Archive - Jun 14, 2011 - Story

Muddy Waters has just distriubuted the following release with its take home notes on the just completed Sino-Forest conference call, the stock of which as of this moment is the single biggest loser ever held by Paulson & Co. As can be expected, MW's commentary is not pretty...

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It appears that the "guaranteed" political consensus required to pass the Troica's mid-term fiscal proposal, also known as the "bailout #2" vote, which will soon be voted upon in Parliament, may not be all that guaranteed. Reuters reports that a "Greek deputy says will leave ruling PASOK parliamentary group over new austerity plan." Could the government shake up discussed earlier be coming far sooner than G-Pap wanted, and should PASOK lose more deputies in the next several days, that will make the vote passage just a tad problematic.

One year after the passage of Dodd-Frank's provisions on swap regulation absolutely nothing has been implemented. And judging by the just announced yet another 6 month delay of rule implementation, it now appears pretty much certain that the $600 billion derivatives market will never be actually regulated, courtesy of conflicted interests at the CFTC. "The U.S. Commodity Futures Trading Commission proposed delaying rules for the huge derivatives market that had been automatically set to go into effect on July 16. One year after the passage of the Dodd-Frank financial overhaul that ordered a crack-down on the $600 trillion derivatives market, regulators have not been able to meet the deadline for translating the legislation into specific provisions. That prompted the CFTC on Tuesday to propose delaying some of the so-called "self-executing" rules until as late as the end of the year." After all, it is the CFTC's sworn duty to do anything to help the poor OTC traders who may experience a modest drop to their multi-million year end bonuses if profit margins are cut into by regulatory intervention: "Traders had feared that billions of dollars in transactions might suddenly fall into legal limbo. Without relief from the CFTC, a delay could have caused those contracts to lose the legal protection afforded them by a clause in the Commodity Futures Modernization Act of 2000 that created a framework that stated they were not illegal off-exchange futures." But lest someone suspect the fine upstanding gentlemen at the CFTC led by former Goldman Sachs employee Gary Gensler who has absolutely no interest in seeing his old firm continue along the confines of the status quo (very much like that other form Goldmanite Hank Paulson), the CFTC did provide this brilliant clarification: "The temporary relief proposals have "nothing to do with any outside pressure one way or the other to extend the rule-making or the effective date," a CFTC staff member said." Well, if they say so, it must be true.

Back in 2004, following the disastrous Iraq war, started on false Weapons of Mass Destruction pretenses, and which was nothing but a backdoor subsidy to various energy contractors close to the Bush administration, the US government decided to impose a mini Marshall Plan and literally flood the country with billions in crisp $100 bills. The LA Times reports: "Pentagon officials determined that one giant C-130 Hercules cargo plane could carry $2.4 billion in shrink-wrapped bricks of $100 bills. They sent an initial full planeload of cash, followed by 20 other flights to Iraq by May 2004 in a $12-billion haul that U.S. officials believe to be the biggest international cash airlift of all time." And here we are making fun of the Chairsatan and his puny helicopter. Yet where the story gets very disturbing is that it now seems that more than half of this "reconstruction" funding was blatantly stolen! "Despite years of audits and investigations, U.S. Defense officials still cannot say what happened to $6.6 billion in cash — enough to run the Los Angeles Unified School District or the Chicago Public Schools for a year, among many other things. For the first time, federal auditors are suggesting that some or all of the cash may have been stolen, not just mislaid in an accounting error. Stuart Bowen, special inspector general for Iraq reconstruction, an office created by Congress, said the missing $6.6 billion may be "the largest theft of funds in national history."" Is another huge political embarrassment in store for the current US administration (even if on this occasion it can legitimately be blamed on the predecessor?): it appears so: "The mystery is a growing embarrassment to the Pentagon, and an irritant to Washington's relations with Baghdad. Iraqi officials are threatening to go to court to reclaim the money, which came from Iraqi oil sales, seized Iraqi assets and surplus funds from the United Nations' oil-for-food program." Prepare for many more hearings involving Halliburton et al. As for where the money is - why, it has long been spent.

First Citi, next the Senate, now the website of the Greek presidency: the global hacking campaign is getting ever more "effective."

It appears that "Goldman employee of the decade", Greek Finance Minister Giorgos Papaconstantinou's days in parliament may be numbered. According to Greek daily Kathimerini, following the commencing of the Troica's midterm fiscal plan review by the parliament tomorrow, there could be a substantial reshuffling in the Greek cabinet: "Prime Minister George Papandreou will soon conduct a Cabinet
reshuffle but has not yet decided if it will be before or after the
government’s medium-term fiscal plan is voted through Parliament,
sources told Kathimerini. From the website: "The two options being discussed by
Papandreou and his closest advisers are either to shakeup his team of
ministers as soon as possible, possibly even as early as this week, or
to make changes to his Cabinet after the government’s economic proposals
have been debated and voted on in Parliament. This would mean that the
reshuffle would happen in early July." While there are risks that the vote on the IMF-imposed fiscal plan may fail, this appears to not be a big concern in Greece currently: "Papandreou and his aides
appear confident that PASOK MPs will not scupper the midterm fiscal plan
in Parliament. The government has a six-seat majority and while it is
expected that one or two deputies might vote against the proposals,
which include further cuts to public spending and more tax hikes, there
will not be a large rebellion." Yet, several high profile pink slips are expected: "It
is expected that one of the casualties of the reshuffle will be Finance
Minister Giorgos Papaconstantinou, who has been severely criticized by
PASOK deputies in recent weeks, both because of the measures he has
adopted and due to claims that he has failed to consult with them." Of course, all of this ignores the popular mood which so far has been peaceful, although it may all come to a head during tomorrow's major strike and Parliament blockade. We hope to webcast from Athens as soon as practical.

Back in January, when collapsing the Brent-WTI trade was all the rage after the spread had hit all time wides, we cited a JPM report which contrary to Goldman (which 6 months ago had seen WTI higher than Brent) warned that the spread was likely to persist and even widen, and for once, agreed with Jamie Dimon's firm, cautioning: "those who believe that a compression trade between the spot curves is a slam dunk: be very careful." Sure enough, some decided to be brave and sell Brent while buying WTI. Considering today the spread just hit a new all time record of over $23, those brave souls have now been wiped out. Yet that does not explain why the spread continues to diverge, and has recently taken a sharp $7 jump in just the past few days. Below we present David Greely's latest thoughts on what the reason for this unprecedented divergence is, on why he has been dead wrong, and why he believes, eventually, he may be proven right, even as Goldman's prop desk has almost certainly milked this move for its entire duration.

Following less than parabolic moves higher in the precious metals complex over the past several weeks has extinguished some of the fervor in the space, which of course is welcome: a slow, gradual increase which does not provoke the CME's attention is far better for the boiling free than a sudden surge in prices. Yet the recent period of stability may soon be over. Standard Chartered has just released a report which looks at actual gold breakeven prices, production bottlenecks, central bank interest, and Chinese and Indian buying, and comes to the conclusion that $5,000 gold may just be a matter of time. To wit: "The limited supply comes at a time when central banks have completely changed their tune on selling down their gold stocks and now appear likely to accelerate their net buying programmes. China is way behind the curve. Currently, only 1.8% of China’s foreign exchange reserves is in gold; if the country were to bring this proportion in line with the  global average of 11%, it would have to buy 6,000 more tonnes of gold, equivalent to more than 2 years of gold production. We believe that these factors – limited gold production, buying by central banks and increasing demand from India and China – can potentially drive the  gold price to US$5,000/oz, as highlighted in our commodity team’s earlier report." And what according to Std. Chartered is the best way to capitalize on this undervaluation: "We believe the best ways to invest in the gold cycle are buying physical gold (a safe asset) or investing in junior gold miners (highest leverage to the gold price) that are 1-2 years away from production." Perhaps the current price 66% lower is therefore not a bad entry point...

US May PPI came in at 0.2% sequentially, on expectations of 0.1%, and down from 0.8% previously. This was the 11th consecutive increase in PPI. The 12 month change in PPI came at a multi year high 7.3%, much higher than the 6.8% expected, which supposedly is a good thing: inflation is back. PPI ex food and energy was in ling with expectations at 2.1%. Elsewhere, the May Advance Monthly Sales came at -0.2%, on expectations of -0.5%, down from a lower revised 0.3%. Retail sales ex auto and gas came at 0.3% on expectations of 0.2%, with the previous revised lower to 0.2% from 0.3%. Stocks appear to enjoy the increasing inflation on declining economic output.

• U.S. Says Bank of America Corp. "significantly hindered" a federal investigation of the company's foreclosure practices (WSJ)
• Additional 23 Fukushima workers exposed to high radiation (NHK)
• US mirrors sluggish global job creation  (FT)
• Getting Away With It - Why are Galleon's investors not impaired? (NYT)
• The Fed flood slows to a trickle (FT)
• Rising Prices a Risk (WSJ)
• Berlusconi suffers stinging referendum defeat (Reuters)
• Roubini Warns Of Euro Break Up As Greek Credit Rating Tumbles (Forbes)
• China Govt Could Cont Hiking Int Rates (Market News)
• Trichet signals hostility to Greek ‘credit event’  (FT)
• Qaddafi Coddled by U.S. Oil Producers (Bloomberg)

Overnight, China reported a 34-month high year-by-year CPI, which was not as high as many analysts anticipated, allied with higher than expected industrial production, which in turn provided support to Asian and European equities. However, the release was swiftly followed by the PBOC hiking its reserve requirement ratio by 50 basis points, which somewhat weighed on commodities, and commodity-linked currencies. Elsewhere, European peripheral debt concerns persisted, which allied with lack-lustre auctions from Italy and Greece saw widening of Eurozone peripheral government bond yield spreads, and Euro-era record highs in Greek, Portuguese, and Irish 10-year government bond yields. Bund futures also came off their earlier lows once supply from the Eurozone got cleared. In other news, an in-line year-by-year CPI data from the UK observed a knee-jerk reaction in GBP/USD, moving it up around 30 pips, however gains were quickly pared.
Moving forward, markets look ahead to a slew of key economic data from the US in the form of PPI, retail sales, and business inventories. In fixed income, another Fed's Outright Treasury Coupon Purchase operation is scheduled in the maturity range of Dec'12-Nov'13, with a purchase target of USD 2.5-3.5bln.

The heavy economic data week begins with Retail Sales, expected to come negative, a drop from April, and PPI, expected to post another solid gain in the past month. In the meantime NFIB small business optimism declined in May, as expected.

Stagflation Threatens Major Global Economies - Inflation in China at 5.5% and UK at 4.5%. Another fundamental factor supporting gold prices and likely to lead to further gains are the increasing signs of stagflation in major global economies. UK inflation data released this morning shows that inflation remains high at 4.5%. The Bank of England expects inflation to reach 5% later this year prior to falling but the Bank’s credibility is increasingly strained as inflation has now exceeded the BoE’s target of 2% for 34 of the last 40 months. British savers and pensioners are suffering from negative real interest rates and this continues to make gold an attractive diversification from a devaluing pound. There appears to be a gathering “perfect storm” of deepening inflation, slowing economic growth and double dip recessions, stagflation, sovereign debt crisis in many major western economies and the risk of sovereign and banking contagion.

The next two days will be very exciting in Europe: as noted previously, tomorrow Greece will experience a general strike, another parliamentary square blockade (with or without an evacuation tunnel involved) and most importantly, an MP vote on the Troica's "bailout" measures. Yet the vote appears far from certain to pass affirmatively, just as the entire bailout hinges on some incomprehensible "voluntary" definition which may or may not trigger a "selective" rating agency default anyway. As a result the bonds of Greece, Ireland and Portugal are once again trading at all time record high yields as the market has zero confidence the Eurozone will succeed with this juggling act. In order to prevent a last minute breakdown of the Eurozone, its finance ministers are holding another emergency meeting later today hoping desperately that a deux ex machina will just fall into their laps: "Yields on 10-year Greek bonds climbed to 17.12 percent today, a record in the 17-nation euro-area's history, before an emergency session of finance ministers in Brussels. They’re seeking to narrow differences on how investors share the cost of easing Europe’s biggest debt burden and to wrap up a new financing plan at a leaders’ summit on June 23-24, a year after Greece received a first bailout." All this is just theatrics to avoid the impression, and reality, that Europe is now completely powerless: "Greece will default; it’s a question of when, rather than
if,” said Vincent Truglia, managing director at New York-based
Granite Springs Asset Management LLP and a former head of the
sovereign risk unit at Moody’s. “It’s a basic solvency issue
rather than a liquidity issue. Only a debt writedown will do." Which incidentally is as we have been claiming since January of 2010. But it seems that for the currency experimentalists, reality is something best postponed (even at a cost of trillions of taxpayer money).