Archive - Feb 2011 - Story

The gradual drain of COMEX silver inventories seen in recent months continues and COMEX silver inventories are at 4 year lows. Total dealer inventory is now 42.16 million ounces and total customer inventory is now at 60.68 million ounces, giving a combined total of 102.847 million ounces. The small size of the physical silver market is seen in the fact that at $30 per ounce, the COMEX silver inventories are only worth some $3 billion....Talk of a default on the COMEX is premature but the scale of current investment demand and industrial demand, especially from China, is such that it is important to monitor COMEX warehouse stocks. The possibility of an attempted cornering of the silver market through buying and taking delivery of physical bullion remains real and would likely lead to a massive short squeeze which could see silver surge as it did in the 1970s.

Earlier today the Euro dropped to a three week low in the mid 1.34s, following a Reuters report that troubled German lender WestLB may have hit a snag in its restructuring plan. Per Reuters: "Aid for WestLB hangs in the balance, a source told Reuters
on Monday, as the bank struggles to come up with a rescue deal
as it enters the final stretch to present a restructuring plan
to the European Commission. "The WestLB news doesn't provide a great deal of optimism to
the euro at the start of the week."." Not at all, although the 100 pip move lower is par for the course for the one currency that has now absorbed all the vol of the Fed-manipulated and irrelevant stock market. The only question on most investors' minds is whether WestLB will follow Danish bank Amagerbanken A/S as the second one to follow with a senior bondholder restructuring per the new European guidelines. While Amagerbanken was small and isolated, it is time to see just how willing Europe truly is to put its insolvency where its mouth is.

The administration’s FY 2012 budget and one Fed appearance of note…There is a micro $1-2 billion TIPS POMO to celebrate Valentine's day.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 14/02/11

Ben Shalom Bernanke, we the entrepreneurs of the United States of America request that you divide one upcoming day's worth of asset purchases between Wall Street and us, to wit, may the tiny sum of $3 billion, minuscule juxtaposed with the hundreds and hundreds of billions of dollars you are feeding your Primary Dealers and their clients in your Quantitative Easing program, may the modest sum of $3 billion be used for a pilot program to purchase securities issued by American entrepreneurs in connection with the startup of 3,000 validly formatted new business enterprises, such $3 billion to be used to purchase $1 million of the Perpetual Subordinated Capital Securities of each. Your pilot program, Ben Shalom, will show results almost immediately, thereupon you should expand the program, first to $5 billion, a little more than half of one major day's worth of asset purchases, for the startup of 5,000 validly formatted new business enterprises, then to $7 billion, almost all of just one major day's worth of asset purchases, for the startup of 7,000 validly formatted new business enterprises. A validly formatted new business enterprise is one with a valid business purpose and whose management is mentored by the SBA's resource partner the Service Corps Of Retired Executives. The SBA will manage the Perpetual Subordinated Capital Securities positions purchased by the Federal Reserve System. Transactions will be executed on a first come, first served basis, venture capitalists aka vulture capitalists neither welcomed nor required.

With the economy strong, EM underperforming, US yields rising, and no signal of QE2 being extended, USD could be poised to rally here. The recent breakout in USDJPY could signal a shift of carry funding back to the JPY, as the summer 2010 double-dip fear-induced USDJPY plunge is unwound.

Now that the Rare Earth bubble has come and gone (and may well come back again depending on how much China wants to stretch its political muscle), the Rice bubble is in progress, and may see prices going back to the $24 range we saw last in 2008 when net CBOT non-commercial spec contracts were approaching the 8k levels, the last R-bubble prediction is coming true. Back in October, Zero Hedge said the next bubble are the 3Rs -Rare earths, Rice and Rubber. Lo and behold, rubber just hit an all time high on the Tocom, after returning 30% YTD. And far more importantly to those who care about such things, the rubber forward curve is in backwardation. No need to explain what that means.

First it was "Get Ready For Higher Food Prices" going mainstream... Now, logically following, it is "Get Ready For Margin Collapse." As Zero Hedge has long been warning, the one immediate consequence of surging commodity prices as a result of endless liquidity, is a collapse in corporate margins. Now, about 6 months after we first broached the topic, it has finally hit the mainstream media. The WSJ highlights what is so obvious, it is no wonder no sellside "strategist" is willing to touch the topic with a ten foot pole: "This earnings season has seen a much-welcomed return to revenue growth, giving investors another reason to push stocks to two-year highs. But beneath the surface lurks a fresh worry: For many companies, the cost of raw materials is rising at a faster pace than revenue. Blame it on soaring prices of everything from cotton to copper and corn. That has squeezed profit margins more markedly than many analysts anticipated—and is serving as a worrying sign for future earnings." But yes, aside from the painfully obvious collapse in margins, and thus plunge in net income (sorry, companies can't fire their skeleton crew workers any further) which will mean 2011 S&P 500 EPS will come far, far lower than prevailing consensus, everything is fine...and don't forget to BTFD.

Democracy, as Churchill said, “is the worst form of government except for all those other forms that have been tried from time to time,” the assumption being that because the state is the only conceivable form of government (and therefore necessary for civil society to exist), the democratic state is the best state, even if it is merely the best among bad ones. This flies in the face, of course, of the godlike esteem in which democracy is held around the world, both by those who are ruled by such states and by those who yearn to be. Democracy, after all, is based on “the proposition that the legitimacy of all political power arises from, and only from, the consent of the governed, the people” – the assumption being that the democratic state embodies this noble proposition.

In the early part of the week (Monday – Tuesday) China will release key lending growth data. Goldman expects the amount of CNY loans made in January to be around Rmb1.1 trillion, up from Rmb480 billion in December. The yoy growth of CNY loans is expected to fall to 18.5% yoy in January from 19.7% yoy in December. Also, January net exports are expected to decline to US$9.8 billion vs.US$13.1 billion in December. Meanwhile China CPI is expected to continue to rise to 5.3% from 4/6% previously.

The final nail in the zombified Build America Bond program may be finally approaching, in which case the dead cat bounce in the MUB may be about to end. After late last week Gerald Connolly,
D-Va, proposed an extension to the BAB program through 2012, resulting in yet another risk bounce in the one asset class that has seen a major walloping in early January, not to mention record outflows (and a corresponding inflow into US equities), it seems that the GOP is not very excited about the prospect of further state subsidies. From the WSJ: "Key Republicans signaled they would block renewal of the Build America
Bonds program as the Obama administration prepared to reinstate the
bonds in the 2012 budget plan due Monday. Build America Bonds were originally introduced as part of the $787 stimulus program in 2009 but expired at the end of last year. They allowed states and localities to sell taxable bonds and receive a federal subsidy payment from the Internal Revenue Service equal to 35% of the interest costs on their bonds. But Sen. Orrin Hatch (R., Utah), the ranking Republican on the Senate Finance Committee, said late Friday that BABs were "simply a disguised state bailout." "These bonds rightly expired at the end of 2010 and it is my hope the Obama administration does not try to resurrect such a nonsensical provision in their upcoming budget," he said." Yet that is precisely what the president intends on doing, while somehow pretending that the budget will actually cut $1.1 trillion from the deficit over the next decade. Just how crazy is it to request that at some point America has a president and economic advisors who actually understand at least the most basis mathematical concepts, the key of which is that spending does not equal saving...

As you know by now, the endless money printing by our inept and foolish "leaders" is causing prices to rise in all things dollar-denominated. Economics 101 teaches us that more dollars chasing a static supply of goods leads to an increase in price. Eventually, these rising input costs are passed along to the consumer in the form of cost-push inflation. This insidious monster is the most painful of economic afflictions as rising costs are not met with commensurate rises in wages. The pain to the consumer is great and often brings about social unrest and upheaval. We will surely discuss this phenomenon in greater detail in the days ahead. For now, I wanted to give you charts on some items that we don't normally follow here, just so you can grasp the dimension and scale of that which lies ahead.

Analyzing last week's CFTC Commitment of Trader data continues to confirm our assumption that ever more speculators are honing in on rice as the fulcrum commodity. Jumping to a fresh year high of 6,652, non-commercial net spec contracts are the highest they have been since December 2009, when they hit 6,773, and approaching the record from early 2008. Yet while the price of rough rice in late 2009 was comparable to recent price levels in the $16 region, the peak from early 2008 was 50% higher, approaching $25. Therefore it is safe to assume that should speculative interest continue surging at the current rate, and if it were to approach the spec exposure of ~8,000 last seen in early 2008, then the price of rice has a long way to go...

Zero Hedge enjoys entertaining contrarian views, even to our own. The most notable recent one comes from Peak Theories which speculates that based on technical patterns, food prices are bound to fall. The one exception is rice, as we have speculated is long overdue for a major surge in price. Furthermore, as we will shortly show, speculative traders seem to agree with CFTC data indicating that net non-commercial specs continue to surge. As for dropping commodities, the ball we believe is in Bernanke's court - as last week's ICE margin hike in cotton demonstrated, exchanges' actions are now backfiring, and the only immediate price catalyst is broad market liquidity. Thus the question is whether Bernanke believes the Russell 2000 is at a high enough level that allows for a food price correction yet...

All those who were hoping that Egypt would open its stock market today, as had been indicated previously by the Egyptian Central Bank, will be disappointed. Not only will the CASE not open today, but it will remain shut on Monday and Tuesday as well. The reason: the Thermidor reaction at local banks is starting. Per Reuters: "Egypt's central bank declared Monday a bank holiday after a series of worker protests and strikes on Sunday at state-owned banks." Oddly enough, in the power vacuum immediately following a revolution, when the country has just transferred power to a supposedly beneficial, but not really, military regime, Egypt's number one priority is not to keep the general casino open. What a disgrace. More from Reuters: "Banks were also due to be closed on Tuesday, which is an official holiday marking the Prophet Mohamed's birthday. "Employees are demanding higher salaries," Deputy Central Bank Governor Hisham Ramez said by telephone, adding that strikes were mainly at state and not private banks." But do not despair, according to the perfectly efficient ($25MM AUM) EGPT ETF, the Egypt stock market is currently 15% undervalued. All that is needed to make sure that someone can pocket a guaranteed 14.6% arbitrage is for the Egyptian financial industry to have enough people left employed to open the stock market.