Archive - Jan 26, 2011 - Story

Frequent readers know that when it comes to Goldman Sachs, Zero Hedge has consistently claimed two things: i) that in the peak bubble days, the firm regularly commingled flow and prop traders on its trading floor(s), thereby allowing prop traders to either front run the firm's flow accounts, or trade alongside them in real time; and ii) that when it comes to OTC derivative trading, Goldman Sachs is the de facto Wall Street monopoly, a status made even more acute following the annihilation of Bear and Lehman, thereby cementing the firm's undisputed role as primary fixed income/OTC derivative market maker. Whereas yesterday we received indirect confirmation of the former, when we learned that Merrill was slapped on the hand with a token $10 million fine for doing precisely what we alleged, and which we are certain will soon be reconfirmed transpired at all other major banks in the 2003-2007 period, Goldman most certainly, and probably profitably, included, tomorrow it will be made clear that Goldman was an effective monopolist within the derivative space, with a bulk of its revenues in its highest margin, FICC group, coming from derivatives. When tomorrow the FCIC releases its long-awaited 545-page report exposing a tiny fraction of the criminality on Wall Street, we will discover that "Derivatives accounted for 70 percent to 75 percent of revenue in the firm’s commodities business from 2006 to 2009, and “half or more” of revenue from interest rates and currencies, the firm estimated, according to a report by the Financial Crisis Inquiry Commission. From May 2007 to November 2008, about 86 percent of $155 billion in trades made by the firm’s mortgage business involved derivatives, the FCIC said."

Watching Obama deliver his State of the Union Speech last night, reminded me of all the rah-rah quarterly meetings that we had to attend as Managing Directors at Goldman, where senior management would remind us all of how great we were, and if there were any areas of competitive weakness relative to our adversaries at other banks, all we had to do was step up our game, innovate and globalize (or something like that.) Obama wasn't delivering a summary of what has, or is, going on for most Americans last night, no such negative status report. And, if you didn't expect him to, he gave good speech - full of reminders of how it is America's destiny and the American dream to be great and powerful, "robust democracy" that we are. There was a massive pink elephant in the room called reality though....My reaction was wtf?

While the Fed refuses to extract its head from deep within the sand of ignorant hubris that only a career in Ivy League education can provide, the world continues to burn, in many places quite literally. For all those who are finding it hard to juggle all the rioting, and confuse their Cairos with their Calcuttas, below we present an interactive map disclosing all recent documented food price hikes, protests, and riots.

Tunisia’s uprising has democracy watchers wondering if the instability will spill over into neighboring North African countries, but really that instability is already there. In the first week of the year, Algeria experienced violent protests after the government hiked prices for staple foods like milk, sugar, oil, and flour. Some 800 people were injured in several days of rioting, prompting President Abdelaziz Bouteflika to cut costs on some foods and lower import duties on others. The rioters went home, but odds are they will return to the streets when prices rise again. But Algeria is not poor – an OPEC member, it is the ninth largest crude oil producer in the world. More importantly for this conversation, Algeria is the world’s sixth largest natural gas producer, pumping out just over 3 trillion cubic feet (Tcf) of natural gas in 2008. At the beginning of 2010, the country’s proven natural gas reserves stood at 159 Tcf, the tenth largest in the world, and notably, Algeria exports some 3.6 billion cubic feet (Bcf) of natural gas each day to Europe. On top of the natural gas flowing to Europe through pipes, Algeria has become a key supplier of liquefied natural gas, or LNG. In 2008, Algeria exported 711 Bcf of LNG, and 90% of it went to Europe.

If there is one thing that the one-time GAO audit of the Fed disclosed, is how woefully insufficient the extremely superficial data discovery was. Another thing uncovered was just how needed this disclosure was: it provided extended material into how the Fed subsidizes banks (both domestic and international) on an ongoing basis, not to mention substantial number crunching for the blogosphere. Either way, if Bernanke was hoping that the Frank-Dodd bill would take care of the Fed opacity, pardon, transparency issue in perpetuity, he may be disappointed: Ron's son, Rand, has just announced he is introducing legislation to, well, Audit The Fed, precisely along the lines of what his father did previously and generated massive support from everyone in Congress. Once again Ben Bernanke is about to become a major thorn on the side of the political puppetry.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 26/01/11

Highlights from Netflix' earnings release:

• Subscribers – 20.01 million
• Net Subscriber Additions – 3.08 million
• Revenue – $596 million
• Operating Income – $78 million
• Net Income – $47 million
• EPS – $0.87 per diluted share
• Total subscribers: 20.01MM from 16.933MM Q/Q
• Paid subscribers increased by 2.4MM, from 15.863MM to 18.268MM
• Cancellations per month increase to 857K from 723K Q/Q
• Bust most importantly, free subscriberssurged from 1.070MM to 1.742MM. These are people who are not paying.

Last week, I was forwarded an analysis that really set me on end. According to a report by the American Enterprise Institute, public pensions are under funded by more than $3 trillion nationwide. Illinois pensions alone are $208 BILLION UNDERFUNDED using realistic measures. The overall level of funding is 29% --- the worst in the entire nation. Illinois SERS pensions at 23% of funding is $36 BILLION in arrears, Illinois teachers pensions at 28% of funding is $98 BILLION in arrears, Illinois Universities pensions at 30% of funding is $35 BILLION in arrears, Chicago Teachers pensions at 43% of funding is S16 BILLION in arrears, and Illinois municipal pensions at 47% of funding is $24 BILLION in arrears. To get this money, total population and corporations of the state will have to be taxed. This will not occur without a fight --- so Illinois is looking for an “out” from these obligations and also what it owes schools, health care providers, and nursing homes. Be prepared to get stiffed!

Dow Jones reports that wheat futures just hit a 29-month highs on "strong global demand." Per the newswire, Algeria bought 800,000 tons of milling wheat, with traders estimating the nation's purchases for January at about 1.8M. Turkey and Jordan bought wheat last week after rising food prices helped fuel unrest in Tunisia. "They're saying, 'Boy we've got to eat. We don't know where wheat is going to be in a month,' says PFG Best. CBOT March wheat ends up 18 1/4c at $8.56 1/2 a bushel, while KCBT March climbs 22 1/2c to $9.40 and MGE March jumps 21c to $9.77. The chart below shows the UBS Bloomberg constant maturity Wheat index which confirms the vicious loop of what surging prices and geopolitical instability means to wheat prices. The higher the prices, the greater the scramble by developing (and soon developed) countries to acquire as much wheat as possible and hoard it, hoping to avoid Tunisia's fate, which of course will lead to even greater price surges. And all of this ignores the impact of the Goblin in Chief, whose money printing fetish has earned him, in our books, the adjective 'genocidal'. Once China figures out what is going on, and rice prices finally explode as we fully expect they will, the world will figure out just why...The only silver lining - soon farming will be the most profitable profession in the world. And as bankers only go where the money is, Bernanke's strategy may in fact lead to the first net natural outflow of bankers from Wall Street in history.

Several days ago we highlighted that wage inflation in China spreading after Shanghai announced it would hike minimum salaries by 10%. Today, through Global Times we learn that this is just the beginning. Or the continuation rather: it seems that 30 provinces had already hiked minimum wages in 2010: "By the end of 2010, 30 provincial-level regions had raised the standard for the minimum wage, with an average increase of 22.8 percent year-on-year., Yin Chengji, spokesman for the Ministry of Human Resources and Social Security (MHRSS), said Tuesday. According to him, 29 provinces have issued the guideline for the minimum wages, and the benchmark line grew about 2 percent. In Shanghai, the local minimum wage was the highest nationwide, totaling 1,120 yuan ($170.2) per month." And 2011 will be even worse: " Also, according to a China Business News (CBN) report Tuesday, in 2011, many areas would continue to raise the standard. A Xinhua News Agency report Wednesday revealed that northern Chinese city of Tianjin is considering raising the minimum working wage by 16 percent this year amid rising inflationary pressure and labor shortages." We are confident America's workers will be delighted to know that Bernanke's massively destructive monetary policies are finally resulting in higher salaries... In China. But wait: this also means US consumer purchasing power is about collapse as since very soon all imported Made in China trinkets are about to get far more expensive as already razor thin margined China producers scramble to raise costs to their primary export market.

Even Goldman is not buying the Fed's (and of course Steve Liesman's) religious and nonsensical belief that only the core CPI is relevant: "To us, the main surprise-and it is a small one-is that the FOMC continued to characterize core inflation as trending downward despite an uptick in the December CPI." We were more surprised that the Fed did not acknowledge its new role as the CIA for the QE generation, where with the push of a (printer) button, Bernanke can now incite revolutions.

There was a time when stocks would make massive moves in the post-FOMC minutes, when there were actually things called "traders" participating in this algorithmic joke of a matrix/market. Not anymore. Which is not saying there is no vol. As we have now long been claiming, the only vol left is in FX and commodities. Observe the reaction in the EURUSD. With 500 margin, someone just got totally wiped out.

Some of the observations in this snoozer: observations on the lack of unemployment improvement, on the less than sufficient household spending, but most notably, the Fed notes the increase in commodity prices, yet still believes longer-term inflation expectations are stable. Notable is the deletion of the $75 billion per month deletion of the monetization run-rate, no reason is given for the change in the runrate purchases. And with Hoenig gone, every voting Fed president is now a docile little lamb. Lastly, there is no discussion anywhere of the Fed's only (third) mandate: that of getting the Russell 2000 to 36,000 in one massive flash smash (see IBM yesterday).

The world gold council has released its quarterly comprehensive investment digest, as usual chock full of actual data, and not just anti-gold speculation based on myth. Probably most relevant are the core facts: "The gold price rose by 29% in 2010. By comparison the S&P Goldman Sachs Commodities Index (S&P GSCI) rose by 20%, the S&P 500 rose by 13%, the MSCI World ex US Index increased by 6% in US dollar terms, and the Barclays US Treasuries Aggregate Index rose only by 6% over the year." The main reason for the jump: excess supply of paper currency alternatives, and surging investor demand. And while the recent pull back has been primarily driven by the flawed assumption that the Fed will not monetize any more debt and pump the "Yucca Mountain" of excess reserves (it will), many forget that the demand is actually still there. The chart below confirm this, and provide some other observations on the gold market.

Today's $35 billion 5 Year auction closed at a 2.97 Bid to Cover, the second highest following the 3.06 in July of 2010. The bond priced 2 bps inside of the When Issued indicating a substantial interest. The high yield dropped marginally from the last auction which came at 2.041% (29.85% allotted at high), with Indirect Bidders taking down a substantial portion of the auction or 45.0% a major jump from the prior 35.6%. Still there was a little change in the hit rate on the Indirect bid which was 76.6% compared to 80% last time. Altogether just another auction: there are many more to go. We are confident primary dealers will monetize roughly 30% of their allocation at the first opportunity, which will be on the February 9 02/15/2015 – 07/31/2016 POMO.