Archive - Dec 2011 - Story

Many are doing their damnedest Ph.D.-best to somehow fuse economic theory and technical charting, and state that a breach of the 200 DMA in gold is indicative of imminent price collapse. And then there are facts. Such as this nugget from Stone McCarthy which looks at previous episodes of the 200 DMA breach and concludes based on severity of trendline penetration compared to average, that "this is just one reason we see strong potential for a rebound as participants reduce short exposure." So much for technicals.

• Merkel Mired by Woes That May Deter Crisis Effort (Bloomberg)
• Trade wars accelerate: China set to tax US-made car imports (FT)
• Bernanke Tells Senators Federal Reserve Has No Plan to Aid European Banks (Bloomberg)
• Cameron rules out putting extra €30bn into IMF (FT)
• Inside Wukan: the Chinese village that fought back (Telegraph)
• Dems Moving From Insistence on Millionaire Tax (Bloomberg)
• Republicans face voting shake-up (FT)
• Nicolas Sarkozy: David Cameron's like a child (Metro)
• China FDI flows stumble in November as U.S. drags (Reuters)
• Putin Ally Resigns Russian Parliament Post (WSJ)

According to Bloomberg's TJ Marta, market sentiment this morning is "ambivalent with modest, mixed price action on uneven developments in global growth and the EU debt crisis." In addition to the Spanish bond auction, here are the other key developments.

We start off the morning with a key bond auction out of Spain that came rather mixed as only one out of three issues priced better than the previous auction, and two out of three had lower bids to cover; yet somehow it was considered a smashing success because a total of €6.03 billion was sold more than the €3.5 billion targeted. First the details: Spain sold €2.45 Bn of 3.15% Jan'16s, at a worse bid/cover of 2.00 vs. Prev. 2.83, and a better yield of 4.023% vs. 5.276% previously; €2.18 Bn, 4.00% Apr'20, at a worse bid/cover 1.50 vs. Prev. 2.01 a worse yield of 5.239% vs. Prev. 5.006%, and lastly €1.4 Bn, 5.50% Apr'21, at a better bid/cover 2.20 vs. Prev. 1.76, and a worse yield 5.545% that was again higher than the previous 5.433%. However, in this world of living bond auction to bond auction, this is considered a smashing success and the result is 5 point rush higher in S&P. And here is the official party line courtesy of Reuters: "Spanish bond yields fell on Thursday, narrowing the spread over German Bunds after the country surprised markets by selling far more than the amount targeted in its last bond sale of the year, although its cost of borrowing remained close to euro-era highs.Bunds were steady but are firmly supported ahead of year-end by investors seeking safer liquid assets as markets question euro zone leaders' ability to find a lasting solution to the debt crisis now in its third year. Spain sold just over 6 billion euros of five- and 10-year paper, compared with a targeted maximum of 3.5 billion euros, taking issuance this year up to its target of 94 billion euros, according to Reuters data. It paid a yield on the 10-year paper maturing in 2021 of 5.545 percent. Spanish 10-year government bonds trading in the secondary market were 17 basis points lower on the day at 5.57 percent, leaving the spread over Bunds at 363 basis points." And just like High Yield issuers, the fate of Europe now relies on market windows: which means that while bond auctions such as today will "succeed", a bond auction scheduled on a day when the market crashes will fail with almost certainty. And while HY issuers can easily pull a bond issue due to "market conditions", countries do not have that luxury, and what happens next nobody knows.

To anyone who doubted that the gloves are now fully off between France and Britain, we bring you exhibit A: Speaking in an interview with local newspaper Le Telegramme de Brest to be published later on Thursday, Bank of France head and ECB member Christian Noyer said that a downgrade of France's AAA credit rating would not be justified and ratings agencies are making decisions based more on politics than economics and questioned whether the use of ratings agencies to guide investors was still valid. "In the arguments they (ratings agencies) present, there are more political arguments than economic ones," said Noyer, the head of the Bank of France and a member of the ECB's governing council. "The downgrade does not appear to me to be justified when considering economic fundamentals," Noyer said. "Otherwise, they should start by downgrading Britain which has more deficits, as much debt, more inflation, less growth than us and where credit is slumping." The bolded sentence confirms two things: i) that the Nash equilibrium in Europe is now fatally broken, because when you have the head of one central bank doing all he can to throw another central bank under the bus, that's pretty much game (theory) over; and ii) when he said that "the agencies have become incomprehensible and irrational. They threaten even when states have taken strong and positive decisions. One could think that the use of agencies to guide investors is no longer valid." it proves that this amateur has no more understanding of basic finance than your generic Reuters blogger, both of whom apparently fail to comprehend that there are several hundred thousand bond and loan indentures in the real world, not the world of "S&P has no credibility so ignore it", which are loaded with covenants discussing springing liens, rating indexed interest levels and collateral thresholds, all of which are based on a sovereign and corporate rating, and all come into play in a completely unpredictable way (hint AIG - the reason why AIG imploded was because a rating agency downgrade unleashed a terminal margin call) when there is a rating downgrade. Such as that of France in a few hours to days top.

Congress just passed the National Defense Authorization Act in a 283-to-136 vote. 190 Republicans and 93 Democrats voted for; 43 Republicans and 93 Democrats voted "against." Prepare to be arrested, without charge, simply because someone "up there" believes you engage in "terroristy" stuff. Good luck proving them wrong.

Everyone still dazed and confused by today's market rout will be delighted to know that Goldman is none the wiser... Or rather, Goldman knows precisely the reason why the market tumbled.

It may be just me, but it seems like majority of market participants are terrible at dealing with one of the rudiments of life as a human being; time. It is almost as if the herding man lives in constant contempt for his former self and dogmatic surety about his current convictions (whether they relate to past, present or even the future). If this hunch happens to be true, then it doesn’t take much to see the folly – for surprise surprise; as time passes the much-loved present conviction joins the realm of past regrets. So to thwart the arrogance of the gold bubble-top callers and the long-for-the-sake-of-being-long speculators here I outline why you, they and — hell — I might just buy that forthcoming parabolic move in gold.

Earlier today, we noted that according to Disclosure Insight, it appears that following a response to a FOIA request, the SEC has disclosed that the video streaming company may be involved in some form of regulatory investigation commenced at a point in time after November 10, 2010, which has not been previously disclosed by Netflix itself. Following a flurry of requests to demonstrate just what an SEC response looks like in a situation such as this, below we present the formal response from the SEC, which contrary to what most people think, is more than just a regional athletic conference and sometimes also pretends to regulate criminal activity and other types of fraud.

Earlier today we presented one of the 12 forecasts by Citi's FX Technical group which saw gold reversing recent drops, and soaring to $2400 by H2 2012 and far higher later on. Naturally, one argument is that this is simply Citi talking their books, and that one should be short when a bank is pitching a long. Of course, that is a valid interpretation. On the other hand, it is also possible that the recommendation is nothing less than a contextual recommendation of the what the big picture would look like if the bankers' grand plan falls into place. And the plan is simple, and has been discussed extensively before here: namely, to push the market to that critical triple digit threshold at which point Congress and the population (most certainly including the "99" which just happen to have 401(k) and other pension funds) will beg Bernanke to print. However, the traditional resistance has been the market discounting precisely this, and refusing to sell knowing that when the market drops, it will eventually rise: a traditional Catch 22. Which is why stocks in the US have lagged the correction in China and Europe for as long as they have - this has not been a decoupling as is widely misunderstood; what it has been is a delayed realization that Bernanke will not print until market discounting fails, and stocks flush. Then and only then will "salvation" come from Saint Ben. Which is actually precisely what Citi is preaching. In the next two charts, we see its recommendations for the Dow Jones Industrial Average and the S&P, as dropping to 9300 and upper 900s in the S&P, at which point the Fed will have no choice but to intervene. It is in this context that the lift off of gold will take place, and where the previously stated targets of north of $2400 are quite feasible. Yet, ignoring the price of gold, it is Citi's ultimate conclusion that is most disturbing: the bank finds eerie similarities in the current stock market formation with previous charts, both of which eventually led to World Wars...

Turns out it is not France. Instead, it is its most insolvent bank (although with SocGen and BNO around, who really knows)

• CREDIT AGRICOLE CUT 1 LEVEL TO A+ FROM AA- BY FITCH    :ACA FP

As a reminder, it is our hypothesis that it was none other than Credit Agricole who was bailed out by the coordinated central bank action two weeks ago: "Dollar Libor Market Hints 66x Leveraged Credit Agricole Was Bank X"

Following today's margin call anticipating, liquidation-driven rout in gold, the weak hands are, as the saying goes, puking up blood. Which may not be a bad thing - after all, sometimes a catharsis is needed to get people away from potentially toxic paper exposure which very likely has been hypothecated repeatedly via the same channels we discussed last week when exposing the MF Global-HSBC "commingled gold" lawsuit. But what about the future? Well, nobody can ever predict it, but at least we can sometimes look at charts in an attempt to glean a pattern. Which is why we present the just released slide deck from Citi's FX Technicals group titled "The 12 Chart of Christmas" which has some blockbuster predictions about the coming year, chief among them is without doubt the firm's outlook on gold which they see at $2400 in the second half of 2012, and moving "toward $3400 over the next 2 years or so." So for those looking at today's price action, consider it an opportunity to roll out of paper exposure and into gold, because the more deflationary the environment gets, the more eager the central planning cabal will be to add a zero (which in our day and age of primarily electronic money can be done with the flip of a switch) to the end of every worthless piece of monetary equivalent paper in circulation. And that's a 100% certainty.

Following today's end of day rumor being a dud (and non-existent due to the habituation nature of the market), the closing news is more unpleasant than Europe would have liked to set the overnight mood, and comes to us via the FT (yes, that FT), which states that, as long speculated both here and elsewhere, "the German government has begun preparations for a possible state bail-out of Commerzbank." The plan would be activated if CBK is unable to figure out a way to fill a €5.3 billion shortfall in the next 30 days, which in reality will likely turn out to be far greater when all of the bank's dirty laundry is exposed for all too see. And with German banks by far the most sensitive to any perceived "tipping points", since it is the German state whose job it is to bail out the world's biggest economic block, it becomes obvious why letting doubts appear about the stability of German megabanks would likely not be a "good thing."