Archive - Feb 2011 - Story

The US Treasury completed the latest ponzi shuffling of Treasuries to Primary Dealers (who will shortly send it all back to the Fed, pocketing a few hundred million in bid/ask spreads and commissions in the process), selling $35 billion in 5 Year bonds at a 2.19% high yield, the highest since April 2010. The internals, as has lately been the case, were not pretty. The bid to cover was 2.69 compared to 2.97 previously and 2.76 LTM average. Directs took down just 7.7%, as it now becomes obvious that the "UK" is no longer gobbling up bonds, and we expect the UK-bond build up as per TIC will stop in a month or two tops. Indirects also took down less than average, as foreign banks purchased just 34.2% of the auction, compared to 41.5% on average. Which of course means that PDs had to step into save the day: at 58.2%, PDs took down the highest amount since July 2009. Lastly, the auction prices about 2 bps wide of the when issued. That we could have such a weak auction in a day when risk is surging, is a stunner. Have gold and silver (and the CHF) finally become the widely accepted new risk avoidance products, instead of the USD and the UST? If so, that is a far bigger revolution than anything happening in the Maghreb now.

Remember when all "experts", pundits, and all other idiot verietals couldn't shut up how gold was going to triple digits imminently? Yes, neither do we.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 23/02/11

You really can't make this shit up: "The economy is in a much stronger position to handle” rising oil prices, Tim Geithner said today during a Bloomberg Breakfast in Washington. “Central banks have a lot of experience in managing these things." We are, all of us, now doomed.

NC-17/WR: Forbidden for those under the age of 17 or for current employees of Waddell and Reed

Our advice to Italy, which imports 425,000 barrels of oil each day from Tripoli: "Panic." Following yesterday's Force Majeure announcement from Libya which meant that oil production and exports will continue only for a few more days, the FT now reports that over half of Libya's production, or about 750,000 barrels is now offline. As Libya accounts for ~2% of global oil exports, this means that 1% of world oil output has just been removed. And to all those who claim that excess OPEC capacity can be easily substituted, sorry it can't - Libyan crude is far higher in quality than the general muck, meaning it is not a simple apples for apples replacement. From the FT: "Industry executives told the Financial Times that at least half of Libya’s 1.6m barrels a day oil output had been closed down. They cautioned, however, that they could only estimate the total outage since they did not have direct knowledge of production at their competitors’ oilfields." And if Nomura's earlier call is correct that a combined Libya-Algeria oil stoppage will result in the doubling of crude prices (and one can only imagine what happens if Saudi is thrown into the fray), then our January call for "higher" oil may lead to some very tidy profits. In the meantime, we expect the partial Libyan oil closure to reach 100% shortly.

While it is not surprising that the Swiss Franc is surging almost as much as silver in today's flight to safety episode, and even "value investor" Whitney Tilson is rumored to be shorting Netflix again after topticking his cover with immaculate perfection, what is a little disturbing is that the dollar has plunged to the lowest levels since February 3. The reason, of course, is that with global unrest spreading like Molotov cocktail fire, and implied US GDP plunging by 5% in the past week on the hike in oil prices, it is becoming very evident that the recovery myth is now over, despite claims by the NAR charlatans, and another round of quantitative easing is almost inevitable. What that means for the dollar is precisely what one can see on the chart below. As for the use of funds in the upcoming QE episode, perhaps the Fed can instruct the Primary Dealers to go out and buy some WTI this time instead of just crowding into Apple and REITs...

A $10 move in a week is just what the doctor ordered to destroy the last trace of surreality in the whole "economic recovery" story. At this rate we will take out all time high crude prices by mid March. As we have been saying since December, a rapid move in oil will undo years of carefully planned propaganda and money printing. Yet the weakness that "nobody could have possibly predicted" is just as we had forecast: global and US weakness in late February/March, market swoons in March/April (as per DeMark's repeat appearance), Fed releases early indications of QE3 in May. In the meantime, we also get a war as a bonus to boost the US military-defense industrial complex. Pretty much a rerun of the first great depression to the dot.

With the facebook revolutions having claimed virtually every other country in the region, the time may be coming for that most important one of all. And if Facebook is to be relied on for its revolutionary calendar, a job it has so far done without reproach, the revolutionary wave will come to Saudi Arabia on March 20. That will also the day crude passes $200.

To those who bought Italy CDS last week, congratulations. To those who are buying it right now, also congratulations.

Waiting for a Saudi revolution before buying those $200 oil calls? It may be time to reevaluate: according to Nomura a halt in just Libyan and Algerian oil production (far more likely than the crisis spilling over to Saudi) would send oil to over $220/bbl. Specifically "the closest comparison to the current MENA unrest is the 1990-91 Gulf War. If Libya and Algeria were to halt oil production together, prices could peak above US$220/bbl and OPEC spare capacity will be reduced to 2.1mmbbl/d, similar to levels seen during the Gulf war and when prices hit US$147/bbl in 2008." Wouldn't a doubling in price lead to a major demand plunge as well? Yes it would "This could also result in a temporary demand destruction of some 2.0mmbbl/d globally." Also, since the Fed's free money was not flooding global market last time, $220 is just a lowball estimate: "We could be underestimating this as speculative activities were largely not present in 1990-91."

The global stock markets' big dump yesterday has long-frustrated Bears salivating. Everyone knows the market has traded up for months on thin volume and heavy intervention by the Federal Reserve, so it makes a certain sense to expect the markets to cascade downward once the charade ends. Everybody also knows the tradewinds that have filling the markets' sails--record profits, impressive gains in overseas revenues, the expectation that China alone would fuel a commodities boom for decades to come, to name but a few--have all suddenly ceased, and in the stillness, a storm--oil over $100/barrel--is gathering ominously on the horizon. But too many hedge fund managers and other traders have been waiting for a big dump to make their year, which means the big dump is suddenly less likely. We might also anticipate that the Powers That Be aren't going to let their pride and joy, a manipulated market, roll over and expire just because Libya imploded and oil is heading over $100/barrel.

• Qaddafi Vows New Crackdown as Violence Spreads (Bloomberg)
• Merkel Says EU Considering Extension of Financial Aid Program for Greece (Bloomberg)
• Dale Joins Sentance, Weale in Push for BOE Rate Increase (Bloomberg)
• Making sense of Wisconsin's union showdown (WaPo)
• Ireland Needs Help with its Debt (FT)
• What Inflation Means to You: Inside the Consumer Price Index (dshort)
• New Zealand's Central Bank May Hold Rates as Earthquake Postpones Recovery (Bloomberg)
• Hong Kong's Main Task Is `Fighting Inflation,' Tsang Says (Bloomberg)

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