Archive - Feb 27, 2011 - Story

After last week we saw the Euronext, the Italian and the London Stock Exchanges crashing and burning, it is now Australia's turn. According to the ASX, the exchange is "currently experiencing technical difficulties regarding trade dissemination on Partition 3 Securities" which in non-binary means the prices on the ASX are not updating. Must be all that pent-up buying pressure over the continuing Libyan revolution... Of course, those who only trade the futures, such as the big banks and the quant desks are immune as futures are still trading without a glitch. How long before the threat of a racist, unpatriotic down print takes down the Nikkei, the Shanghai Composite, and finally the Deutsche NYSE? Luckily, the Nasdaq where only C-grade vacuum tubes trade any longer, will be spared.

With violent protests springing up like mushrooms, following recent appearances in North Korea and Vietnam, and following last weekend's failed attempt at a Jasmine Revolution, China's authoritarian regime is about to be put to the supreme test. Bloomberg reports that "Chinese Premier Wen Jiabao pledged to punish abuse of power by officials and narrow the growing wealth gap as police blanketed Beijing and Shanghai to head off planned protests inspired by revolts in the Middle East." In other words, beatings (and disappearances) will continue until morale finally improves. As for the beatings, Bloomberg's Stephen Engle managed to experience one up close and personal: "Security officers also detained several foreign journalists, including
Stephen Engle, a reporter for Bloomberg Television. The Wall Street
Journal saw Mr. Engle being grabbed by several security officers, pushed
to the ground, dragged along by his leg, punched in the head and beaten
with a broom handle by a man dressed as street sweeper." Yes, China may be the most repressive regime when push comes to shove, but should 1+ billion angry and hungry Chinese decide there is nothing all that unique about China compared to Tunisia, Algeria, Egypt, Libya, Bahrain, Oman, Saudi Arabia, Ivory Coast, Vietnam, North Korea, Djibouti and countless more to come, not even the most convincing "blanketing" by police forces will do much of anything to prevent the only revolution that matters.

Uprisings in Africa and the Middle East last week trumpeted any and all global investment themes. The hearts and minds of peoples against regimes played out on a global scale. Crude ended the week up 9.1%. CBOE Volatility Index, VIX, rose 15%. Global equity bourses retreated a few percent with the U.S. outperforming by a marginal percent on QUALITY flight. In some ways there is a marriage of both global and domestic themes alike as the peoples yearn for representation and the embodiment of what government REPRESENTS for people. Or doesn’t represent. Played out on a minor scale, one eye this week was on Wisconsin, Indiana, Ohio, New Jersey and the battles of the hearts and minds of public and private employees alike or better quantified as the high profile and human debate of the efficient allocation of private tax dollars and the consequent rate of return of public service. To oversimplify, it seems like the relevant and searching question everywhere in nation(s) is, how effective does government allocate public and private resources and consequently represent its peoples? This is the looming topic in the United States this week as both sides of the Congressional isle try to avert a government shutdown as lawmakers have funded our domestic "obligations?" only through this Friday. I guess obligation is a relative term. Federal agencies are scrambling to figure out how to handle a shutdown of government. Hey, mail would continue but Federal Parks would be closed. There are many other obvious fiscal and market iterations to be learned as to any auxiliary impacts of how a shutdown or our budgetary largess will shut us down from our creditors.

When analyzing the Federal Reserve monetary expansions, pundits only assess economic issues like inflation, balance sheets, bubbles or public debt. Significant as they are, it will be very useful that all this smart people were added to the camp of those who want to “save the planet”. Let me to try pin down it.

The FT reports some disturbing news for lovers of free information everywhere: JP Morgan's Digital Growth Fund is rumored to be in talks to acquire 10% of Twitter for $450 million, or a $4.5 billion valuation (for a service which we have yet to get confirmation is generating any more than token revenue whatsoever). "It is not clear if the JPMorgan fund will make a direct investment or buy out existing investors and shareholders with Twitter’s approval. But the fund does not intend to buy shares on the secondary market, the people said. The deal has not closed." For those unfamiliar with the DGF, it is merely JPM's way to copycat Goldman into "allowing" its high net worth clients to put their money into the latest tech bubble frenzy. "JPMorgan’s Digital Growth Fund was established this month to give rich clients exposure to fast-growing private tech companies, and follows a similar effort by Goldman Sachs to invest in Facebook. The fund has raised $1.22bn to date, according to a filing with the Securities and Exchange Commission. But it plans to raise $1.3bn in total, and will have a maximum of 480 investors, say the people. JPMorgan expects to earn commission of at least $13m from the fund." And since none of these company are quite public, and all of them supposedly trade on a shadow secondary market, the frenzy for which bank can open up the tech bubble market to most high net worth investors, a race for now headed by Goldman with its Facebook investment, has certainly marked the tech top. One thing that is certain is that those who mostly enjoy using twitter as a free information conduit will now aggressively seek to find a replacement that is not backed, and thus at the mercy, of the Fed's favorite bank.

Almost a year ago, Zero Hedge looked at the trend in US tax refunds, and we found that last year the government was doing everything in its power to accelerate the remittance of refunds to taxpayers. Back then we said that "one of the primary reasons why consumers may have exhibited an abnormal propensity to spend in January and most of February (at least according to government, if not Gallup, data), is the much greater individual tax refunding conducted by the Treasury/IRS this year compared to the prior year." But if accelerated tax refunds was the story in 2010, in 2011, at least so far in the year, it is precisely the opposite. In fact, to date the IRS has refunded nearly $20 billion less compared to 2010, and about $14 billion less than in 2009. With consumers suddenly having far less cash, does this mean that February and March are set to be major disappointments from a retail sales perspective, and any other vertical having to do with consumer "strength"?

The three events to watch this week are the global PMI’s, US payrolls and events in the Middle East. Goldman expects the China February PMI to be largely unchanged from January’s level. Regional factory surveys point to a strong ISM index for February. Nonfarm payrolls in February probably grew at their fastest rate since last April. Consensus is looking for a 190k NFP number, and a 9.1% unemployment rate. The dramatic events in the Middle East over the last few weeks will likely continue to impact global financial markets.

All who enjoy hearing a meaty Marc Faber fire and brimstone sermon, that cuts through the bullshit, will be happy to know that the Gloom, Boom and Doom author conducted a 40 minute interview with the McAlvany Financial Group, which covers all the usual suspects: gold, silver, precious and industrial metals, the "crack up boom", the future of the Ponzi and capital markets in general and much more. Of course, it wouldn't be a Faber interview without the requisite soundbite: "I think we are all doomed. I think what will happen is that we are in the midst of a kind of a
crack-up boom that is not sustainable, that eventually the economy will
deteriorate, that there will be more money-printing, and then you have
inflation, and a poor economy, an extreme form of stagflation, and,
eventually, in that situation, countries go to war, and, as a whole,
derivatives, the market, and everything will collapse, and like a
computer when it crashes, you will have to reboot it." Of course, on a long enough timeline...

Looks like speculation that the Egyptian Central Bank's gold stash may have been just modestly plundered is starting to play out. According to Reuters. "Egypt has issued a ministerial decree
immediately banning the export of gold in all its forms, including
jewellery and ornaments, until June 30, the official news agency MENA
said on Sunday. "This decision, which comes in light of the
exceptional circumstances the country is passing through ..., is to
preserve the country's wealth until the situation stabilises," MENA
said. Egypt's currency has come under pressure after some of the
country's main sources of foreign currency, including tourism and
foreign investment, collapsed after the protests that ousted President
Hosni Mubarak erupted on Jan. 25." Obviously, this "emergency" step would not be required if the E(gyptian)CB was still in full possession of its purported stash of the inedible metal. Whether the decline is due to alleged Mubarak sequestering of the shiny metal, or by other members of the former ruling regime is unclear, but one thing is certain: the WGC is long overdue in adjusting the Egyptian gold holdings from 75.6 tonnes to their real current value... far lower. As for Egyptian fiat: that is as freely exportable now as ever. If only anyone wanted it. But yes, somehow emerging markets are manipulating their currencies lower than fair value, the conventional wisdom claims.

A week ago we highlighted the major inversion in the non-commercial spec bets between the GBP and the JPY, after the two had been trending with very close correlation for almost a year. This week, after GBP spec bets had hit the highest in over a year, on expectations that the BOE would commence a tightening regime (which we believe are unfounded and largely premature considering the worsening stagflation the UK finds itself in), GBP bets dropped by a the second largest amount in over a year, or by 16,563 contracts (only the 18,788 decline in February of 2010 was greater), to 36,009. And as we suggested last week, when we told readers to "note the surge in GBP bullish bets, and the plunge in JPY. Those willing to bet that the spec crowd is always one step behind the curve may be well advised to take the other side of the trade" this is indeed what is starting to happen: the drop in Yen specs was roughly half the GBP decline, at 9,198 to a total of -27,746. In other words the GBP-JPY convergence is starting to play out. Nonetheless with Yen specs at the lowest they have been since May of 2010, this is a level of concern.

While John Noyce covers his usual fare of weekly FX technical developments, with an emphasis on the EURUSD, the AUDUSD, the USDSEK, the NZDUSD, and broadly the extremely low level of implied vol in FX (unlike commodities - we expect a switch from commodity implied vol to FX very soon), as well as a very curious collapse in correlation between G10 FX implied vol basket, the VIX and the EURAUD spot. But the most notable observation is what may happen to stocks now that the 55 Day Moving Average is in danger of being breached for the first time in 123 days. The two key support trendlines are the August uptrend since August, which is at 1,300 and the 55 DMA, which is at 1,284. Should both of these be taken out, there is no technical support until the Jackson Hole level of mid 1,000s.