Archive - Oct 3, 2011 - Story

We round out the evening with this simple SAT-type exercise:

Oct 3, 2008: SPX=1099.23; VIX=45.14 is to Oct 3, 2011: SPX=1099.23; VIX=45.45

as

Oct. 10, 2008: SPX=899.22; VIX = 69.95 is to ....

I have been very bearish.  I fought some strong moves up.  I argued why certain things wouldn't work - and by certain things, I mean everything the politicians out of Europe said.  I'm not planning on being long for long. Europe is fracturing, but France, without a doubt is still pushing for a solution. The data has been marginal, but not horrible. BAC was a disaster again today in terms of stock and then there is Morgan Stanley. I'm playing around for a quick bounce.  I might be being too cute, but too many of the moves seem ripe for a rebound.  I do think, as some smart commenter on ZH pointed out, that 1120 is now resistance rather than support. And with regard to Buffett, are we as a country, ignoring some people, who may not always be bullish, but at least have been right more often than not in the last 10 years?  As a business and a country we should be looking for other oracles, and some of the best out there aren't always positive, but maybe that is what we, collectively need, a harsh dose of reality.

A few hours ago, the maniac simians at the Senate finally did it and fired the first round in the great US-China currency war, after they took aim at one of China's core economic policies, voting to move forward with a bill designed to press Beijing to let its currency rise in value in the hope of creating U.S. jobs. As Reuters reports, "Senators voted 79-19 to open a week of Senate debate on the Currency Exchange Rate Oversight Reform Act of 2011, which would allow the U.S. government to slap countervailing duties on products from countries found to be subsidizing their exports by undervaluing their currencies. Monday's strong green light for debate on the bill bolsters prospects it will clear the Democrat-run Senate later this week, but prospects for action in the Republican-controlled House of Representatives are murky. If the bill did clear both chambers, it would present President Barack Obama with a tough decision on whether to sign the popular legislation into law and risk a trade war with Beijing, or veto it to pursue a more diplomatic approach." The response has been quick and severe: "China's foreign ministry said it "adamantly opposes" a bill pushed by the U.S. Senate that will allow the United States to impose duties on countries that undervalue their currencies." And just because China is now certain that the US will continue with its provocative posture, most recently demonstrated by the vocal response in the latest US-Taiwan military escalation, we would not be surprised at all to find China Daily report that China has accidentally sold a few billions in US government bonds... just because.

Earlier today the CME did something quite contrarian to its nature: it validated gold by a factor of 150%, when it announced that the amount of gold bullion that customers can post as collateral is increasing from $200 million to $500 million. To confused NYU adjunct economics professors this means that the credibility of gold in the global monetary system just increased by more than ever before. Regarding the stated reason for this move "the Chicago-based company said that the change will allow market participants to better manage their risk and to take advantage of lower gold lease rates." As for the real reason for this surprising move we are unsure: whether it is due to an actual shortage of dollar dollar bill margin as collateral or some other reason we don't know. In fact, we are confident the CME will likely hike gold margins once again as soon as gold approaches $1900 shortly. But at least it has finally tipped its hand as to how even the biggest US futures exchange feel about the yellow metal. Of course, the end result is that should gold, just as cash, be used to collateralize stupid transactions which result in margin calls, the collateral will be confiscated. Therefore, one would be forgiven if one assumes that this is merely a ploy to more than double the amount of perfectly legally confiscatable gold in the capital markets. Which of course would mean that someone, somewhere would be interested in procuring far more physical gold than is already in possession. But that's just crazy talk. Why would one want gold, especially at these near record prices, when one can have glorious spam?

In tonight's data dump, in which Goldman has just slashed its forecast for the world economy and now sees a recession in France and Germany, among the actionable idea is the following update by forecast farce Thomas Stolper, whose batting average over the past 2 years is precisely 0.000 (go ahead, we dare you to calculate it). Instead of seeing a 1.40, 1.45 and 1.50 for 3, 6 and 12 months, the perpetually wrong Goldman FX team now expects 1.38, 1.42 and 1.48 in the EURUSD cross. From Stolper: "Given the latest global forecast revisions—and in particular the more marked downward revisions to our Euro-zone growth profile—we are shifting our EUR/$ forecast path slightly lower again and discuss potential additional downside risks. These changes follow a more substantial revision published in our latest Global FX Monthly Analyst. Despite these revisions, however, our strongest conviction remains that the underlying broad Dollar weakening trend remains intact. This is also reflected in the clear upward trajectory in our new EUR/$ forecasts of 1.38, 1.42 and 1.48 in 3, 6 and 12 months." Based on the tried and true strategy of always doing the opposite of whatever Stolper recommends, if anyone needed a catalyst to long the EURUSD, this is it.

We won't comment on the supreme imbecility of being able to predict something as amorphous as a recession in decile increments, but for what it's worth, here it is. Just out from the crack Goldman tag team of Hatzius and Dominic Wilson, who usually don't work together unless they have to make some big statement: "We now see the risk of a renewed US recession as around 40%." (this was 30% before - expect every other Wall Street idiot to follow suit with an identical prediction). Also, those wondering if Goldman is content with getting shut out on its IOER cut demand, we have the answer: no. To wit: "We expect additional easing of monetary policy beyond the ‘operation twist’ announced recently, although this may not come until sometime in the first half of 2012. In addition, the market’s focus on changes in the Fed’s guidance on future policies - including a greater emphasis on the employment part of the ‘dual mandate’ and/or a temporarily higher inflation target - is likely to intensify." Lastly, as relates to the saving grace in Europe, little surprise there - Goldman, whose plant Mario Draghi is about to take over the ECB, expects the very same ECB to open the spigots: "The increase in financial risk is likely to lead the European Central Bank to ease its liquidity policies further this month, and the economic weakness will probably result in a cut in the repo rate by 50bp to 1% by December." As for European economic prospects, well, sacrifices will be made: "we now expect a mild recession in Germany and France, and a deeper downturn in the Euro periphery." And with a former Goldmanite about to take over the European money issuance authority, we have a bad feeling about what will transpire in Europe after October 31, when Trichet finally exits stage left.

Even as the three bureaucratic stooges from the Eurogroup mumbled something or another about kicking the Greek can down the road in the just concluded press conference indicating that Finland will indeed get the Greek collateral its desires, only it will be in the form of worthless Greek bonds that can not be touched for 15 or so years, we have a feeling that Greek society may soon take matters into its own hands, and with quite a terminal outcome at that. According to Kathimerini, the Deputy Education Minister Evi Christofilopoulou (henceforth known simply as Lud-E-Chris) has "suggested" that the police be mobilized to break up "hundreds of sit-ins at schools on Monday a few hours after hundreds of pupils protesting cutbacks clashed with riot officers in central Athens." And if people think that our own version of occupational protests is troubling, just wait until a country's protesting student body comprehends that its country has just sicced the police force against it.

It appears the US has decided to apply a scorched earth policy to China. While we are seeing flashing headlines that the Senate just passed a China currency bill 79 to 19 (we don't know what is in the bill yet), we doubt it will be something that China will be too pleased with, as most likely there will be some language about currency manipulation and/or some such typical politician propaganda. What is more troubling is that the CME just made sure the tens if not hundreds of billions of Chinese copper collateralized Letters of Credit just lost even more value following yet another margin hike in Copper, which raised initial and maintenance margins by 15%. If China perceives US actions as provocative (and it made very clear that US overtures in Taiwan already are), we may just see an 'oopsie' moment tomorrow when the Mainland decides to offload a few billions in US Treasurys. And the cherry on top was a 28.6% margin hike in Platinum: a direct warning to gold and silver longs once again.

Just because outright denials by Dick Bove, Alliance Bernstein, Credit Suisse, Jim Cramer and Wells Fargo were not enough to prevent a rout of Morgan Stanley stock after someone dared to point out one simple observation, here comes the 2008 deja vu when the Asians had to step up and protect their "strategic alliance" partners, also known as deeply underwater investments. We expect another Eureka moment from the Orkimedes Of Omaha (and grand tax vizier) shortly.

The S&P cash made new lows for the year as we aggressively probed lower into the close and penetrated Doug Kass's bottom from Aug 9th with cash and futures closing below 1100 back to 13 month lows, with the pain spreading wide following rumors of hedge fund blow ups. Financials led the dance and just could not get a break all day despite the early perfectly fadable cheerleading from Cramer et al. Credit markets were a disaster with red everywhere and notable gaps suggesting some desperate reaching for hedges/unwinds as index overlays started to disengage from single-names. TSYs saw an enormous day as 'Twist' started with 30Y -18bps and 10Y -16bps and both investment grade and high yield bonds were net sold - something we have not seen for a while. Instead of its normal sideways plod after Europe closes, FX markets continued to weaken dramatically against the USD with only JPY holding stronger while EUR broke to a 1.31 handle. Gold and Silver managed decent gains (the former outperforming the latter) as oil and copper lost 2-3% on the day. Stocks remain slightly expensive relative to where credit currently trades.

America has now officially closed the books on the 2010-2011 fiscal year. It is only fitting that the last day of the year saw the settlement of all outstanding and recently auctioned off debt. The result: a surge of $95 billion in total government debt overnight, and a fiscal year closing with the absolutely unprecedented $14,790,340,328,557.15 in debt. Net net, in the past fiscal year, the US has issued a total of $1.228 trillion in new debt and has accelerated over time. At a rate of $125 billion per month, total US debt to GDP will pass 100% in just over a month. Incidentally, one may inquire about the benefits of centrally planned fiscal stimulus (cough Solyndra cough): the US economy added over 3$ trillion in debt in the past two years and the stock market is almost back to where it was back then. Perhaps it is about time someone demanded that all those lunatics who say that issuing debt for the sake of growth (and pushing the S&P higher of course) be finally locked away in perpetuity, and the key dropped into the deepest volcano in Mordor.

According to the German edition of the FT, G-Pap is once again using the R-card (that would be resigning-cum-retiring) - the last time he did this was back in early July when he had to persuade the government to vote for the July 21 Greek bailout #2. He was bluffing then. He is likely bluffing now, although if he isn't, it means game over for Greece and probably for the European dream, not to mention united currency. From FT: "[G-Pap] has been trying for months to keep his country from bankruptcy - Tens of thousands of Greeks are against the austerity policies of the government on the barricades. No wonder the prime minister is thinking of throwing the rocks." Since this is google translation, we assume "throwing rocks" is loosely translated as getting the f#*$ out of Dodge while the getting is good, while the private jet still has fuel and while the gold is still in the cargo hold.

As most know by know, a flurry of rumors that American Airlines may be on the verge of bankruptcy not only took down the stock by about 40% at one point today, but was halted around 6 times following repeated consecutive circuit breaker triggers. Yet none of that is material at all to the biggest holders in the stock, and especially those analysts at their companies who recommended AMR, and are all about to be summarily sacked. While John Paulson is not an investor in AMR, other "balls to the wall" funds like Appaloosa, with 5.6 million shares, are. Below is the full list of top 25 entities losing about a third of their notional on AMR today.

Where is the US and global economy going? What will happen to the dollar and euro? And how can investors protect themselves from the fallout? All these questions and more were answered at the Casey Research/Sprott, Inc. Summit When Money Dies. Kevin Brekke reports live from the conference…