Archive - Aug 2010 - Story

I apologize as I have not provided much added commentary on relative value trading ideas these past few days, I have been solely focused on trading bet (or risk) and digging into the data of last year's POMO days to isolate patterns and trends associated with Federal Reserve market operations. Regarding that last point I will have a comprehensive analysis out tomorrow, so far the results are interesting, maybe that will convince a few traders out there to actually come in on Friday to read it tomorrow! As far as relative value is concerned, I had recommended bear conditional flatteners right at the highs. While the curve has lost a lot of delta to the curve, it is well in the money as we have flattened dramatically the past week. Why a bear flattener? Clearly a bull flattener would have been more profitable but the trade had no negative carry, in case of further bull steepening you would therefore have broken even, and since on a sell-off a flattening was virtually guarantied, the risk reward for that trade was excellent. On the flip side bull flatteners had negative carry. Still a good trade and the odds are that now market is going to keep flattening aggressively with steepeners getting carried out on stretchers, low participation overall, and the demand for yield pushing buyers ever further out the curve. - Nic Lenoir

Today we got our first Hindenburg Omen confirmation. The number of new highs was 136, and new lows was at 69 (per the traditional WSJ source). Granted this particular criteria set was a little weak as the 69 is precisely on the borderline for confirmation (the 2.2%), and the new highs number was not more than double the new lows (although it was close). Less gating were the McClellan oscillator which was negative at -83.6, and the 10 week MVA, which rose, which were the two remaining conditions. The first omen was spotted on August 12 - a week later the H.O has been confirmed. The more confirmations, the scarier it gets from a technical perspective, not to mention the conversion into a self-fulfilling prophecy (like every other technical indicator).

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 19/08/10

Two days into the proposed Nikkei-SPX convergence, the ROI stands at about 4% after last night's ramp in the Nikkei and today's plunge in the S&P. Granted, it is disingenuous to not account for the today's Nikkei session which is why absent a 4% down day in the Tokyo index, the trade should still be profitable. We are still confident that the BOJ will be forced to act to stop the Yen surge, unless the most recent PM wants to have a tenure even briefer than that of his predecessor, at which point the convergence will outperform further toward the goal of 10%. Regardless, those who believe deflation has a firmer foothold in Japan may be wise to unwind. The flipside is that the US will be unable to pursue further QE steps until September 21 at the earliest when the next Fed meeting will be held. Which is why the trade can likely be held for at least a few more weeks without any adverse catalyst on the horizon.

Social Security is a demographic and financial time-bomb. With something like 60 million Baby Boomers about to begin retiring, the so-called “Social Security lock-box” is going to take quite the beating—especially considering that that famed “lock-box” is stuffed not with money but with nothing but Treasury IOU’s. Politicians of both parties are making rumbling noises, essentially in two directions: Cutting benefits, and finding an “alternative system". One of those alternative systems some American pundits and politicians have been looking at is the Chilean system of AFP’s—Administradoras de Fondos de Pensiones, literally “Managers of Pension Funds”. This system is a workable free market solution to the problem of funding worker pensions, and has worked like a charm for the past 30 years. Unfortunately for this good idea, the system was imposed by decree by the Right-wing dictator Augusto Pinochet. - Gonzalo Lira

A few days ago we presented the most recent investor letter by Egon von Greyerz of Matterhorn, whose pessimism makes David Rosenberg seem like a CNBC staple cheerleader. Today, CNBC invited the hyperinflationist to its European studio where von Greyerz engaged in some entertaining sparring with the anchor over two totally different worldviews. Those who have read the letter previously, and have followed the inflationist side of the argument, will not be surprised by any of the disclosures: decades of debt fueled prosperity, $20 trillion backstop of financial institutions, deteriorating fundamentals, reckless money printing, and gold as the only real store of value: in other words - all the things that those who see no treasury bubble will close their eyes to and quickly walk away from.

As we expected, the murder (or whatever a group thereof is called) of wall street Ph.D. lemmings is appropriately positioning its collective tail between its legs and duly following Jan Hatzius into preliminary double dip(ression) territory. JPM's Robert Mellman just cut his Q3 and Q4 GDP forecast from 2.5% and 3.0% to 1.5% and 2.0%. The firm has not touched its 2011 estimates yet. Obviously once Q2 GDP is revised to sub 1% as we are fairly confident will be the final revision, it will. We are waiting for the hilarious capitulation from Wall Street's most discredited cheerleader: that of BofA's David Bianco.

Who’s putting out those estimates for the Philly Fed Survey? Obviously not an exact science but I demand a Congressional Investigation. While they are at it, how about a look into the crush in the Spoos and NDX futures after 4 pm yesterday (on no news) for 6 and 14 points respectively. That’s all I have to say about that. The market unraveled on the worse than expected Philly Fed Survey with a couple of support levels being taken out. Around noon, the S&P found support at 1070 but with the NYSE a/d off worse than 5 to 1 negative, I don’t expect a bounce to carry that far. If the market continues its slide tomorrow, I expect the S&P 500 to make a stand in the 1055-1060 area.

Even as the public debates aggressively on the nature of bond bubbles and whether they have a footing in the US economy, Tim Geithner's office has no intention to discover the denouement of this particular polemic, and instead is preparing to belch the lastest batch of US-backed paper. In the upcoming week the US Treasury will issue a total of $102 billion in 2, 5 and "curve sweetspot" 7 year notes, with nominal amount all in line with expectations. In other news, the Fed will surpass Japan as the second largest holder of USTs by the end of September, and China, which holds just $40 billion more, by the mid-term elections. In other words, we should not worry that China will soon forsake us - after all the Fed is gladly once again monetizing the Chinese stake.

Those who were disappointed by the earlier CBO budget reestimate which increased total deficit by about $44 billion over the next two years, will have to weep more tears based on the just released statement by Congressional Budget Office director Doug
Elmendorf who said that in reality the budget deficit could come much higher than the just disclosed estimates, and the recent economic data releases have been "more negative" than data factored into the projection. Which, in government talk, means that the real deficit will likely come at least 20-30% higher, and since debt issuance tends to track around 40% higher than nominal deficits, the bottom line is that the US will have to issue a gross $3 trillion+ over the next two years. But who cares: one could add 10 zeroes to this number, and rates would likely drop to zero overnight.

Two years ago when I told everyone I knew that the United States was bankrupt and would ultimately default of its debt one way or the other (by inflation or restructuring) I was called crazy and dismissed by 95%+ of the people I met. These days many of the same people still think I am crazy when I say that a political, financial and intelligence elite which has now teamed up with large corporations is attempting to create a global currency and world government (with them at the helm of course), but the notion that the U.S. is bankrupt is now more or less mainstream. Even the corporatist/socialists in power are now unable to merely dismiss questions about the deficit. The public has woken up from its slumber of consciousness and is now starting to see things as they are. This is an extremely positive development and is why as I have said before I think the elite are in their last days as the freight train of consciousness runs them and their twisted illusions of grandeur into the sea. The weakest link in this sick and corrupt financial system that was forced upon many of us before we were even born with its mechanics purposely hidden in the shadows so that we remained ignorant of its preposterousness, is the commodity market. However, within the commodity market the weakest link is gold. - Mike Krieger

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 19/08/10

Retail threw in the towel weeks ago, which is why at this point confirmation that nobody is trading is like watching reruns of Weekend at Bernies (or GETCO's). ICI reports that the week ended August 11 saw a record 15th weekly outflow from domestic stock mutual funds, this time of $2.1 billion. YTD outflows are now just under $48 billion. Hedge funds are not the only ones who missed the miraculous and completely senseless July stock ramp: retail pulled out $13.1 billion in the same time, and has followed up by redeeming another $4.1 billion in August so far: nothing matters anymore - stocks can go up, they can go down: it is all the same to the one segment of the stock market responsible for the biggest portion of market capitalization. There is no improvement in the trend - retail has no faith in stock valuations, in the SEC, in the possibility that another flash crash won't happen tomorrow. Furthermore, retail is getting older and the retiring baby boomers would rather drink cyanide than put their money in stocks. We wish all the best to the computers and the Primary Dealers - they are now all alone. We dread to even think what cash levels are like at mutual funds.

Though the official London Gold Pool disbanded in 1968 when it suffered massive outflows of bullion trying to frustrate free market forces that were manifesting themselves as insatiable demand for the metal, someone is now operating, albeit covertly, a second London Gold Pool. However, what I will show unequivocally in this article is that this “Second London Gold Pool” is about to suffer the exact same fate as the first one did. - Adrian Douglas

Today's POMO has closed, with the Fed monetizing $3.609 billion in debt, far more than previously expected, and much more than last auction's $2.5 billion (is Liberty 33 sweating in its reliquification attempts courtesy of today's nightmarish economic date). The hit rate was also worse than the previous one, coming in at 16.5%, with 12.2% previously (another way of saying this is that the submitted/accepted ratio was 6.07). And yet again, Morgan Stanley was spotless, with its 9 bond predictions all eligible for purchases, and in fact seeing 6 of the 9 proposed issues purchased by the Fed. In a basket which had 27 eligible CUSIPs, this is quite an impressive result.