO likely to open just north of 0 if at all (and will do so on the Pink Sheets), investors are curious which other name brought to you courtesy of the NYSE overeagerness to float any garbage, is just minutes away from becoming the next Chinese fraud export du jour. We present ONP, or Orient Paper, which Muddy Waters has been even more bearish on (since late June), and has a target price of $<1.00 (in essence, barely a liquidation recovery). The research report begins boldly enough: "We are confident that ONP is a fraud. Its purpose is to raise and misappropriate tens of millions of dollars" and then goes on to prove its allegations. The stock was last trading at $5.88. The only question is how much lower can it go.

As the US, due to its key role as primary supporter of the various IMF rescue facilities, is already intimately involved in the Greek bailout (not to mention that the US Central Bank will soon again reprise its role as key lender of dollars, once the Irish crisis flares up again next week), there are those who are already calling to prevent the US from participating in yet another European bailout (second of many). The first person to have voiced this objection is Washington Congressmwoman Cathy McMorris Rogers, who in a just issued press release notes that she had warned the administration in April that a blank check for Europe would cause a “gathering storm." She is, of course, right. She will, of course, be ignored. We hope that politicians will gradually realize what traders have known for about two years - namely that courtesy of the Bernanke put, there is just no risk left, which means ever escalating bail outs until, one day, NASA will be sending out binary message to Alpha Centauri seeking the assistance of intelligent, and more importantly, rich, life to save the earth. Until then, the all in bet (with other people's money) will simply keep getting bigger.

Lately it seems that the entire world has forgotten that in addition to China, the EMs are also the BRI - Brazil, Russia and India. However, now that Brazil is outright hostile toward US policies (not so much toward China), and Russia continues to be Crazy Ivan, the only relevant other overheating economy appears to be India. The reason why India has not attained much media attention in recent years, is that unlike China, the country has been doing its thing and not engaging in overt or covert conflict with the developed world. And as China's inflationary star may be waning, we believe ever more investors will continue looking toward India. Which is why, courtesy of Ambit, we present an analysis of what the investment bank believes will be the five key megathemes which will dominate the Indian economy over the next five years.

Bill Gross continues to telegraph that an MBS monetization announcement is just a heart beat away. Either that, or the firm is now fully convinced it will be able to putback every single MBS in its book (and then some) to some soon to be sad shell of a bank (read- Bank of America and/or Wells Fargo). In October, Pimco's Total Return Fund saw its margin cash jump by the most since February 2009: the time when the full QE1 was announced: at $28.1 billion in margin cash, the firm increased it dry leverage powder from $7.6 billion to $28 billion. And where did this money go? Virtually all of its went in Mortgage Backed Securities, which stood at $100 billion as of October 31. This is a $50 billion increase in the past two months, and brings the total to the highest since February 2009, again - just before the Fed started monetizing UST and MBS/Agency debt in earnest. As Gross never does anything without a reason (and fundamentals are never a "reason" for the Fashion Island denizens) there are only two possible explanations: either Gross knows that the Fed will have no option but to promptly shift from monetizing MBS in addition of USTs (now that rates have once again started leaking wider), a topic we have covered repeatedly in the past, of the firm is convinced it will be successful in getting the BofA's to accept all of its putback demands, and possibly more. As both outcomes will result in a material profit on all recent purchases, the bottom line is that taxpayers (either via QE or via TARP2) are about to make the GEM (Gross-El Erian-McCulley) even more valuable.

For those who wrongly believe that the biggest real estate bubble in the world is in Manhattan, the following may come as a surprise: according to Dylan Grice, in central Hong Kong, a 400 sq. foot property recently sold for HK$14MM, or about $1.8 million: an insane $4,500 per square foot. And that's just the beginning. Yet, as we have started to speculate recently, is this precisely the goal of Ben Bernanke - to create pockets of silly inflation within China so that the country is eventually forced to unpeg the CNY? If so, this is a huge gamble, as the bulk of the country still has far more slack than America ever can. And while China, and the bulk of its wealthy citizens, continue to pretend there is no bubble (created by the same free credit mechanism that results in the 2008 near-death of the US economy), has, as Dylan muses, China "already lost control? And if so, who's to say what will happen if the asset inflation goes into reverse? Maybe when the authorities engineer the slowdown they desire and tell investors it's safe to buy again, those investors  won't want to buy. In which case a hard landing shouldn't be beyond the realms of imagination." Grice then proceeds to explain the obvious, namely that the fall out of the inevitable collapse of the Chinese bubble will be unprecedented, as not only the EM world, but the developed economies have all hitched their fates upon the successful continuation of the Chinese bubble - the same bubble Bernanke has to unwind to get the much desired CNY reflation. Grice says "Go to Ireland and ask them how they feel about bubbles. They'll tell you a bubble is a curse, not a blessing." Of course, Ireland is about to be bailed out. Who, however, will be able to bail out China when the overheating economy gets it trillions in loan supports taken out? That one not even Chairman Ben will be able to rescue...

A topic we covered extensively in the past makes a second appearance, this time courtesy of Abigail Doolittle and The Weekly Peak, whose weekly musings focus on the much fabled ratio between the price of gold and silver. Some observations:

• 323 B.C. – The ratio stood at 12.5 upon the death of Alexander the Great.
• Roman Empire – The ratio was set at 12.
• 12th to 17th Century – The ratio was around 12.
• End of 19th Century – The nearly universal, fixed ratio of 15 came to a close with the end of the bi-metallism era and England’s attempt to demonetize silver and conceivably because the country had little of the precious metal.
• 1980 – At the time of the last great surge in gold and silver, the ratio stood at 17.
• 1991 – When silver hit its lows, the ratio peaked at 100.
• 2003 - 2007 – This part of the bull market in silver caused the ratio to drop to 45 from 80.
• 2008 – The ratio rose back to 80 on the Great Recession.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 19/11/10

Last week, the US Treasury issued $16 billion in 30 year notes due 2040 (CUSIP: 912810QL5) which was one of the ugliest 30 Year auctions in recent history (Santelli grade: F), and which we speculated may be a dud as PDs were not aware of what the POMO schedule would look like, and that in turn it would likely be promptly refunded back to Bernanke. We covered that issuance in detail. Today, Brian Sack just completed a $2.2 billion POMO focusing on bonds in the 17-30 bucket, at a relatively high Submitted to Accepted Ratio of 5.1x (and yes, the higher than median ratio may be an indication why stocks are red again as explained before). What is most notable is that the last bond on the accepted list (highlighted below), of which the Fed monetized $24 million worth, is CUSIP QL5: the 30 Year bond auctioned off last week. And so the shell game continues.

Atlantic Capital Management, whose previous analysis on why the US Economy is caught in another perfect storm (link) was spot on, presents its latest special report focusing on the "desperate" Fed, and why it believes QE2 "Is a hail mary toward the wrong endzone." The must read report, has three parts explaining why spending is about sources, not cost, the differential between wealth and the Chinese imbalance, and the last part emphasizes the Bernanke put, i.e., how there is no longer real risk in the decision-making process. For those who enjoy flipping to the last page of a book, here is the conclusion: "QE 2.0 moves us further in the wrong direction. It removes even more market enforcement in favor of political hocus pocus, “nobody loses” nonsense. To return to sustainability and longterm growth, discipline must be enforced on everyone, including the Fed...As to the consequences of QE 2.0, we believe this new monetary amplifier will produce exactly the wrong responses for the reasons contained within this report. It’s as if Chairman Bernanke has lined up in the wrong direction, ready to heave one to the wrong endzone. The only question is whether the rest of his teammates will tackle him before the damage is done, and the game lost."

Marc Faber was on Bloomberg TV sharing his thoughts on China's 5th RRR tightening in 2010. While the man whose on the ground perspective affords him a good sense of what is really happening, does not anticipate major adverse developments out of the recent round of tightening posturing, he does warn that unless China manages to control commodity inflation, things could get ugly, essentially reiterating what Albert Edwards said yesterday. "Inflation is a dangerous situation everywhere in the world. I think in general that Consumer Price Indices published by China and the US do not reflect the real cost of living that households in these countries have. In Emerging Economies it is worse in the sense that if you have a per capita income of $1000 per year, food accounts for 50% of our expenditures... Even if China tightened, interest rates are still far below the true rate of inflation, and I spoke to a lot of people in China - my view is that inflation in China is running at 10% per annum." On Bernanke's overnight defense of his failed policies: "All I would say is that the problem of the world is that the US overconsumed and spends too much on consumption, and as can be expected some currencies didn't want their currencies to appreciate too much. I think that China and the US are on a collision course, both economically and politically." In other words, our speculation that China and the US are playing a global game of chicken is validated, the problem is that billions of people will suffer no matter who blinks first.

GM is now officially threatening to break the IPO price, less than 24 hours after breaking for trade yesterday. The stock had dropped to as low as $33.11 before a spurt of buying by DMM GETCO pushed it higher. The question of whether the HFT firm can internalize what has become an onslaught of selling is open. We can only hope GETCO has sufficient redundancy to absorb the massive volume, which at last check was 36 million shares and jumping: it appears GM will once again dominate NYSE volume. Should GM drop further from here, the world's greatest IPO will need some serious cheerleading by Phil Lebeau to rekindle America's hope in the company that went bankrupt, and was saved by taxpayers a year ago. And the one aspect of the stock that nobody seems to be mentioning is that GM is now a China play: with more cars sold in China than in the US, should China persist in its tightening, GM will be among the first casualties as excess liquidity redemption hits car purchases as consumers are forced to save all their money for more relevant purchases... like food.

Families stay huddled in their McMansions, protected from phantoms by state of the art security systems. Their interaction with the world is through their electronic gadgets. Neighborhoods of cookie cutter 4,000 sq ft mansions appear deserted. Human interaction is rare. Happiness is in short supply. As I sit in miles of traffic every morning during my soul destroying trek to work I observe the thousands of cars, SUVs, and trucks and wonder how this can possibly work when the peak oil tsunami washes over our society in the next few years. Then I reach the bowels of the inner city and my pessimism grows. This concrete jungle is occupied by hundreds of thousands of uneducated, unmotivated, wards of the state. They live a bleak existence in bleak surroundings and depend upon subsistence payments from the depressed suburbanites to keep them alive. How will they survive in a post peak oil world? They won’t.