Archive - Jan 2011 - Story

After the Fed bought over $1 trillion of US Treasury bonds in the past 2 years, it is now reverse payback time, in which the Fed gives the Treasury just a little more cash. The FRB announced that per "unaudited" 2010 results (obviously), the Fed is provisioning to pay the Treasury $78.4 billion, a 50%+ increase from the $47 billion paid to the Treasury in 2009. What is the basis of this payment? Why the Fed's charter of course: "Under the Board's policy, the residual earnings of each Federal Reserve Bank, after providing for the costs of operations, payment of dividends, and the amount necessary to equate surplus with capital paid-in, are distributed to the U.S. Treasury." Which means that as the Fed buys up ever more Treasurys, and as rates continue their inexorable rise higher, the Fed will continue to receive interest payments from the US Treasury, which, at the end of every year, it will promptly remit back to whoever the current incarnation of Tim Geithner is, in essence nullifying the "checks and balances" impact of cash out interest expense on Treasury, and thus government, deficit decisions. In fact, the greater the amount of debt issued, and therefore monetized, the less the Treasury actually has to pay in interest. And in the meantime, the higher interest rates go, the greater the duration-adjusted loss on Fed holdings. But who cares about those: after all, results are all "unaudited" and the Fed will hold all securities to the earlier of "maturity" or default - as if anyone doubts which will happen first.

It appears that gold isn't really a currency... until it is. The Economic Times reports that India is attempting to ensure steady crude oil supplies from Iran. In doing so it is doing everything it can to pay Iran in a way that avoid loopholes associated with recent US sanctions. And the stunner: "India could settle crude oil import transaction using gold in the short term, while efforts to resolve the deadlock continue." But does Iran realize they can't possibly eat all that gold? Or that The Fed has no way of diluting to oblivion? Or that, unlike the dollar, it is currently not involved in a global race to bottom in which every central bank will have no choice but to print ever more of its linen-infused currencies? Something tells us that the answer to all three is yes.

Simon Black, whose first person observations of the world outside America have made his website Sovereign Man truly an entertaining and informative read, and who has been anticipating the encroaching transition of America to a control state, shares his two cents on this weekend's tragic shooting in Florida. "With one of their own victimized, however, I'm concerned that politicians will close ranks, capitalize on the social mood to generate a renewed faith in government, and pass a host of reactionary policies... all after sanitizing their Twitter feeds for any reference to violence, of course. Perhaps some form of gun control is in the works... though with a Republican controlled Congress, I'd think new legislation targeting suspected 'Anti-American subversives' could be on the table, or something that gives sweeping new powers to government agents and police forces." And as always, Simon's suggestion is a logical one: "I would suggest that if your ideals and beliefs make you increasingly isolated from your neighbors, maybe it's time to find new neighbors." We are sure this will anger Mike Krieger who advocates an attempt to regain control back from the kleptocratic corporatocracy (by peaceful means of course), although at some point one has to ask: when is enough, enough...

The fundamentals of the last PIG country, which has so far avoided the bond carnage of its peripheral peers, reported that while broad unemployment was 8.7%, the "highest since the beginning of the beginning of the time series in 2004" it is youth unemployment which, like in Spain, is becoming a few bigger issues. Corriere Della Sera announced that youth unemployment has hit a record of 28.9%: "Youth unemployment, however, did rise as the rate climbed to 28.9%, up 0.9 percentage points on October and 2.4 points higher than in November 2009. This, too, is the highest level since time series were introduced in January 2004." Yet even at these levels, this is still modest compared to countries like Spain, where the same metric was trending around 40% and is expected to remain there through 2011.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 10/01/11

Back in 2007 and 2008 every single dry shipping company had put in future delivery orders for everything from Panamax to Capesize vessels, at even the most shoddy of Chinese shipyards. Now, a few years later, as these orders are starting to be completed, the world's dry bulk shipping industry is suddenly experiencing an unprecedented supply glut of coal/ore carriers, which has resulted in the Baltic Dry index droppoing below 1,500 for the first time since 2009. And as Bloomberg reports, with at least 200 capesize ships, stretching at 35 miles end to end, expected to be completed by the world's shipyards, which represents an 18% expansion in the world's shipping fleet, the excess supply will once glut the modest demand rise which is expected to come at just 7%. The winners: raw material companies which have massive pricing power in an environment in which shipping costs are plunging, as well as the shipping companies which have managed to lock in charter contracts at historic rates. The biggest loser: dry bulk shippers operating at spot, and which have large, debt-funded balance sheets.There the pain will be substantial.

And now for today's stunning mutual fund first of the month-day statistic: David Rosenberg notes that "134 points of the 143 points that were racked up in 2010 occurred in the first trading day of each month. That is truly remarkable ? 94% of the entire year boiled down to 12 sessions. And what do you know? 2011 started with a 1.1% pop and has sputtered since." Has trading for humans only been relegated to just 12 times a year when mutual funds invest their previously month's capital allocation in the stock market? Statistically, the trade is to go long at closing on the last trading session of any given month, hold long through next day's closing, and short the remainder of the month.

Our recent reports by third parties on alleged Chinese fraud companies, even if conflicted, appear to have hit the nail on the proverbial head. And after all, how different is it to have anyone present a position paper with a bearish bias, compared to what managers such as Ackman, Einhorn and Tilson do on a periodic basis when they talk their book, online or on financial TV channels? At the end of the day, it is the market that decides if the investment thesis of any bullish or bearish report is viable, and if not it merely provides a better, and lower cost entry point (long or short) for those who end up being proven correct about a given company. That said, RINO is now trading on the pink sheets, while our most recent disclosure on China Green Agiculture has pushed the stock down 20% in a few days. But who says frauds are only foreign in origin. Our latest report, courtesy of Dalrymple Finance (and yes, we were correct that a plethora of micro-funds focused on ferreting out alleged frauds would soon appear), focuses on a company that has nothing at all with China, and a lot to do with Bermuda, and the US hedge fund industry. Presenting Gerova Financial Group (NYSE:GFC), which per the authors is a "NYSE-listed shellgame, in our opinion."

Remember when the Chicago PMI came at 68.6 ten short days ago, trouncing expectations of 62.5, and the highest since July 1988? Well, post-revision reality is slowly coming back to roost: the number was just revised down to 66.8. Presumably there will be no more revisions, however since these numbers now come straight from the Department of Imaginary Numbers, we wouldn't hold our breath.

Some unpleasant news for pensioned workers who believe that their insolvent state will be able to afford ridiculous legacy pensions in perpetuity. According to Pensions and Investment magazines, Newt Gingrich is pushing for legislation that will allow insolvent states to be taken off bailout support and file bankruptcy, in the process allowing them to renege on pension and other benefit obligations promises to state workers. And if there is anything that will get government workers' blood pressure to critical levels, it is the threat that money they had taken for granted is about to be lifted, courtesy of living in an insolvent state (pretty much all of them). And obviously what this means for equity investors in assorted muni investments is that a complete wipe out is becoming a possibility, as Meredith Whitney's prediction, which everyone was quick to mock and ridicule, is about to come back with a vengeance.

For all who need another confirmation that the silver physical market is increasingly more illiquid, at least compared to its infinitely dilutable and utterly mangled paper cousin, here is PSLV manager Eric Sprott himself: "Frankly, we are concerned about the illiquidity in the physical silver market," said Eric Sprott, Chief Investment Officer of Sprott Asset Management. "We believe the delays involved in the delivery of physical silver to the Trust highlight the disconnect that exists between the paper and physical markets for silver." Curiously, this has occurred even as the US Mint reports that sales of silver in December was the lowest in 2010, at just 1,772,000 ounces. It is unclear if this number was this low due to an actual supply shortage at the mint. Perhaps the fact that 2,221,000 silver ounces were sold in just the first week of January, a number which if run-rated would be an absolutely all time monthly record, should provide some clarity on this issue.

Ever since Repo 105 (and long before that), it has been well-known that Primary Dealers enjoy padding their books before the end of every quarter, typically collapsing their asset holdings in the week just before the quarter end in order to have cash on the books, and to make their capitalization ratios appear better than they really are. Well, the "book padding" that just occurred in Q4 2010 was a doozy, with total PD asset holdings plunging by a stunning $126 billion in the past month, the bulk of which was due to a drop in PD holdings of Treasurys. Was this huge selling by the Primary Dealer community, either for window dressing reasons, or due to expectations of future increases in Treasury yields, one of the main reasons for the drop in bond prices? It is unclear, but the massive selling certainly has not helped. And now that window dressing is again over for at least three more months, PD holdings can only go up (or so the myth goes). So with PDs now back with fresh books for 2011, and once again lifting offers, is the sell off in bonds about to be replaced with a major buying spree?

• ECB buying every sovereign bond it can find. Seriously
• Obama Eyeing Internet ID for Americans (CBS)
• US Banks Face Fresh Stress Tests (FT)
• SNB Clarifies Stance On Portuguese Bonds (WSJ)
• Demanding the Mark Back: Opposition to the Euro Grows in Germany (Spiegel, h/t Mark Mansfield)
• Evans-Pritchard: Deepening crisis traps America's have-nots (Telegraph)
• Trade War Looming, Warns Brazil (FT)
• Yellen Speech May Offer `Proxy' for Planned Unwinding of Fed QE (Bloomberg)
• Paul Krugman Channels Jimmy Carter, and The Club of Rome (Forbes)
• Portugal under pressure to seek EU/IMF aid (Reuters)
• China City Set to Tax Residential Real Estate (WSJ)
• "Illusory Prosperity" - Ludwig von Mises on Monetary Policy (Hussman)
• Queensland Floods Within Insurers' Capacity Deluge Worsens (Bloomberg)

It seems at least one person read Buiter's 84-page "Europe is pretty much doomed" (our titling) magnum opus over the weekend. Irish CDS tells the whole story.

Markets finally digest weak jobs data out of US, but it is Europe that has everyone's attention. Asia weakness compounding to problems.