Archive - Aug 2010 - Story

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.

The moment many gold bulls have been waiting for - the Chinese Central Bank has just released a directive informing everyone it is commencing the development of a healthy gold market. In the release (below), the PBoC stressed the need to develop the market to serve the overall situation of China's gold industry, based on improving the competitiveness of China's financial markets, effectively strengthening innovation, and promoting the formation of multi-level market system. The PBoC has asked the Shanghai Gold Exchange, Shanghai Futures Exchange and commercial banks to become actively engaged in developing a national gold market. With China owning a mere 1,064 tonnes of gold (sixth in the world and well behind both France and the GLD ETF in terms of holdings), which represent just 1.6% of its reserve holdings, there is only one way to interpret this borderline revolutionary press release. China has now officially entered the gold market.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 03/08/10

Jon Hilsenrath is out with the latest rumor of what the Fed will decide to do to stimulate a double dipping economy next week, and while it is already well known that Bullard is all for QE 2, and the idea of reducing the interest rate on excess reserves has been widely pondered and for now at least, snubbed, the WSJ confirms that the latest plan is to use proceeds from maturing mortgages to buy treasuries. The result: a 2 Year that is at a fresh all time record low yield of 0.542%, and a 10 Year flirting again with the 2.9% barrier. Stocks and bonds are once again terminally disconnected, as the market attempts to front run the Fed in buying up Treasuries, even as the marginal buying isoccurring in stocks since the Fed has essentially announced that anything yielding less than 4% is risk free. Of course, as Jon points out: "Any change—only four months after the Fed ended its massive bond-buying program—would signal deepening concern about the economic outlook. If the Fed's forecast deteriorates significantly, it could also be a precursor to bigger efforts to pump money into the economy...The Fed's mortgage buying pushed investors to buy other assets, including corporate bonds and stocks. Any extension of that program, even in the form of reinvestment, could help support the recent rally in such riskier assets." So can we at least stop pretending the economy is not double dipping and that stocks are in way even remotely indicative of fundamental values. Tangentially, and as frequent readers will recall, any message from the WSJ is very likely to have had the prior stamp of approval of the New York Fed, implying it is vastly more than mere speculation.

John Paulson is a billionaire for good reason: he has been right far more than wrong. Yet is his "recovery" bet premature? Does his entire strategy hinge on a bet on housing, which as Bullard, Greenspan and Shiller all say is very precariously balanced on the edge of another leg down. Will Paulson finally be proven wrong, and if so will he be remember for his one wrong bet far more than for the series of right ones?

Local governmental officials that are demanded from the government to produce double digit GDP growth numbers give real estate developers permits to build housing projects in return for bribes. They also get bribes in return for allowing the shark loan companies to operate under their jurisdiction. Some of them are active partners in shark loan businesses. For example, a party secretary of legal affairs, that controls the public security bureau, which is a court and prosecutor division of government in Yanking city, in She Kiang province tired to run abroad using a passport in 2009 after he found out he can’t repay 60million Yuan. Every scheme has a ring leader whose job is to collect money from all the participants in the ponzi scheme. When some of these ponzi schemes blow up, the party leaders always get bailed out first, and some even ask local business owners to lend them money, and then bail out their own personal fund. After that the ring leader turns himself in and gets protection from the local government.

Still confused by Jim Bullard's critical paper from last week Seven Face of The Peril in which the St. Louis Fed president, and voting Fed member, stated that he has no qualms about buying up Treasuries, further debasing the currency, and raise interest rates at the same time should deflation persist? Jim Rickards explains the (lack of) logic behind the argument, and evaluates the alternative: what if, just like every other time before, the Fed is wrong yet again...

Oil prices broke out decisively to the upside on Monday, breaking above
resistance at $79.69, $80.00, $80.40 and $80.82. It is what the bulls needed to
do to generate a convincing signal that this market intends to move higher. By
settling at $81.34, above all of those resistance levels, the bulls wwere able to
negate last Tuesday’s technical failure and they broke decisively over all the
resistance generated since the end of May.
Technically, prices now have a sound reson to advance on the major highs,
the highs for 2010, at $87.19. It was from that high that we had a technical
failure in early May, which effectively set us upon a course of steep decline and
then consolidation. Prices have now broken out of their trading range. - Cameron Hanover

Dan Rather chats with Alan "Taz" Grayson in the enclosed clip, over the opportunities that America may glean as part of the historic one-time only audit of the Federal Reserve, which passed in a watered down vote as part of the FinReg. The exact conditions and the applicable disclosure are still rather murky, although we will take the congressman's word that the information obtained will be material. As Rather says: "soon auditors and accountants will comb through he Fed's book, looking at all the lending the Fed engaged in, starting in 2007 and ending in July 2010, a one-time only peek behind the curtain of the secretive institution." Grayson elaborates: "I expect to learn exactly who got what. We have nothing but single line descriptions of hundreds of billions of dollars that have been disseminated by the Fed. We don't even know who got that money. We don't know the terms of that money. We don't know what the Fed got in return. And in particular we don't know why the Fed keeps insisting that none of these deals were deals that exposed it to the risk of loss." Alas, we are convinced that since the Fed did in fact allow politicians to vote unanimously on the one-time deal, that, just like Goldman, it had found a loophole to proper, correct disclosure far in advance: the truth of what happens behind the Marriner Eccles walls will not be disclosed until well after the reset button has been pushed. Importantly, as Alan points out, occasionally the people in this country can make a difference by calling their congressmen and making it clear just what is important to the broader population, and oddly enough transparency at the money printer, especially when the only thing that can keep the economy solvent is printing ever more money (and issuing more debt, but the two are synonymous, just ask the primary dealers).

Just because it didn't work once, and caused the firm to lose hundreds of millions in Q2 profits, doesn't mean Goldman is done pitching the short vol trade to someone, anyone, who is still stupid enough to listen to the firm's advice (the real important clients are already on the other side). Almost exactly 8 months after the firm came out with its top trade recommendation for 2010, namely the "short S&P 500 Dec10/Dec11 Forward Starting Variance Swap" which was opened at 28.20, with a target of 21, and is now at 30.38, and on which a client made hundreds of millions for doing precisely the opposite (to the chagrin of Goldman's flow desk). One thing to be sure of: Goldman won't be caught on the wrong side of the trade twice in a row. At least when Goldman was constantly wrong in its EURUSD recos, it would change the recommendation (over and over). Here, clients are not so lucky. Which can only mean that the capital at risk now (for Goldman) is quite material. And with Goldman selling vol harder than ever (not to mention hedging its own underwater variance swap legacy position), and Hatzius more pessimistic on the economy than ever, something big must be coming.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 02/08/10