Archive - Jul 26, 2010 - Story

Marc Faber closed out this week's Agora Financial Symposium with a speech that pretty much recapitulated the view that the end of the world is if not nigh, then surely tremendous dislocations to the existing socio-political and economic landscape are about to take place (with some very dire consequences for the US). His conclusive remarks pretty much summarize his sentiment best: "We've had a trend for most of the past 200 years: GDP of countries like China and India went down while the West surged. That's now changed. Emerging economies will go up, and your children in the West will have a lower standard of living than you did. Absolutely. We won't sink to the bottom of the sea. But other countries will grow much faster than us. The world is very competitive, and the odds are stacked against us. Americans, with their inborn arrogance, will not let it go that easily, so there will be lots of tension going forward." While long-time fans of Faber will not be surprised by the gloom and doom (not much boom) here, anyone else who still holds a glimmer of hope that at the end of the day the CNBC spin may be right, is advised to steer clear of Faber's most recent thoughts.

Crude oil prices finished flat on a day during which refined products prices moved lower. Prices traded on both sides of unchanged in a seesaw market that never really figured out what factors were most important for it. It was the first day in a very long time that front month crude oil futures finished totally unchanged. Traders were left trying to make sense of conflicting reports. Sales of new homes were 23.6% higher in June after having crashed in May after the expiration of a key government tax credit for new buyers. June’s level was still depressed, but it was substantially higher than May levels. Equities were rallying when the Dallas Federal Reserve reported regional manufacturing falling to negative 1.9 from 20.8 in May. Of course, it is difficult enough to try to follow so many different index figures, but it is even more difficult when one is not sure what scale the numbers occur within, like that set. It sounds bad. Equities paused and oil prices faltered. Later in the day, and after oil prices were done for the day, the DHJIA finished up 100.81 to 10,525.43. - Cameron Hanover

Today was relatively unsavory. Ever since the market has swictehd back above 1,087 we have been increasingly convinced that we are most likely going to witness a proper market melt up in the next few weeks. We have already advertised that global liquidity has been running up as per our global liquidity chart. As such there is definitely all the money needed around to push financial assets' prices further up. Looking further at liquidity the 3M Euribor/Libor regressed against EURUSD is particularly interesting. the best summary of the situation lies in the comparison of the Euribor-Libor spread with the EURUSD currency FX pair. Since last summer the two have moved in tandem. In the present case the rate spread indicates that EURUSD could possibly move all the way past 1.40. Surely if a melt up/risk on environment is here with us to stay for the next few weeks it would totally reinforce the fact that EURUSD is mispriced and can run up to 1.40. For traders who are not willing to take beta exposure, it is possible to express the view by selling the Eurodollar/Euribor September spread and buying EURUSD. The mispricing seems to be 15bps or at least 8% based on which space you consider it. - Nic Lenoir

The ever insightful James Montier of GMO presents a short, sweet, certainly controversial (he espouses stimulus over austerity) and to the point essay on what everyone at Zero Hedge realizes (or should by now) all too well: "If the Austerians and their ilk win the day, we may see some short-term deflationary pressures and, as noted above, they will be even more dangerous than they were previously because we are starting with no margin of safety in terms of the inflation rate. However, the U.S. at least has a central banker who seems to understand the risk. Despite his complicity in getting us into this mess in the first place, Ben Bernanke has shown he understands the risks that deflation poses, especially in a debt-laden economy, and believes that he has sufficient tools to prevent deflation from gaining traction in the economy (even with rates at zero). Indeed, he has given speeches where he has laid out a menu of policy options in the event of deflation risk. First on the menu was aggressive currency depreciation; second was the introduction of an inflation target; third was money-financed transfers (effectively, tax cuts financed by printing money); and, finally, quantitative and qualitative easing. Ergo, the “good news” arising from an Austerian victory would be the rapid arrival of QE II. Thus any short-term deflation will ultimately lead to long-term inflation pressures." Montier once again brings up the ever more critical Current Account equation. By now it is more than clear that deleveraging by both private and public sectors will not end well, however throw in the inability to fund the Current Account, and you can see where our concerns about the $1.3 trillion collapse in shadow banking lending in Q1 2010, and the ramifications on our CA as foreign banks null and void their shadow exposure, will soon be the most discussed topic by pundits. So aside from the obvious investment choices, how does a professional
money manager (it is kinda tough to tell your LPs "all your 2 and 20
generating assets are tied up in zero cash yielding gold" unless one's
last name ends in -aulson, -horn or -rott), how does one plan for "A
flight path that contains short-term deflation and long-term
inflation?" Read on to find out (and no, it's not US Treasurys).

Today's ES price volume presented without commentary. Well one: the 10 Year closed below 3%. Stocks closed at highs. The takeover of the market by the administration as we head into the midterms is now complete.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 26/07/10

Next time your broker calls you and tells you you have a margin call on your short in stock XYZ, tell them you refuse to comply as you have it "marked to maturity", and on a long enough timeline, every stock will go to zero. This is precisely what (technically the inverse) German banks DG and WGZ, which had previously refused to post the details of their stress test "passage" did in order to pass the "Stress BS." Dow Jones reports: "WGZ's disclosure showed that it had accounted for almost all of a EUR35 billion portfolio of sovereign bonds as "held to maturity," thus avoiding the need to subject them to the discounts required by the "sovereign risk shock" in the tests." As we had previously expected, all banks would promptly reclassify their worst debts (Greek and Spanish exposure) as their best: i.e., as part of the Held to Maturity book. This is precisely what happened, and why Europe is still as insolvent as ever. And get this: 'bonds held in the banks' trading books were subjected to theoretical markdowns of up to 23% in the case of Greece, but the regulators didn't apply that to long-term assets, as that would have implied recognition of the possibility of a sovereign default--something they said was "unthinkable."' So the test tested for everything except for the all too real six sigma events that blew up Bear Stearns, Lehman, AIG, Merrill, WaMu, RBS, Northern Rock, Hypo, and the 7 or so banks to go tits up each week in the US (what is the latest MTD tally on bank failures in the US: 100? 1,000?), not to mention every bank in the world had the US taxpayer not involuntarily bailed them all out... And since this is precisely the same stress test architecture that the one and only tax cheat #1 created in the US a year ago, one can only imagine the level of scammery involved domestically, which had even less testing disclosure than in Europe.

Excitement has been growing about a long out-of-print book Dying of Money: Lessons of the Great German and American Inflations by Jens Parsson  and currently costing $234 at Amazon. The author vividly and thoroughly recounts the influence of inflation
throughout history with special emphasis on the U.S. economy and the hyperinflationary events of the 1920s in the Weimar Republic, Germany.

The only thing worse than HFT algos that buy and sell the same stock 1 million times a day, are highly overrated "hedge fund managers" who pretend to have a long-term view on the market, yet flip their mind 180 degrees not once, not twice, but three times in the span of less than 30 days. At least HFTs are merely programs: their stupidity is endowed in their decision making process by their 19 year old math Ph.D. creators, who incidentally have long proven that correlation is in fact causation (until the market plunges by 90%... at that point it is always time to reevaluate one's stupidity for about 2 minutes, and then jump on the latest Fed reflation attempt with no changes). The question is: what excuse can Barton Biggs use?

Nothing much to be said here. Stocks are broken for yet another day, as correlation 101 fails as expected due to the most recent attempt to ramp stocks regardless of anything and everything. Oh, guess where volume is... Laughable. At this point nobody, absolutely nobody in stock land dares to take on the Fed, even as the bond vigilantes rumble in their sleep.

Warren Pollock reports on a rather troubling development which we can only attribute to various cost cutting measures by near-bankrupt states, as anything beyond that would be far too macabre even for us. It appears that "several drugs are in severe shortfall, drugs used to treat emergency patients that might be transported by ambulance to emergency rooms, the drugs include heart attack drugs, epinephrine, lidocain, as well as drugs used to treat shock and other conditions. These emergency care drugs are now in shortfall with alternate protocols going out to emergency services in various parts of the nation. This means that if you need emergency services, the drugs you rely upon to save your life may not be there." As WEP asks, "where have these drugs gone? It isunrealistic to suggest that a whole variety of emergency treatment drugs would go missing from the inventory all at the same time, and areas around the country all at the same time." Pollock highlights the states of TN, PA and CA may have already seen the incorporation of the "alternative protocol." Once again, we hope this is merely an interim shortage and not a widespread effort to impair the traditional operation of emergency technicians across the country.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 26/07/10

With the assumptions and conditions for the stress test pulled straight out of CEBS' collective bottom, it is no surprise that a mere 7 banks for a total $246 billion in affected assets end up being defined as undercapitalized. But what happens when instead of using a 6% Tier 1 capital threshold, a Basel III 8% Tier 1 is used? Something log scale worse. As Austrian Der Standart journalist Lukas Sustala points out, and as demonstrated on his chart below, the failure rate goes up exponentially: instead of 7 banks failing, 39 of Europe's biggest banks would be undercapitalized, and the impaired assets would amount to a whopping E2.6 trillion, requiring at least E30 billion in incremental equity capital, on top of the hundreds of billions already infused by European governments. In Lukas' words: "The stress tests were a farce (taking no account of counterparty risk or a sovereign default), but at least they provide some good data points (I currently look into all the sovereign holdings of the individual banks, so there is more to come). 39 banks fail the 8% criteria."

As usual, some terrific points from the man who was far too smart for Merrill Lynch. We are also glad that Rosie caught our observation over the weekend that securitized loans have plummeted by trillions recently: easily the single biggest argument for QE2.

If you thought volatility in stocks was beyond ridiculous, we hope you have been keeping an eye out on what happens to the US economy when the central planning bureau takes over. Case in point: the Dallas Fed Manufacturing index of General Business Activity was just released, and it is a stunner: after coming in at -4 in June, and expectations were for a gradual improvement in July to -2.5, the actual released number was -21! And of course after the usual downward revisions as per page 1 of the Chinese data presentation manual, in which superfluous zeros for negative numbers are strongly encouraged to be eliminated , this will likely end up being something like -210 when it is revised next month. But the market does not care: after all it can pretend Americans are buying homes until next month's revision indicates that new homes sales in June were actually a negative (is it possible? who cares - not Cisco routers).