Archive - Mar 21, 2011 - Story

Even as the market has now apparently fully priced in Fukushima, the bad news continue coming:

• TOKYO ELECTRIC RADIOACTIVITY FOUND CONFIRMS FUEL DAMAGE: NHK
• TOKYO ELECTRIC DETECTS 5 TYPES OF RADIOACTIVITY, NHK SAYS

No surprise there: by now everyone is well aware that the fuel rods are if not completely then certainly partially destroyed. However, the real danger, and explains why we have been following atmospheric conditions over Japan so closely, is that as Kyodo just reported, the rain is now pouring radioactive cats and dogs. But the most troubling development is that instead of being proactive and finally warning its citizens about the dangers, the Japanese government has just raised the decontamination threshold by nearly 20 times from 6,000 cpm to a stunning 100,000 cpm. Is is rather safe to assume that this number was not picked arbitrarily.

Reuters has released another "must bookmark" chart showing just how dramatic the impact of recent geo[political|logical] events has been on everything from the S&P, to Nikkei, to gold, VIX, Treasurys, and pretty much every other relevant asset class.

Who would have thunk it: Goldman advising clients to brace for high oil prices. In a note just released by Goldman's David Greely, the commodity analyst sees further upside "risk" to the price of oil as the black swan clusterflock flaps its wings ever stronger. "We estimate there is a $10/bbl risk premium embedded in oil prices. However, with the coalition airstrikes on Libya, damaged nuclear reactors in Japan, and continued risk of political contagion in the Middle East and North Africa, the risks to our forecasts are still to the upside." Furthermore, as we assumed a week ago, the so called demand destruction in Japan which pushed crude prices lower materially, will have a far more than equal and opposite reaction in oil prices once the restocking process begins with a material portion of Japan's nuclear capacity offline. "Concerns over the impact of events in Japan on the economy provoked a sharp, though brief, sell-off last week, but we expect the increased demand for oil-fired generation will far outweigh oil demand lost to reduced economic activity." And as always, in this market which is now entirely impervious to news flow, and in which jumps in gas prices imply a surge in GDP, any oil dip is to be purchased, especially since the marginal dollar is once again going toward the purchase of commodities.

In a crushing blow against the Fed and the banks that own it, in this case represented by the Clearing House Association, the Supreme Court rejected an industry appeal set forth by the CHA, that sought to keep critical bailout data from going public. The lawsuit was originally started by the great and late Mark Pittman, who tragically passed away around Thanksgiving 2009: we are confident we would be delighted to learn that his unprecedented act of suing the Fed in order to generate more transparency has finally succeeded. From Matt Winkler: " "At some point long before the credit markets seized up in 2007, financial markets collapsed and the economy plunged into the worst recession since the 1930s, the Federal Reserve forgot that it is the central bank for the people of the United States and not a private academy where decisions of great importance may be withheld from public scrutiny. As only Congress has the constitutional power to coin money, Congress delegates that power to the Fed and the Fed must be accountable to Congress, especially in disclosing what it does with the people's money."

To all those wondering why the Treserve scrambled on Friday to allow banks to resume paying dividends (even something as downright hilarious as Citi's $0.01...Is that the lowest recorded dividend yield in history?) here is your answer. The Treasury just announced it would sell its $142 billion MBS portfolio, supposedly to the same banks who are now using their cash on the books to satisfy shareholders too. The Treserve will sell $10 billion per month depending on market conditions, meaning a downtick in the market will now crash not only that given day's POMO (a UST market operation), but also have a reflexive impact on the entire MBS trading complex. As usual we can't wait for Directive #1 which will make selling any share an act of treason.

Central banks and sovereign wealth funds with massive exposure to the dollar, such as the Russians and Chinese, are not going to shout from the roof tops their intentions to diversify into gold and silver bullion as this would lead to a surge in bullion prices and an even greater depreciation of their dollar holdings. China imported 245.6 metric tons of silver in February. The figure is close to the 260.6 metric tons imported in February 2010 and suggests that the Chinese are more than willing to buy silver at over $30 per ounce. It also suggests that the record Chinese imports of 3,475,394 kilos seen in 2010 (a massive four fold increase from 2009) may be again attained in 2011. News that Iran and other nations with large dollar currency reserves have greatly increased their gold reserves (see News) will not come as a surprise to our readers. It stands to reason that they would given the degree of exposure which most creditor nations have to the U.S. dollar. It also stands to reason as some of them do not have cordial relations with Washington and may be reluctant to fund the U.S. continuing imprudent fiscal policies.

Nomura's Richard Koo opines on the aftermath of the Japanese crisis: "n short, the view overseas is that a country with these national characteristics and this level of technical prowess is bound to recover. In that sense, I feel as though the world is supporting Japan from afar. This focus of global attention on Japan should reassure the government that it can take necessary fiscal measures without fear of being downgraded by overseas rating agencies. From an economic perspective, the short-term outlook is bleak, and demand fueled by reconstruction projects is unlikely to emerge for some time yet. But I am confident the Japanese economy will be able to pull through this disaster if the public, the government, and political parties on both sides of the aisle join together and work as one." We are confident that once the situation stabilizes, the Krugman in Koo will promptly reassert himself and note to readers just how great of an economic opportunity the massive rebuilding effort truly is. And few if anyone will retort that in the spirit of creative destruction where GDP can only go up but never down as a result of massive devastation, the world should blow itself up every year and be promptly rebuilt in the scramble to double world economic output by the year 2020.

Yesterday it was the Arab League... today it is the country which arguably has the biggest oil reserves in the world - Russia. And they both are very pissed at what is increasingly seen by the word as an unholy oil crusade, headed by Sarkozy, but with the US and UK not far behind. Per Reuters, Russian Prime Minister Vladimir Putin on Monday likened the U.N. Security Council resolution supporting military action in Libya to medieval calls for crusades. Well, when your gasoline is $9/gallon a crusade surely sounds like the politically responsible thing to do. Especially if in the process one can get on the Nobe peace prize nominations list.

While the wacky desperation antics of America's nationalized bank (that would be Citigroup for the cheap seats) enter the surreal zone, after the bank just announced a 1 for 10 reserve stock split (finally returning the stock price to Al Waleed's cost basis, if not entrance market cap) and a 1 cent dividend (which effectively means the Fed can now exit the prop each failing bank game... but won't), the bigger question is what happens to the momentum algos that traditionally traded 500 million shares of Citi stock, providing a supporting base for the market courtesy of massive momentum surges that provided a buying feedback loop mechanism driven out of pure churn volume. Those days are now over, as the volume will plunge pro rata from half a billion to a measly 50 million shares. Furthermore, with algos receiving liquidity rebates on a volume basis, it is conceivable that the biggest piggy bank to the 3 man Ph.D. HFT operations is about to break, as exchanges cut their rebate payouts by 90%. And with the stock market these days being far more a function of volume churn than technicals or, heaven forbid, fundamentals, what happens with the natural HFT support to the market is anyone's guess. One simple assumption: the next time the S&P does a May 6, or a USDJPY flash crash, the liquidity providers will pull out that much faster, leading to a massive freefall without any of the foreplay.

• A Crisis That Markets Can’t Grasp (NYT)
• World Bank Says Japan Quake Rebuilding May Take Five Years (Bloomberg)
• Central Banks to Maintain Pressure on Yen (WSJ)
• Japan Faces Fresh Food Safety Crisis (FT)
• Coalition Air Strikes Rein in Gaddafi (FT)
• Geithner to Decide on Regulation of Foreign-Exchange Swaps (WaPo)
• Help Housing? Dump Uncle Sam (Forbes)
• Oil Companies Fear Nationalisation in Libya (FT)

Each time we begin to approach the end of an announced QE period, the nervous jitters of financial markets start to set in. Will Bernanke continue with QE(n+1) or won’t he? Now it’s true that professional traders live and die by their ability to front run rumor and perception, but for long term investors who fret over such decisions, it demonstrates a fundamental lack of understanding of what QE really is. To put it succinctly, QE is an economic deal with the Devil. Once it is begun in earnest there can be no turning back. It must be played to its ultimate conclusion.

While US stock futures continue doing their own thing, primarily on the back of JPMorgan's $20 billion financing for AT&T to buy T-Mobile (gotta love proximity to the discount window and/or excess reserves), with ES surging by 16 points overnight (but not Sprint - sorry guys, you are on your own) after the world apparently did not end, the black swan formation refuses to disperse. Here is the latest news update from Japan, Libya, and Yemen.

Futures positive this morning as Japan’s nuclear crisis made a step forward and U.N. allies took control of Libya’s airspace. Portugal’s government will present its fiscal austerity plans to Parliament today. Portuguese PM Socrates has warned of his resignation if the plan does not get passed while the main opposition party which has reached majority position has shown no support for the cost-cutting. The potential political turmoil will make a foreign bailout likely. Sunday’s German regional election in Saxony-Anhalt, showed less support for Chancellor Merkel’s CDU party which lost ground in the victory. Its lead in the region’s coalition will likely remain the same, but foreshadows a greater potential upset in the next round of election on March 27. U.N. allies began airstrikes on Libya this weekend, taking control of the country’s airspace and stopping Qaddafi’s advance on rebel outposts. Meanwhile, Syria and Yemen continue to see social unrest, adding to upward pressure on oil prices. Japan managed to gain control of two of six nuclear reactors, but the situation still remains dangerous despite the accomplishment.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 21/03/11