Archive - Jan 31, 2011 - Story

The March Brent Crude contract has just surpassed $100 for the first time since October 2008. Surely nobody is worried about monetary policy and Middle East contagion. After all, this is just throwing darts at the next disinflationary target.

In today's episode of "Flip That Bond", the Primary Dealers succeeded in flipping a whopping 26% of the just auctioned off 1% of 1/25/2014 (912828PQ7) back to the Fed. Today's POMO has closed with $7.720 billion in bonds maturing between 2013 and 2014 monetized by Sack Frost, of which, and this should come as no surprise to anyone, the bond most put back to the FRBNY, to the tune of $3.7 billion or 48% of all, was PQ7. Keep in mind that the PD take down in this bond was $14.2 billion. Just two weeks later the Primary Dealers have reduced their positions in this most recent auction by 26%. In other news, there is no monetization. And Tim Jeethner pays his taxes.

The Dallas Fed prints at 10.9 and misses expectations. Stocks ramp as the miss would have been bigger if it had snowed in Texas, and so you must acquit. In the meantime, GETCO buying not just every single INTC share in Level 2 - 200, but moving on to everything not nailed down. Melt up must proceed as planned. Since this index missed and is thus completely irrelevant, here is the only notable extract from the report: "Prices climbed again in January. The raw materials price index jumped from 43 to 62, reaching its highest level since mid-2008. The share of manufacturers who saw an increase in input costs surged to 64 percent, compared with only 2 percent who saw a decrease. Finished goods prices rose for the third month in a row, although the great majority of respondents continued to note no change. Sixty percent of respondents anticipate further increases in raw materials prices over the next six months, while 40 percent expect higher finished goods prices."

What's wrong with this map?

"As part of ongoing quality assurance, Intel Corporation has discovered a design issue in a recently released support chip, the Intel® 6 Series, code-named Cougar Point, and has implemented a silicon fix. In some cases, the Serial-ATA (SATA) ports within the chipsets may degrade over time, potentially impacting the performance or functionality of SATA-linked devices such as hard disk drives and DVD-drives." As a result: "The effects of the chipset issue and these transactions are incorporated into the company’s revised outlook. The company now expects first-quarter revenue to be $11.7 billion, plus or minus $400 million, compared to the previous expectation of $11.5 billion, plus or minus $400 million. Gross margin percentage is now expected to be 61 percent, plus or minus a couple percentage points, compared to the previous expectation of 64 percent, plus or minus a couple percentage points. Spending (R&D plus MG&A) is now expected to be approximately $3.6 billion, compared to the previous expectation of approximately $3.4 billion."

Chicago PMI Surges again, hitting 68.8 on expectations of 64.5, compared to the lower revised 66.8. And as recently has become trading, the only indicator everyone is looking at is the Price Paid (i.e., the margin collapse metric) which came at 81.7 compared to 78 previously. The key comment from the survey panel: "Steel prices are going crazy." Nuff said.

At the outset of the last century America was still a vital, free, growing country on the rise. The song of the century began as a joyous ballad and ended as a funeral dirge. The creation of a Central Bank, which could create inflation on demand, and allowing politicians the ability to buy votes through pork spending, paid for with ever increasing taxation, have sucked the life out of the American Dream...The Federal Reserve has not been alone in killing the American Dream. Politicians since 1913 have done their part in suffocating the dream. The tax code consisted of 400 pages in 1913 and tax rates ranged from 1% to 7%. In less than a century politicians of both parties have carved out 70,000 pages of payoffs, entitlements, and bribes for their contributors and constituents. Tax rates now range from 10% to 35%. Those 70,000 pages of rules, regulations and tax breaks do not benefit the average middle class American. They benefit those who had the money and power to buy off a Congressman.The Federal Reserve and the US Tax Code bastardized the American Dream, created barriers to economic advancement, and supported the accumulation of wealth and power by a select few. The ruling elite have used their power and control over the media to convince the majority of Americans that the American Dream is about accumulating material possessions with debt. The American Dream no longer meant attaining the fullest measure of your capabilities, but living in the biggest McMansion, driving the nicest BMW, watching the biggest TV and wearing the latest fashions, all acquired with debt. America is dying.

The geopolitical ramifications of the revolution in Egypt and the likelihood that it will spread throughout the Middle East, North Africa and possibly further afield is leading to volatility in markets. Equity indices in the Middle East and Far East were mostly down (except for China) overnight. European bourses were under pressure this morning but have recovered somewhat. Gold and silver are marginally lower after their strong showing Friday which resulted in silver closing the week 1.7% higher and gold being tentatively lower (-0.14%). Remarks by a People’s Bank of China advisor that the Chinese should diversify into gold and silver are very important (see below).

• Lonely Analyst Warns of 2015 Bank Crisis Amid `Upbeat' Davos (Bloomberg)
• Wall Street's Collapse to Be Mystery Forever (Bloomberg)
• Egypt and Tunisia usher in the new era of global food revolutions (Evans-Pritchard)
• Central Bank Raises Priority of Price Controls (Xinhua)
• Brazil and China Trade Tensions Set to Rise (FT)
• United, Delta Profit at Risk From `Silent Killer' in Fuel Hedges (Bloomberg)
• Home Prices Sink Further (WSJ)

Of today's Personal Income and spending numbers, the most relevant one was the savings rate. Income came unchanged at 0.4%, in line with expectations (previous revised to 0.4%), Spending was higher than expected, at 0.7% compared to 0.5% consensus (an increase of 0.3% from the revised 0.3% November point), meaning that the savings rate as a percentage of disposable income was 5.3%: the lowest since March 2010. The saving inflection point appears to have been 6.3% hit in June 2010. Is it all downhill from here?

Part 1 of the Economist FTW cover series came a week in advance of the first Greek bankruptcy (not to mention flash crash). Here comes Part 2...

And so it starts, as the first of the shipping giants decides evacuation is the better part of valor. Reuters reports that shipping conglomerate Maersk has suspended shipping activities in Egypt. But fear not. The Suez Canal is open. For now. From Reuters: "Danish shipping and oil group A.P. Moller-Maersk has suspended its Egyptian port terminal operations and closed its shipping offices in the country rocked by turmoil, the company said on Monday." Surely this is bullish for stocks.

Geopolitical risk takes center stage following the weekend's geopolitical headlines and Friday's slight disappointment on GDP. The Fed does seem to be getting some consumer stimulus to go along with the commodity price inflation as the consumer contributed 3.04%age points of the 3.2% preliminary number on Friday. Today will see more critical consumer data points in PCE and consumer spending/income.

The one commodity which has so far sneaked quietly between the cracks of rampant limit up opens and overnight price surges, just happens to be the most important one: rice. If the price of rice were to follow the same fate as wheat, not to mention chocolate, and if the world starts getting visuals of what is happening in Egypt transposed a few thousand miles east, smack in the middle of Guangdong province, then not even the Sack Frost dynamic futures lifting duo will be able to do much to instill confidence that the revolution is progressing "better than analyst estimates." And it appears that the seeds of rice's price surge may already have been planted. Bloomberg reports that "U.S. farmers are planting the fewest acres with rice since 1989 just as global demand surpasses production for the first time in four years, driving prices as much as 12 percent higher by December. Plantings in the U.S., the third-biggest shipper, may drop 25 percent this year because growers can earn more from corn and soybeans, according to the median in a Bloomberg survey of nine analysts and farmers. Rice, the staple food for half the world, declined 4 percent last year, extending a 2.9 percent drop in 2009. The other crops jumped 34 percent or more." Zero Hedge predicted in October of last year that the next real bubble will be rice. We stand by this prediction, which has so far not been validated presumably due to some quite interesting behind the scenes PM-for-food arrangement between China and one of the very popular US TBTFs. As the chart below shows,  rice is poised for an imminent break out.

Forget Egypt ATMs running out of cash. A far bigger problem for the country is starting to materialize, one which would promptly shift the revolution into overdrive: the disappearance of all staples. CNN reports: "While discontent, resentment and nationalism continue to fuel demonstrations, one vital staple is in short supply: food. Many
families in Egypt are fast running out of staples such as bread, beans
and rice and are often unable or unwilling to shop for groceries. Everything
is running out. I have three children, and I only have enough to feed
them for maybe two more days. After that I do not know what we will do."
school administrator Gamalat Gadalla told CNN." And while the world is merely concerned about whether the Suez canal is still open, perhaps it is time for a little food paradropping exercise, because if the 80+ million strong population realizes there is nothing to eat, we may just see the kind of Somali ship piracy in the Red Sea we have all grown to love, move just a little bit inland.