Archive - May 2011 - Story

Today's Flash Smash visualization in the stock of Enstar is brought to you by Nanex: from $102 to $0.01 in just under a second. But fear not: William O'Brien, the CEO of Direct Edge, made infamous by Zero Hedge through the whole Flash trading frontrunning scandal, says "the most egregious aspects of the Flash Crash, such as a stock trading at $39 and then going to 1 penny and back up to $38 in a matter of minutes, can't happen again with the progress made the last year". Behold progress...

And so we get another example of government efficiency at work. The still taxpayer funded General Motors has just announced it will spend $109 million to keep and add 96 jobs. This amounts to $1.135 million per employee. That's right, a carmaker is about to spend on a per worker basis, roughly what an average Goldman worker makes in base+bonus... in the hub of wage expansion, Michigan.

And yes, a token eurotrash sipping the Red Bull was there. Also, does this mean Nevada's GDP will be up by 10% next month?

Because one chart is worth a thousand Fed Chairman press conferences...

In the last two years, one of the most accurate predictors of both long and short-term trends has been FX Concepts' John Taylor, whose April call for a EURUSD peak of 1.4925 was almost to the dot. Which is why he is either about to cheapen his predictive record by being wrong, or the days of the rally are ending. In a statement very comparable to that from Jeremy Grantham released a few days ago, Taylor tells Bloomberg that: "the rally in higher-yielding assets is coming to an end with Europe’s sovereign debt crisis resurfacing, growth sluggish and banking systems unsteady. “This is the end of the nice slow moving risk rally that has lulled us pleasantly to sleep since the first half of 2009,” Taylor, chairman of New York-based FX Concepts LLC, said in an interview. “This warning is worthy of a brass band and bright lights as the other side of this low volatility rally will most likely be a scary descent that will have a very negative impact on markets. Our statistical models say we are about at the end of the road for risk.” Taylor gives a deadline to his prediction: "Higher-risk assets, such as equities, the euro and emerging market currencies, have either peaked or will do so by end of July." If Taylor's previous predictive record is any indication, it may get volatile soon. On the other hand, his forte is FX not stocks, and many other forecasters have been burned (or should have been) at the stake of predicting capital markets in a time of central planning.

April consumer inflation rose 0.4% in April, in line with expectations, and 3.2% year over year. This is a modest drop in the monthly increase from 0.5% in March, while the Y/Y number was an increase from 2.7% to 3.2%. The energy index posted another increase in April as the gasoline index continued to rise, the latter accounting for almost half of the seasonally adjusted all items increase. For those who eat in addition to use energy, the BLS had this to say: "The food index increased as well in April, though the 0.5 percent rise in the food at home index was the smallest increase this year." Still: "Within the food at home component, the indexes for meats, poultry, fish, and eggs, for dairy and related products, and for nonalcoholic beverages all posted notable increases, though the fresh vegetables index did decline following recent advances." Core CPI rose for 0.2%: the third such increase in 4 months. Overall, CPI continues to be far less than indicated by the MIT BPP.

• Japan’s Most Important Banker Sees Only Bubbles (Bloomberg)
• China May Limit Rate Increases After Raising Bank Reserve Ratio (Bloomberg)
• Japan Approves Tepco Nuclear Claims Plan (Reuters)
• What Is The Purpose Of The Euro? (Forbes)
• Senior IMF Official: Asian Countries, Including China, Increasingly See Currency Rise Needed (WSJ)
• Suicide Bombing Kills At Least 69 in Pakistan (Reuters)
• U.S. Attorney Sends a Message to Wall Street (NYT)
• Mighty Determined Sellers (NYT)
• IMF Weighs Extending Greek Repayments (WSJ)
• Beef Buying Koreans Fuel Record U.S. Meat Rally (Bloomberg)

In the aftermath of the Shanghai exchange's margin hike and trading band increase reported previously, a pair of articles from Bloomberg and the FT looks at the trading of silver in China, where the mostly retail-traded metal continues to be seen as an inflation hedge. From Bloomberg: "Silver trading in Shanghai, which jumped 65 percent in terms of volume last month, will continue to increase on demand for a safe-haven investment, even as the government moves to curb volatility and speculation." And since China's inflationary concerns are unlikely to go away soon, it is only natural that domestic hedging, mixed in with some wild speculation, will continue: "“Chinese investors have piled into silver as one of the investment choices to hedge against rising inflation,” Shi Heqing, silver analyst at Beijing Antaike Information Development Co., said today. The government’s move to increase margins in an effort to curb volatility won’t affect buying interest in physical material, Shi said." Sure enough volume has exploded: "Volume on the Shanghai Gold Exchange rose to 33,293 metric tons in April, up from 20,206 tons the previous month, according to data from the exchange, the main bourse in China for trading silver." The FT provides another look at the unprecedented surge in silver trading in Shanghai: "At the same time, silver turnover on the Shanghai Gold Exchange, China’s main precious metals trading hub spiked, rising 2,837 per cent from the start of this year to a peak of 70m ounces on April 26, according to exchange data. The number of contracts outstanding, an indicator of investor exposure, doubled over the same period." In other words, while in the US it is mostly gold that is a pure inflation hedge at both the retail and institutional level, in China, where runaway inflation is running far higher than here, silver is the primary means to cut inflationary exposure. Therefore, nothing short of a full on deflationary episode in China will do much if anything to have a long-term impact on the price of silver.

Following last week's ECB very dovish conference, in which Trichet was believed to have put any tightening plans in the eurozone on hold for an indefinite amount of time, today's release of very strong core Eurozone data once again brings the specter of a rate hike to the fore, sending the EURUSD notably higher, and of course, leading to a weakening in the dollar. In addition, the already well known schism between Europe's core and periphery continues, following very weak data reported in the austere PIIGS countries, offset by consensus beating growth in Germany and France. From Bloomberg: "Euro-region economic growth accelerated to the fastest pace since the second quarter of 2010, powered by forecast-topping expansion in Germany and France that offset the impact of tougher austerity measures from Ireland to Spain. Gross domestic product in the 17-member euro area rose 0.8 percent from the fourth quarter, when it increased 0.3 percent, the European Union’s statistics office in Luxembourg said in a statement today. Economists had forecast the economy to expand 0.6 percent, according to the median of 31 estimates in a Bloomberg News survey. GDP rose 2.5 percent from a year ago." All of which once again proves that there is no possibility that Germany and France will ever allow a disintegration of the euro, and will continue to bail out all their troubled neighbors as the continued pegging of Germany's red hot economy to such weaklings as Greece is the only factor that matters for the country's export-led growth.

Just two reports today: CPI and Confidence, both expected to paint worse picture and thus should be favorable to stocks.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

A little under a year ago Moody's Mark Zandi and Princeton economist and former Fed vice chairman Alan Blinder penned a paper titled "How we Ended the Great Recession" which did nothing but extoll the virtues of spending trillions in both fiscal and monetary stimuli and preventing U3 from hitting 16% (of course how one proves a counterfactual is irrelevant: just remember - if the Fed disclosed its top secret bailout plans the world would end. Same thing here - accept it - after all the guy is a professor at Princeton). In a nutshell Blinder is nothing but Paul Krugman on steroids: a man who believes that there is nothing worse in this world than establishing fiscal (and monetary) discipline now. Well, in an interview with Tom Keene earlier, Blinder fired the first shot across the QE3 bow, telling his Bloomberg host that the US needs "somewhat more" fiscal stimulus once again in order to boost employment (hold on: didn't we end the Great Recession, and certainly the normal one in the summer of 2009 according to the NBER?). How this would be accomplished in the current climate is not explained. Instead what Blinder says makes one wonder just who is on the tenure committee at Princeton - when asked how we bring the deficit in without austerity, the Princetonian responds: "Unfortunately I think it is very subtle for most political processes especially for the political process in the US. What we should be doing is somewhat more fiscal expansion but at the same time legislating into law fiscal consolidation for the future. Starting 2 years from now, 3 years from now, 18 months from now. But not now." Of course never now: why bite the bullet now when it can be kicked to some other administration in the indefinite future? Especially when tenure money and/or Wall Street bribes are at stake...

For the first time (and when it comes to the Fed's balance sheet that phrase will be heard many times) the total notional value of Treasurys, MBS and agencies held by the Fed surpasses $2.5 trillion. $2.518 trillion as of May 11 to be precise, of which Treasurys amounted to $1.466 trillion (excluding today's POMO), $927 billion in MBS (unchanged for the third week in a row), and $125 billion in Agency paper. The total is an increase of $24.4 billion from a week prior. Following the last schedule and a half of POMO, it appears the Fed will hold approximately $1.6 trillion in total debt. On the liabilities side, to go with all this debt, the Fed also had a total of $1.544 trillion in total bank reserves (including excess and required), also a record. As the chart below shows, reserve growth has slowed down substantially after it overshot materially following the unwind of the SFP program designed to provide the Treasury with debt space. As noted above, and as we discussed previously, the level of prepayment of the Fed's agency portfolio has slowed substantially (as confirmed by this month's forecast of only $13 billion in monetizations via QE Lite), which means the natural roll off of and remonetization of the Balance sheet will be far slower than some expected. Total Fed paper maturing in under a year continues to be just under $150 billion: a number we don't expect will change substantially. Elsewhere, total other assets continue to climb, and have now hit another record of $130 billion. Lastly, the Fed's lead on the second largest holder of US debt, China, continues to increase.

Following up on earlier reports that the fuel rods in reactor 1 were truly exposed, NHK now reports another speculation from long ago, finally confirmed by official sources, namely that the reactor is now melting down. NHK reports that "Tokyo Electric Power Company says the No.1 reactor at the Fukushima Daiichi nuclear power plant is believed to be in a state of "meltdown". The utility company said on Thursday that most of the fuel rods are likely to have melted and fallen to the bottom of the reactor. Earlier in the day, it found that the coolant water in the reactor is at a level which would completely expose nuclear fuel rods if they were in their normal position." And from Reuters: "The finding makes it likely that at one point in the immediate wake of the disaster the 4-meter-high stack of uranium-rich rods at the core of the reactor had been entirely exposed to the air." Had been, or are? At this rate of admissions (we claimed precisely this happened in March) the next thing we might get a confirmation of from official sources is that there is actual recriticality going on. Which, of course, will be used by the market as another excuse to BTFD, as under central planning everyone lives happily ever after. Oh, and in the meantime, if we recall correctly, the cores of reactors 2 and 3 have also melted down. But Bernanke will just kiss them and make them better.

It is not surprising that following a relentless barrage of margin calls, many have speculated, jokingly or not, that the CME has recently set out on a path of outright warfare with commodities investors and speculators, which was further escalated after the exchange decided to hike WTI margins on a day when priced broadly declined and not in a violent manner either. As the article author herself notes, much to the incredulity of some of her readers: "margins are set as part of the neutral risk management services we
provide. They aren’t a means to move a market one way or another, or to
encourage or discourage participation from one kind of market
participant or another." The response was in question to when the CME will reduce margins now that the price of silver has tumbled by 30%. We would actually love to get an answer to that as well...