Archive - Mar 31, 2011 - Story

After years of threats about untold destruction should the Fed release discount window borrowings by both the Fed and the Clearinghouse Association (read the bulk of the Primary Dealers), the Fed today released "thousands of pages" of discount window borrowings. And while we are waiting for the docs to be uploaded in a publicly disclosable and legible format, we observe that not only has the market not plunged, but the Dow is in fact higher at this moment, confirming yet again that not only is each and every threat by the Fed that if it does not get its way hollow and baseless, but the whole TARP rescue which pledged over $20 trillion in taxpayer capital to prevent the apocalypse was likely just as much of an empty threat, whose sole purpose was to prevent the bankruptcy of bank management and shareholders. We will release the documents with our analysis as soon as we get them, but in the meantime, here is the summary on this event from Bloomberg, whose employee Mark Pittman was responsible for this lawsuit, and won.

Chicago PMI was released, printing  at 70.6 on expectations of 69.9 and a decline from the prior 71.2. As Japan's PMI released earlier, look for this data series to drop substantially once the impact from the Japanese tragedy is felt in the US. Among the more amusing series in the index was the Order Backlog which hits the highest since February 1974, and the Employment index which hit a ridiculous 28 year high, and the second highest since February 1973. Most notably Price Paid, rising to 70, was the highest pring since July 2008 A few more points here and this index will be the highest since 1980. The followign surve response says it all: "1. It seems like it's time for everybody to jump on the "price
increase" bandwagon, justified or not. 2. Disasters in Japan will cause
inventory to blip upward as contingency plans are placed into effect. 3.
Challenges remain for offsetting any price increases incurred during
2011." Nothing else to be added.

For those wondering how much the latest intervention in the Yen cost to the BOJ, we now have our answer. According to the Japanese Ministry of Finance, Japanese authorities intervened in the foreign exchange markets to the tune of Y692.5 billion in March. Market News elaborates: " The data from MOF confirmed that the Japanese authorities intervened in the markets from March 18, although MOF did not confirm the actual dates the Bank of Japan intervened on its behalf. However, Japan Finance Minister Yoshihiko Noda had already announced intervention had started on that Friday."

Pimco's El-Erian is doing his latest daily media tour, this time holding a live chat with Reuters' Chrystia Freeland. The live interview can be watched live here.

For all those still confused...

Two rather unpleasant headlines for the Old World from Reuters:

• There has been disagreement in ECB governing council over new liquidity facility
  
• ECB will not announce plans for a new liquidity facility to help Irish banks on Thursday

EURUSD has now erased all of the CPI-beat gains. Bond selling picking up.

Remember when we said March would be the cruellest month for Europe? Looks like someone did, at least on a NPV basis, and is now preparing for the next phase of the European Crisis. According to Newedge, there is very large selling on dealer screens in "all kinds of bonds: Spain, Italy, and France." It seems at least one trader is not waiting around to see what the Irish stress test results indicate, and the expectation is that, as Bloomberg noted earlier, bondholder haircuts will be fast and furious.

Today should be fun.

And so we find that last week's surprising beat was actually a miss as is this week's, which came at 388K on expectations of 380K, last week revised from 382K to 394K. Snow not blamed as this number sets a big question mark on tomorrow's NFP number. Continuing claims last week was also revised higher from 3,721K to 3,765K, with this week missing expectations (3,705K) as well at 3,714K. And the 99 week cliff is impacting more and more as persons claiming benefits on all programs, including EUC and Extended Benefits, increased by just 4,372. A US Labour spokesman says nothing unusual in last week's claims, and revisions showed mild upward shift.

The downgrade reflects the significant financial obligations the company faces as it continues to address multiple challenges resulting from the March 11 earthquake and tsunami that seriously damaged several of its nuclear and thermal generating facilities, most notably its Fukushima Daiichi nuclear plant. TEPCO continues to struggle to control reactor temperature and limit radioactive leaks at the plant, problems that appear far from being resolved. The downgrade takes into consideration the enormous costs the company will incur as it recovers from this disaster, including costs for replacement power, the building of new generation plants to replace the permanently damaged plants, and the decommissioning of the contaminated plant. These costs will inevitably increase TEPCO's already high debt leverage and could result in substantial rate increases that its residential and industrial customers may not be able to tolerate over the near term. These costs could lead to losses for at least the next two years if the company cannot increase the rates substantially.

• Bondholder Haircut From Ireland May Shut Italy, Spain Funding (Bloomberg)
• Bank of Ireland, Two Smaller Banks Said to Need $12.7 Billion of Capital (Bloomberg)
• Hoenig Says Fed Shares Blame for Higher Commodity Prices; Urges Tightening (Bloomberg)
• Gaddafi Foreign Minister Flees to UK (FT)
• Fed's Stimulus Exit May Not Wait for Global Turmoil to Pass, Bullard Says (Bloomberg)
• Kuwait's cabinet resigns to avoid questions (Al Jazeera)
• Cairo Revolution Finds New Target: Free Market (WSJ)
• Stop The Madness: Make The Dollar As Good As Gold (Forbes)
• Stark Defends ECB Plan to Lift Rates (FT)
• Bill Gross Says Treasuries Have Little Value, Echoing Buffett (Bloomberg)

In the first economic metric since the Japanese earthquake struck, Japanese manufacturing activity slumped to a two-year low in March and posted its steepest monthly decline on record, confirming all the worst fears about supply chain disruptions and production operations, according to the Japanese PMI released on Thursday. From Need to Know News: "The 6.5-point drop in March was the largest on record, surpassing the falls seen after the collapse of Lehman Brothers in September 2008 and the U.S. terror attacks in September 2001, MarkIt Economics said, adding that the March PMI index was the lowest since 41.4 marked in April 2009. Kohei Okazaki, economist at Nomura Securities, said March industrial output due out on Apr. 28 is expected to show a m/m fall of at least 10%. The PMI index is closely correlated to industrial output released by the Ministry of Economy, Trade and Industry. Markit, a UK-based research firm, conducted the latest survey between March 11 and March 25, and only 67% of those polled responded. It releases manufactures PMIs for 25 areas in the world every month." And in addition to all the collapse in all output metrics, adding insult to injury is the confirmation that inflation is now ravaging the land: the input price index increased to 65.2, the highest since September 2008, due to higher costs of raw materials such as crude oil and naphtha. It now appears that Japan is about to have the worst stagflationary episode in its history ever.

Markets mostly negative this morning in anticipation of early results from Ireland’s bank stress tests and an announcement from Portugal’s president. Compelled by lawsuits emerging from the Freedom of Information Act, today the Fed will release details about its discount window lending activities during the recent financial crisis. The Fed announced yesterday that it will auction $5B in 28 day term deposits next Monday in an attempt to reverse the liquidity injected into the economy during the 2008 crisis. Early Irish bank stress test results began leaking yesterday afternoon, but will formally be announced later today. The Irish government will need to take up the slack in banks’ capital needs, which may translate to further Euro zone aid or bondholder hits. ECB’s Weber reportedly said that creditors may be sharing the burden on bank losses. The Irish government is also contemplating a merger between two of its biggest banks as a restructuring tool. The latest nuclear news out of Japan highlights the possibility of chain reactions from the Fukushima power plant. The Nomura PMI showed Japan’s first post-earthquake manufacturing figures with a sharp drop to 46.4 v 52.9 prior, the first contraction since last October (a score of 50 indicates no growth)

Not much in the economic docket, with just Initial claims, Chicago PMI and Factory orders pending, as well as a bunch of Fed speeches throughout the day: today's its the doves' turn. Small POMO closes at 11:00 AM EST.

‘Poor man’s gold’ is set for a record nominal quarterly close which will be bullish technically and set silver up to target psychological resistance at $40/oz and then the nominal high of $50.35/oz . Silver’s record quarterly close was $32.20/oz on December 31st, 1979. While silver is up 22 percent this year and is heading for a ninth straight quarterly advance, its fundamentals remain very sound. With gold above its nominal record of 1980, poor man’s gold continues to be seen as offering better value. To the masses in India, China and Asia, silver is the cheap alternative to gold and an attractive store of value and hedge against inflation and debasement of paper currencies. Increasing global investment and industrial demand in the very small and finite silver bullion market is a recipe for higher prices. Thus, as we have long asserted the gold silver ratio is likely to revert to its long term average of 16 to 1. A return to a ratio of 16 to 1 is likely due to basic supply and demand and the geological fact that there are 16 parts of silver for every one part of gold in the earth’s crust.

Earlier Eurostat released its February European CPI number which was higher than January (2.4%) and consensus (2.4%), coming at 2.6%. That is the fastest inflation growth in more than two years in March as
European Central Bank policy makers prepared to raise interest
rates to fight increasing price pressures.Per Bloomberg: "Inflation in the 17-nation euro region quickened to 2.6 percent from 2.4 percent in February, the European Union’s statistics office in Luxembourg said today in an initial estimate. That’s the fastest since October 2008 and exceeds the ECB’s 2 percent limit for a fourth month. Economists forecast inflation to hold at 2.4 percent, the median of 32 estimates in a Bloomberg News survey showed." The primary reason for the jump in inflation are energy costs, leading to such paradoxes as $9/gallon gasoline, as Europe is far more expose to Brent prices than the US which has spiked this year: "Crude oil prices have surged 15 percent this year as output from Libya slumped. An armed conflict between Libyan leader Muammar Qaddafi’s troops and rebel forces has forced companies including Total SA and ConocoPhillips to suspend operations and evacuate staff. Crude was trading at $105.30 a barrel today." The result of the release was a kneejerk jump in the EURUSD to 1.423 as a modest hike by the ECB seems now virtually assured. Of course, a hike in rates means that the already cooling Economy will deteriorate even more. What that means for a continent that is now harboring increasingly more insolvent nations only Trichet (and Bernanke) knows.