Archive - Jun 9, 2011 - Story

This is where things get downright bizarre...

In 2007, Shai Agassi starting a company called Better Place. The concept behind it was changing out batteries that power a car, instead of filling your car with gasoline. Shai Agassi looked at the problem correctly. He saw transportation fuel as a never ending relay race. But what if there was a technology that could do the same thing, without changing out the battery?

About a year ago Zero Hedge posted an article titled: "Record Number Of Americans Using Retirement Funds As Source Of Immediate Cash" after a report by Fidelity uncovered that "plan participants with loans outstanding against their 401(k) accounts had reached 22 percent versus 20 percent a year earlier." It is now time to revisit this very important topic because if recent press reports are true, last year's record number has just increased by another 50%. "On "The Early Show" Thursday, financial journalist and Newsweek
columnist Joanne Lipman said, "Right now we have 30 percent of people
who have 401(k)s have loans against their 401(k)s, which is a historic
high. And the problem is, it's growing like crazy: By 2014, we're
expecting to see 30 million people take loans against their 401(k)s." The raiding of the last ditch piggybank is on, and who can blame them? With banks setting the example of always reverting to the Discount Window (or the Excess Reserve stash as is now trendy) when in trouble, ordinary working Americans are merely following in the footsteps of their financially more "literate" betters. Unfortunately, unlike the "depositor" institutions, nobody will replenish these funds should they not be repaid and the retirement money is gone for good.

Update 2: State Department official says Clinton would not even take World Bank job if it was offered - CBS News

Update: NBC WIRE: From Philippe Reines, a Clinton spokeman: "It's 100% untrue, Reuters is wrong. That's on the record."

Phew, that was scary...

We are surprised that the "recidivist rapist" post-DSK PR backlash took so long. Yet it is now here. From Reuters:

• Secretary of State Hillary Clinton has been in discussions with the
  White House about leaving her job next year to become head of the World
  Bank, sources familiar with the discussions said Thursday.

Far more importantly, another rat leaves Obama's sinking ship. In the meantime, feminists everywhere rejoice, because, you know, Hillary, extremely experienced in economic, bankruptcy, and other financial issues is a woman.  Next up: Oprah seeks to run the Bilderberg group, in order to give it a more "streamlined", humane appearance and Rachel Maddow in rumored to run the Trilateral Commission. Obviously, Erin Burnett is a shoo in for the CFR. And yes, the world has now officially gone crazy.

More scary stuff from the US Treasury which has resumed living auction to auction, even as it has plundered over $80 billion in G and CSRD retirement fund money to provide cap under the debt ceiling, a number which will eventually rise to $270 billion by August 2nd at which time all bets are off unless the politicos in DC finally relent with their soap opera and allow the inevitable $2 trillion debt ceiling hike (which probably won't happen. Instead Congress will start voting on incremental $200 billion debt ceiling hikes month to month in order to keep the public glued to their TV in a demonstration of just how fiscally prudent Congress is). In the meantime, here's the math: in the first 8 days of the month of June, the Treasury has seen its cash balance decline from $112.6 billion to $23.5 billion: a solid burn rate of $90 billion in just over a week. But lest readers think that this is due to paying down debt, it isn't: total US debt was flat (at the ceiling), while intragovernmental holdings declined by $20 billion to accomodate another $20 billion in marketable debt (see the plunder of retirement accounts discussed above). So how does one reconcile this data? Simple - in June the Treasury has collected $44 billion in withheld individual income taxes (and a whopping $400 million in corporate tax), while spending double that, or $89 billion. Fiscal prudence? Rhetorical.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 09/06/11

Sure enough, just like every other single up day in recent history when the up volume is a pale shadow of what happened over the past 6 days of concerted selling, today was no surprise. As the MVOLNYE chart below shows, following a day in which almost 4.1 billion shares were traded, we followed up with a complete wash out in volume, as once again it was merely the churners and the vaporware algos that sent the market higher on horrible initial claims data, and a trade deficit number which was only lower than expected due to supply disruptions.... and somehow that is supposed to be good for the economy? As usual, the Wall Street shortbus brigade fails to understand that absent a massive stimulus in Japan, none of the recent weakness, which originates in Japan, will revert to the mean. And so far no stimulus is coming. Which means that the Q2 GDP "strength" due to the beancount GDP boost from artificially lower imports will merely serve to further collapse Industrial Production in future months. But one has to not get paid millions of dollars and work at 60 Wall Street to actually grasp this very simple fact.

I love Exchange Traded Funds (ETF). In theory. In practice they are being abused by issuers and traders alike (see Beware of systemic risk in ETF). But that’s another topic. Today let’s take a look what can happen with inverse ETF through the compounding effect. I like inverse ETF (i.e. SH) on the stock market, because if I am wrong (market goes up), my problem gets smaller (ETF goes down). If I had sold short the market (i.e. SPY or via futures) my problem would get bigger. Of course this “advantage” comes at a certain cost in form of a potential performance drag. To make it clear, let’s look at 4 simple examples...

Pimco has just released its May Total Return Fund holdings data, and we are delighted to discover that following all the recent debate over whether PIMCO is or is not short Treasurys, the firm has relented and has actually changed the way it reports it exposure, which in turn is precisely just as we had speculated: a modest long cash position offset by a substantially larger swap short. Yet combining the three (the firm now breaks out its "Government Related" category into Government- Treasury, Government- Agency and Swaps and Liquid Rates, which had been lumped before), we find that on a Market Value basis PIMCO is still short government securities to the tune of -3%, a minimal increase in its exposure from April when this was -4%. Yet on a duration weighted exposure basis, the firm's Swaps and Liquid Rates, the flagship fund's positioning is a whopping -31! Just as importantly, semantics aside, TRF's net cash position declined from 37% of its $243.2 billion in AUM to...35%, or $85 billion in cash. Hardly much of a vote of confidence in US government paper.

Yesterday, just after 8 pm Eastern we presented a very curious move in NatGas trading on the NYMEX when under very light volume, the NG performed something akin to a sine wave expansion, with about 12 peaks and troughs with ever increasing amplitude, until ultimately it triggered a major sell off when it appeared to touch off an avalanche of limit orders about 3% from the prevailing price, leading to an almost instantaneous 8% drop in Natgas which was promptly recovered. We dubbed this a fractal pattern, and after a follow up with the trade forensics experts at Nanex, it appears this was a very spot on designation, as zooming into the pattern indicates increasing levels of self-similarity and complexity. Yet aesthetic observations aside, this latest algo appears to be nothing more than a limit order-busting market manipulation device, whose sole purpose is to destabilize and generate volatility for the creator of the algo. Curiously, as Nanex indicates, the algo is not limited to Natgas but also appears to recur in other far more liquid instruments, such as the SPY, when a comparable fractal pattern was observed in broad daylight. As to how the algo itself profits from the price instability it generates: we are unsure. One could certainly trade the increased volatility through derivatives, by buying vol cheap in advance of such as limit order triggered waterfall, especially in very thin markets, and then selling the vol at the apex of a given move. Obviously, this is merely speculation. That said, we are dead certain Finra and the SEC are promptly pursuing the trader responsible for this glaring attempt at market manipulation in order to find out precisely how one profits from such fractal algorithms.

"The primary trend I see in the markets is the destruction of the purchasing power of all fiat currencies, with the U.S. dollar having the most to lose as the world’s reserve currency. Nothing throws a population into more of a tizzy than a destroyed currency. Similarly, nothing provides a more fertile ground for power hungry control freaks to take over your lives than economic chaos. What has really started getting my attention in the last several months is how the UN seems to be trying to position itself as a “world government” savior of sorts. First, the UN decided it would be a good idea to launch a war in Libya and Obama decided the U.S. would get involved without ever asking Congress for an authorization of force (which according to George Friedman of Stratfor is a first). What is so pathetic is where are the fake liberals in America? Where are the anti-war protests? We are so successfully divided in the fake Republican/Democrat, Red/Blue, Yankees/Mets paradigm of stupidity that the “left” in this country won’t criticize Obama for starting a new war because he is “their guy.” This is pathetic and dangerous because guess what will happen when we get a Republican thug as president that uses the precedents Obama has set to shed even more blood all over the world. Who will protest then and who will care? "

We have complete the cursory first run of the just released quarterly Flow of Funds (Z.1) updated for Q1 2011. While we will present the far more important breakdown of the shadow economy, we first focused on the key asset and liability data covering the household, corporate and government sectors, which presented few surprises. In summary, total household net worth increased by $1 trillion from $57.1 trillion to $58.1 trillion in the 3 months ended March 31, 2011. This the highest level of household net worth since Q2 2008 when it stood at $60 trillion, and still down substantially from the all time high of $65.7 trillion in the summary of 2007, or the peak of the credit bubble. Looking at the asset components we see once again just why Bernanke is so focused on pumping up the Russell 2000: the stock market (through holdings of corporate equities, mutual fund shares, and pension fund reserves), accounted for $1.2 trillion of the $1.0 trillion increase. This paper profit was offset by a $349 billion drop in mortgage equity, which declined to $18.1 trillion, the lowest in almost a decade. Additionally, household deposits increased to the peak level of $8 trillion once again, which is explainable since household liabilities declined with a drop in both mortgage ($68 billion) and consumer ($31 billion) debt. In a nutshell the consumer continues to delever. But probably the most surprising move was the substantial drop in the positive contribution to total debt from state and government debt. Coming in at $9.6 trillion, total government debt outstanding, rose by the lowest amount since Q2 of 2008, courtesy of a modest increase in Federal Government debt of $184 billion and an actual decline in state and local government debt of $18 billion.

Today's $13 billion in 30 Year bonds (Cusip QQ4) priced at a disappointing 4.238%, with a nearly 4 basis point tail to the when issued which was trading at 4.19%, which resulted in spooking the bond market briefly and causing some LT curve jitters. The Bid To Cover was 2.63, a bounce from the May 2.43, though below the LTM average of 2.68. The internals were relatively normal: Indirects taking down a below average 38.4%, Directs purchasing 9.3% of the auction, and Dealers left holding the bag, even if only for 2 weeks, with 52.3% of the auction. The Indirect bidder hit rate raised a few red flags coming in at a rather high 77.3%, although besides the surprisingly big tail, the auction once again came in as expected, which is to be expected: after all dealers will flip the bulk of it back to the Fed at the next two 17-30 year POMO.

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

Market Recaps to help improve your Trading and Global knowledge
Weakness in CAD evident after mixed Canadian economic data

On the rare occasion that I’m bored, I like to watch 24-hour news television for entertainment. It’s hilarious watching the talking heads spin out of control in apoplectic fits when they’re essentially arguing the same point; they might be from different parties, but they’re merely battling over small details of the same government-sponsored solution. Recently I caught one of these talking head financial experts on TV arguing about debt levels in the United States. He was saying that the US debt doesn’t matter all that much because the US government has so many assets to offset its debt. For example, he suggested that things like the highway system, national parks, and strategic petroleum reserve would more than offset America’s liabilities, so the looming national debt isn’t such a big deal after all. He couldn’t have been more wrong.