Archive - Mar 2011 - Story

Sticker shock in grocery store checkout lines and gas pumps around the western world is starting to set in. At this point, you have to be living under a rock to not notice that prices of goods and services around the world are increasing substantially. Much of the blame for rising prices has rightfully been levied on the uncontrolled expansion of central bank balance sheets-- the US Federal Reserve, for example, created more money in the last two years than it had created in the previous 200. Rejecting reject the possibility that any of this money could impact consumer prices is just intellectually dishonest. There is another factor, however, that weighs heavily on inflation, and it is seldom discussed in this context: taxes.

Following the relase of its general equity market overview, GTAA has followed up by releasing the quarterly FX market analysis. In a nutshell, Cleusix sees the USD as the fulcrum security with substantial upside (we would agree...if Bernanke were to not pursue further debt monetization). "The USD is becoming increasingly undervalued against most currencies. It is at a 40 years low on a real broad trade-weighted basis. Sentiment is increasingly supportive for the USD. Speculators had their biggest USD net short position ever a week ago and have covered a third despite continued USD weakness (a positive divergence. Assets in the the Rydex Weakening Dollar have surpassed assets in the Rydex Strengthening Dollar fund but have yet to spike briefly higher as they usually do when the USD decline exhausts itself. There is a big global short USD position which is growing by the day as the increase in foreign central bank reserves can not be completely explained by their current account balance and the net foreign direct investments. Hot money is flowing to emerging markets and we are on the look out for canaries…" All this and much more in the full 56-page report enclosed.

While everyone knows that the CPI in the US is manipulated beyond repair (a topic far too broad to be discussed here suffice to say that as disclosed previously true inflation in the US is currently runrating at over 8%), inflation as actually represented by US consumers and reported by Zero Hedge earlier, in the form of the 1 year inflation expectation index of the Conference Board lack of confidence index, is near all time highs. So if one takes this data series and adds to it the narrow unemployment definition (U3) one would get an adjusted Misery Index for US citizens (using inflation expectations instead of manipulated CPI). As the chart below shows, the Misery Index, which is merely inflation plus unemployment, constructed as such, would now be at an all time high. Hardly in keeping with Bernanke's wealth effect prerogative, but surely in line with record food stamp usage reported month after month. That said, the silver lining to that particular mushroom cloud is our confidence that as the bulk of Americans live in record "misery", they will be comforted to know that their 20 shares of NFLX are trading at a four digit EPS multiple. And the other good news is that we have the Brits beat again: whereas the US is at a record, the UK is merely at a 20 year high, proving once again that only the US never does anything half-assed.

Following recent news that the supremely organized Libyan rebels have established their own central bank and oil company (does anyone recall when rebels merely rebelled instead of immediately setting up an oil export infrastructure and a fiat counterfeiting authority... those were the days), we now learn that this impressively "impromptu" development may have actually been intended all along. From Reuters: "The United States on Monday gave a green light to sales of Libyan crude oil from rebel-held territory, giving a potential boost to forces battling Muammar Gaddafi. A U.S. Treasury Department official said Libyan
rebels would not be subject to U.S. sanctions if they avoid entities
linked to Gaddafi's regime, which would allow them to sell oil under
their control." And confirming just hos hypocritical any international embargo attempts are, here is the Un confirming that when it comes to determining international priorities, the only word that matters is the one that did not figure once in Obama's Libya speech yesterday: "There is no U.N. embargo on Libyan oil," a U.N.
Security Council diplomat told Reuters on condition of anonymity. "The
rebels can sell oil. But they can't do it through the Libyan National
Oil Corporation."" And the kicker: according to the US NATO leader among those profiting from this latest move of US desperation is none other than Al Qaeda.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 29/03/11

If one central bank ramps up the wannabe Zimbabwe stock market to infinity and absolutely nobody is there to hear the sonic boom, did the central bank really pull a Gideon Gono?

And another update from Fukushima on its route to the concrete dome, irradiated ground water, and a 100 km "no live zone" from the Guardian: "The radioactive core in a reactor at the crippled Fukushima nuclear power plant appears to have melted through the bottom of its containment vessel and on to a concrete floor, experts say, raising fears of a major release of radiation at the site. At least part of the molten core, which includes melted fuel rods and zirconium alloy cladding, seemed to have sunk through the steel "lower head" of the pressure vessel around reactor two, Lahey said. "The indications we have, from the reactor to radiation readings and the materials they are seeing, suggest that the core has melted through the bottom of the pressure vessel in unit two, and at least some of it is down on the floor of the drywell," Lahey said. "I hope I am wrong, but that is certainly what the evidence is pointing towards." But there is good news: "It won't come out as one big glob; it'll come out like lava, and that is good because it's easier to cool." Well that's a load off.

Starting to get doubts about QE3? Don't tell that to the official Chinese rating agency Dagong, who in traditional uber-pragmatic fashion, has the following summary observation on US monetary policy, and any imaginary changes thereto: "The second round quantitative easing policy ongoing in the United States can not change its weak domestic demand in the short term. In fact, it can only lower the interest rate of US Treasuries so as to maintain stable interest rate in the capital market in the long term, playing the indirect role of clearing some obstacles for a stable recovery. However, the plan of purchasing 600 billion US dollar Treasury bonds can not realize its predicted goal; and therefore, the United States will hardly change its predetermined monetary policy in 2011." What does this mean for China and the rest of the world: "The continuous implementation of such unconventional monetary policy in the United States will lead to the escalation of world credit war and inflict greater losses for related parties in the world credit system." Any questions?

In the most recent release of the Personal Income and Disposition report by the Bureau of Economic Analysis the headline numbers were seemingly very good with personal consumption expenditures up 0.7% and personal incomes rising 0.3%. Unfortunately, that is about where all the good news ended...The problems that exist today are a function of America, as a whole, losing sight of what brought this country to its feet. A generation of savers and investors (individuals that took capital and built something with it) has turned into a generation of gamblers and speculators in many regards trying to build wealth through service based programs and financial transactions that generate little or no economic throughput. The end result will be a malaise of economic growth into the future plagued by higher levels of real unemployment, a weaker financial system as 78 million baby-boomers become net capital extractors and higher interest rates and inflation caused by excessive liquidity and theoretical monetary policy.

Today's TOMO has closed, with the Fed conducting a whopping $2.180 billion reverse repo, easily the biggest operation of this nature since 2009, when the Fed commenced comparable liquidity extracting tests. The TOMO consisted of $770 million in Treasury, $710 million in Agency and $700 million in MBS being use a reverse repo collateral, paying 0.09%, 0.1% and 0.14% respectively to the banks involved, undoing the entire $1.6 billion TIPS POMO conducted earlier. It seems that Fed is doing all it can to telegraph that this time it really is done with QE2. In other words 2011 is not 2010, when this movie ran the last time around...

Like clockwork, the Treasury placed $35 billion in 5 year bonds with the usual suspects. While the high yield was the highest since May 2010, at 2.26% there was nothing particularly notable about this auction, which saw a 2.26 Bid To Cover, continuing the trend of a gradual trendline ever higher, with Direct bidders taking down 11.2%, the highest since November, Indirects jumping to 42.4% from 34.2% last month which was the lowest in two years, and Primary Dealers eating up the balance. The bond came with a 1.5 bps tail to the When Issued which had been hugging 2.246%. What is far more eventful is that with yesterday's $35 billion 2 Year auction, today's $35 billion in 5 Years, and soon, tomorrow $29 billion in 7 Years, total US debt subject to limit will be $14.258 trillion: just one auction away, or $35 billion, from breaching the debt ceiling. Also, the total debt, not just that subject to the ceiling, could pass the legal threshold as early as tomorrow (pro forma for settlement).

All sorts of trends are being extrapolated to justify sky-high stock valuations, insane levels of government borrowing and complacent confidence in a permanent abundance of cheap energy--to name but a few. The Fed has raced out and scored a few points in the Great Recession, and yet few analysts extrapolate its expanding balance sheet out a few years. Can the Fed really create $10 or $20 trillion in free money and use that to buy up the U.S. economy's impaired debt and unwanted Treasury bonds without any negative consequences? Corporate profits have rebounded on the back of a declining U.S. dollar and an unprecedented explosion of Federal deficit spending. Yet SIFPs (standard-issue financial pundits) still expect corporate profits to rise steadily despite the fact that the underlying trends have reversed. As stock market Bulls are about to discover, the one thing we know about trends is that they do not continue on to the Moon as per extrapolation lines neatly drawn with a ruler. They flatten, reverse or crash.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 29/03/11

Following today's Case Shiller confirmation that housing is due for many more month of pain, a press release from LPS confirms that the pain will be very prolonged, and home prices will declining for a long period of time. To wit: "The February Mortgage Monitor report released by Lender Processing Services, Inc. (NYSE: LPS) shows that while delinquencies continue to decline, an enormous backlog of foreclosures still exists with overhang at every level. As of the end of February, foreclosure inventory levels stand at more than 30 times monthly foreclosure sales volume, indicating this backlog will continue for quite some time. Ultimately, these foreclosures will most likely reenter the market as REO properties, putting even more downward pressure on U.S. home values." That is assuming Banks manage to bribe enough people to allow them to get back to foreclosing on tenants with improper loan docs (something we have no doubt will happen). And possibly far more troubling is that the Option-ARM trap is finally slamming shut: "February’s data also showed a 23 percent increase in Option ARM
foreclosures over the last six months, far more than any other product
type. In terms of absolute numbers, Option ARM foreclosures stand at
18.8 percent, a higher level than Subprime foreclosures ever reached. 
In addition, deterioration continues in the Non-Agency Prime segment.
Both Jumbo and Conforming Non-Agency Prime loans showed increases in
foreclosures and were the only product areas with increases in
delinquencies."

Corporate insider appear to have moderate their relentless dumping of stock. After selling around have a billion in stock each week, corporate executives and officers, sold only $185 million worth of S&P 500 stock in the week ended last Friday per Bloomberg. The biggest selling was in the stock of HJ Heinz ($39 million), Pall ($20 million), and First Solar, Cisco and Priceline in 3rd, 4th and 5th positions (not all that surprisingly). As for buying, it continues to be lethagic and is rescued each week by the 10b-5 buying in Titanium Metals stock which accounted for 70% of last week's 10 million in purchases (one of the 8 transactions that comprised insider buying). Look for tomorrow's ICI number to see if domestic outflows have extended to a 4th consecutive week now that retail has once again lost its appetite for top ticking the market.