Archive - May 2011 - Story

There have been quite a few spoof and comedic versions floating around, but here, courtesy of the NYPD, is the official version.

When we discussed yesterday's miss in April Industrial Production, and noted the plunge in the vehicle assembly rate, we merely said what anyone with half a brain would have seen as glaringly obvious ever since the Japan earthquake in March. "The immediate impact: the drop in the industrial production already
seen, but the bulk of it due to delayed aftereffects, will likely impact
the May number, as the follow through from the Japanese supply chain
halt starts ringing a loud alarm bell across Wall Street. Of course,
this is another thing that all those calling for a 4% H2 GDP could have
absolutely not foreseen (and in fact it was originally supposed to be
positive for the economy, eh Deutsche Bank?). Expect to see drastic
downward cuts to May Industrial Production and next, to Q2 GDP." Fast forward to today when we read in Reuters precisely what was predicted less than 24 hours ago: "here are fears auto production, which added 1.4
percentage points to growth in U.S. gross domestic product in the first
three months of the year, may now be a drag." And irony of ironies: "Some financial
institutions, including Deutsche Bank, are already trimming their second
quarter GDP estimates." But, but, wasn't it Deutsche Bank's very own Joe LaVorgna who first said that the disaster would actually be beneficial for world GDP, and subsequently that the world is "overreacting." Guess not: "Before Tuesday's industrial production data, Deutsche Bank had been expecting economic growth to accelerate to a 3.7 percent annual pace during this quarter after a sluggish 1.8 percent rate in the January-March period. "We lowered it by half-a-percentage point to 3.2 percent. We are going for a more conservative narrowing because other manufacturing activity is still expanding despite the supply disruptions in the auto sector."  And there you have that very dirty NC 17 three word phrase: "Wall Street Strategist."

The market was called to open $13 higher today, entering back into the meat of the trading range for the last two weeks. One would think that this retracement of a down move would be accompanied by a retracement of the volatility but we’ve come to learn from this market that skew and its implications are more volatile than volatility itself. Volatility should have been lower today. Calls should have been slammed today. Having attained break-even for the day, one wouldn’t expect back-month options to be of interest when the gamma lies with the shorter-dated months. If you thought any of those things you would be wrong. Here’s what happened: The market opened at 1493 and a buyer of the June 1500 Call came in, purchasing approximately 1000 lots. The market absorbed the balance as there is plenty of two-way business at the strike. Subsequently, a buyer surfaced in the December 1600 Call. The MO of the buyer was very similar to the MO of the August 1600 Call buyer we saw two months ago. As a quick review, between 10,000 and 15,000 August 1600 Calls were bought over the course of roughly a week and afterwards the market went to 1570. Today, 4,000 of the December 1600 Calls traded and it was this option that single-handedly changed the term structure of volatility. By the end of the day the front months were down, the back months were up and October served as the fulcrum (see chart below). Who is this buyer? We don’t know. Its most likely a fund or a dealing bank executing an order for a fund. We can’t tell you the market is definitely going to go higher from here but we can tell you that if it does volatility will firm up.

It is no secret that Geoffrey Raymond, the author of the infamous "Annotated ____" series, is one of Zero Hedge's favorite artists, in no small part due to the crowdsourced method of artistic creation. Indeed, it was only last summer that a copy of the Annotated Cramer (who can forget that prominent third nipple) was sold to a mysterious collector for a stately sum after it was annotated (in addition to the comments from the usual disgruntled suspect scribbling directly on the canvas) with comments compiled from our own post revealing this masterpiece. And once again, just as it should be, Zero Hedge and it's readers get the last word.  Prior to shipping his portrait of Ayn Rand to its new buyer, Geoffrey Raymond has invited ZH readers to submit a final round of comments, which he will then transcribe, more or less verbatim, onto the painting. He painted The Annotated Rand to coincide with last month's release of the Atlas Shrugged movie (a truly terrible flick, we are told) and the annotations inscribed in black were taken outside the premiere, then later at theaters around NYC.  The blue comments were taken at his usual stomping grounds outside the NYSE.  The Raymond market, as we've predicted here before, remains hot, with prices for this best work now flirting with six figures.  Might make sense to go to www.annotatedpaintings.blogspot.com and pick up a choice one while they still cost just a little more than a handful of gold coins in CME-adjusted terms. Regarding the Rand painting, our favorite annotation is "Rand + Greenspan = Bonnie + Clyde". All you closet Objectivists can now step up to the plate and have at it...

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 18/05/11

And just as everyone was starting to bet on the great USD renaissance, here comes Thomas Stolper to spoil the party, by not only refusing to close out his EURUSD trade reco after losing 800 pips in two weeks (and still being profitable), but by actually doubling down: "We have changed our forecasts to project more Dollar weakness."The reason is that the US apparently has a thing called a massive trade deficit that has to be normalized: "Since the last revisions to our forecasts, the Dollar decline has roughly tracked the expected path. Large structural imbalances in the US are highlighted by weakness in the tradable goods sector.The outlook for monetary policy differentials and BBoP trends remains USD-negative. Dollar weakness is common during periods with slowing GLI momentum." The bottom line: "We now see EUR/$ at 1.45, 1.50 and 1.55 in 3, 6 and 12 months, and $/JPY at 82, 82 and 86". Oddly enough, there is no mention of the real reason to position for a USD plunge. (Hint: Hewlett Packard). On the other hand, this may be the time to go balls to the wall long the USD, as it appears that Goldman is doing another USD fundraising campaign courtesy of its clients. Oh, and speaking of Goldman's clients, it's best to baffle them with bullshit. Here is Goldman's Jim O'Neill with a blurb from his Sunday note on why China is going down (among other things): "it seems to me that a bigger risk premia is still necessary for the Euro. I can’t see how it can remain at about 1.40." Yes. From Sunday. If your head didn't go boom yet, that's ok. It will soon enough. And way to cover your bases there Goldman...

Just because today was lacking a little on the whole surreal news track:

• MUNICH RE SAYS PROSTITUTES ATTENDED AGENTS' REWARD PARTY
• MUNICH RE SAYS ABOUT 20 PROSTITUTES WERE AT 2007 BUDAPEST PARTY
• MUNICH RE SAYS PROSTITUTE PARTY AT SPA VIOLATED COMPANY POLICY

Well at least someone was rewarded at the peak of the credit bubble. In completely unrelated news, Munich Re gets a Buffett boost

The Economist has stolen InTrade's thunder on the matter of IMF head odds and has compiled a list of the most likely candidates to take over for DSK, whose entire world has come crashing down in the span of a few minutes. This particular selection process may be more complex than usual, as it will see non-European countries vying for representation, as well as the possibility of PR damage control of having a woman, Christine Lagarde, on top. What is certain is that no matter who ends up standing when the conclave is over and white smoke is released, Mohamed El-Erian will be again correct: the process will high on pomp, even higher on Feudal traditions, and lacking in any true significance. From the Economist: "The head of the IMF has traditionally been a European, but calls from emerging countries to break with this unwritten rule, which they consider unfair, have been growing louder in the aftermath of the Strauss-Kahn imbroglio. But Europe seems unwilling to give up the privilege of having one of its own at the top of the IMF, particularly at a time when the IMF’s main job is crafting bail-out packages for euro-area countries. Here are some of the people viewed to be plausible contenders to replace Mr Strauss-Kahn, and the odds on their getting the top job according to William Hill, a British bookmaker. A win for a non-European would be a first for the IMF, as would the appointment of Christine Lagarde, who would be the first woman to head the organisation."

As usual, to get the best take on the Fed's minutes, it pays (metaphorically) to listen to those who actually set them...

David Stockman has become every major news organization's (and CNBC) go to critic when it comes to bashing each stupid idea currently preoccupying the DC C-grade soap opera artists. Obviously, at the current time this would mean the budget deficit and the debt ceiling. On both those issues, Stockman's position is well-known. Today, when asked by Bloomberg's Tom Keene to compare the current deficit with that of Reagan's, Stockman spares no praise: "The essential distinction is that we had a clean balance sheet then - $1 trillion of national debt. Today we have $14 trillion in national
debt.  We have used up all the runway, so to speak. We
have piled our national balance sheet with so much debt that the
government is at the very edge of a huge solvency crisis that isn't
going to be addressed unless both parties dramatically change their
position, and I see no sign of it.  So we're going to have a gong show." Stockman also opines on the Monetary Roach Hotel that the US debt has become: "We have not had a two-way bond market.  We have had a rigged
market that has been dominated by not just the Fed, but all the central
banks.  Today over half of the $9 trillion in publicly-held debt is in
central bank vaults. I call it the 'Monetary Roach Hotel.'" Lastly, on a proposal endorsed by Zero Hedge back in the summer of 2009, namely the introduction of a Tobin tax for Wall Street's high-frequency casino: "Wall Street needs to have a transaction tax.  I know they won't like it.
A tax on every trade, a small amount, would go a long way to putting
money in the coffers." As usual: absolutely spot on recommendations, which have little to no chance of occurring before the final bond crash finally takes away the multiple-use heroin needle from both DC and Wall Street.

Key highlights: "Participants viewed the weakness in first-quarter economic growth as likely to be largely transitory, influenced by unusually severe weather, increases in energy and other commodity prices, and lower-than-expected defense spending. As a result, they saw  economic growth picking up later this year....Recent increases in consumer food and energy prices, together with the small uptick in core consumer price inflation, led the staff to raise its near-term projection for consumer price inflation. However, inflation was expected to recede over the medium term, as food and energy prices were anticipated to decelerate...Nearly all participants indicated that the first step toward normalization should be ceasing to reinvest payments of principal on agency securities and, simultaneously or soon after, ceasing to reinvest principal payments on Treasury securities....A few members remained uncertain about the benefits of the asset purchase program but, with the program nearly completed, judged that making changes to the program at this time was not appropriate...The participants who favored earlier sales also generally indicated a preference for relatively rapid sales, with some suggesting that agency securities in the SOMA be reduced to zero over as little as one or two years. Such an approach was viewed as allowing for a faster return to a normal policy environment, potentially reducing any upside risks to inflation stemming from outsized reserve balances, and more quickly eliminating any effects of SOMA holdings of agency securities on the allocation of credit."

Some say that QE3 won’t happen. The U.S. is done with stimulus and force-feeding liquidity and inflation down the world’s throat. Okay, it’s austerity then. How much austerity does anyone think we’re going to have here in America? What is the critical mass and when will we reach it? How much inflation can our creditors handle before they reach their critical mass and have to allow rates to rise? Paradoxically enough, the real question has become ‘can we afford austerity’? I believe the answer is ‘not anymore’. Due to relatively recent events, austerity has become a mathematical impossibility.

Just because the US (and Sarkozy-led NATO) has done such a bang up job with Libya, the Nobel prize winner has decided to take his humanitarian intervention to Syria (unwillingly one must admit: after all Syria barely has any oil, and the risk of an escalation that will involve Israel is rather profound) where the US has just announced it is imposing sanctions and freezing the assets of president Bashar al-Assad and 6 aides, demanding that Syria "cease its brutal crackdown on protesters." And as if the sudden assassination of bin Laden was not enough, it now appears that the US administration (for right or wrong reasons) is dead set on antagonizing the entire Muslim crescent once again. Lastly we wonder, just how much of the USD jump over the past several weeks is due to the repatriation of dollars by other 3rd world 'dictators' in preparation (and avoidance) of comparable asset freezes against one and all?

Take a moment and conduct a mini thought experiment. Imagine that you're from the future many hundreds of years from now, researching what life was like in the early 21st century. You pull up an archive of newspaper headlines from the year 2011 and read the following...

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

Market Recaps to help improve your Trading and Global knowledge