Archive - May 5, 2011 - Story

The anti-speculator witchhunt is bearing fruit: following the wipe out in precious metals, the next, and key, target of this commodity take down, crude, just went from triple to double digits, hitting a low of $99.70, with the $100 limit orders resulting in a surge in the USD and accelerating the drop in EUR. Stocks continue to be completely disconnected from this massive liquidation across all commodities, as every mutual fund knows all too well that Ben will always step in and make sure that the Russell 2000 never has a downtick. Yet this complete isolation of equities from other products merely confirms that not even the HFTs correlate stocks to other asset classes. It also means that HFTs are no longer present in stocks, which means that even the fake liquidity provided by HFTs is no longer there, and we will likely have a far worse flash crash the second Brian Sack loses control of the stock market.

Forgotten how much fun it is to interpret Alan Greenspan's seemingly indecipherable 1024 bit cypher during Q&A? Today, the ECB's Trichet, in a surprisingly incomprehensible press conference filled with equivocation and indecision, reminded everyone just how fun translation central planner talk can be. Luckily, SocGen's James Nixon has released a note helping us make some sense of Trichet's message. In addition, SocGen has now revised its expectation for an ECB rate hike from June to July. Alas, we are confident that when the time comes, July will become August, and so forth, until finally the ECB finally lowers the interest rate, a major slap in the face of the legacy JCT as he is about to replaced by Goldman's Draghi. Yet in the off chance we are wrong, and the ECB has merely taken a one month breather from hiking, today's 300+ pip plunge in the EURUSD could be the buying opportunity of a lifetime. Alas, for that to happen, we would like to see Goldman issue a sell EURUSD note first.

Just out from Minneapolis Fed's Kocherlakota: "A core inflation rate of 1.5 percent is still markedly below the Fed's
price stability objective of 2 percent. Accordingly, an increase of 50
basis points in the fed funds rate would still leave the Fed in a
highly accommodative stance. First, the fed funds rate would be
extremely low—between 50 and 75 basis points. As well, the Fed's
holdings of long-term assets would continue to provide significant
accommodation. Using estimates from the staff research that I mentioned
earlier, we can conclude that the total monetary policy package of the
two forms of accommodation would be roughly equivalent to maintaining a
fed funds target rate of negative 1.5 percentage points. Such a stance
can only be described as being easy monetary policy—just not as easy
as late 2010." That said, someone please remind us just how many of these so-called hawks voted against the FOMC action at the last meeting? Yeah, that's what we thought. And yes, Narayana, we will be closely watching your vote during the next FOMC meeting, because we can't shake this nagging feeling that you, just like all other Fed presidents, are mostly full of nothing but hot air.

When William Shakespeare penned the words, “All the world’s a stage“ in, As you like it, it was centuries before tense photos of tense leaders would show tense concern over tense military operations. What transpired around the killing, or killing announcement, of Osama bin Laden has been astounding. Whether you believe that bin Laden was “taken out” by this NAVY Seal operation, after nearly a decade, two wars, an over 81% increase in the military budget, and thousands of deaths, following the tragic loss of life on 9/11, or whether you believe he was dead and iced years ago and strategically used as a sign of unflappable leadership, is irrelevant. The surrounding uproar was theatre of the extravagant, no matter how you slice it. But, theatre was invented for distraction, in culture and in politics. So while all the Osama drama was unfolding, the Treasury Department issued another plea for raising the debt ceiling, aka supporting its pro-bank policy. It went something like this: We need to borrow more to pay social security obligations and not default on our debt, so other countries won’t question our ability to manage an economy (as if that hasn’t already happened) and we won’t have to pay more to borrow more. If we don’t – you know what’ll happen – yep, another financial crisis. The actual quote was: “The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.”

The Berkshire-Sokol scandal has once again been drowned away by a variety of secondary noises, which however does nothing to eliminate the latent, and increasingly broader, sentiment that something is very wrong at the firm which for so many years was nothing short of the Oracle's cathedral for the great unwashed. Today, Bloomberg's Jonathan Weil shines a light in another can of worms that has just been exposed courtesy of Berkshire's report on David Sokol's conduct by its "audit committee", letting many new and unexpected cockroaches appear.

And now for a contrarian view on the fate of crude, and the Obama administration, from Oil Price: "The nation has about eight months of supply of crude oil saved in salt domes, in what is called the Strategic Petroleum Reserve. There is more oil available in the Naval Petroleum Reserve, a set-aside of oil in the ground. Obama needs to say that we are going to start using this oil as soon as it can reach the refineries. He has to go the whole hog – to set the machinery of using our special reserves in motion. That will counter-spook the market and humble the traders." Alas, any article that discusses the price of oil and ignores the possibility of another trillion or so in free liquidity courtesy of the Fed, which will immediately make its way to crude and the entire commodity complex, is woefully inadequate in our view.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

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There are those who are surprised by today's action in the EURUSD. We wonder why that is the case: had these people looked at our post from Saturday indicating the near record divergence between long EUR and short USD position, in which we speculated that the unwind would be fierce, today's Goldman call which we posted earlier, would be very much welcome. And yes, there was no margin hike in either EUR or USD spec contracts either last week or recently. We wonder why. So while we await the start of QE3 rumor reemergence, which will once again kill the dollar, and send the PM complex to the moon, here is what we said then...

More political theater out of DC:

• BOEHNER SAYS NO DEBT CEILING HIKE WITHOUT "REAL SPENDING CUTS AND BUDGET REFORMS"
• BOEHNER SAYS TIME TO TALK `ABOUT TRILLIONS' IN SPENDING CUTS
• BOEHNER SAYS `NOTHING OFF THE TABLE' EXCEPT 'RAISING TAXES'

So what exactly budget reform involves doing nothing to the revenue side of the income statement? Oh, the type that cuts spending, something Washington has not really succeeded in doing once in history? Good luck, in the meantime, we look forward to our new debt ceiling of $16.3 trillion to be announced in June or July at the latest, which will then have to be hiked to $18.5 trillion for capacity through March 2013.

Today seems like an opportune time to remind readers that as of March, margin debt, and specifically net leverage, were at near all time highs. Surely, selling off from a market that has more leverage now than almost ever, will lead to a perfectly orderly unwind.

It seems like yesterday that the LCH reduced Irish bond margins from 45% to 35% (it was actually 4 weeks ago). Since then, as the CME has demonstrated so well, when in need of some temporary price hike, best to just purge the "speculators." And to wit: after hiking margins back to 45%, LCH.Clearnet has for the first time raised Irish bond margins to over half, or 55%. Whether this will work as effectively in "normalizing" Irish bond prices, as it has so far "worked" with silver, remains unclear.

The liquidation wave has arrived, as the entire commodities complex, with an emphasis on silver and crude, continues to feel the wrath of a bipolar market which from inflation has suddenly realized that the underlying deflation needs to exhibit itself before the US Central Bank has a justification for more monetization. Elsewhere, the by bar biggest bubble in the world: the dollar short, is blowing up, with the EURUSD on route to post a 300 pip move in a few hours. Basically, the tit for tat repeat of 2010 in this Anno Domini 2011 continues.

After IPOing, with so much Bob Pisani fanfare, RenRen, has just forced the SEC to activate Short Sale Rule 201, having plunged from $22 yesterday to below $16 today, and just $2 away from its IPO price, which at this rate will be taken out shortly. Somehow we doubt the CME will hike "overvalued Chinese stock" margins today. Still, we wonder if the Chinese IPO bubble finally over? And as for RENN, who would have thought a company IPOing at 72x sales may be poised for a collapse. In other news, is the "market contingent" LBO of the NYSE by the Nasdaq now pulled?

And even as Bernanke continues to believe he can take away inflation with a 15 minute wave of his magic wand, the downstream effect persist. The UN's Food and Agriculture Organization reported that April food prices rose once again, from 231 to 232.1, putting it at the second highest compared to the all time high peak hit in February. Bloomberg reports: "“There seems to be some easing for a lot of commodities, but whether this is demand rationing, we have to wait and see,” Abdolreza Abbassian, a senior economist at the FAO, said before the report. “If the weather is good, if plantings expand, I think we could see some relief in food prices." Granted, in April various food commodities have seen their prices drop: "Sugar prices slumped 18 percent in New York last month, while milk futures fell 1.8 percent in Chicago, U.S. wholesale beef prices dropped 3.4 percent and pork declined 2.2 percent. Wheat prices rose 5 percent in Chicago after falling the previous two months and corn jumped 9.1 percent." Yet the drop has not been uniform: "Corn has almost doubled in the past 12 months on speculation that more planting in the U.S., the world’s largest grower, won’t be sufficient to rebuild global stocks. Wheat surged 57 percent over the same period and soybeans gained 39 percent as flooding ruined crops in Canada and Australia and drought reduced harvests in Russia and Europe. Of the grains, corn “is the most worrisome,” Abbassian said in a statement. “We would need above-average, if not record, yields in the U.S.,” however, “plantings so far have been delayed considerably due to cool and wet conditions on the ground,” he said." On the other hand, as most know, a far bigger issue is that prices tend to be sticky on the upside once they begin rising. And a cursory check in local retail stores confirms that any price drop has yet to impact the US proper.

Today's horrendous Initial Claims number was so bad that not even CNBC tried to spin it. In fact, as John Lohman points out, it was the second biggest miss to consensus in history! Of course, seeing how this is consensus and the BLS does not reveal any unknown information, we wonder just how difficult is it to factor in any special factors in determining project numbers, and if the answer is "very" then why do we need economists in the first place (that's rhetorical). And while Liesman is in Europe on some assignment, here is Goldman explaining why the historic miss was based entirely on special factors.