Archive - Feb 2011 - Story

Ever since the advent of QE2, few if any, sellside analysts employed by Too Big To Fail banks have dared to voice a negative opinion of the Chairman's third mandate, that of raising stock prices (for obvious reasons: nobody will bite the hand that feeds them trillion in taxpayer bailout money). Which is why we continue to believe the BofA credit strategist Jeffrey Rosenberg is one of the few men standing who dares to call it how it is. In his latest piece, Rosenberg lays out what is the most harshly (yet diplomatically) worded criticism of QE we have read to date. "In our view, the longer term problem with such a strategy is that in delaying the adjustment to the root causes of the credit crisis, namely excessive leverage in the economy and financial markets, the essential vulnerabilities from that excessive leverage remain. What triggers their realization again is the inflationary shock leading to an interest rate shock that undermines the cheap cost of that debt that currently enables its maintenance." As for the implicit assumption that savings and wealth are inversely correlated, Rosenberg points out the glaringly obvious: "Inflation erodes the value of those savings and decreases their standard of living." The only option left: "Lowering the value of savings creates a powerful incentive to take on investment risk to maintain the real purchasing power of those savings." And while everyone getting aboard the investment ship at the same time is a horrible idea when it happens in one country, it is a guaranteed disaster waiting to happen when it occurs at the global level. Which is precisely what has happened: "Today, we see that same pattern again at play. But this time, it’s not limited to just the US Fed policy. Globally, central banks are pursuing coincident easy money policies. And even in Emerging Markets where the inflation fears stand most acute, the policy rate increases are just keeping  up with inflation increases. The result: global negative or zero real policy rates." The entire global "economy", which really means stock market, is now one timebomb, just waiting for the first central banker error-induced 'crack' to appear in the windshield, following which the destruction will be unprecedented.

As is by now well-known, Apple stock is underperforming after hours following reports of an allegedly sickly-looking Steve Jobs leaving the Stanford cancer center. The National Enquirer has released photos supposedly of an emaciated Jobs, yet one who is not readily identifiable as the Apple CEO. The National Enquirer, who initially reported the news today (to be published tomorrow), talked to critical-care physician Dr. Samuel Jacobson, who said, “Judging from the photos, he is close to terminal. I would say he has six weeks.” That said, given the reliability of The National Enquirer, waiting for further news before jumping to conclusions is advised. Furthermore, as TNW reports, "We’ve done a little digging into Dr. Samuel Jacobson. Jacobson appears to be a Florida based pulmonologist (breathing doctor) – not Oncologist. Which would naturally make you wonder just how qualified he is to diagnose someone via a photo, especially outside of his speciality." Obviously, a prudent question. While there is still no definitive confirmation either way, and Apple has not issued any statement, the stock has moved on the news, and we believe that this information should be shared as it is in the public doman and market moving.

All those focusing on the politburo policy tool known as stocks have missed what is by far the biggest mover in corporate (distressed) land so far in 2011. MBIA, whose CDS had traded in 2010 at levels assuming virtually no recovery, have plunged from 55 points up front a fortnight ago to just 37 up today (a 4 pt tightening today alone), a pick up that could make many a distressed credit fund's (sorry Oaktree) quarter. And while the move has been stunning in its velocity, many have been left scratching their heads as to the reason why. Enter Protium: a Barclays 2009 spin off fund which according to the British bank's results posted yesterday, entered into a CDS commutation with an unnamed monoline effective January 2011. And since it was already known by the market that banks such as JPM and Barclays had dropped lawsuits against MBIA in 2010 in exchange for comparable CDS commutations, it was immediately assumed that the beneficiary of this generous 'Protean' gift is none other than MBIA. The net result? A boost to creditor recoveries, a surge in unsecured claim prices, and a near 20 point tightening in CDS.

Forget high unemployment, hyperinflationary central bank policies, competitive devaluations, and all those useless demographic and political factors that go into the Shoe Thrower’s Index. In what can only be described as a moment of pure Keynesian genius, Paul Krugman concludes that the primary reason for the surge in food riots is…global warming. Perhaps he’s right. In order to put an end to these pesky riots and revolutions we should reduce our carbon footprint via extensive taxes on emissions (even though many scientists believe CO2 actually lags temperature change). Come to think of it, we should reduce all activities which are ‘positively correlated’ with a rising temperature anomaly, just to be on the safe side. And millions of public sector jobs would be created as new regulatory agencies would be needed, thus solving our structural unemployment issue.

The numbers for silver demand are starting to make some market-watchers nervous. The U.S. Mint sold over 6.4 million silver Eagles in January, more than any other month since the coin’s introduction in 1986. China’s net imports of silver quadrupled in 2010, to 122.6 million ounces, roughly 13.7% of global production. Meanwhile, mine production can’t meet worldwide demand; the only way demand gets fulfilled is from scrap supply. That is some very hungry demand. Which raises the question, how long can this pace continue?

Chris Dodd's political corpse may just come out of the grave for one last dance. The reason - the even more worthless half of Frankendodd is about to see all of his preferential Countrywide records exposed in the open. Darrell Issa has just announced that he has issued a wide-ranging subpoena to Bank of America for all documents and records related to Countrywide’s VIP program. Yes, this means all of Dodd's dirty laundry is about to be made public. Not like it matters: at this point everyone in America knows too well that the biggest criminals in the country are those in charge of it (and those regulating them, just happen to be the biggest porn-addicted idiots: see Matt Taibbi on the SEC). And it is not like Wall Street's favorite pet Dodd even has a remote chance of getting within miles of a courtroom...

Today, WTI spreads continued their blow out, making the lives of all Goldman clients who expect the spread to collapse a living hell (with ever louder rumors of pending or already transpired energy fund blow ups). The spread between April-delivery WTI futures and Brent, the basis for European and West African crudes, widened $1.63 to $15.70 a barrel at 12:16 p.m. in New York. And since in addition to Brent, there are roughly 100 other grades, here is how WTI has been trading compared to some of the more illiquid varieties: Light Louisiana Sweet premium increased 30 cents to a record $20.10 while Heavy Louisiana Sweet premium widened 30 cents to $20. Mars Blend’s premium to WTI strengthened 40 cents to $14 a barrel, while Poseidon increased 30 cents to $14.30 over the benchmark. Southern Green Canyon’s premium widened 40 cents to $13. Thunder Horse’s premium to WTI strengthened 5 cents to $19.20. West Texas Sour’s discount narrowed 35 cents to $6.40. Syncrude’s premium widened 50 cents to $8.50 a barrel. The discount for Western Canada Select widened $1.25 a barrel to $21 a barrel. Yet despite all these divergence dynamics, it is the WTI that is of critical importance due to its prevailing liquidity and utilization in the US. Luckily for Ben, the WTI glut just hit a record, allowing the Fed to continue pretending that the real price of oil is not well over $100. Per Bloomberg: "Stockpiles at Cushing, the delivery point for futures traded on the New York Mercantile Exchange, rose in the week ended Jan. 28 to 38.3 million barrels, according to the Energy Department. That was the highest level in records begun in 2004. Last week TransCanada Corp. started deliveries to the hub from its Keystone pipeline, which connects Alberta and Cushing." What is more interesting is recent speculation that ConocoPhillips may reverse its Seaway pipeline to relieve the Cushing excess. This would make economic sense for Conoco, yet for some odd reason the company refuses to proceed.

When George Bush first was informed about the 9/11 attacks, he was reading a children’s story to second graders. The attacks caught him off guard and interrupted his reading of My Pet Goat, and he sat perplexed as to how he should respond. Ben Bernanke was similarly blinded by the crisis even though lawmakers on capitol hill had on many occasions asked him about the possibility of a housing bubble caused by subprime mortgages. Bernanke had his My Pet Goat moment in 2008, where in a panic, he lowered rates all the way down to zero. At least George had a military that he could send out to fight for him. Poor Ben’s options were limited, lower rates and print more money, which he did with the same sense of panic and righteous rage. If we can agree that the 0% short term rate put out by the Fed, is not a market rate, then what should it be? At 1%, the real rates are still not positive. An honest rate would have to be well above 1%. Increasing the rate would push up rates on your mortgage and car loans, but it would also allow you to not lose money in real terms by placing it in the bank. The Fed reduces borrowing costs, but only by screwing savers and investors. Again we see the bailout mentality of having the righteous pay for the wicked’s sins.

Using the Birinyi technical methodology of market "extrapolation", and recreating our "analysis" from last week, we observe that following the micro dip observed yesterday (which happened to be the second largest since late November), the S&P is on track to surpass its all time highs right on schedule: June 27, 2011, or in 93 trading days. This should be just around the time when QE2 ends, and passes the baton to QE3, as neither the unemployment situation, nor the housing double dip will have improved by then. And in the unlikely case that the Fed does not resume QEeasing, the plan seems to be to get the market to its new all time high at the moment when the rug is pulled from underneath it.

Last August, Anthony Ward's Amajaro fund tried, and failed, to corner the cocoa market. He may have been half a year early, as the country may soon let cocoa speculators (at least those on the long side) finally enjoy their day in the sun. After an ongoing political crisis has left the country with two presidents, neither of which is willing to abdicate power peacefully, and technically bankrupt the latest development is the logical: a countrywide bank run. The Globe and Mail reports that the world's largest exporter of cocoa, which has now effectively been isolated by the global banking system, following its technical default on $2.3 billion in bonds, is seeing bank after bank shut down as residents are scrambling to withdraw whatever money is available in the financial system. "A third bank shut its doors Wednesday amid a political crisis in
Ivory Coast, as residents in the commercial hub lined up at banks to try
to withdraw their savings amid rumours of a cash shortage. British
bank Standard Chartered confirmed in an e-mail Wednesday that it had
suspended its operations in Ivory Coast, joining two other banks, BICICI
and Citibank, and the regional stock exchange. Hundreds of people marched from one bank to the next in downtown Abidjan
Wednesday afternoon, trying to find a working bank machine." Well, not really a bank run. More like a bank march. However, unlike Egypt, we don't anticipate the government (one of the two), to start flying in hundreds of millions in currency to placate the mob.

Tensions in the Middle East is once again heating up. Following earlier reports that Israel would not take too kindly to Iranian warships passing through the Suez Canal, the WSJ now reports that Iran has likely resumed nuclear-research work. "A new classified US intelligence assessment concludes that, even as Iran enriches more uranium, there is an increasingly heated debate within its regime over whether to move towards building nuclear weapons, suggesting international economic sanctions may be sowing serious divisions." Does this mean it is time for a new revision and more lethal version of Stuxnet to be released? How much of this report is based on fabricated data is unknown, although judging by how well it worked last time around there was a full scale US incursion, we will likely find out soon enough (or eventually). As to whether Israel is actually willing to take the risk and actually initiate a military offensive against Iran, and, indirectly, against Egypt's military coup government, we will likely find out tonight when the ships are actually expected to cross the canal.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 16/02/11

A month ago, we wrote an article titled: "How Allstate Used Sampling To Confirm BofA/Countrywide Lied About Virtually Everything When Selling Mortgages" in which we described how the insurance company used sampling to confirm that Bank of America had misrepresented virtually every metric when selling mortgages: everything from loan LTV, to percentage of owner-occupied properties. The differentials in some cases were as large as 50%. Today, Allstate, again under the guidance of Quinn Emmanuel, has used the same technique to determine that JPM and WaMu are guilty of precisely the same criminal misrepresentation in its prospectuses when selling tens of thousands of loans. And once again, this will most certainly lead to absolutely nothing. The reason? Just read Matt Taibbi's Rolling Stone piece on why when it comes to crime, Wall Street has a limitless "get out of jail" card. The alternative is a domino-like fall out that would likely see most if not all Wall Street executives actually having to lose sleep over the possibility of jail time (which would also take down every single externally regulating and SRO organization created to "police" the greatest scam in history). And that, as the FCIC has determined, will never happen until the market is in an uptrend. What happens after the next (and final, unless intelligent and wealth extraterrestrial life is discovered, willing to bail out the entire world which has gone all in the ponzi recreation quest) crash is a different story.

On labor: "Overall, meeting participants continued to express disappointment in both the pace and the unevenness of the improvements in labor markets and noted that they would monitor labor market developments closely."

On the stock market as the economy: "Conditions in financial markets improved somewhat further over the intermeeting period. Broad equity prices rose, adding to their substantial gains since the middle of 2010."

On the wrong interpretation of the steep yield curve: "Some participants noted that a steep yield curve is a typical feature of an economy in recovery, and that much of the steepening appeared to have occurred in response to stronger-than-expected economic data."

On the surge in commodity prices: "Regarding risks to the inflation outlook, some participants noted that increases in energy and other commodity prices as well as in the prices of imported goods from EMEs posed upside risks."

On ending QE2: "A few members noted that additional data pointing to a sufficiently strong recovery could make it appropriate to consider reducing the pace or overall size of the purchase program. However, others pointed out that it was unlikely that the outlook would change by enough to substantiate any adjustments to the program before its completion."

On the head of the Plunge Protection Team: "By unanimous vote, Brian Sack was selected to serve at the pleasure of the Committee as Manager, System Open Market Account, on the understanding that his selection was subject to being satisfactory to the Federal Reserve Bank of New York."

On Fed monetary policy-driven revolutions in Tunisia, Egypt, Algeria, Morocco, Libya, Bahrain, Yemen, and Iran: "..."

Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer. "Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that." I put down my notebook. "Just that?" "That's right," he said, signaling to the waitress for the check. "Everything's fucked up, and nobody goes to jail. You can end the piece right there." One has to consider the powerful deterrent to further wrongdoing that the state is missing by not introducing this particular class of people to the experience of incarceration. "You put Lloyd Blankfein in pound-me-in-the-ass prison for one six-month term, and all this bullshit would stop, all over Wall Street," says a former congressional aide. "That's all it would take. Just once."