Archive - Jan 2011 - Story

A few days ago, when it was first announced that Portugal is contemplating a direct placement of bonds (with amount and buyer undisclosed), we speculated: "Reuters reports that Portugal is in the process of making a private
placement of bonds, without announcing details on size or the buyer. Our
guess: buyer is China, and size is about €1 billion." We were off. By €100 million. The WSJ has just confirmed that China was indeed the buyer, and the amount purchased was €1.1 billion. It is unclear if, as we suspect, Goldman Sachs was the underwriter on the transaction.

Today's 10 year $21 billion auction closed at 3.388%, an increase from last month's 3.34% and the highest since May 2010. The Bid To Cover came at a strong 3.30 compared to the one year average 3.12, and much better compared to last month's 2.92. The reason for the strong auction, which has caused 10 Years to pare their losses on the day is that indirect bidding jumped, and took down a whopping 53.6%. Just as importantly is that Primary Dealers, read the Fed's shell intermediaries, bought just 31.6% of the auction (with 14.9% going to Directs): this is the lowest primary dealer take down ever (at least according to our database)! This is very surprising as the Fed continues to have to monetize every single auction eventually, which means that China et al, who make up the indirect bidder roster, will have to flip their bonds to the Fed sooner or later, presumably at a profit. This also confirms our observations that PDs have become allergic to US paper in recent week, with PD UST holdings plunging by a stunning $70+ billion since late November. This trend appears to not be reversing for now.

The reason for today's most recent bizarro boil up per Bloomberg: "The European Central Bank spent between 1 billion euros ($1.3 billion) and 1.5 billion euros in government bonds in the last two days, according to Nomura International Plc estimates." No news yet on how much Japan, China, the Smurfs, and Uranus ended up having to purchase to bring you today's 1% surge in stocks.

Virtually every US media continues to ignore the situation in Algeria and now Tunisia, where rioting predicated by high unemployment (read massive economic slack) and surging cost of living (but, but, didn't you just say massive slack??? how the hell can cost of living be up if you have "massive" slack? that's unpossible - the San Fran Fed has said so repeatedly), especially food prices, has just escalated once again. According to RFI, Tunisian rioting has spread to the capital, following more protesters (killed by the Police), and where a curfew has just been imposed. "Weeks of unrest in Tunisia have spread to the capital, where the heaviest protests took place on Wednesday. Police opened fire on a demonstration in the central town of Douz, killing two, the AFP wire service reports." And, lo and behold: even in Tunisia politicians are accountable when surging prices lead to death: the Tunisian interior minister was sacked earlier in an attempt to placate the rioters. Alas, no such luck: "The sacking of the Tunisian interior minister and the deployment of troops has failed to bring calm to the capital Tunis which again erupted on Wednesday. Security forces fired tear gas on hundreds of demonstrators in the heaviest protests yet in the capital after weeks of demonstrations since December." What fools: do they not realize that Core CPI in the US is pretty much at the lowest it has ever been? They should all just disperse and eat 50% off LCD TVs post haste.

Quote the chairman: "This fear of inflation is way overstated. We've looked at it very, very carefully. We've analyzed it every which way... We will not allow inflation to rise above 2% or less... I am 100% certain i can control inflation." Presenting the Jefferies global commodity index (CRB) which just hit a 27 month high.

As we have been highlighting for quite a while, the 5th member of the PIIGS, Italy, has emerged very much unscathed so far from the European sovereign debt fiasco. Is that merited? Not according to famous euroskeptic Nigel Farage, who gives another unvarnished, and uncensored interview with RT, in which he lays out his reasons for why a plunge in Italy bonds has at best been delayed.

We have already seen Chinese ghost cities, rickety buildings, and a construction spree that makes our own unionized labor force seem positive antiquated. Time to add empty malls to the list. The latest confirmed sighting of Chanos' "treadmill to hell" China real estate bubble thesis comes from Bloomberg's Paul Allen who reports from Dongguan, China on the New South China Mall, which has remained mostly vacant since it opened in 2005. Allen tours the South China Mall, originally conceived as the world's largest mall, and finds retail space that has been largely vacant since 2005.  Allen reports, "The reality at South China Mall is somewhat different: shuttered shops, unfinished, never occupied by a single tenant. The few retailers that are here have favorable leases, but little profit."  Allen also states that despite obvious problems, the mall’s owners plan to expand to more than one million square meters of retail and residential space will be available.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 12/01/11

David Rosenberg, who appears to have almost jumped the xtranormal bandwagon, and now realizes that the most effective way of communicating with the several 20 year old ADHD-addled speculators who still trade the market is in cartoon or chart form, continues on his one picture is worth a thousand words theme from yesterday. Today, he generously spares readers the trouble of reading 18,000 give or take words, and instead present 18 charts about the economy that paint a somewhat less rosy picture of what is going on out there, the bulk of which continues to be a government stimulus-funded, steroid liquidity driven sugar high, which has no choice but to keep getting ever more in stimulus and liquidity, or else everything collapses. And that in the meantime food riots are spreading from Africa to India (more on that shortly), should not worry anyone at all. After all the Chairman said he is 100% confident he can stem inflation before it results in such riots as we already reported on two occasions in 2011 alone (here and here).

All those who continue ridiculing gold, saying it has no utility, tend to forget one thing: it just happens to be the ultimate status symbol (especially for the nouveau riche). And who these days wants to demonstrate status (and has a lot of nouveau richness)? Why, the 2+ billion consumers who are benefiting from the biggest growth story in the world, i.e., China and India. According to the World Gold Council, gold demand in India in the last year reached a record. Per Bloomberg: "Purchases were about 800 metric tons, compared with 557 tons in 2009,
Ajay Mitra, managing director for India and the Middle East at the
producer-funded group, said today in a phone interview from Dubai." But how is that possible? After all gold prices surged in 2010 compared to 2009: is gold demand supposed to be inelastic? Surely you jest? Well, no: "Our assessment is demand will continue to be strong,” [Mitra] said. “Price is no longer a factor.”" Re-reading the bolded sentence a few times just may explain why PM distribution centers with actual physical inventories have suddenly become rarer than hen's teeth.

Just headlines for now. And so we have gotten to the point where even the 'smart money' is publicly denouncing the global Bernanke put, and the world's central bank "white knights" in the form of China (whose real debt number is wrapped in boxes, mysteries and enigmas), and Japan (which has more debt as a % of GDP than any other developed country). Luckily both can afford to buy a little debt of some other Ponzi nation, and thus preserve their own trade surplus status quo for a few more months. In the meantime the world's biggest bond fund is implicitly saying that frontrunning the last recourse EUR backstops is too risky for him.

The NIA, traditionally known for cutting to the chase and not really mincing its words today focuses on the latest trillion + dollar bubble: that of US higher education, which is getting increasingly more funded directly by the US Government. "The National Inflation Association believes that the United States has a college education bubble that is set to burst beginning in mid-2011. This bursting bubble will have effects that are even more far-reaching than the bursting of the Real Estate bubble in 2006. College education could possibly be the largest scam in U.S. history." And the kicker: unlike housing debt, college debt has that extra oomph to it that it typically is not discharged in bankruptcy: as such it is the ultimate subjugation mechanism. This one sure is set to get interesting...

Just in case there was any confusion that congress (and its Wall Street superiors) almost work for the majority, but not quite, here is some additional evidence: "The U.S. public
overwhelmingly opposes raising the country's debt limit even though
failure to do so could hurt America's international standing and push up
borrowing costs, according to a Reuters/Ipsos poll released on
Wednesday. Some 71 percent of those surveyed oppose
increasing the borrowing authority, the focus of a brewing political
battle over federal spending. Only 18 percent support an increase." Yet somehow the market has already factored in that no matter what happens, Congress has no choice but to continue heaping on the debt, and following this week's auctions, the total should approach $14.1 trillion in debt, cutting the buffer by another $100 billion. Which is why expect to hear many more threats of untold destruction should Congress actually side with the supermajority for once.

That's odd: usually these invocations are reserved for when futures are down 50 points or so. It appears the NYSE, unlike virtually all other venues, actually does need a human presence to operate.

From JPM: "We downgrade GS from OW to N today. Our downgrade is driven by considering it has reached our Target Price of $175, offering the lowest upside within our Global IB universe. Even the theme of capital re-leveraging is discounted now in our view with the share price upside potential limited at a re-leveraged PE of 9.0x assuming $15.2bn buyback (17% of market cap) in 2012E, as discussed in Table 7 below. The Basel 3 Tier I ratio would be reduced to 9.9% from 12.1% in 2012; in-line with our JPM required capital methodology."