Archive - Feb 2, 2011 - Story

After what was largely a quiet day, events in Cairo's Tahrir square have taken a turn for the worse, after at least four protesters were killed and thousands more injured after semi-automatic gunfire erupted, supposedly out of the pro-Mubarak supporters, some of whom were previously exposes as being Egyptian police. End result - Egypt CDS (ignoring that ludicrous $25.5 million AUM EGPT ETF, which for some ungodly reason is supposed to represent the entire Egyptian stock market) are about to bounce once again, two days ahead of the February 4-5 "Days of Rage" in Syria, and as concerns about a Suez stoppage and Saudi contagion spread yet again.

Those poor idiotic rating agencies can never catch a break. Despite doing their fair share of hiring as many prosimians with a single digit IQ (not to mention a penchant for spreading inside information to preferred clients, see Deep Shah) as they can, thereby keeping the labor pool sufficiently susceptible to BLS manipulation, it was they that, according to Koo, destroyed the global economy the first time around, after keeping every toxic CDO at a AAA rating. Now, the Nomura economist, whose obstinacy in his views at times makes even such distinguished voodoonomic shamans as Paul Krugman seem like docile little lambs, is convinced that "these same agencies are once again attempting to interfere with governments that are trying to do the right thing in response to the economic crisis (ie, the balance sheet recession) triggered in part by these agencies’ actions. In spite of the fact that fiscal stimulus is the only effective measure during such a recession, the rating agencies are making it more difficult for governments to spend money by implicitly threatening downgrades." Yeah ok, the right thing is to fight debt with more debt. And more debt with morer debt. And so on. We wonder if that is the case, why doesn't Dictator Bernank just tell his Jeethner lackey to print $100 trillion tomorrow? After all that is the NEF's target for debt in 2020. That way we should grow world GDP by about 100% overnight, and save ourselves ten years of deleveraging misery. But stop there? Why not print $1 quadrillion, $1 quintillion, $1 decillion... After all debt is wealth remember? Because try as hard as we can, we just can't spot any faults with this argument which derives straight from Mister Koo's supposedly irrefutable logic.

One wonders who is right...

Total US debt as of yesterday: $14,109,842,878,903.50. Keep in mind that this number will likely not increase very much over the next several weeks, as organic issuance of about $150 billion per month is offset by $100 billion in monthly SFP draw downs. Incidentally, keep a close eye on stocks tomorrow: since today we had the December 8, 2010 56-day CMB maturity, which will not be met with a rolling re-issuance tomorrow, the Primary Dealers, whose ranks have now swelled by such "traditional" bond trading firms as pure-play derivative expert MF Global (led by ex-Goldman CEO Jon Corzine) and pure-plau futures trading expert SocGen, will have an extra $25 billion in pocket change to invest in 5x beta stocks as they see fit.

The latest inflation fighting strategy in a world that has now completely forgotten the threat of "disinflation", and instead is relishing 30 year highs in sugar and 150 year highs in cotton, comes from Belgium where supermarket chain Delhaize has been exposed as coercing 120 franchisers to sell products at a loss. As a result, said franchisers, formerly on very good terms with the supermarket operator, have organized themselves into an interest group with its own steering committee to make their grievances heard. And while the outcome of this escalation will certainly not be pleasant for any of the parties involved, one thing is certain: prices at both Delhaize supermarkets, and Belgian competitors who follow suit, are about to surge as retailers have no choice but to seek avoiding bankruptcy through reindexing prices. Which makes us wonder just how many supermarket stores and grocery retailer in the US use comparable tactics? But have no fear: according to the CPI, food inflation in December at 0.1% was the lowest it has been in five months. And with nobody having the guts to tell Bernanke that the food emperor is completely naked, we are 100% confident that everyone in America will be able to afford the 0.1% increase in food prices.

Zero Hedge has long claimed that the best stories of Wall Street fraud and corruption come from disenchanted former insiders of the very firms that in 2010 were paid a record $135 billion in compensation. And while we spend day after day chronicling what to other more normal banana republics would seem to be unprecedented criminal activity south of Canal street (and let's not forget the Park Ave corridor), we are always delighted when an ex-insider discovers their conscience and discloses all the massive fraud they and their coworkers engaged in "once upon a time" especially on Over the Counter desks - the same place where firms such as Goldman Sachs dominate all trading. Today's story from Omar Rosen on Citigroup's corporate derivatives team is just such a blatant example. If America had anything even remotely resembling a fair and honest enforcement arm in its regulatory body, this disclosure would be enough to shut down the entire Citigroup derivatives team. As it stands, the firm will probably not even have to pay a fine, without either having to admit or denying guilt.

The day started with December volatility being offered in risk reversal form. Volatility continued to soften through the front months until late morning when the December 1800 C buyer resurfaced. Iron butterflies are synthetically offered as dealers offer straddles and funds buy wings. The fat-tailed aspect of gold options is approaching Nassim Taleb proportions, especially in December. Calls between the 1800 and 2000 strike area are constantly bought. Puts from June on back with a value under $5 are also consistently bought. Meanwhile you can buy all the 1400 calls in any month you want at any time. Taken together this can be translated as “We’re not moving anytime soon but if we do we aren’t stopping.” We reiterate our statement that volatility will firm up if we settle below 1325 or above 1346.

While everyone is relishing the Fed's third and only mandate these days, namely to send the Russell 2000 to 36,000 and cotton limit up to infinity and beyond, while everyone else is terrified to short stock in advance of what increasingly appears like near certain additional quantitative easing, congressman Ron Paul has announced that the first Monetary Policy subcommittee meeting will focus on one of those two now forgotten Fed mandates, that of creating jobs. “I’m very pleased to hold our first subcommittee hearing in the new
Congress on a topic that could not be more critical, namely
unemployment.  Despite enormous amounts of monetary and credit expansion
by the Federal Reserve in recent years, the nation’s unemployment
picture remains bleak.  While many focus on the impact of fiscal
policies on employment,  the effect of monetary policy often goes
unexamined.  In my view we are now experiencing the bust that inevitably
results from the misallocation of capital and human resources in a
period of artificially cheap credit.  It is important to understand the
Federal Reserve’s role in creating today’s unemployment crisis, while
also highlighting that high unemployment and low economic growth can
persist even in the face of tremendous monetary inflation.” Of course, the answer to all of these problems is simple: no debt ceiling raise. If the Fed can't monetize any more debt and make the Primary Dealers ever richer (now that the PD ranks have just been expanded from 18 to 20 to include SocGen and derivative (!) trader MF Global, and its CEO Jon Corzine) from commissions on indirect debt monetization, its power is gone. But that will mean doing something for less theatrical than a few hearings, and far more responsible: such as preventing rampaging inflation across America (see cotton chart posted previously).

It seems like so long ago that we noted that cotton was up over 17% year to date. Alas it was yesterday. Yet the time-lag effect is not surprising considering that less than 24 hours following our initial report cotton is now up 23% YTD, or a 5% pick up in one day! This was yet another limit up day for one of the world's most popular commodities, which closed at $169.72, a 150 year high. The reason, per Reuters, for the relentless surge in cotton's price is Asian mills: "It's basically mills panicking," said Lou Barbera, a cotton analyst for brokerage VIP Commodities. "Overseas mills are getting the ball rolling." In reality, mills are just one part of what is rapidly becoming a perfect storm for a commodity which will soon destroy margins for all mid-tier retailers: "Powerful cyclone Yasi in Australia also worried the market because it would hit prime cotton-growing areas. Losses there could further crimp supplies in Asian markets, dealers said. Sharon Johnson, senior cotton analyst at brokerage Penson Futures in Atlanta, said it is "possible there's a squeeze" in the U.S. cotton market."

As part of its quarterly refunding statement issued earlier, the Treasury announced that it now expected to breach the debt ceiling "sometime between April 5, 2011 and May 31, 2011.  The modest change in
these estimated dates reflects an upward revision to projected receipts
and a projected downward revision to debt to be issued to government
trust funds." The tentative breach point has been pushed back by one week compared to the previous estimate of March 31, 2011 to May 16, 2011. Of course, these numbers incorporate the benefits of the wind down of the SFP program, discussed extensively previously on Zero Hedge, which we believe will provide a major (as in $195 billion over two months) liquidity boost for risk assets. As a reminder, as there was no 56 Day Cash Management Bill rolling auction today now that the Treasury is unwinding the SFP, tomorrow the market will see $25 billion in extra liquidity as an 8 week old bill matures and the proceeds are used by the PD to invest as they see fit. Back to the debt limit: when asked how much bigger the new debt ceiling should be, the Treasury left the ball in Congress' court:"We do not have a have particular figure that we
have put to Congress. That is their prerogative to offer that," Mary
Miller, Treasury assistant secretary for financial markets, told a news
conference. While not new, Reuters summarizes what will happen should Congress not succeed to raise the debt target number fairly well: "If Congress does not raise the limit in a timely
way, the government could be forced to scale back operations. A failure
to lift the limit could raise the specter of a first-ever U.S. debt
default and push up interest rates sharply." According to Zero Hedge estimates, Congress will end up raising the debt ceiling to $15.9 trillion from the current $14.3... a number which will need to be raised once again in January of 2012, at which point the entire debt "ceiling" farce can just be put aside.

One of the consequences of Meredith Whitney's recent prognostications that we could be facing hundreds of billions worth of municipal defaults, is that after tens of billions of investor capital have been pulled out of municipal funds, with last week seen record $5.8 billion in redemptions alone, virtually the bulk of this money has been recycled in the form of inflows into equity instruments. As such, it is surprising why so much energy is wasted to attempt to debunk Whitney's thesis: after all, she has done more to stimulate equity inflows than years of government/CNBC propaganda ever could. Yet one firm which certainly stands to lose should the ongoing muni redemption wave not moderate, is everybody's favorite PIMCO, which is oh so good at bashing the Fed and Satan Bernanke with one half of its mouth, while with the other investing tens if not hundreds of billions in federally subsidized Build America Bonds, which for the past month have been in free fall. It is therefore not surprising that as Charlie Gasparino points out, Bill Gross "has launched an all-out war to discredit Whitney’s research in an attempt to restore confidence in the $3 trillion municipal-bond market." Of course, this is nothing more than a good old-fashioned book talking campaign: Meredith, who after have failed to predict anything notable at her new venture, needs to return to her shock factor roots, and Gross, whose TRF fund, after seeing nearly two years of AUM increases in his flagship TRF, has been having a bit of a hard time recently, all due to the firm's huge municipal exposure.

Whereas yesterday Zero Hedge looked at the relationship between the ISM Price Paid index and the broad inflation CPI (coming to the conclusion that 12 months from today the CPI may be increasing by a massive 6%+), today we look at a correlation with the metric that should be even dearer to investor hearts: operating margins. The chart below shows the PMI Price Paid index compared to an inverted scale of of the S&P margin. It appears that margins follow the PPI with a four quarter delay, and while the period between 2003 and 2007 did not see a major contraction in margins, this can be attributed to massive abundance of liquidity available to the common man which allowed companies to pass through costs for more aggressively than before. Alas, and as confirmed by Whirlpool and Electrolux' results today, such an outcome this time around is impossible. One thing is certain: should February's Price Paid index continue to rise, margins will, intuitively, have no choice but to plunge. Which is why we anticipate a dramatic 15-20% drop in margins, an outcome which will have material consequences on S&P 500 EPS forecast.

Whereas two days we presented what the Treasury's options are to extend the inevitable moment before the debt ceiling is hit (which , today Goldman's Alec Phillips analyzes another angle of the ceiling hike: what the congressional debate on the debt ceiling rise may look like. While everyone is certain that the ultimate fate of the debt target, pardon, ceiling issue is a given, and that the UST will end up hiking it by another $1.5 trillion, little has been said about just how we get there. From Goldman: "Split control of Congress is apt to lead to a longer-than-usual debate over increasing the statutory debt limit, and could result in at least one failed attempt at an increase before the limit is raised. It also looks possible if not likely that Congress could approve at least one short-term increase in the limit as the debate unfolds, the first such stopgap since 1996." Yet no matter what how heated any debates, the final outcome is certain, and at least according to Goldman, should be priced in: "Although the debate over the debt limit is likely to capture the market’s attention from time to time, the overall effect of the debt limit debate is apt to be modest. Looking back to the 1995-1996 episode, there is little evidence that the most important legislative developments in that period had an effect on Treasury yields." In other words, the US will continue issuing $125 billion in debt per month, while US GDP grows at one sixth this rate, confirming that the hyperinflationary toxic loop of failed monetary policy is beyond repair. That said, we agree with Goldman - the debt ceiling will be raised as the alternative will be another round of mutual assured destruction from everyone. The same thing is true for 2012, when the next debt ceiling hike will need to take place. Then in 2013, then in 2014, and after that the debt ceiling will be raised on a daily basis.

No matter how hard the ECB is trying to mask the fact that the only way to rescue Europe is through yet another ponzi scheme, which has a CDO in its foundation no less, depositors refuse to be fooled. According to the ECB, in December Irish banks lost deposits worth €40.3 billion, over 50% more than November, when €26.7 billion evacuated the banking system. The brings the total deposit flight from Ireland's 15 retail banks to a massive €110 billion, a number which if indexed to the US, would be well in the trillions. And as the Independent points out, "The most dramatic element of the latest data, however, is the sharp
acceleration in the fight of deposits from the so-called 'domestic
group' of banks." In other words, Irish banks are likely operating on liquidity fumes, and all of their operations continue to be funded on a day to day basis by the ECB and possible the IMF. And what is even worse, is that just like in the US, Irish consumer refuse to relever: "Yesterday's figures also show another contraction in banks' lending, as loans to households fell by 5.2pc and loans to non-financial companies fell 1.2pc in the year to December."