Archive - Aug 3, 2010 - Story

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 03/08/10

Earlier today, the Middle East again came once step closer to war after the latest Israel-Lebanon clash claimed the most lives since the Second Lebanon War. As part of the escalation, 3 Lebanese soldiers and 1 journalist were killed, as well as an Israeli officer, over what appears to have been a day of gardening gone horribly wrong: Haaretz reports: "The violence apparently erupted over a move by Israeli soldiers to trim some hedges along the border, a sign of the level of tensions at the frontier where Israel fought a war in 2006 with the Lebanese militant group Hezbollah." Surely this latest escalation explains the most recent surge in stocks, as Ben Bernanke will now have an excuse to take his money paradrop operation over to the Middle East, in hopes of keeping everyone occupied through endless amazon.com purchases of assorted useless gizmos.

Barclays' Joseph Abate adds to the recent confusion over what path of QE (if any) the Fed will decide on at its August 10th meeting, and flatly disagreeing with Nomura which as we noted last week is now convinced the Fed will advise of further loosening in its language, believes that neither MBS roll offs (telegraphed earlier by Jon Hilsenrath), nor lowering the IOER to 0.00% will be sufficient to do much if anything to boost the economy, and instead he believes that the likely path the Fed will take is to allow the Supplemental Financing Program (which currently holds $200 billion in untouchable reserves on the Treasury's book) to roll off, by ending the 56-day Bill auctions, thus pushing almost a quarter trillion dollars into the banking system which can then be used to buy any combination of beta > 5 stocks. The result of this, according to Abate, "would likely push bill and repo rates well into the single digits." Of course with the 2 Year already at almost south of 0.50% one wonders just how much further along the curve does the Fed hope to have its impact felt. Could the Fed merely be trying to steepen the 2s10s by forcing 2s to zero? At this point, nothing would surprise us.

From Bloomberg's Michael Rosenberg: "U.S. bond yields are presently priced for an anemic economic recovery,
consistent with U.S. nominal GDP growth averaging around 3% for the
next two years, which is nowhere near the 5% projected by
private-sector economists and the FOMC. Something has to give here.
Either forecasters will need to revise their forecasts lower, or U.S.
bond yields are at risk of moving sharply higher. All of this suggests that greater caution on the part of investors is
warranted. Indeed, in a world where market expectations are not firmly
anchored and where the economic outlook is “unusually uncertain”, a
defensive posture appears to be the prudent course from here on." In other bizarro words, buy stocks. Below is July's Financial Conditions Watch in which yet another person tries to make sense of what is now a completely irrational and busted market. (and yes, the pageview flipping presentations that some of our competitors will make out of this document will be simply mindboggling)

Someone please slip some lithium to the ES trading desk at Liberty 33. While all of last week the general public had to endure the Fed's various public talking heads' platitudes threatening an imminent round of massive liquidity infusions unless Joe Sixpack went and bought the highest beta stocks available, here come the bipolar futures traders from the FRBNY, saying that Bullard and Bernanke were only kidding, and instead they are about to go ahead and withdraw liquidity in the form of various triparty reverse repos. Only this time the Fed will also allow assorted MBS of dubious quality to be tested for collateral purposes, which we are certain the banks will be delighted to provide the Fed cash against: "Beginning tomorrow, New York Fed intends to conduct a similar series of small-scale, real-value reverse repurchase transactions with primary dealers using all eligible collateral types, including, for the first time, agency mortgage-backed securities (MBS) from the SOMA portfolio." At this point the Fed's behavioral psychology experiment has reached such grand proportions that it is willingly shotgunning the most contradictory statements in the open just to see if the ES will rise a few bps without Liberty 33's intervention.

Look at AUDJPY versus the S&P future. AUDJPY is the poster child of carry trades, and with JPY strength across the board, the pair is diverging quite a bit from the strength of the S&P futures. Here again we would recommend selling S&P futures against buying AUDJPY, unless you prefer selling equities outright but as per my update yesterday we have not seen the upside targets yet (first in line at 1,126... maybe close enough? I will wait to be outright directional but the convergence is a good value play for the day).

Pending home sales came in at -2.6%, on hope and faith of even a modest rebound to the tune of 3.9%. This of course came after last month's plummeting (and revised) -29.9%. Factory orders also dropped to -1.2%, versus expectation of -0.5%, after the prior -1.4% reading. Lastly, the trifecta of ongoing bad news was completed as the June durable goods number was revised from -1.0% to -1.2%. And that giant slurping noise you hear in the background is the printers at the Marriner Eccles building loading up with ink.

As Tiger Wood’s Dad would say: I am disappointed in you, Gold.

The Gov’t is clearly preparing the field for QE 2, Stocks, Bonds and Commodities all get the picture but Gold (don’t call it a commodity please) is struggling. In a world where every asset has a 100% correlation, where hedges add risk instead of mitigate it, Gold still underperforms. It is annoying to say the least. The Fed sure is having its way, and I am wondering if waiting for them to be wrong is as good a trade as riding the fiat wave of bubbles they are recreating.

After the longest consecutive decline in the BDIY plunged the Baltic Dry shipping index to record oversold levels, the subsequent 200 point jump was sufficient for many to say that the next dry bulk shipping renaissance has arrived. Alas, the latest inflection point is here, a mere two weeks since the lowest point in years, coming before the index could even reach the psychological barrier of 2,000. The BDIY has now reversed its two weeks of gains, dropping 0.7% from 1,977 yesterday, to 1,963 earlier, with a drop in all three index rates: capesize, panamax and supramax. Is this the beginning of the second leg down in the BDIY?

• Tim Geithner just broke every lie detector in the country: Welcome to the recovery (NYT)
• Treasuries Lack Safety, Liquidity for China, Yu Yongding Says: U.S. Treasuries fail to provide safety or liquidity when it comes to managing China’s $2.45 trillion foreign-exchange reserves, said Yu Yongding, a former central bank adviser. “I do not think U.S. Treasuries are safe in the medium- and long-run,” Yu, a member of the state-backed Chinese Academy of Social Sciences, wrote yesterday in an e-mailed response to questions. China is unable to sell the securities in a “big way” and a “scary trajectory” of budget deficits and a growing supply of U.S. dollars put their value at risk, he said. (Bloomberg)
• China won't relax property measures (China Daily)
• Japan Finance Minister: Markets Should Set Yen’s Rate (WSJ)
• Weber is a Bad Choice to be EU’s Top Banker (FT)
• David Stockman channels Herbert Hoover (Barrons)
• The next sovereign debt crisis... will be here (The American)
• Here comes food inflation: Rise in Wheat Prices Fastest Since 1973 (FT)
• The Death of Market Fundamentals (Jim Sinclair, h/t Kyle)
• Property Slump Adds to US Muni Woes (FT)

While economists were looking for Personal Income to come at a 0.2% growth in June, the actual number was an unchanged print from May (and a drop from the 0.3% revised rise in May). One wonders just where the Chairman gets the temerity to say that US consumers will spend more with time, despite the just confirmed (for the nth time) contraction in actual incomes, not to mention that the second drop in Payrolls in as many months will once again confirm the double dip.Further confirming the Goblin-in-Chief's delusion was that personal expenditures also printed below expectations, coming in at 0.0%, on expectations of 0.1%, down from a revised 0.1%. In other words the savings rate in June was unchanged. Yes, that means consumer did not spend more than in May, and goes against the whole "economic expansion" propaganda. And putting the last nail in the spending coffin, was the personal savings rate, which at a revised 6.4% came at the highest reading since June 2009. The US consumer is done (there are only so many iPads a bankrupt mortgage holder can buy), and no matter how fast the Dow hits 36,000, nothing will change this.

• Asian stocks rose, with MSCI at a 3-mt high, on lower corporate default risks.
• Australia Central Bank keeps key interest rate at 4.5% as inflation cools.
• China's worst floods since 1998 to cut farm output, lift price.
• EU raided offices of companies manufacturing Polyurethane foam in a cartel probe.
• Euro-Zone PPI rises 0.3% - less than expected.
• Fed likely to pass on more stimulus amid signs economy weak: Bernanke.
• Japanese stocks climb on US manufacturing data; Trading companies gain.
• Pending sales of existing US homes probably rose in June.
• 4.9M barrels leaked into GoM from the broken well operated by BP, government agency.

For those who are unlucky enough to be on vacation and having to keep track of the deranged lunacy that passes for markets, the 10 Year just dropped below 2.90% as futures turn green! This is so insane, that it makes all the sense in our bizarro world now. Remember, last week we warned of a 10% meltup in stocks and bonds. So far it is working. In Europe, the same thing as Bund stops are triggered, and as 10 year Gilts trade to lowest yields since April 2009. Thank you Ben Bernanke: you have once again destroyed any semblance of logic in the market and driven another batch of traders out of the market: those who have no recourse to lose other people's money. Bloomberg's Matthew Lynn sums it best in Risk Is the New Black in World Turned Upside Down: "Investors need to reverse everything they thought they knew about risk. Assets such as property, the dollar and developed-country bonds are only for those who don’t mind losing their shirts. Small-time investors who depend on getting their money back should be buying into small companies, emerging markets and private-equity or hedge funds. We don’t know precisely what will emerge as “safe” once the dust has settled on both the credit crunch and the sovereign-debt crisis. But emerging markets are safer than developed ones, equities beat property, and corporate bonds are preferable to government notes. Sometime around 2015, don’t be surprised if bankers are advising widows and trust funds, which need to preserve capital above all else. They will be offered Turkish bonds, a hedge fund or two, and a portfolio of small emerging-market stocks. Real estate, Treasury bills, and dollar or euro blue-chips will only be for people who fancy a flutter -- and have already been warned they may lose everything." Logic is now dead.

Goldman's Jon Pierce asks why, and how much longer, will the EUR keep surging. He provides some answers, but not the real one, which is that the Fed's second round of monetization is now being actively priced in and just like last year, is resulting in a plunge in the dollar. Which incidentally means the end of Europe's export-led economic "miracle" - it was fun while it lasted. Surely US exports can take over from Europe... Of course it would be great if the US had stuff to export. Either way, Goldman has provided another downside stop target of 1.305 (a level we were at as long ago as last Friday). Somehow every time GS goes out and shares its stop limits, they imminently get hit. Although with the Fed now actively back to destroying the dollar, Goldman may just luck out for once.

A modest bout of profit taking in gold, in big part driven by hedge fund liquidations at the end of Q2, has pushed spot price by less than 7% from the all time high, and a variety of bears have crawled out of the woodwork screaming the end of the gold bull market. In the grand scheme of thing this is rather myopic. It was precisely the same quantitative easing the provided the impetus for gold's straight line rise from just over $800 to $1270 in the span of a year as faith in the future of monetary currencies has progressively disappeared, that will serve as the springboard for the next major move higher: and with the Fed now days away from announcing some iteration of its brand new monetization scheme, the days where gold can be purchased cheap may be ending. For those still relatively new to the gold market below is a useful recap of the major developments for the world's best performing asset in Q2 courtesy of the World Gold Council.