Archive - Apr 15, 2010 - Story

Dennis Lockhart leads the doves on parade today, by saying that there "is risk associated with starting a process of tightening too soon.." Too bad neither he nor the other dove, Bullard, sees the same bubble risks that George Soros is believes will lead to the greatest market crash ever. Indeed, St. Louis Fed's James Bullard, speaking at the Levy Economics Institute, said the economy is not having a “super strong recovery,” but called it “robust” and “very reasonable.” When the time comes, Bullard suggested he would not want the Fed to raise rates as slowly and incrementally as it did earlier in the decade. But he said the pace will need to be “state contingent,” or data-dependent. "I would love to tell you a particular date but I can’t" because "I haven’t seen how the economy is going to perform." Brillliant. We can't wait to see when the government massaged data indicates the tightening time has come: Dow 36,000, Dow 36,000,000, or Dow 3.6E36?

When it comes to energy, there is an incoherence to President Barack Obama’s policies. This incoherence is embedded in his administration in the person of Carol Browner. She is largely regarded as the agent of a kind of reactionary environmentalism that once haunted the Democratic Party. Browner, administrator of the Environmental Protection Agency under President Bill Clinton, is a special assistant to Obama for energy and environment. To a wide variety of industries, though, she is the agent of regressive, just-say-no environmentalism. Browner’s background–from environmental jobs in Florida to working with Al Gore–dooms her to suspicion of zealotry, which is probably unjustified. Her defenders (just about all in the environmental movement), see her as a great public servant and standard-bearer. But she is largely out of sight these days; her writ and her influence unknown.

Here are some images of the volcanic cloud which is causing airspace shutdowns over most of Europe.

George Soros, speaking at a meeting organized by The Economist, warns all those who are throwing their money into the equity pit, that "the financial world is on the wrong track and that we may be hurtling towards an even bigger boom and bust than in the credit crisis." Advice from Soros or from CNBC. You decide. Reuters reports that Soros said "the same strategy of borrowing and spending that had got us out of the Asian crisis could shunt us towards another crisis unless tough lessons are learned." We hope all those who are buying stocks have very tight stop loss triggers.

Albert Edwards is out with an interesting twist on inflation/deflation. In his latest letter he notes "I have stated openly that I expect the UK 1970s experience of almost 30% inflation to be repeated in my lifetime. I also expect this to be reached in countries that got nowhere near this 30% rate in the 1970s (e.g. the US and Europe, which both peaked around 15% ? somewhat surprisingly Japan also hit almost 30% in the 1970s)." Yet he counters: "But despite my belief that we will see a paradigm change over the next decade or so, I continue to retain our heavy overweight for government bonds. Recent inflation and monetary data continues to make me feel we are now only one cyclical failure from falling into outright deflation." So for the time being, Edwards is long bonds. The question is when will the secular inflation thesis become dominant and when will "rapid nominal GDP growth [appear] dragging bond yields higher." Yet at the core of any debate is the ongoing paradox of market schizophrenia: bonds continue pressing lower arguing for accelerating deflation even as stock surge higher in anticipation of inflation and the reduction of debt through surging prices and excess liquidity. Are bonds and stocks right in principle, yet disagree in terms of timing? And if so, why do stock (which tend to have a much shorter investment horizon ) price in inflation first, and bonds second? Is Albert right, or is the market simply reacting to unprecedented Fed intervention without any guidance on how to make proper asset allocation decisions? If, as we expect, Greece collapses soon, that may be the tipping point that accelerates the resolution of that fundamental quandary.

RANsquawk 15th April US Afternoon Briefing - Stocks, Bonds, FX

Rather simple day in FX land: in a word (or two) - risk off. The Yen is surging against all currencies, the Euro is weaker against pretty much everything (thanks Greece), with the USD one again a conduit between the JPY and the EUR carry. An interesting observation on currency trading via an email in our tip box:

• Hedge funds and props of all stripes switched to FX trading en masse aka going long USD vs. anything else and shorting EUR against everything.   That includes "not quite so smart" money -- insurance companies and bond investment outfits.
• HFTs and stat arb quants run arb strats on DXY, int rates, equities against FX moves creating totally surreal enviroment where short term histrorical correlations mean more vs. anything.

The entire stock market is now one big liquidity/carry trade.

Yesterday we observed that the SEC has finally decided to start collecting data on the one segment of the market most misunderstood by the SEC (by their own admissions), that of High Frequency Trading, and we demanded that instead of merely collecting data and throwing it into the shredder, this data has to be released for thorough public analysis and investigation, as the SEC has proven time after time that it is hopelessly inadequate when it comes to matters dealing with simple cognitive processes and determination of cause and effect (we are certain that a few well trained lab rats could do the entire job of the SEC, and have none of the billion dollar taxpayer cost attendant with feeding this bloated monster of disregulation and corruption). Today, Senator Ted Kaufman joins our pleas for full and transparent disclosure of all tagged HFT data. Alas, we are convinced that as long as the market is not allowed a down day by the primary dealers, any push for the SEC to do its job properly will be drowned out in the typical chorus of bullshit that the market is doing oh so well, and look just how much liquidity in Ambac and Citi there is... After all, that is all anybody trades these days.

As we reported a few days ago, the IMF massively expanded its last resort bailout facility (NAB) by half a trillion dollars, in which the US was given the lead role in bailing out every country that has recourse to IMF funding. Yesterday, Ron Paul grilled Bernanke precisely on the nature of the expansion of the US role to the NAB: "The IMF has announced that they are going to open up the NAB which coincides with the crisis in Greece and Europe and how they are going to bailed out. The irony of this promise is that in the new arrangement Greece is going to put in $2.5 billion in. I think only a fiat monetary system worldwide can come up and have Greece help bail out Greece and be prepared to bail out even other countries. But we are going from $10 to $105 billion... We are committing $105 billion to bailing out the various countries of the world, this does two thing I want to get your comments on one why does it coincide with Greece, what are they anticipating, why do they need $560 billion, do we have a lot more trouble, and when it comes to that time when we have to make this commitment, who pays for this, where does it come from? Will this all come out of the printing press once again, as we are expected to bail out the world? Are you in favor of this increase in the IMF funding and our additional commitment to $105 billion?" Bernanke, of course, washes his hands of any imminent dollar devaluation - it is all someone else's responsibility to bail out life, the universe and everything else. Bernanke pushes on "I think in general having the IMF available to try to avoid crises is a good idea." Yet Paul pushes on "Where will this money come from? We are bankrupt too." Indeed we are, but nobody cares - that is simply some other poor shumck's problem.

As was widely expected, four German professors are preparing to ask for a constitutional court injunction to block the transfer of German funds, claiming the EU-IMF rescue for Greece violates the "no-bail-out" clause of the EU Treaties. Furthermore, as the Telegraph reports, this is occurring "as fresh details emerge on the scale of the bailout - "Germany's Handelsbatt cited sources in Berlin warning that the bill may be three times as high as thought, pushing the EU share to €90bn (£79bn) - with an extra €15bn from the IMF." We are confident that the US-controlled IMF will have no problems with taking on the entire load of the bailout package, thereby forcing Americans to be the only party responsible for making sure European creditors are made whole, but that the next target of currency debasement becomes, once again, the dollar. Cause after all, there is that little bit about the several trillion in toxic CRE debt that has to be inflated away before 2012.

The latest confirmation of the stock market bubble comes from Sentiment Trader which points out that yesterday's Nasdaq TICK almost passed an all time high, yet settled down...to 8 year high levels. As ST points out: "There were only three other dates that even come close to the current extreme: October 4, 2001: The NDX was coming off a major low, but still backed off for 3 days before rising again. May 2, 2002: The NDX dropped hard for the next 3 days. May 15, 2002: The NDX managed to rise a bit for the next 2 days, then rolled over into a major decline. Since then, the TICK hasn't managed to get above +4000 at any point, even intraday, much less to the +5300 level it closed at yesterday. Truly remarkable." Ben Bernanke has now succeeded at convincing virtually everyone that moral hazard is the right approach to dealing with an insolvent financial system. And for another indication of just how overbought the market is, Sentiment Trader also points out that the equity-only Put/Call ratio dropped to 0.32, the lowest reading since January 16, 2004, which on a relative basis is 45% below six-month average. The conclusion: " That, my friends, has never happened before (at least going back to 1997)."

Yesterday’s action did a lot of good for the bulls. Volume was solid by recent comparisons. Advances beat declines heavily as did up-volume over down-volume. The real victory was in the new highs column. New highs were 609 to 8. That’s key because new highs had begun to diverge by slipping back.

With the new highs back at new highs, as are breadth indices, the technicals are solidly in the bulls’ camp. Topping may be weeks or months away according to handbook guidelines.

The S&P has been up in eight of the last nine sessions and it sits clearly in overbought territory. That condition may be resolved either by sideways churning or a small consolidating pullback. But, as previously noted, the technicals say the bulls reinforced their controls yesterday.

Follow the motions: with Greece imploding once again, and bonds back to 7%+. let's try everything all over again and hope it works this time: IMF is *yawn* sending another team to Greece, Dominque Strauss-Kahn reports, even as Greek PM G-Pap has sent a letter to top officials in Europe and the IMF, requesting talks to discuss the details of a contingency financial support plan for his country. Um, we did that charade last weekend: it worked for 24 hours, just long enough for you to issue $2.1 billion in Bills, which auction by the way bankingnews.gr recently reported was a scam, with half the bids being fake! Well, congrats, but it ain't gonna work any more, as the market has called your half-pregnancy bluff. But that does not stop Greece, and its ex-Goldmanite head of public debt management, from demonstrating just how clueless it is when accessing the capital markets. At least Greece is acknowledging that at this point formal aid request is merely a matter of a few days. We are now convinced that Greece is in fact doing all it can to be allowed to default, yet Germany and Europe are forcing a two tier sovereign debt capital structure, with new guaranteed money becoming the Secured tranche in the Greek balance sheet. Of course this means that any demand for the "Unsecured" portion will disappear as soon as the bailout mechanism is finally activated.

The Treasury has just released the latest TIC data: we will provide a full analysis later, but here are the key observations. Total foreign holdings at the end of February increased by $44.4 billion, however this was not thanks to China. Mainland China sold $11.5 billion in total Treasuries. However, the components of this number were primarily due to ongoing sale/roll off of Bills, which holdings decreased from $58 billion to $42 billion. At the same time Long-Term Chinese UST holdings increased marginally from $831 to $836 billion. Of the top three, Japan barely added to its total UST holdings, which increased from $765 to $769 billion. Just like China, Japan allowed more Bills to be sold/roll off, while adding Long-Term debt, $8.1 billion to be precise.Yet the biggest surprise continues to be the UK, which is certainly the nexus of whatever shell game operation the Federal Reserve has in play in order to stimulate artificial demand for US Treasuries. Note that UK Treasury holdings have literally exploded from $106 billion in October, to more than double, or $231.7 billion in February. This is by and far not just hedge fund additions, and is certainly not merely any offshore operations that China may have in order to acquire USTs under the radar, as that would be a very naive way of avoiding the spotlight.

Jobless claims missed consensus for the second week in a row, coming it at 484,000, 44k worse than expected, 24k worse than the week before, and the worst since February 20. Of course, the B(L)S has to provide a narrative for why the economy is not performing as expected by the propagandorium: and this week's explanation is hilarious. A Labor Department economist said Thursday that this  latest rise can also be pegged to lag effects from the spring holidays including  Easter and Cesar Chavez Day, which is celebrated in worker-heavy California. This is now the second week that Easter has gotten blamed for deteriorating economic data. Easter was also blamed for the delay in Greek bonds a few weeks ago (those particular investors now wish they had just slept in through the day they were getting their allocated share). As for initital claims, the four-week moving average, which aims to smooth volatility in the data to help paint a  better picture of the underlying trend, also rose for the week ended April 10.  The Labor Department said the four-week moving average went up by 7,500 to  457,750 from the previous week's unrevised average of 450,250. Continuing claims also increased by 73,000 to 4,639,000 from the preceding week's revised level of 4,566,000. And while Extended Benefits declined by 99,716, Emergency claims increased by 261,817 to 5.855 million.