Archive - Mar 9, 2011 - Story

That didn't take long. Ann Althouse writes: "Meade, who is in the building now, tells me, by phone, that he saw a
window on the Wisconsin Avenue side of the building opened and
protesters entering through that window. He thought it seemed as if someone in one of the Democratic legislators'
offices had opened a window to let them in, and — once they were in —
many doors have been opened all around, and people have streamed into
the building. He says he counted 3 "troopers" — I'm not sure what the
official job title is for these security people — and that they were
absurdly overwhelmed by the crowd." So...Wisconsin is not Cairo?

And so the biggest farce in US politics so far in 2011 (absent of course from the whole debt [ceiling|target] debate, not to mention the ridiculous budget, but those are topics for another day) is about to come to an end. After earlier tonight the Wisconsin Senate used a "procedural move on Wednesday to pass the proposal without the Democrats present" thereby rendering their three week long self-appointed exile to Illinois moot, "the leader of Democrats in the Wisconsin Senate says his caucus will return to the state, but he won't say when." The loophole used by the Republicans is that in lieu of passing the full budget bill, lacking a Democrat vote for a quorum, they instead formed a special committee to isolate only the collective bargaining portions of the bill and passed it with just 19 votes. The Seattle Times reports: "the floor session lasted just minutes, and the state Assembly is
scheduled to take up the measure on Thursday morning. That's the last
step before it can go to Walker for his signature. Senate Democratic leader Mark Miller of Monona says Democrats will
"join the people of Wisconsin in taking back their government," but he
refused to say when." In other words, the first attempt at forced austerity in the US is about to be ancted. What happens next will likely not be pretty as it suddenly becomes evident that the whole "cost-cutting" thing that is so popular in Europe is about to really come to the world's most entitled country.

The European Union is facing a similar set of events as those leading up to the 2008 US financial crisis. In 2007/08 the US economy was teetering on the brink of recession and the talk among many was that of a goldilocks soft landing. Economic data was still somewhat positive including job growth while equity markets were still holding up. The housing market was beginning to show signs of exhaustion. Manufacturers were confronting rising input costs while consumers were paying more at the pump. The Federal Reserve introduced a new chairman who tried to calm markets with his infamous quote on March 28, 2007, "the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained."

Those who have been following our series of US naval updates will not be surprised to learn that US forces are amassing around Tripoli. The LHD-3 Kearsarge is now within striking distance, and certainly within No Fly Zone enforcement, while the CVN 65, which according to some prior reports had already passed the Suez, is waiting just on the Southern tip of the canal. This is somewhat odd as it indicates that Naval command is still split as to where the Enterprise may be needed more: Libya or off the Persian Gulf where the Vinson is keeping watch for a potential Iran escalation. Of course, should Iran flare up, it is likely that Pakistan, Afghanistan and even India could rapidly go downhill which is why the US will probably need two aircraft carriers before it considers a full on attack against Iran. But the most surprising development was the launch of all three San Diego based aircraft carriers which three weeks ago were all sitting peacefully, their crews binging in the Gaslamp District, and since moving on to new deployment areas, most of which in the Pacific theater. Which means that very soon, the US will promptly need to get the 7 aircraft carriers that are currently at home port back in commission as things are heating up faster than the US can appropriately cover.

Having worked at PIMCO for 4.5 years, I can tell you that this kind of a major allocation decision was not reached overnight nor was it reached without considerable debate by every senior member of the firm. In other words, the decision to lower total US Treasuries to 0% was discussed by senior portfolio managers, senior account managers and many prominent outside consultants for days and perhaps even weeks before it was finally implemented. They never do anything over there without vigorous debate and discussion. For example, Alan Greenspan is a paid consultant to the firm and often participates in their quarterly Secular Outlook meetings. I don’t know if Mr. Greenspan participated in the debate about this decision but I wouldn’t be surprised if he or others of his stature did. By this move PIMCO is clearly indicating, almost by putting their reputation on the line because imagine the underperformance they face if they are wrong, that bond yields in the US will be rising soon, US Treasury prices falling and liquidity drying up to some degree.

It was to be expected: after 7 consecutive weeks of inflows during which the market drifted aimlessly, while seeing insiders dump a few billion to witless retail hot potato chasers, forming what some are calling a quadruple top, not to mention various revolutions and now counter-revolutions in MENA, the retail investor has once again said enough and turned their back on stocks. The beneficiary: taxable bond funds, which saw a whopping $4.8 billion in inflows, despite attempts by everyone in the propaganda machine to dissuade investors (read Baby Boomers) from putting their money into fixed income and reroute capital to stocks. Well, in an age of immediate demanded gratification and POMO-adjusted Newtonian third laws, every future inflow better be met with a greater than expected spike in the market, or the resulting outflow in the next week will be vicious. Also those hoping that the ongoing outflow from munis will finally end, will have to wait at least one more week: the week ending March 3 saw $711 million in muni outflows. Of course, following today's spanking by Jeff Gundlach we wouldn't hold our breath on a massive resurgence in capital allocation to an asset class which one of the greatest fixed income minds is due for a 15-20% correction. Yet what truly boggles the mind, is Legg Mason's response on how the $672 billion asset manager plans to deal with billions in sudden redemption requests: "Those outflows will be largely offset by market appreciation," said Nachtwey, chief financial officer of Legg Mason." In other words, the Ponzi will continue... or else Legg Mason is dunzo.

The following exchange between Ben Bernanke and Senator Kirk is a must watch for everyone who wonders how Ben Bernanke justifies the fact that America is now an open Ponzi scheme. Kirk's question "in laymen's terms this is one part of the government lending another part of the government money, which would not let to long term confidence once the American people understood the basics a little bit better" relates to the open monetization that the Fed does each and every day at least until the end of June. What Kirk did not ask is what happens when the American people realize just how truly preposterous the Ponzi is, and that all the interest "paid" by the Treasury to the Fed ends up being remitted as cash right back to the Treasury as revenue in essence incentivizing the Treasury to spend and borrow more in order to earn more! This is the most circular Weimarian nightmare scenario imaginable, and we can only hope that "the American people" understand this as soon as possible. As to Bernanke's surprise that the US had a currency without any Federal debt to back it up (yes, it is possible to live within one's means, even for a central bank) can we remind the Chairman that the gold on the Fed's balance sheet, all eight tungsten thousand tons of it, is actually Marked to Market to almost $300 billion, and can by definition be used as a pledge to any liability, such as a currency or excess reserves. But oh yes, how could we forget, using just gold as an asset would never afford us the kind of adamantium price stability that we have seen in recent times. Plus how on earth could one infinitely dilute the dollar if the Fed's balance sheet was limited by actual "assets" that do not require Hewlett Packard tech support every now and then.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 09/03/11

Two days ago we pointed out the dramatic change in the ratio of copper to gold, which moved at the highest rate of change since June of 2010. Today, the rate of change is even higher at 4.3%. And with copper starting to seriously take on water, a curious observation emerges: is the gold-copper ratio, which on an inverted basis was virtually a tick for tick correlation conjugate for the S&P, now simply a harbinger of where the stock market is headed. All else equal, once the Chinese exuberance dynamics which appear to have stalled out in copper, move to equities (which as Finisair demonstrated yesterday is only a matter of time) we believe, as the attached chart shows, that the fair value of the stock market is about 120 points lower. Since this is a relative comparison, those who do not wish to trade a single series, can put on a pair trade of short the Gold/Copper ratio (predicting it will decline from the current 3.4 - it is shown inverted on the chart below) and short the S&P in expectation of a compression.

Yesterday we tried (and failed) to make a big deal of the fact that Primary Dealers flipped 53% of the 7 Year Bond just issued two weeks ago (apparently nobody in charge cares or understands what this means, except for Bill Gross of course), so today we will go for an encore, and courtesy of today's $6.69 billion POMO, point out that the Primary Dealers have now managed to flip 50% of the just issued 5 Year Bond CUSIP: 912828QJ2, which was issued on February 23, and which saw $20 billion allocated to Primary Dealers. Well, on the Pomo from March 2, the Fed monetized $4.9 billion, and today this was followed up with another $5.1 billion. The monetization farce is now moving to every single OTR bond, and nobody in congress dares to ask why or how much money the Primary Dealers are making as a result of this travesty. Which is why going forward we may or may not report on bond auctions that have a Primary Dealer component (so all): in essence with the Fed guaranteeing to buy back half of every Primary Dealer take down, it is no longer an auction. Luckily, there is a 35% SOMA limit on how many bonds the Fed can monetize per CUSIP. Oh wait, that was scrapped as part of QE2. It is now a true Vaseline free for all.

DoubleLine's Jeff Gundlach appeared on CNBC earlier, and among other things, the muni market was discussed.It appears that the fund manager whom many consider to be roughly in the same ballpark as Howard Marks when it comes to fixed income investing is very much in Meredith Whitney's camp when it comes to his outlook on muni market prospects. Asked by Faber if he believes that munis are ultimately going the way subprime securities did, Gundlach responds "If by that you mean lower, the answer is yes. If you mean crashing, I am agnostic on that." And for all those who love taking out their actuarial tables and their historical default data to refute what is simply common sense, Gundlach has a few words as well: "I don't think you need to know what the default rates are going to be, or need to know how low low is, munis are going to go down. There are going to be other shoes to drop. There might be so many it looks like Imelda Marcos' closet when all the shoes drop because all the states have to deal with this stuff.... Between here and the endgame lies the valley and the valley is full of fear. And I think the muni market is going to go down by at least 15 to 20%. At least." As for Kaminsky relentless advocacy of munis, this time coming out with the always disingenuous "hold to maturity" defense, Gundlach simply made a mockery of that whole spiel: "You know what the definition of an investor? It is a trader who is underwater. People say they hold to maturity until they get scared and sell. It gets scary when the prices start to drop. The fear factor here is going to be palpable." This is probably the single smartest statement ever made on CNBC, where for once a guest actually replied with what is elsewhere known as common sense, instead of ivory tower economic theories that work everywhere but in the market (yes, stocks just like housing can only go up, until they can't). Aside from that cue the congressional subpoena.

It is not like we don't have enough revolutions to worry about, now we have to be concerned about that good old staple: the Thermidorian reaction, made so popular during the first real revolution, and now about to be repeated in Egypt. According to Agence France Presse, Egypt's new government warned Wednesday of a "counter-revolution," the official MENA agency reported, following clashes in several parts of the capital widely blamed on diehards of the former regime.  Those expecting press releases of the "Egypt is not Egypt" variety will not be disappointed: it was only on February 24 that Reuters reported that "Egypt's new military rulers assured the nation on Thursday they would guard against what protesters have called a counter-revolution by associates of Hosni Mubarak, deposed nearly two weeks ago in an 18-day uprising. The Supreme Council of the Armed Forces said it noted the use of political expressions such as "the counter revolution" and denounced what it said were "attempts to create strife", saying it was taking all steps to meet the people's demands."  It is oddly ironic then that it is the very Supreme Council using threats of taboo "counter-revolution" suppression to get the people to finally understand that they deposed one dictator and replaced him with another.

Reuters is reporting that Nomura is "downsizing" its commodities trading desk, resulting in some "job losses" - that is a modest euphemism. According to an insider, virtually the entire London commodity desk at Nomura was shown the door over the past several days, with deep cuts globally. This process however did not start today, and has been going on for a few days. As a result market expectations emerged earlier that there are commodity-related liquidations originating at Nomura. These are now likely very much unfounded, yet per two traders, the weakness in commodities is driven on expectations there is an legacy position unwind bottleneck. To an extent this is true, and the main reason why the WTI-Brent spread collapsed yesterday was due to the unwind of opposing bets by Nomura. Said unwinds are however now said to be completed, with little if anything left for liquidation, and we expect that the spread will promptly revert to its recent historical level in the $14-18 range, as the oversupply issues at Cushing persist as evidenced by today's DOE update. Additionally, the technical overhang on crude will soon be lifted after trading desks realize the order flow from Nomura has ceased.

Today the government auctioned off a reopening of the 912828PX2 10 Year, which at $21 billion, priced at 3.499%, and a 3.32 Bid To Cover. The auction was decent, pricing inside of expectations of 3.535%, however it was nothing like last month's blowout 10 Year which saw the highest Indirect take down on record at 71.3%. This time around, foreign institutions supposedly bouth 53% of the full amount (at a 74.5% hit rate), with Primary Dealers responsible for 40.5% (a really low 17.7% hit rate). Direct bidders remerged after their complete disappearance last month, and were responsible for 6.5% of the take down. Since the auction process is now a farce, and really no longer matters as it is merely an intermediary step to fund PDs, who promptly flip bonds back to the Fed, we refuse to dig too deep into what if anything today's action means for bond demand. If Bill Gross is correct, it means that USTs are in for a lot of pain in the future.

Why wouldn't the average Japanese person, who is in the exact same boat, enjoy falling prices, too?
Well, as it turns out, they do! Though wages and asset prices have stagnated in Japan for decades now, the quality of life for the average Japanese has not massively deteriorated in the way you'd think if you blindly accepted what the Western media tell you. Sure, Japan has huge problems. The rapidly aging and shrinking population, a lack of political willingness to reform, and a huge government debt burden all pose enormous challenges. But, as far as I can see, what's usually portrayed as the biggest problem of all in Japan, deflation, only really hurts the government. And that's only because the "real" value of all the hundreds of trillions of yen that it owes (mostly to its own citizens) goes up every year.