Archive - Nov 2010 - Story

And now for some very provocative, "out of the box" views: Simon Black, better known as Sovereign Man, presents some disturbing thoughts which are sure to get the broader spirits elevated. Instead of continuing to fight what some see as a losing ideological battle with a government which no longer even remotely represents the broader population's interests, Black says simply to walk away: "When you think about it, what we call a 'country' is nothing more than a large concentration of people who share common values. Over time, those values adjust and evolve. Today, cultures in many countries value things like fake security, subordination, and ignorance over freedom, independence, and awareness. When it appears more and more each day that those common values diverge from your own, all that's left of a country are irrelevant, invisible lines on a map. I don't find these worth fighting for...The government beast in your home country feeds on debt and taxes, and the best way to win is for bright, productive people to move away with their ideas, labor, and assets. This effectively starves the beast and accelerates its collapse. Then, when the smoke clears, you can move back and help rebuild a free society." Perhaps Black is right and this is the best, and possibly only, non-violent way to fight the political-financial plutocracy?

Now that Ireland is a vassal state of the EU, and its democracy as its citizens know it, is finished, it was only a matter of time before the EU's Economic Affairs counsel started telling Ireland what and how to conduct its affairs. Sure enough, it took all of 24 hours between the "bailout" and the first order. RTE reports that Olli Rehn "says it would not be advisable for any new government to try to renegotiate key aspects of the IMF/EU deal." In other words, the EU is promptly realizing that the new Irish government is likely to reneg in part or all of the just struck deal and is therefore interjecting itself in the process. "In an interview with RTÉ News, Commissioner Rehn said it did not want to involve himself in democratic politics in Ireland, but he said: 'They are key parts of the programme so I would not advise re-opening these'." In other words, despite hating to do so, Rehn is now supreme dictator of Ireland, and the nation must do his every bidding if it wishes to not receive the Mutual Assured Destruction treatment and not get any banker Holiday greetings cards this year.

The onslaught against Chinese fraud stocks is getting stronger as we expected, and the cottage industry of those looking for Chinese public scams is starting to make some serious cash. Today's casualty is China Education Alliance which according to Kerrisdale Securities "is fabricating its SEC financial statements. We believe that the company’s revenue and profit are highly overstated in its SEC filings and that the company is mostly a hoax." Stock down about 18% at last check. Of course, from $3.61 to zero it still has a long way to fall. All in all, this is just another slap in the face for the NYSE which continues to admit the biggest (alleged) scam companies to trade on it, destroying all credibility of prescreeing, merely to pursue a listing dollar here and there.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 29/11/10

The first POMO of the day has closed and Brian Sack has just monetized $2.170 billion of bonds maturing between 2/15/2021 and 11/15/2027, which represents a high 6.4x Submitted to Accepted Ratio as PDs had $13.9 billion in bonds they wanted converted to Netflix shares, and only got satisfied on 16% of the Submitted. But more importantly, as per our Fed Frontrunning Cheat sheet, virtually all of the bonds that were monetized were predicted to be bought by Sack, and in terms of notional, the frontrunning success ratio hit 93%. As a reminder here is where we demonstrated the specific CUSIPs that were most likely to be acquired. Sure enough of the $2.17 billion in notional, $2.02 billion was monetized precisely as expected.

In 10 minutes the teleprompter in chief will announce that he is about to freeze government salaries for two years. Of course, government workers thank him, as this means federal salaries which have exploded in the past 5 years will be stuck at all time highs for at least two years, even as nominal salaries for everyone else (except FIRE workers of course) continue to decline. As we suggested a few days ago, in order to promote some vaguely credible idea of austerity, instead of freezing salaries, Obama needs to be cutting. Why? One look at the chart below explains it all.

Most asset classes are at key junctures this morning. S&P futures sit on a H&S neckline, Gold is fairly close to its neckline as well, and both are also on the 50-dma support. Bunds have also tested the major trend support. EURUSD in the meantime has not really made any formalities and dived through the 200-dma. Trouble could be just around the corner as the world is not digesting the details of the Irish bailout as the forces in power expected. - Nic Lenoir

The man in charge of the Fed's Market Group has had an easy life so far: he has been able to delegate the vaporware levitation of the market to the HFT and the PD crew for the most part of 2010 (with that notable May 6 exception). And when those two fail there has always been either State Street, which has been happy to pull borrow on demand, and of course POMO, which so far worked like a perfect confirmation bias charm. Until now that is - ever since the QE2 POMO buybacks were launched, there has been a perfectly inverse correlation between Fed market interventions and the stock market. In fact the only day the market surged last week was when there was no POMO. This has not gone unnoticed by the stat arbs. Which is why one wonders whether today's double POMO shotgun is not about to backfire. The poetic justice of a second flash crash on the only double POMO day would be beyond words. As a reminder POMO #1 start in 5 minutes and ends at 11am Eastern. We will closely track the market's performance during both this and the next one in what could be a confirmation of a major POMO regime change.

The ECB's Securities Market Operation is finally cranking. After a relatively quiet summer during which the ECB would monetize at most €200 million of sovereign bonds weekly, things got rather hot in early October when a record €1.384 billion was acquired. That was followed by the eye of the hurricane when in a period of 4 weeks nothing happened. Then November happened, and things got out of hand. Over the past month the ECB has finally started flexing it muscles, buying €3.845 billion in bonds, most of these Irish and Portuguese. Of course, this is nothing compared to what the US does, which is now buying about $8 billion a day. Then again, the ECB works differently by providing funding directly to member banks, thereby monetizing indirectly. The fact that it has upshifted its direct monetization efforts is troubling as it indicates that QC for the secondary route is collapsing and JC Trichet no longer can rely on his henchmen on the ground, most of which are gripped in a total liquidity drought. Altogether €67 billion in bonds have been monetized under the SMP. Look for this number to double on short notice should the contagion hit Belgium and Italy as is now widely expected.

Merrill's Mary Ann Bartels looks at a slew of technicals today, and focuses on the most relevant one for the day: the EURUSD, although she focuses on the dollar basket DXY. According to her Fibonacci analysis, the EURUSD has a 50% retracement target of 81.49, which "would correlate to a move in the euro to 1.3124." As the EURUSD is trading inside of 1.31 now, this means that purely based on the EUR contribution to the DXY, there is a short-term arb opportunity of going long the DXY which is at 80.90 and selling the EURUSD. Then again, with a firesale in everything EUR related a short leg may not even be required, especially with complete lack of liquidity in the market, and a total lack of appreciation that the US will have to print far more before all this is over.

Update: 1.31 just taken out: will this level prove to be support or new resistance? Next question- what happens to the pair after not one but two POMOs.

The EURUSD, which has just taken on water, and moved to fresh multimonth lows, has just dropped 200 pips in under 6 hours. The pair is now threatening to drop below 1.31 after which John Taylor's target of 1.26 becomes reachable within days. It is unclear what caused the latest weakness in the pair, besides the usual understanding that Europe is in trouble, to put it mildly. More troublesome is that just like the BOJ discovered recently, the half life of interventions and bailouts is now measured in hours. And despite this implicit strenghtening in the USD, gold continues to trade close to overnight highs.

Roger Penrose, knighted prof of Oxford, and co-workers have just found evidence supporting his theory that the inflationary Universe, a term used to describe the rapid expansion of space-time, is not a one-time catastrophe originating from the Big Bang, but rather a cyclic phenomena. Economists are known as those who can't make it in math and physics. Well take this you mathists and physicists. Not to mention PhD economists from decent departments, but even econobloggers, and EVEN people who read econobloggers have known for a long time that inflation is cyclic. There, we now have a Grand Unified Theory of Physics and Econmics. This is just too beautiful to be wrong.

• Insider Case Has Soft-Dollar Focus (WSJ)
• Treasury 30-Year Returns as Market Bellwether as Fed Policy Propels Trade (Bloomberg)
• Portugal, Spain in crosshairs as Ireland bailed out (Reuters)
• Wall Street Shrinks From Credit Default Swaps Before Rules Hit (Bloomberg)
• Lee Says North Korea Must Pay for Attack; China Urges Talks (Bloomberg)
• Don’t Just Tell Us. Show Us That You Can Foreclose (NYT)
• Democrats Gird for Tax-Relief Battle (WSJ)
• What the UK is Contributing to Ireland (BBC)

Today at around 5 am Eastern Italy conducted an auction of 3 and 10 year paper. The result was a very weak auction with spreads jumping compared to the prior auction even as BTCs dropped. The Italian treasury sold €5.5 billion of the BTPs, compared with the 83.5 billion to €5.5 billion planned. It also sold €1.339 billion of the October 2017-dated floating rate bond, or CCTeu, compared with €1 billion to €1.5 billion planned. But the sale came at a steep price. The 3 Year sale of €2.5 billion 2.25% bonds closed at 2.86% compared to 2.32% prior, and a bid to cover of 1.38 compared to 1.35 previously. The yield on the 10 Year auction came at 4.43% or over half a percent higher compared to the previous auction of 3.89%, pricing at a 1.27 Bid to Cover, much worse than the 1.42 previously.

• Asian stocks pare gains as Dollar rises on Korea tensions, Ireland bailout.
• Greece wins EU pledge for 4 1/2-year extension to repay emergency bailout.
• Ireland gets $113B bailout as EU Ministers seek to halt debt crisis.
• Ireland to pay 5.8% for bailout as Cowen protects tax rates, senior bonds.
• Oil rises to trade near 10-day high on Europe's debt measures, North Korea.
• Retailers’ stocks may be in the spotlight Monday as investors respond to results from Black Friday.
• UK adjusts projected GDP for 2010 and 2011.