Archive - Mar 1, 2011 - Story

Ten days ago, when we first looked at the Libyan investment authority (its sovereign wealth fund), we asked "Which US Banks Are Managing Billions For The $32 Billion Libyan Sovereign Wealth Fund?" Based on Wikileaks data, it was disclosed that various US banks manage billions for the country which has just seen $30 billion of its assets largely frozen (although this is merely half of its total deposits). Obviously, we had "some" banks in mind, most of the variety whose directors believe they are above the law and can share inside information with criminal intent with utter disdain for the law. Now, courtesy of Marcus Baram of the Huffington Post we find that the usual suspects are, naturally, all here: among the key banks that serve as advisors and asset managers are Goldman Sachs (and not just anyone, but Jim "Revolutions are Bullish" O'Neill's GSAM, Citi and JP Morgan. The only question now is how long before we get some sort of public statement out of the likes of Lloyd Blankfein and Jamie Dimon: on the 22nd we said: "perhaps it is time for the US banks who manage billions in capital for the LIA, to step up." Now that they have been exposed by a third party, the CEOs should really take the hint before this escalates into a full blown PR disaster.

When a nation's top central banker says that even he is surprised the middle class is not far angrier at the bankers, you know the lithium consumption is surpassing Surgeon General RDA levels. From The Telegraph "In some of his strongest language yet, Mervyn King today claimed the fall in
households' living standards was the fault of the financial services sector
and he expressed sympathy that innocent families paying the price. "The people whose jobs were destroyed were in no way responsible for the
excesses of the financial sector and the crisis that followed," he told
MPs on the Treasury Select Committee. The people who are now suffering "did not get bonuses of the scale people
in the financial sector got". The financial crisis may have occurred
two years ago but, as austerity measures kick in, "the cost is now
being felt", he said.It remains "a big political problem", he added: "I'm surprised the real anger hasn't been greater than it has." What anger? Doesn't Merv realize Joe Peasant simply looks at the closing level on the Russell 2000 and says: "Damn, bitch, I am rich. And the economy is just humming along. It just makes me so happy" More importantly, if he continues with that kind of talk, King would be well advised to not get closer than 500 feet to any book repository.

It’s about time that this market started acting like a commodity and not a proxy for some ETF product traded by mutual fund managers. Call skew rallied to levels not seen in a long time as first dealers rolled their longs higher to let them hedge their gamma and then funds added to existing positions. It seems that the constant flow of GLD call selling that used to spill over onto comex has subsided. Perhaps we are entering a parabolic phase now that we are at all-time highs. We alerted readers to get long 2 days ago and remain behind our call of a top side of 1475-1550 in the next 8 weeks.

Now that all auctions from last week have settled, the real debt picture has emerged: as of February 28, total US debt was $14,194,764,339,462.64 (a settlement change of $57 billion on the day alone). As a reminder, the total debt limit is $14.24 trillion, or $100 billion away. Purists will interject that the total debt includes $52 billion in debt that is not subject to the debt limit, so in reality the total remaining capacity is $151 billion, although should total debt pass the ceiling, with or without the technicality, it will be pretty much game over. What is quite relevant is that the winddown of the SLF program is halfway completed, as otherwise the US would be in breach of the debt ceiling right now. Since there is another $95 billion outstanding on the SLF, which with the lack of any Treasury auctions in the coming week, has allowed the Treasury to issue an updated debt limit breach projection:"Today, Mary Miller, Assistant Secretary for Financial Markets at the U.S. Department of the Treasury, issued the following update regarding the projected dates by which the United States will reach the statutory debt limit:  “The Treasury Department now estimates that the United States will reach the debt limit between April 15, 2011 and May 31, 2011." Previously the projected breach range was expected to occur 10 days earlier. In other words, the Treasury is once again panicking, and sending the ball over to the Hill, to make sure politicians add another $1.5 trillion to the debt ceiling, which however, with $2 trillion in total issuance in 2011 will need to be raised just after the end of the new year.

There are those who would point out that without “velocity” we can’t have hyperinflation; and with 23% employment we aren’t going to get people spending, therefore there will be no velocity and thus no hyperinflation. I’d advocate that this argument be looked at again. First, the government is spending “funny money” that is, to some extent, creating some “velocity.” What is more important - money is a commodity as described in Part 1 - and therefore the more of a commodity that there is the less its value. Since the inception of the Fed in 1913 the dollar went to a value of .04 cents, 80% of that devaluation happened since Nixon took us off the gold standard. So if our dollar goes to a value of less than .04 cents, lets say .00000001 cent - we will have massive hyperinflation. Printing money is the road to .00000001 cents.

Today's market sell off was notable not only because it was the biggest single day percentage drop since November, but because it snapped the nearly unbreakable series of positive "first day of the month" returns. The biggest loser: the thousands of momo traders who go all in the last day of the month hoping to recreate the pattern. Alas, the pattern now longer exists, and today was the biggest outlier since June of 2010. That said, since the beginning of 2010, the bulk of the market's returns are still confined to the "first day" performance as nearly 15% of cumulative returns since 2010 are of that kind, and the rest is a meager 3%. It may be time for a major algo regime change.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 01/03/11

Even as gold closed at all time highs, and silver surged to a fresh 31 year closing high, the most important observation is that the market snapped the critical 7 month winning streak of major surges on the first day of the month (we will provide an update on this shortly). This means that all lemming momentum chasers are now blind deaf and mute, with no orientation in a suddenly very unfriendly stock market. In the meantime, all those who continue to believe that with oil over $100 the biggest winners will be gold and silver, are, for the time being correct. The attached charts confirm it.

It was just earlier this week that a bunch of irrelevant confidence trackers said that US consumer confidence had hit 3 year highs. Oddly enough, ground data not only does not confirm this data, but says it is merely more baseless propaganda. According to Gallup, which actually knows how to poll, "Americans have become much less confident in the U.S. economy over the
past two weeks, with Gallup's Economic Confidence Index falling from -18
to -30 during that span. The -18 Index score from two weeks ago was the
most positive Gallup had measured in the last three years." And as we suspected when we reported the latest confidence data "These results ... indicate the Thomson Reuters/University of Michigan Index of
Consumer Sentiment, released Friday but based mostly on interviewing
from early and mid-February, was essentially out of date when it was
released. The Index of Consumer Sentiment showed consumer confidence to
be the highest it has been since January 2008, similar to what Gallup
showed two weeks ago. But Gallup's latest weekly update suggests
consumer confidence has fallen back to where it was in early December." Luckily bad news no longer matters, because if it did Gallup's forecast would guarantee QE3,4, and so forth: "The short-term prospects for a turnaround in consumer confidence do not appear great, with gas prices likely to continue to rise, with state and federal governments facing increasingly difficult budget situations, and unemployment remaining high."

Update: Canada has now sent a warship to Libya as well.

Here we go:

GATES SAYS 400 MARINES BEING SENT TO JOIN RELIEF EFFORT (as we predicted yesterday)
GATES SAYS WILL `PROVIDE PRESIDENT WITH FULL RANGE OF OPTIONS

And to those who think the good Colonel will leave his oil in the hands of the infidels, we suggest you short Brent now.

Just in time for silver to catch a breather, gold steps in, and hits a fresh all time high of $1,432.57. Alas since this price action is merely stragglers loading up as a semi-mute Cramer, who suddenly has no 100x fwd P/E momentum stocks to pitch, goes back to pushing gold. As such the spike is likely rather temporary (for now).

Guggenheim's Scott Minerd has released a somewhat controversial piece looking at several steps forward in case the MENA crisis escalates to the point where dominoes start toppling each other. His conclusion: "After all these dominoes fall, global investors will likely find themselves in a world that looks like this: the Middle East is highly unstable, emerging market economies are slowing, and the crisis in Europe has been exasperated by shrinking exports, leading to a decline in the value of the euro. Against this landscape, the U.S. economy and dollar-denominated financial assets will look increasingly attractive on a relative value basis." Needless to say we disagree with this rather simplistic assessment, or rather, with a very large caveat: in nominal terms, Minerd may well be right, but the resultant surge in oil to well over $200 (should his thesis pan out) will cripple the US economy, force the Treasury to turn on the afterburner on debt issuance, and ultimately result in the biggest bout of monetization ever, resulting in the death of the US dollar (and thus, the resurgence of the gold standard). That said, it is a good piece, if one takes the conclusion with a big piece of salt. In our opinion, the only clear winners from the domino collapse will be oil as we have claimed since early January... and the PM complex of course.

While GM has traded below its IPO price in the past, so far the most coddled IPO of 2010 has yet to close below its IPO price of $33. Indeed, while the special services of HFT powerhouse GETCO have been instrumental in allowing the car maker to continue diverging with its true price, courtesy of massive bouts of momentum buying every time the stock price appears to break with government regulation, today may be the day when gravity and reality finally wins. And considering that GM just released its February sales data, which confirmed that the company continues to engage in dealer inventory stuffing, with 517,000 cars held in dealer inventory, compared to 510,000 in January, and 420,000 a year ago, (and the second largest amount in history after the 536,000 in November), the veneer off the world's most overvalued carmaker is finally starting to come off.

Reuters presents an interesting chart, which shows the historical correlation between oil (both Brent and Crude) and equities. After we had seen a positive correlation, either weak or strong, between the commodity and the risk asset for two and a half years, the correlation has finally flipped and gone negative. And while many debate whether or not the WTI is relevant at all any more with all the factors that have caused a record spread between it and Brent, one thing is obvious: the last time WTI to Stocks hit a correlation of -0.5 is just after the market peaked in late 2007, early 2008, as the market had started its decline which culminated with the global sell off of everything not nailed down, bringing the S&P to 666. The correlation between the two assets is again -0.5. If Brent confirms the WTI correlation, it may be time to run.

... for those who are lucky enough not to drive a gas consuming vehicle. Alas, with well over 254 million registered passenger vehicles in the US as of 2007, that's probably not that many. As for CNBC's claim that food inflation is somehow "taking care of itself" due to demand destruction, they may well be all too right: a few more revolutions, and resulting "disappearances" of protesters, and there will be far less organic demand for such a headline CPI nuisance as food.