Archive - Feb 11, 2011 - Story

Silver backwardation continues and while spot silver is at $30.09/oz, the March 2011 contract is at $30.07/oz and April at $30.01/oz. Incredibly, the July 2012 contract is trading at $29.93/oz and the December 2013 contract at $29.91/oz. Backwardation is when the market quotes a lower price for spot delivery or a more nearby delivery date, and a higher price for a distant delivery date in the futures market. It indicates that buyers are concerned about securing supply in the future and are willing to pay a premium for spot delivery. It suggests that silver bullion in volume is difficult to buy and that the physical market is stressed and becoming less liquid. Backwardation starts when the difference between the forward price in the futures market and the spot price for physical delivery is less than the cost of carry, or when there can be no delivery arbitrage. This is generally because the asset is not currently available for purchase or is increasingly illiquid. It can end in default, failure to make delivery, and in sharply higher prices.

David Ganek's $4 billion hedge fund is dunzo. Full liquidation expected by March 31.

For all those wondering why the Federal Reserve will likely never hike rates on the basis of undisputed surging food and energy prices, here is the reason: in the US, the food component as a percentage of overall CPI is 7.8%. In China it is 31.4%. In India 47.1%! The US CPI, therefore, is a completely irrelevant metric when it comes to measuring the one factor that has been responsible for two revolutions already year to date. In other words, if food prices were to double, US CPI would go up by 7.8%, while in China it would grow by nearly 50%. As Nicholas Colas observes when he looks at this data: "This dichotomy points to the potential for increasingly disparate monetary policies when comparing the Federal Reserve future actions to other central banks." This is a huge point that needs far greater prominence in the media, as it confirms that the very models that run central planning for the world's increasingly more involved and desperate central banks are so divergent that it is likely that the US will continue exporting inflation to the developed world long after most of its drowning in bloodshed and rioting. Genocide Ben indeed.

Earlier, the ICE once again engaged in the now traditional margin hike of any surging commodity in an attempt to force longs to sell out of speculative margin positions. Only a funny thing happened as a result: instead of killing the price, the price of cotton surged to $1.935, the highest price ever, as apparently those impacted were on the short side, inciting a short covering spree. A retest of the $2 psychological price barrier is now guaranteed and is on next week's docket. But don't worry, a 100% price jump in the key ingredient of clothing in 6 months will not have a margin impact for consumer discretionary companies. None at all. Sarcasm aside, what the take home message here is that exchange margin hikes no longer have an even short-term adverse impact, and in fact are accelerating price gains to the upside.

We were wondering how long it would take for China's State Administration of Foreign Exchange (SAFE) to come out with a report refuting yesterday's statement by Lu Zhengwei that China should immediately proceed to start selling its GSE concurrent with today's announcement by the administration that the "Fannie, Freddie model is dead", as well as the supposed upcoming end of QE2 (don't worry, it won't end) which would send fixed income prices much lower. The answer: less than 24 hours... although not really. Dow Jones reports: "China's foreign exchange regulator on Friday denied a media report that
said it could face losses of up to $450 billion on its holdings of
securities issued by U.S. housing-mortgage giants Fannie Mae (FNMA) and
Freddie Mac (FMCC).  The State Administration of Foreign Exchange's statement didn't specify which report it was denying, but it appeared to be referring to a report on Thursday by Chinese newspaper International Finance News, which said a forthcoming plan from the Obama Administration to gradually phase out the two government-controlled companies could lead to the losses. SAFE said the report was "groundless," and that is has been receiving regular payments of interest and principle on the bonds it holds from the two companies." Well, duh. The alternative is a technical bankruptcy of the US. What, however, was not denied anywhere is that China may and will commence selling GSE notes soon. Especially since as we reported yesterday, it had already been selling out of its GSE holdings for the past two years. And if they start offloading GSEs, what happens to USTs? Although with the Fed now holding over $1.13 trillion in debt, or over 10% more than China, the answer to that question is increasingly irrelevant.

As the Treasury releases its long-awaited GSE report on "Reforming America's Housing Finance Market" the one asset class that moved is gold. The reason: D.C. proposes, very tentatively, to decrease the role of the government in GSEs, as rumored previously, considering that the banks would love to get an ever greater piece of the securitized GSE action. Not helping is the soundbite from the administration: ""The GSE model is dead," an Obama administration official
told reporters as the Treasury Department released a
long-awaited report on options to revamp housing reform.
" As Reuters reports: "The housing "white paper" presents three different visions for replacing mortgage finance giants Fannie Mae and Freddie Mac, which are set to be slowly wound down. The paper does not make a single recommendation, but broadly outlines alternative possibilities to reduce the government's role in the mortgage market. That strategy aims to "open a dialogue with Republicans that would lead to a consensus outcome within a couple of years," said Michael Barr, a professor at the University of Michigan and a former Treasury Department official." In other words, just like the findings of the president's commission on the deficit, this paper will be glossed over by a bunch of beltway politicians and then promptly forgotten as whatever the banking lobby wishes to happen behind the scenes, happens. As for actionable proposals, the paper core recommendation is "increased guarantee fee pricing, increased down payment requirements, and other measures – to bring private capital back into the mortgage market and reduce taxpayer risk."

So much for a surge in the deficit. In December the US imported more than it exported by $40.6 billion, in line with expectations of $40.5 and slightly more than last month's 38.3 billion. From the release: "For December, the trade deficit increased to $40.6 billion from $38.3 billion (revised) in November. Exports increased $2.8 billion from November to $163.0 billion in December. Goods were $116.6 billion in December, up from $113.7 billion in November, and services were $46.4 billion in December, virtually unchanged from November. Imports increased $5.1 billion from November to $203.5 billion in December. Goods were $170.1 billion in December, up from $165.0 billion in November, and services were $33.4 billion in December, virtually unchanged from November." Curiously, ex-oil, the trade gap dropped to $15.3 billion, the lowest since March.

• Per Reuters: Obama admin seeks to wind down Fannie, Freddie, bring private capital back to mortgages: Treasury report
• Paulson Says Fed Gave ‘Little’ Oversight to Subprime (BusinessWeek)
• PBOC Plans Overhaul of Money Policy (ChinaDaily)
• China sees U.S. stoking Brazil and India anger over yuan (Reuters)
• U.S. Not "Satisfied" With China's Progress on Boosting Yuan, Brainard Says (Bloomberg)
• Mubarak Defiance of Ouster Calls Angers Protesters (Bloomberg)
• Hopes High for China’s Push on Inflation (FT)
• Seoul’s Capital Controls Begin to Bite (FT)
• Blankfein Sought U.S. Blessing on Executive Pay, Feinberg Says (Bloomberg)
• Beggars can be choosers: Greece Joins Italy in Objecting to Proposed EU Debt-Reduction Benchmarks (Bloomberg)

When back in November, long-before anyone had even heard of expert networks, Zero Hedge compiled a forensic analysis of SAC's 13F filings and holdings in various biotech companies (in this case ITMN, CYBX, MYGN) which had undergone actionable clinical trials and the result was either price surges or plunges, we concluded that there was indirect evidence that at least based on changes in stock holding patterns, SAC, one could certainly claim, was trading with a near-100% batting average ahead of critical clinical trial outcomes, leading to questions about trading propriety of the world's most infamous hedge fund. We also repeatedly asked the question: "Did SAC consult with an expert network or an outside consultant on any of the trades?" This was before it was made clear a few weeks later that there was a huge SEC operation looking at expert network hedge fund collusion. We are happy to see that today, roughly three months later, Bloomberg has extended our holdings analysis and has come to the conclusion that "SAC’s trading mimics insider dealings identified by prosecutors." In other words, the circumstantial evidence against Stevie Cohen and his trading methods continues to mount.

Today at 8:30 am the US trade deficit for December will be revealed. The consensus is $40.5 billion. Yet the final number could come well worse of even the bleakest expectations. Citi's Stephen Englander looks at export patterns by key trading partners and concludes "that the risk of a big negative surprise and a number beyond the pessimistic Citi forecast is not out of the question. We already have indications from a number of US trading partners about their exports to the US and these indications point to a sharp surge in US imports." In addition to the logical substantial deterioration to GDP numbers, a surge in the trade deficit would have one other key consequence, namely that "a deterioration in US trade performance, if it persists, would suggest that much of the direct impact of QE2 was spilling abroad." In other words QE worked... Just not for the US. Look for a sharp drop in the dollar if Englander is proven true.

Equities soft for a second day on geopolitical concerns, which outweighed the mild positive on Jobless Claims observed yesterday. Treasuries are rallying in the early going as a result of higher oil and the rising unrest in Egypt as well as record EM outflows over the past week. We still classify the jobless data as a mild positive as it still has not passed the test of time and still is a long way from progress given that the participation rate has dropped significantly during this recession. Today will see Trade Balance reports for December (-$38.3B prior, -$40.5BE) as well as UMich Confidence for Feb (prelim, 74.2 prior, 75E).

Trade and confidence today….There is a $6-8 billion POMO for bonds due 08/15/2016 – 01/31/2018: the battle between reality and central planning continues

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 11/02/11

The U.S. economy has become increasingly dependent on asset bubbles, financial legerdemain, credit expansion, Federal borrowing and the manipulation of risk trades to maintain the illusion of "growth." Compared to an economy based on organic demand and productive growth, the current U.S. economy is a travesty of a mockery of a sham, and has been since 2001. There are a number of factors at work, but let's start with two: the ratchet effect, and the Keynesian Project. The ratchet effect is a key feature of addiction. When one beer no longer creates a "buzz," then the consumer drinks two, and so on, until a six-pack is the new baseline. Below that level of consumption, the addict gets panicky, for the entire necessity of creating a buzz is at risk of catastrophic failure.

For now, developed markets remain strong, but the potential for EM spillover into DM exists. Perhaps it is the FX mode of transmission that catalyzes it, as the USD was bid today and looks to be creating a significant cycle bottom.