Archive - May 2011 - Story

So far the only good news to accompany the Fukushima catastrophe has been that for all the fallout, the radiation has been mostly contained due to Northwesterly winds which have been blowing any radioactivity mostly out and into the Pacific (coupled with relatively little rainfall), as well as the dispersion of irradiated cooling water which promptly enters the Pacific after which it is never heard of or seen again (there is at least a several year period before 3 eyed tuna fish feature prominently in restaurants across the country). This may be changing soon now that Super Typhoon Songda, which according to Weather Underground will form shortly as a Category 5 storm with 156+ mph winds, will take a northeasterly direction and 2 days later will pass right above Fukushima. The good news: by the time it passes over Fukushima it will be merely a Tropical storm. The bad news: by the time it passes over Fukushima it will be a Tropical storm. As the latest dispersion projection from ZAMG shows, over the next two days the I-131 plume will be covering all of the mainland. Although judging by how prominent this whole topic is in the MSM lately, it seems that conventional wisdom now agrees with Ann Coulter that radioactivity is actually quite good for you.

The now traditional mid-day attempt to boost stocks by the FRBNY has once again resulted in a substantial divergence between the ES (aka the S&P) and all other risk indicators (10y, curve butterfly, EURUSD, AUDJPY, Crude and Gold), the spread henceforth known as the "RISK spread" (courtesy of Capital Context), meaning that the "buyer" of last resort is throwing what little money it has left purely into ES keeping the stock market, aka the Russell 2000, aka the "Economy" afloat. Those who enjoy closing the spread divergence would be encouraged to take the opposite sides of this pair trade with the expected compression bent by EOD.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 26/05/11

The past few days have not been good for Greek GDP, since every single day we have seen thousands of protesters occupy the Athens parliament square, the location of so much more of the same back in 2010, in what has so far been a series of peaceful protests. Today's, however, appears to be the biggest. Luckily, the market is about to close which means no restraining order on Waddell and Reed is necessary. Then again, ES does trades all the night... when liquidity is negligible to begin with. Hmm. Anyway, watch live developments from Athens at the link below.

The 'other' of SocGen's strategist dynamic duo, Dylan Grice, chimes in with some off the beaten path observations on the (f)utility of following and trading the news. In experimenting with the impact of newsflow absence on one's trading record, reaches the Nassim Taleb conclusion that news "makes idiots of us because it gives us confidence, not insight." What Grice does find, however, is that living without news nonetheless is difficult as it removes the entertainment aspect of sub-stories spawned by any given news thread. His words: "Without the news, I was missing the joy of a good story." And for those who have not read "Fooled by Randomness", and find the topic interesting, we suggest going through Nassim Taleb's seminal book which does a far more in depth analysis on the topic. On the other hand, since the average Zero Hedge reader has the attention span of an HFT algorithm, here is Grice's abbreviated perspective. (Of course, since Grice is right, and news are fundamentally irrelevant, we sometimes wonder why we have any readers at all).

Recently, I have been thinking about a former marine I know that recently "retired" from the federal government after a couple of decades as an US postal inspector. During his entire career in government service, he carried a weapon, and spent most of his time conducting narcotics investigations. He has photos of himself beside giant mountains of cash and drugs that he had seized on raids. Several months ago, before he retired, he shared a little bit about his financial situation; specifically that he has several hundred thousand dollars in a federal retirement account invested in U.S. treasuries. He said it was essentially all that he and his wife had saved, and that he knew it was not going to be enough for him to truly retire, especially because they still have kids to put through college. Being a bit of an instigator, I asked this ex-marine/postal worker what his assumptions were regarding inflation, his life expectancy, and future returns...

And continuing with the rates discussion from the prior post, next up we have that "other" bond manager, DoubleLine's Jeff Gundlach, chiming in on what would cause a treasury rally following QE2. His assessment: nothing short of a confirmed double dip, or "zero GDP growth." Dow Jones reports: "Over the past two months, government bond market participants have fiercely debated whether the end of the Fed's $600 billion in Treasury bond purchases in June will trigger a market sell-off or rally...the U.S. government bonds' rally in recent weeks shows investors have already bet the Fed's exit from the market will boost safe-harbor Treasurys because the economy will slow. So any gains will be limited.  "The 10-year Treasury yield has hit the moment of truth," Gundlach said in an interview with Dow Jones." Needless to say, 0% growth, which is already in the cards according to a simple correlation analysis between Y/Y GDP growth and initial jobless claims, will force the Fed, in the absence of another fiscal stimulus (which everyone knows is not coming from DC this year and possibly next year either), to step up double time and to launch far more easing to offset the economic weakness which we have been predicting for 6 months, and which the recent Japanese earthquake, and Chinese slowdown, merely accentuated. The only wildcard continues to be Japan, which many have expected would take up the monetary slack and issue tens of trillions in yen in QE, yet which has so far been slow to come, leaving the ball in either the US or European court. However, with the ECB in transition as JCT wishes to cement his hawkish legacy, the only real alternative continues to be the Fed. Oddly enough, stocks today appear to have started to already price in the start of QE3. When this sentiments shifts to precious metals and crude, our advice would be to hide you kids, and hide your wife...

Recently Bill Gross appeared on CNBC stating that contrary to what some "blog" had said, the firm was not short bonds. This provoked said "blog" to pen a response (actually two) to this somewhat misleading statement, which we equated to someone claiming they are long x million in cash exposure offset by y billion in synthetic. Today, when interviewed by Bloomberg TVs' Tom Keene, Gross declined to refuse he was short treasuries (in fact, ignored the topic entirely), merely saying the following: “We're not overweight Treasuries. We're certainly underweight Treasuries, but that does not mean we don't own lots of other bonds...It does not mean as well that we're not a little bit shy in terms of duration." And once again the bottom line, and what it is really all about: "We’re having a good year...so don't cry for Pimco." Simply said, Gross is concerned by what traditionally skittish fund investors will think about the fund manager being correct (yes, Gross is correct to be short bonds, especially in the long-run) but being late. That is understandable. But making statement such as Pimco is not short market, and especially duration equivalent exposure, that is both misleading and condescending. Far more from the Pimco boss in the full interview.

Not much new in Howard Marks' latest missive which falls back on the Oaktree's boss' economy (and risk perception) as a "swinging pendulum" theory and focuses on what should be the "right approach to today" for the average investor. His advice: "money and nerve." Easier said than done of course when one doesn't have the benefit of tens of billions of "economies of scale" backing up one's conviction. Especially since as he points out, 'what if you had money and nerve in 2006 or early 2007? The results would have been disastrous. In those times you needed caution, conservatism, risk control, discipline and selectivity to stay out of trouble. In short, when the market is defaulting on its job of being a disciplinarian, discernment becomes our individual responsibility." Either way, Marks' always philosophical bottom line: "We can never be sure what will happen – and certainly not when – but it’s important to be prepared for what’s likely to lie ahead. And understanding the inevitable pendulum swing in the way investments are viewed – from weeds to flowers and back – is an essential ingredient in being able to do so."

This week's trifecta of bond issuance closes with a thud as today's $29 billion in 7 Year bonds (Cusip: QQ6) price at the second consecutive record high Bid To Cover (3.24) following yesterday's also record 5 Year Record high BTD, despite the high yield coming well lower compared to lost month's 7 Year of 2.71%, pricing at just 2.43% High Yield, the lowest since November 2010. It appears investors just can't get enough of the belly of the curve where the best risk/return profile appears to be concentrated. The Indirect take down was 39.35%, just short of the LTM average of 41.57%; Dealers were happy to step back and purchase just 39.35% of the issue, the lowest relative amount allotted to Dealers in 2011. The balance was made up by Directs, who took down 13%, or the highest since September 2010. Once again the key difference was the overall competitive bid tendered which surged from $76 billion to $94 billion, with increases across all three categories (Directs from $8.7 bn to $12.4 bn, Indirects from $12.8 to $19.2 billion, and Dealers from $54.7 to $62.3 billion) and a resultant drop in the hit rate across the board. And like yesterday, the bond came well inside the WI to the tune of almost 1.9 bps. As for the underlying reason for this bond strength, we refer readers to the must read analysis by Gleacher's Russ Certo, indicating that contrary to expectations, this bond strength is merely a confirmation of increasing economic and policy instability.

Today's chart of the week comes from Bloomberg's Senior Economist, Joseph Brusuelas, who correlates initial claims (inverted axis) and GDP (Y/Y% not annualized). Alas for Tim Geithner and anyone who read his "Welcome to the Recovery" Op-Ed from August 2010 clearly written under the influence of hallucinogenic Kool-Aid, it appears that the economy is about to grind to grind to a halt. The chart needs no explanation.

One of the most interesting things going on here in Hong Kong at the moment is the gradual displacement of the US dollar, and even the local Hong Kong dollar, by the Chinese Yuan. Walking around town, the signs are obvious: from shops that gladly accept Chinese Yuan cash for the goods they sell, to the money changers which now ALL display the Hong Kong dollar / Chinese Yuan cross-rate much more prominently than the US dollar / Hong Kong dollar cross rate. In many ways, this is a live economic experiment. Hong Kong has long had one of the world’s freest, most sophisticated economies; residents are free to choose what currency to accept (and save), whether HK dollars, US dollars, Chinese Yuan, gold, or anything else...US monetary inflation makes it inevitable that the Hong Kong Monetary Authority will come up with some sort of a scheme to either peg the Hong Kong dollar to the Yuan (rather than the US dollar), or perhaps even replace the Hong Kong dollar with the Yuan altogether. This would be a HUGELY popular move. Hong Kong is one of the few places on Earth with a net savings rate; the loan to deposit ratio its banking system, for example, stood at 81.7% at the end of March, meaning there are only 81.7 cents on the dollar lent out in Hong Kong for every $1 on deposit in the banks. Consequently, savers would love to see the Hong Kong dollar revalued higher by pegging it to the Chinese Yuan at the current Yuan/dollar rate of 6.50, rather than the current HK dollar/US dollar peg of 7.80. Bottom line, the clock is ticking on a Hong Kong dollar revaluation.

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

Market Recaps to help improve your Trading and Global knowledge

Yesterday we reported that Sarah Palin has just purchased a new property in North Scottsdale, AZ for $1.75 million. We further speculated that there may have been some fishyness with regard to the terms of the purchase of the JPM short sale which was an over 100% flip in about a year. So far so good. Where this story takes yet another detour into the macabre, is a cursory analysis of the release deed of the prior mortgage holder of the property, one Steven Soraya, who had a loan amounting to $980,500.00 with Wells Fargo, which was released on July 3, 2007 and which just so happens was signed by Robosigner extraordinaire, the one, the only, the infamous Linda Green. Ergo our question: did miss Palin just procure a property to which there is no legitimate title, and which, therefore, may not have been legitimately sold to her? Oh yes, MERS is of course involved too.

A little over a month ago, when silver was trading at just about $40, a silver put buyer made headlines (and even arguably moved the price of the metal) after buying $1 million worth of SLV July $25 puts. The same buyer made further headlines after he or she generated a 68,294,229,502,717.3% annualized return 4 weeks later. Well, today the trilogy comes to a close with the last headline saying something to the nature of "easy come, easy go..." - following a massive surge in the July $25 puts volume, we have learned that the same put buyer has offloaded his entire 10k put block.... at a complete wash. In other words, someone just got a very stark lesson in why a 500% paper profit can be converted into a 0% realized non-profit (and loss when factoring transaction costs) in just three weeks.