Archive - Mar 2011 - Story

After Nomura released a report two weeks back predicting oil could rise to $220 if the MENA situation escalates, this morning SocGen's Michael Wittner has released his own scenario analysis on the possible outcomes of the 2011 revolutions. His three cases see oil within the following escalating thresholds: $110-$125; $125-$150; and $150-$200. We are fairly confident that the worst case, which as expected involves all sorts of bad things happening in Saudi Arabia, is missing an extra zero somewhere. Some key observations from the report (attached below): "The forward curve for Brent, the better indicator of global oil market fundamentals, is currently in backwardation (nearby premium, forward discount) for the next 5 years, reflecting concerns over growing physical tightness in the crude markets. The oil markets are pricing in an extended Libyan shutdown of crude exports (see below). Even on the WTI forward curve, where prices are still under pressure from local mid-continent US market conditions, the contango has eased and now only extends through 2011; from 2012 through 2015, WTI is also in backwardation. As the Libyan crisis has escalated, the latest US CFTC data show that non-commercial net length for NYMEX WTI futures has reached an all time high. This is a key indicator that a new wave of investor flows is now moving strongly into WTI and the oil complex in general. With the widespread unrest in the Middle East and North Africa (MENA) region expected to continue, and the oil markets worried about further supply disruptions, the attractiveness of commodities and oil to investors has been underscored. With oil prices driving heightened concerns over inflation, oil itself is seen as a good hedge against inflation." In summary, SocGen sees about $15/bbl risk premium built into current prices, which could jump to as much as $110.

From the BBC: "Libyan sources have told the pan-Arab newspaper al-Sharq al-Awsat that Col Gaddafi has turned to the rebel Transitional National Council to secure his departure from the country in return for guaranteeing his and his family's safety. He sent a negotiator on his behalf to Benghazi and made handing over power before Libya's parliament, the General People's Congress, his condition, the sources said." If confirmed, look for oil to drop substantially. However, since this is almost certainly the latest totally bullshit rumor in a long string of market manipulation attempts, any drop in commodities should likely be BTFDed with a vengeance.

More purposeful confusion out of the Fed this morning after Fed's Fisher just hit the tape saying he may vote to end QE2 before the June deadline, even as Lockhart says QE3 is possible if the US faces another downturn. The purpose of all this constant conflicting disinformation is to keep market participants on edge as the marginal economic improvement is finally starting to reverse as Goldman's Jan Hatzius insinuated last night. In other words, should the Libyan conflict not be resolved for another few weeks, QE3 is pretty much guaranteed.

The stealth (or not so stealth any more) take over of the world by Goldman Sachs continues. Following the withdrawal of Axel Weber from ECB contention, and his almost guaranteed replacement with one Goldman alumnus Mario Draghi, now Goldman is set to take over the trifecta of Central Banks (since another Goldmanite Bill Dudley already controls the New York Fed): the BBC reports that: "the new member of the Monetary Policy Committee (MPC) will be Ben Broadbent, a senior economist at Goldman Sachs." Not at all surprisingly "he will replace the leading proponent of rate rises, Andrew Sentance, when he leaves the Bank of England's interest rate committee in May." We wonder what Goldman's "bent" on dovishness will be. Next up: Goldman just needs to plant its operative at the BOJ and the SNB and the company's global take over will be complete.

• China to stimulate imports from the United States (China Daily)
• Ten thousand apparel retail stores to stay shut on Monday in India today in excise duty protest (Economic Times)
• More grains limit ups coming: Wheat Planting Falls to Four-Year Low in Russia Amid Export Ban (Bloomberg)
• SEC Says Market Data Review to Come, But Not Yet (Reuters, h/t SR)
• Flat-Earth European Central Bank misreads oil spike again, and kicks Spain in the teeth (Telegraph)
• OPEC ministers talking informally, see no need to meet (Reuters)
• Grain prices 'will be stable' (China Daily)
• MSM only a few months behind: MERS? It May Have Swallowed Your Loan (NYT)
• Barclays Awards Chief Executive Diamond $11 Million Bonus (Bloomberg)
• Traders ‘short’ dollar as currency loses attraction (FT)

Currency debasement on a scale never seen before in modern history continues in the U.S. and other countries. This is leading to a real risk of stagflation and possible even hyperinflation if sane monetary policies are not returned to soon.
The fiat currency experiment of the last 40 years (since Nixon came off the Gold Standard in 1971) grows more precarious by the day. Ironically, Alan Greenspan, the central banker most responsible for the cheap money policies and asset bubbles of the last 20 years, has again warned about the euro and dollar being “faulty” fiat currencies. Greenspan again said how gold is the ultimate form of payment and currency (see interview and transcript of interview in News). "What the price of gold is saying is essentially that there are elements within the marketplace which feel very uncomfortable with respect to what's going on generally," the former Federal Reserve chairman said. "It's not an accident that you're finding that central banks are going in to buy gold."

Markets positive this morning, recovering from last week’s leap in oil prices and continued Middle Eastern violence. All eyes will continue to watch the escalating situation in Libya. The Fed releases January consumer credit numbers this afternoon, estimated to increase $3.4BE v $6.1B prior. Look for the release of retail sales this Friday amidst a light release calendar.

With regards to U.S. monetary policy we live in a world of opposites. Less is more and more is less. The long end of the Treasury market would like to see “Biofuel” Ben, nickname for his liquidity provisioning impacts on commodity markets worldwide, actually be a protector of price to ensure that the paltry and rudimentary semi-annual fixed income coupon payments that one receives for 30 years can purchase the same amount of cotton, sugar, gold, wheat, corn, or S&Ps without being diluted. What Ben didn’t say sent the U.S. dollar index near record lows, something inconceivable given the traditional safe haven status of the reserve currency during times of global uncertainty like oil shocks and new world order. The Euro, of all things, seemed to be the beneficiary of flows, breaching a new recent high of $1.40. They have a banker that may at least be contemplating tighter policy. And that is why the long Treasuries couldn’t maintain a bid for most of the week. Less vigilance by the Chairman is more inflation and less of that insurance policy for those fixed cash flows. In a climate such as this where the Chairman doesn’t appear to be steadfast in following his mandate of promoting stable prices, the bond vigilantes and Treasury dealers are likely to make sure they get compensated for the risk of underwriting record supply of Treasury issuance like this week’s refunding.

The macro picture and market reactions became more complex last week. On one hand global activity and hence demand remain solid. Last week’s global PMIs have been very strong and now stand at exceptionally high levels with a few exceptions. The US labour market continues to perform strongly. But on the other hand, Oil prices continue to be the main focus, as market participants continue to debate the risks for supply disruptions. The sudden shift to a much more hawkish stance by the ECB highlights that inflation targeting central banks may have to act to keep inflation expectations anchored...In a relatively data-light week, the main focus will therefore be on policy developments again. First, the instabilities in the MENA region will remain key, with heightened focus on potential demonstrations in Saudi Arabia on Friday, March 11. The second political development is the intensification of Eurozone sovereign negotiations ahead of the “grand bargain” summit on March 24/25. Finally, the US budget negotiations remain a critical issue and there are some tentative signs that the policy consensus shifts slightly towards more frontloaded fiscal tightening. Bond issuance will be focus point in that context. The US is scheduled to issue $66bn worth of Treasuries in maturities ranging from 3-30 years. Portugal will tap the market with a small issuance despite the fact that last week the national railway company failed to raise government guaranteed debt. Merkel and Schaeuble are scheduled to speak towards the end of the week ahead of important regional elections in Germany. On Friday, Eurogroup leaders meet for another summit, trying to agree on measures to finally put the sovereign crisis behind.

It is one of those days when the flight to new reserve currency is on, with gold and silver trading near overnight highs, same for the oil complex, yet futures are also at the highs of the premarket session, purely on the ongoing monkeyhammering in the dollar, which has now completely given up the ghost as the reserve currency on yet another bout of QE3 concerns, following last night's very cautious note from Jan Hatzius. At last check the DXY was at 76.135 and plunging. As for why oil will continue whacking bits and pieces of Q1 GDP, and why Goldman will have no choice but to push for another round of dollar rape, here is Reuters with the skinny: "Brent crude rose to $118 a barrel and U.S. oil hit the highest since September 2008 on Monday as fighting in Libya disrupted its supplies and renewed concern of wider disruptions in the Middle East. While the Libyan crisis has cut supply from a country that normally provides almost 2 percent of world output, the prospect of unrest spreading to larger producers such as Saudi Arabia is a far more bullish scenario for oil markets. "The major risk remains the prospect of the political unrest spreading to the Gulf producing region," said Caroline Bain, economist at the Economist Intelligence Unit. "However, even if there is civil unrest in Saudi Arabia, it is not a given that oil production will be affected." Wrong: it is a given.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 07/03/11

In the fall of 2010, there was no shortage of news regarding faulty foreclosure processes, aka "robo-signing." Bank stocks took a hit and the threat of a nationwide foreclosure moratorium appeared imminent. Then came the concept of put back risk to the big banks claiming violations of reps and warranty agreements or pooling and servicing agreements (PSAs). Since that time the media has gone rather quiet on the subject and the price action in the bank stocks would imply all is well. BAC settled for pennies on the dollar with one of the GSEs and the stock rocketed that very day as investors were no longer "worried about the uncertainty." The story may have gone cold but the lawsuits, court rulings, class actions, investigations have only heated up and continue to grow. In fact they have grown to the point where keeping up with all of it was next to impossible. Banks have tried to downplay any of these threats in their most recent earnings releases and conference calls but suddenly things seem to have changed. Recent SEC filings by JPM, earnings restatements by BAC, a quick departure of Howard Atkins from WFC and regulators investigating CDO transactions by C have begun to turn the spotlight back to the banks and the balance sheet risk they face.

One of our key predictions from early this year has been that Goldman Sachs' formerly crack economic team (and now considered by some to be nothing but a propaganda team on crack) will in the coming weeks and months materially downward revise its dramatic economic upgrade from early December (just coincidentally coinciding with the minute the Fed released previously secret bank bailout records), which ended the firm's skeptical stance on the US economy, and launched it into all out Kool-Aid mode on nothing but one-time adjustments courtesy of a last gasp attempt at fiscal stimulus. While we are still scratching our heads why Hatzius would totally discredit himself by doing nothing more than what momentum traders do at an inflection point, and calling for a paradigm shift in his outlook when the most recent bout of gains is not driven by any recurring fundamental improvements, frankly we don't care. What we do know is when Goldman turns outright bearish again, some time in late March, early April, it will be time to buy QE3 with both hands, following a dinner or two between Hatzius and Bill Dudley at the Pound and Pence. Tonight, Hatzius issued his first and very vague intro to the coming mea culpa: "The increase in oil prices is emerging as a more meaningful downside risk to growth later in the year.  At this point, we emphasize that this is just a risk, not a change in the forecast, as our commodity strategists expect part of the near-term price increase to reverse if the situation in the Middle East stabilizes.  But we are now clearly moving into riskier territory" and "eventually, fiscal policy will need to tighten anyway because the current structural deficit is much too large to be sustained over the longer term.  But if this tightening occurs more quickly than expected, that would likely weigh on near-term growth and, in turn, reduce the likelihood of tighter monetary policy." We are certain that today's note is the first whisper to those who read between the lines on what is coming from Goldman as soon as a few weeks from today, perfectly in line with Zero Hedge expectations. To be certain, it wouldn't be a Goldman report without the now traditional comic interlude: "Going forward, we expect employment to continue growing at a healthy clip, but participation is likely to flatten out and may rebound a bit, as word about the improvement in labor demand gets around more widely." Come again? Goldman is blaming the lack of propaganda media penetration for what will be a rise in unemployment? Frontal lobe hemorrhage to commence in T minus 5...4...3...

Remember when Egypt said that March 6 is the latest, guaranteed stock market reopen, or else? Well, the day has come and gone, and no Egypt stock market (all those who have been buying the EGPT ETF are forgiven for feeling like total idiots right about now). What however is trading are Egyptian bonds, which have plunged as a result of the ongoing total and complete chaos in the revolutionary country, which is now seeing a second wave of reactionary violence as fighting escalates between the police and protesters in Alexandria. As BusinessWeek reports: "Egypt’s borrowing costs are rising to the highest in more than two years
and stocks listed overseas are tumbling as the Cairo exchange’s
five-week shutdown and new rules on shareholder disclosure keep
investors away. The Ministry of Finance sold 3 billion pounds ($509 million) of bonds
yesterday, 1.5 billion pounds less than planned, as yields on 266-day
notes climbed 31 basis points from the last auction to 12.47 percent,
data compiled by Bloomberg show. Global depositary receipts of
Commercial International Bank Egypt SAE sank 15 percent in London last
week to the lowest level since July. Orascom Telecom Holding SAE traded
5.2 percent below its Jan. 27 close, when the Egyptian Exchange shut
down." Our advice: don't expect Egypt to reopen any time soon, and certainly not before the situation in Libya is under control, which won't be for a long time. In the meantime the flight to safety trade (read gold, silver and crude) is raging overnight. And if and when it reopens, look for nothing less than freefall: "The EGX30 may drop another 10 percent when it eventually reopens, said
Slim Feriani, London-based chief executive officer of Advance Emerging
Capital Ltd., which manages $750 million in frontier and developing
nation stocks including Egyptian shares."

In his latest edition of the Privateer newsletter, Bill Buckler confirms that he is one of the premier politco-economic commentators, with one of the most devastating expositions on how America, once the land of the brave and the home of the free, and truly a beacon of freedom for the rest of the world, has entered the death spiral of its cilivizational curve, which "beginning of the end" started in 1913 with the introduction of the income tax and the ascent of the Federal Reserve, and now, a century later, has morphed into what can poetically be called the "ending of the end." Recent events in the Middle East and Africa only underscore how rapidly the sun is setting on the world's once undisputed superpower. That China is merely biding its time before it disconnects its mutual life support system to the US (which contrary to conventional wisdom, is far more important to the US than vice versa, now that the Fed is by the far the biggest owner of US debt), and ends its symbiosis with US fiscal and monetary policy, should not be a reason for optimism to anyone. With each passing day, Chinese superiority is becoming ever more palpable (even despite the massive loan bubble currently in process in China), even as desperate US attempts to cling to the last trace of its former superpower status are getting increasingly ignored by virtually everyone. If Buckler is correct, the final nail in the US superpower status coffin could come as soon as the unwind of events in MENA, where the people have made it all too clear the US is no longer welcome. What happens next will indicate just how rapidly the complete fall from grace for the US will transpire: "The Middle East is again in strife. This time, the conflict is between
the regimes which have been installed and supported by the US government
in their march to empire and the people who those same regimes have
ruled with an iron fist. To these people, the US is not looked upon as
an “exemplar” of anything - except political AND economic repression."