Archive - Feb 28, 2011 - Story

There’s major shift occurring right now in financial markets. Sure, the food and freedom riots that are spreading across the globe are a major indicator that civil unrest follows very closely behind resource shortages and economic turmoil… but there’s something else that I’ve noticed recently– it’s a sea change in the financial system. In the past, major crises normally caused investors to seek safe haven assets, and everything else equal, the dollar would rise. They call it a ‘flight to safety’, and investors would flock towards the perceived stability of US Treasury securities. Fast forward to today. Mubarak. Gaddafi. Khalifa. Al Said. Ben Ali. Etc. There is no shortage of turmoil right now… yet we are seeing the dollar get clobbered while gold, silver, and smaller currencies like the Swiss franc rise. This represents a major shift in the way that the market views risk. Ironically, this makes precious metals among the most attractive safe haven alternatives– the fact that they have no real functional value is a net positive. In other words, $20 wheat means blood in the streets. $2,000 gold only makes for pithy headlines, and its significance is easily dismissed when highly regarded sages like Warren Buffet dispute the notion of holding precious metals (nevermind he bought oodles of silver in the late 90s).

If CNBC is wondering whom to invite to its highly objective and oh so critical news dissemination service, they should take a long hard look at Oppenheimer's Brian Belski.

Feb. 28, 2010 (Bloomberg) -- “Rising oil prices simply do not have the shock value they once possessed” for U.S. consumers, according to Brian Belski, chief investment strategist at Oppenheimer & Co.

After all, Belsky has an impeccable oracular record.

Nov. 8, 2007 (Bloomberg) -- The decline in technology stocks today is an "overreaction'' and investors should buy shares of technology companies because they are undervalued, Merrill Lynch& Co.'s U.S. sector strategist Brian Belski said.

We look forward to Belski's appearance on nanosecond Fast Money.

Who said the CME can only hike margin rates? Today, the Chicago Merc announced that is "unveiled a
cross-margining plan that would help customers trading both interest
rate and Treasury futures, as the world's largest derivatives exchange
prepares for more competition." The step is a preemption of a comparable product to be offered by its recently sold competitor, the NYSE Borse. "The New York Stock Exchange parent expects in March to launch NYSE Liffe U.S., a rate futures market, at the same time as its partly owned New York Portfolio Clearing (NYPC) clearinghouse for the products." In addition to confirming that this step pretty much puts an end to persistent rumors that the CME may overbid the DB for the NYSE, what it also shows is that the exchange is perfectly willing to do anything it wishes when it comes to margin rules as suits it. "CME's new membership class -- called Financial
Instruments Clearing Membership (FICM) -- would provide margin benefits
of up to 65 percent between interest rate futures and Treasury
securities, it said." While we have yet to see a practical example of what this means, we predict that the implication is a major drop in margin requirements when trading products determined to be a national interest such as Treasurys.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 28/02/11

It appears we may have misspoken earlier when we suggested that today's peak-lunaticism will be that spouting from the mouth of one ex-Goldmanite Bill Dudley. Here is another current Goldmanite (whose recent GSAM P&L track record is in dire need of public dissemination), vying for today's prize. "If I look at the whole region together, then just at Africa in general,
MENA has the combined potential to be a BRIC-like economic group. In
this spirit, and despite all the horrible things happening in some of
these places, this revolution strikes me as being essentially rather
bullish." If it weren't for my horse...

Today's POMO closed with the Fed monetizing its usual fare of $6.69 billion in various 3 Year bonds, at a 5.81 Submitted-Accepted ratio. The surge in the S/A ratio is not surprising: a quick look at the internals shows just what the reason for the Primary Dealers' urgency was. Of the entire POMO, one CUSIP: the just auctioned off QH6 3 Year which was sold by the Treasury not even 2 weeks ago represented a whopping 81.1% of the operation. Observant readers will recall that this was the Cusip that was massively monetized ten days ago, when $5.3 billion of QH6 was purchased by the Fed. In other words, in under two weeks, the Primary Dealers have flipped over 50% of their original take down of the auction, or $19,890,840,000! In other words, had the Primary Dealers indicated their true interest in the bond, not accounting for expectations of an immediate flip back to the Fed, the auction would have been a failure. In this way, the Fed has now monetized 33.5% of the 3 Year that was sold to the unwitting public and foreign banks. Luckily, there is a 35% SOMA limit on Treasury holdings. Oh wait, that was scrapped as part of QE2.

Just perfectly anticipated headlines from Reuters for now.

US MILITARY SAYS REPOSITIONING FORCES IN AREA AROUND LIBYA TO BE ABLE TO PROVIDE FLEXIBILITY, OPTIONS

Whatever happened to stretching exercises? More as we see it. This week's US naval update on Wednesday afternoon should be interesting.

Everywhere one looks (assuming one is more than just a market momentum, block order frontrunning algorithm... or a Deutsche Bank "strategist" of course), one sees relentless evidence of collapsing margins. Most recently, this was the Philly Fed, whose Price Paid less Prices Received index spread came at the highest since 1979. Well, at least it wasn't a record the Koolaiders said. Alas, that rebuttal will not work for the Dallas Fed. The latest diffusion index, which came at 17.5, on expectations of 13.0, confirmed two very much expected things: i) economic "growth" continues to be predicated on inventory stockpiling, as has been the case for the past two years, which is nothing but a highly speculative bet that demand will eventually pick up (and we pray the Dallas Fed respondents use FIFO not LIFO accounting), and ii) margins are getting crushed. Recreating the Philly Fed Prices Paid less Prices Received index shows that the differential of 45.50 is now at all time wides. Notably, the last time the spread was at or above 45 was in early 2008 following which everything went to hell. Expect to see many more diffusion indices confirm the relentless erosion in corporate margins, which in turn will result in either accelerating end-user inflation (unlikely), or imminent margin and EPS downside guidance, which even a reluctant Wall Street will have no choice but to take into account over the next several weeks.

It was fun and games so far, with the occasional 10,000 deaths here and there. Now comes the hunger. Reuters quotes a Libyan public health volunteer who says "Rebel-held eastern Libya will start to experience serious food and medical shortages within three weeks. The unrest is disrupting imports, the local supply of fresh food and domestic manufacturing, people in Libya's second city of Benghazi say, with many shops and factories there still closed since the city fell to protesters a week ago. "We will have serious shortages of food, drink, medicine and medical equipment in two weeks, three weeks maximum. We need outside help," said Khalifa el-Faituri, a volunteer with qualifications in public health and pharmacology." So what was merely your 2011 garden variety revolution is about to get really ugly. Somehow we doubt the Libyans will be happy to find that in the past month or so most food prices have increased by 25% or so. The question is who they riot against next?

As the dollar is getting its daily dose of poleaxing, the natural currency substitutes do their usual thing.

Now it's getting plain silly: the Chicago PMI expanded for the 17th consecutive month, grateful for the US policy of total and utter dollar annihilation, printing at 71.2, higher than expectations of 67.5 and the prior print of 68.8. This is the highest since July 1988. And confirming just how credible the data is, the New Order index came at the highest level since 1983. No surprise that inventories surged from 54.5 to 60.2: gotta keep the myth alive. And while priced paid remained near cycle highs, the employment index, in as much anyone cares, dropped from 64.1 to 59.8. But the funniest thing in the PMI was the following response from a survey panel member (all of whom are lamenting the surge in prices): "Seeing turn around in a few areas TOO MANY FRICKEN SPECULATORS in market causing higher price plus weaker dollar and China. Other then that well go figure." Somehow we fail to see how this response mashes with the broader optimistic response.

Former Goldman managing director, and current uberhead of the Fed Ponzi extend and pretend efforts, Bill Dudley, gets the prize for today's moment of lunatic brilliance. Some choice quotes from a speech delivered to the NYU Stern Busines School:

• Fed is not an exporter of inflation and not to blame for inflation in emerging markets
• It would be unwise for the Fed to overreact to recent commodity price pressures
• Current Fed policy is in the interest of the world's economy
• Rates likely to stay low for extended period
• Several areas of vulnerability for US economy, and sees need to be ever watchful for any price bubbles

So much for that "normalization" in European liquidity. After on Friday we noted that borrowings under the Marginal Lending Facility dropped by a whopping €12.7 billion to €2.2 billion, the latest ECB update shows that MLF borrowings have once again surged to a new post launch record of €17.1 billion. And while the original surge was first explained by a "fat finger" and later by the need of failing Irish banks to pledge collateral at a punitive 1.75% rate in exchange for overnight access, this time around the same explanation will be more difficult to fly considering that Anglo Irish and INBS were said to have achieved some degree of normalization over the past week. Today's action puts the whole "blame Ireland" explanation in question, and asks who else is in dire need of liquidity. We can't wait to hear what the ECB floats as justification.

According to the BEA, personal income in January jumped by 1%, on expectations of 0.4%, while Expenditures increased a modest 0.2%, below expectations of 0.4%. The reason - government largesse finally hitting the consumer bottom line: "the January change in disposable personal income (DPI) was affected by two large special factors. Reduced employee contributions for government social insurance, which reflected provisions of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, boosted personal income in January by reducing the employee social security contribution rates (employee contributions for government social insurance are a subtraction in the calculation of personal income).  The January change in DPI was affected by the expiration of the Making Work Pay provisions of the American Recovery and Reinvestment Act of 2009, which boosted personal current taxes and reduced DPI (personal current taxes are a subtraction in the calculation of DPI).  Excluding these two special factors, which are discussed more fully below, DPI increased $11.4 billion, or 0.1 percent, in January, following an increase of $48.5 billion, or 0.4 percent, in December." As a result of this contraction in spending and boost in government largesse, the Savings Rate jumped to 6 month high of 5.8%: the highest since August 2010.

• Madoff to NY magazine: Government a Ponzi scheme (WSJ) - Full NYMag interview here
• U.S. cables detail Saudi royal welfare program (Reuters)
• Saudi activists eye protests, wait for new cabinet (Reuters)
• Congress Inches Back From Budget Shutdown Abyss (Reuters)
• Beijing to Slow Growth (WSJ)
• Will 'Chindia' rule the world in 2050, or America after all? (Telegraph)
• Governors Scramble to Rein In Medicaid (WSJ)
• Irish poll winner eyes bail-out ‘manoeuvre’ (FT)
• Organized Labor: On the Way to Obsolescence? (RCM)
• Cash and Credit - Implications for the Financial Markets (Hussman Funds)