Archive - Jan 2011 - Story

Was today's broad and very much coordinated selloff in commodities a result of the just announced news that the CFTC's position limit plan may, contrary to prior expectations, be enforced very soon? It appears that outspoken CFTC commissioner has flipped in his stalling tactic and instead is now endorsing the position limit plan. Per Reuters: "Under the system, if a trader's holdings in a commodity reaches a certain threshold, it triggers a new level of heightened regulatory scrutiny by the CFTC where commissioners could vote to require the trader to reduce their positions." This means that JPM's accumulated holdings in various precious and industrial metals are not only about to likely become public, but that the CFTC will be mandated to very shortly enforce a break up on those positions which are deemed too concentrated. It is unclear how foreign entities, to whom the recent accumulation in various precious metals has been attributed, will be impacted by the proposal which now appears may be shortly enacted.

While we frequently make fun at Maxine Waters, and often for good reason, in this case the Congressional Democrat is spot on: the member of the House Financial Services Committee has denounced the BofA-GSE settlement as nothing more than a "backdoor bailout" funded by taxpayers, precisely as disclosed yesterday in the exhaustive Forbes piece that is a must read.

Given the composition of the Fed's assets, when interest rates start rising, the immediate effect on the Fed's income will be negligible. But the Fed's interest expense will respond immediately, because the interest it is paying is interest on deposits that commercial banks are free to withdraw without notice. That's not a healthy combination. Short-term rates would only need to rise above 6.5% for the cost of keeping the $1 trillion sequestered to exceed all of the Fed's income. The Federal Reserve would be operating at a loss. And the crossover rate, at which the Federal Reserve starts losing money, may be about to come down. The Fed is about to begin round 2 of "quantitative easing," in which it creates still more reserves to buy still more long-term Treasury bonds. Suppose that QE2, regardless of what details are initially announced, adds up to a purchase of another $1 trillion of 30-year T-bonds, at the current yield of 3.9%. That will add $39 billion per year to the Fed's income. But it will double the effect that any rise in short-term rates has on the Fed's interest expense. The net effect would be to lower the crossover fed funds rate, at which the Federal Reserve starts operating at a loss, to 5.3%.

A few minutes ago we ridiculed Bloomberg's use of Vadim Zlotnikov's opinion on gold as the basis for the otherwise reputable firm's chart of the day. Below, we present a statement from the actual research report that indicates that the man does not have the first idea of what gold is all about. To wit, and we quote: "Gold, which is effectively just another fiat currency, has recently benefited from its perceived ability to hedge against a variety of potential economic outcomes that are currently foremost in investor's minds: inflation, sources of economic growth, downward spiral in fiat currencies, etc." While there is no point to even discuss any part of this report further, we ask: are imbeciles the best that the anti-gold crusade can come up with?

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 04/01/11

The barrage to get investors to dump their gold is on in full force, after one after another media outlet takes turns to guarantee that a day of profit taking in an asset that two days ago was trading at its time highs, and experienced an uninterrupted 30% run in the past year, means the rally is over pretty much in perpetuity. The motive is clear: get people to abandon the safety of hard assets and throw their lot into the ponzi scheme, based on one week of minimal inflows following endless outflows after the first and certainly not last Flash Crash. The latest such attempt comes courtesy of Bloomberg's chart of the day, whose disturbed logic is just left of alchemy. To wit: the shares outstanding of the GLD etf have declined, therefore you must acquit, or dump your gold. Immediately. And we wish we were kidding.

Rich Bernstein who while at BofA used to be one of the few (mostly) objective voices, today got into a heated discussion with Rick Santelli over yield curves and what they portend. In a nutshell, Bernstein's argument was that a steep yield curve is good for the economy, and the only thing that investors have to watch out for is an inversion. Yet what Bernstein knows all too well, is that in a time of -7% Taylor implied rates, QE 1, Lite, 2, 3, 4, 5, LSAPs, no rate hikes for the next 3 years, and all other possible gizmos thrown out to keep the front end at zero (as they can not be negative for now), to claim that the yield curve in a time of central planning, is indicative of anything is beyond childish. A flat curve, let alone an inverted curve is impossible as this point: all the Fed has to do is announce it will be explaining its Bill purchases and watch the sub 1 Year yields plunge to zero. Yet the long-end of the curve in a time of Fed intervention is entirely a function of the view on how well the Fed can handle its central planning role: after all, the last thing the Fed wants is a 30 year mortgage that is 5%+ as that destroys net worth far faster than the S&P hitting the magic Laszlo number of 2,830 or whatever it was that Birinyi pulled out of his ruler. As such, Santelli's warning that a steep curve during POMO times is just as much as indication of stagflation as growth, is spot on.

While everyone has been focusing on American institutions over the past several months looking for entities that may have claims on Bank of America and other domestic banks which have misrepresented their mortgage portfolios, a question that nobody is asking is why are European, and specifically German banks, not joining the fray? After all, when it came to finding idiot investors, Goldman et al's rolodex would always immediately jump to those in the Ruhr and Rhine valleys. And sure enough, as many German (Landes)banks ended up on the receiving end of Wall Street innovation, and thus bankrupt, it has been shocking that very little initiative has been demonstrated by German investors who lost most or all of their capital when subject banks ended up purchasing misrepresented securities. All this may be changing soon (see below). But even if it isn't, a key question is just what leverage does America have over Germany to prevent the country from pursuing rightful putback demands against the mortgage banks. Our guess: those lovely FX lines from Benny and the Inkjets. After all recall that the Swiss tax disclosure was the quid pro quo in exchange for the unlimited Fed credit facility to the SNB when the country was on the verge, and when UBS needed a bad bank to make sure the Swiss giant survived.

Knight Capital's take on the FOMC minutes: "The Fed’s minutes from the December 14, 2010 meeting seem to echo our own concerns (see our “Three Threats, One Risk” report published October 6, 2010). Though noting evidence of growth and an improving “tone” to the labor market, the Fed did not feel that the apparently improving economy warranted any change in QE. The Fed noted that the housing market and debt problems in Europe could curb growth – further noting the impact on LIBOR funding. The rise in unemployment was troubling to policy makers as they noted that the rise came with a backdrop of depressed labor force participation and employment-population ratios. Further stresses come from the depressed housing market, employers' continued reluctance to add to payrolls, ongoing efforts by some households and businesses to delever, and precarious state and local municipalities’ balance sheets. Deflation is also not totally off of the Fed’s radar either (recall it was a buzzword just a few months ago), as some participants noted that with substantial resource slack persisting, underlying inflation might fall further below the levels that the Fed desires."

No reaction on the FOMC minutes, as expected, which basically say that despite the "economic improvement" the Fed does not have confidence in the economy to remove QE. Also, QE is supposedly successful because rates went up, even though the whole purpose of QE is to get rates down. Total idiocy. As for Goldman's take: "Perhaps the best single sentence in this document is the one that immediately precedes the vote on the directive to the New York Fed for its intermeeting operations: "With respect to the statement to be release following the meeting, members agreed that only small changes were necessary to reflect the modest improvement in the near-term economic outlook." In this regard, we remember expecting the committee to upgrade its view only modestly and finding that the upgrade was, if anything, a bit more cautious than we anticipated."

Laszlo Birinyi, the Hungarian famous for discovering such curious novel uses for a ruler such as i.e., a stock price forecast device, has just officially reached over into the twilight zone and pulled out his forecast for the S&P for 2013, September 4^th to be precise, not 3^rd not 5^th, and it is, hold on to your hats, 2,854, or well over a double in just over 3 years. Bloomberg clarifies this particular prediction which is either pure idiocy or even purer brilliance: "While this ‘forecast’ is fraught with potential pitfalls, unseen events
and caveats,” investors should be optimistic about the U.S. stock
market, given its history, Birinyi wrote." While not sure what particular history Birinyi is referring to, it most likely is not the 50%+ plunge in the market in a year and a half, when it became all too clear for a few brief days, that the entire global financial system is one big ponzi.

From Russ Certo of Gleacher: "Why today would gold reverse by $40? And silver down 4$ and the entire complex go for sale. Why is the Swiss Franc off near 2% in a loss of quality flight? Why are all things risk correlated? Is it that UK surprised with largest manufacturing increase since early 90s and we, therefore, don’t need simulative central bank policies? Is it a significant risk reduction in front of the FOMC minutes at 2pm today? I dunno."

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 04/01/11

GM just reported its December sales numbers to a reaction that led all women in Phil LeBeau's presence to order what he is having. The uberbullish take home message from the report: "General Motors dealers reported 223,932 total sales in December, a
16-percent increase from a year ago for the company’s four brands. The
gain was driven by solid retail sales which were 27 percent higher than a
strong December a year ago. For the calendar year, total sales for GM’s
four brands increased 21 percent to 2,202,927, while retail sales rose
16 percent for the year. GM’s four brands sold 118,435 more vehicles
this year than the company did with eight brands in 2009, and will gain
total and retail market share for the year." And on the surface this is pretty: after all the comparison is between a number of 193,824 from a year ago, and 223,932 as of December. But shouldn't the comparison actually be between 385,000 and 511,000? These are the numbers that show what GM's dealer inventory was for the months of December 2009 and 2010. In other words, there was an increase of 30k in sales... accompanied by a 125k increase in "stuffed" vehicles held at dealers. Does anyone still have that AOL case study handy somewhere?

After a few hours ago we highlighted that on Friday the put to call ratio surged to a three month high, it was only natural, in this hollow sham of a market which is now entirely dominated by two or three traders, for us to get confirmation that not only did the Put to call ratio plunge on Monday but it did so with gusto: falling to a fresh three month low, an event which according to Sentiment Trader has never occurred before. Welcome to market schizophrenia you can believe in.