Archive - Jun 2011 - Story

Corporate America is profoundly bankrupt. Not in a financial sense, of course; the Federal Reserve's slow destruction of the U.S. dollar has boosted corporate profits most handsomely as the majority of their earnings and profits are obtained overseas; when stated in dollars, those outsized profits swell even higher. No, the bankruptcy of Corporate America is not found on the bottom line; it is measured by altogether more profound metrics than mere money. Corporate America is bankrupt on levels which are difficult to describe; morally and spiritually bankrupt, not just in the pathologies that guide corporate goals and behaviors, but in the Potemkin shell of free enterprise they present to the world in ceaseless propaganda, and in the manner in which they have cut America loose from their corporate souls. Corporate America only resides in America because it controls the machinery of governance and regulation here for pathetically modest investments in lobbying and campaign contributions. It would be impossible to replace the global Empire that protects and nurtures it, and so Corporate America maintains its headquarters in America, the better to shape policy and skim gargantuan profits from the Empire and its Central State in Washington. The return on investment for lobbying and campaign contributions is simply unmatchable anywhere else; it is without doubt the highest return on investment on the planet. And the risk-return is immensely favorable; there is simply no risk that the Empire or the Central State will ever go against the "best interests" of its corporate partners.

From Greek website Capital: "George Papandreou said that reforms on the political system or the public administration need the voting of Greek people through referendums. Furthermore, he stated that “the road will be difficult but we must endure the pain”, adding that he is determined to proceed with all the necessary changes to make the country’s debt sustainable."

Either we have just gotten yet another confirmation of just how worthless the Flow of Funds "household" plug category is, or there is something very, very wrong with conventional wisdom. According to a detailed breakdown of the Z.1 from Goldman Sachs the biggest seller of US Treasurys to the Fed in Q1, at an annualized rate of $1.1 trillion, were... US Households. We have to wonder how this news makes even remote sense when confronted with the ongoing dumping of stocks by retail investors. On the other hand, if indeed the Fed is correct then the entire paradigm of retail jumping into the safety of US paper may have to be reevaluated. And not only that, but if this activity has continued into Q2, it may present even greater risks for the Fed's unwind of QE2: should households persist in their Treasury dispositions with only dealers left to pick up the pieces, Gross' thesis may be proven right much faster than we expected, Fed Treasury puts notwithstanding.

Tepper giveth (the escalator), Tepper taketh away (the elevator)

Now that the market has successfully retested the 150 DMA with a little assistance from David Tepper who really said nothing new, below we present the immediate support levels in the ES. The 200 DMA and the March swing lows are next (and yes, there are about 20 points in the ES before we go to unchanged for the year).

One picture explains so much. One is the Comex Gold contract, the other is the Hong Kong traded one. One bid is above the other's ask.

Life for the precious metals dealer, and home of the often times infamous Jon Nadler, Kitco just got very ugly. "Claiming widespread tax fraud in the gold refining and trading sector, Revenue Quebec and police investigators this week conducted searches and seizures at 70 locations, mostly in the Montreal area. One of the targeted sites was the downtown Montreal location of Kitco, a
major buyer and seller of gold. A note on the floor of its office on
Thursday said that “operational constraints” had forced the service
counter to close this week." It is unclear if this alleged tax fraud bust means Kitco could be out of business shortly, although based on the following statement it is somewhat difficult to have an optimistic outlook on the future employment prospects of said Mr. Nadler: "The company said it has asked Superior Court of Québec to appoint an
interim receiver so that it may continue normal operations under the
supervision of the accounting firm RSM Richter. The action was taken “to
allow for the time required to vigorously contest Revenu Québec’s
unfounded claims." At the heart of the allegation: "In a communique, Revenue Quebec said that by converting pure gold into a
gold object and then refining it back into a pure state, some in the
gold industry had used “artificial transactions” to obtain refunds of
taxes that were never actually paid." Apparently Kitco was one of them. Oh well, we will miss the pretty charts.

Well, the problems in CMBX are finally hitting some of the mainstream media. We first pointed out the problems in CMBX last Thursday. HYG is down just over 1% since then. We highlighted the CMBX and ABX problems again on Tuesday. Since then HYG is only down a little bit, but as we suggested at the time, it has now underperformed stocks. It moved 1:1 with stocks on Wednesday and was only up marginally yesterday in spite of a decent size stock gain. I am not sure what it means that there were two Bloomberg articles today talking about CMBS market and how it has impacted the rest of the credit market. CNBC just mentioned CMBX. How long has it been since they mentioned CMBX? I suspect it has been awhile. This could be a sign that the problem has played out. It isn't new news to people focused on credit markets. My only hope as someone who is still a little bearish, is that if we do get another round of weakness, the CMBX boogey man will encourage some people who typically don't play in credit, to buy some CDS or even sell financial stocks, which would be good for the short.

The soundbite of the day comes from AFP which quotes the infamous Chinese Rating Agency Dagong, known for being a little too truthy, which told state media Global Times what everyone already knows but is afraid to say out loud: "'In our opinion, the United States has already been defaulting....Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies - eroding the wealth of creditors including China, Mr Guan said." Oddly enough, this contradict Tim Geithner's heartfelt appeal that the US is pursuing a strong dollar policy. The Dagong announcement follows on the heels of various reports from earlier this weeks (most notably the SAFE announcement which was subsequently pulled) which are urging China to not only pull its US holdings, but to minimize its USD exposure in total. Now if only Moody's would opine on the stealth 1.5 TARP Chinese bailout we noted earlier this week, then the full out credit rating cold war would be on like Donkey Kong.

Bernanke's push for monetary easing just got more complicated. While the market had hoped that the most recent Import price index would post a decline of -0.7% M/M, following an increase of 2.2% (revised to 2.1%), the data disappointed and showed that inflation exports by our trading partners is again picking up (and if we are right and Chinese inflation exports only pick up in earnest in the H2, this is just the beginning) making the push for "deflation combating" stimulus that much harder. Oddly, unlike in previous months when the inflation was led by surging Fuel Imports prices, May saw the first Fuel Import price decline since September 2010, dropping -0.2%, with core non-fuel imports being the primary cause for the pick up. From the release: "All Imports: Import prices ticked up 0.2 percent in May after rising more than 1.0 percent in each of the previous seven months. The May advance was led by higher nonfuel prices. In contrast, fuel prices declined for the month. Prices for overall imports advanced 12.5 percent over the past year, the largest 12-month month increase since the index rose 13.1 percent between September 2007 and September 2008. Prices for fuel decreased 0.2 percent in May, the first monthly decline for the index since a 1.5 percent drop in September 2010. In May, a 0.4 percent drop in petroleum prices more than offset a 4.1 percent increase in natural gas prices. Despite the May decrease, fuel prices advanced 42.3 percent over the past 12 months, the largest year-over-year rise since the index increased 54.4 percent for the year ended April 2010. Both petroleum and natural gas prices rose for the May 2010-11 period, advancing 44.6 percent and 8.8 percent, respectively." 

As we have opined since January, when we predicted a major market swoon in the April-May timeframe, the only gating factor for more QE is a substantial drop in the market. As a result we predicted a telegraphing of a major economic slowdown to commence some time in April. We were off by a month. We also were off in anticipating just how stupid and obstinate the market is, as stocks continue to believe that QE3 will come in no matter what, yet it is precisely stocks, and nothing else in the economy, that will be the catalyst for more easing, thus leaving mutual funds in a conundrum of having to sell in order to generate profits. So far, few have been willing to push the sell button which will see many of them getting wiped out courtesy of record margin debt and record low cash balances. Earlier today we once again received validation of our outlook when David Tepper told CNBC that while he is skeptical on QE3 overall, "If (the S&P 500 falls) a couple hundred points and financial
conditions tightened maybe they would reconsider... there is no logic to QE3 now and the only result might be more food and
energy inflation." Once again, the only "logic" would be for Bernie "Madoff" Bernanke to look at his Bberg Screen and see the S&P under 1000. At that point he will have no choice. Absent that, the S&P will still drop to that level but in a very slow bleed which will see even more asset managers put out of business. Once again: game theory at its best...or worst, now that the whole "career risk" thing has been flipped and he who sells first keeps their job. We give the painfully inefficient market a few more weeks before they grasp this.

Another quiet day in the economic data front: Import prices, the budget balance and comments from President Dudley. There is no POMO today: the last POMO schedule is released at 2:00 PM - there will be at most 14 more POMOs for the duration of QE2. Then nothing.

• Germany Digs In On Greek Debt Restructuring (Bloomberg)
• Libya emerges as Opec's big winner (FT)
• Athens approves four-year austerity package (FT)
• Germany sticks to demand for Greek bond swap (Reuters)
• Fed said to consider expansion of capital reviews (Bloomberg)
• Ally Financial delaying IPO (Reuters)
• Tokyo Riot Squad to Safeguard Tepco Meeting (Bloomberg)
• Christine Lagarde's victory a "done deal" says IMF rival (Telegraph)
• Jamie Dimon's faulty capital requirement math (Simon Johnson)

Sometimes we wish the oil minister of former OPEC member Saudi Arabia ("we can supply any amount of oil"), Wikileaks ("Saudi Said To Have Overstated Crude Oil Reserves By 300 Billion Barrels or 40%"), and now Saudi Arabia's very own electricity company would coordinate their story. In a little noticed comment by Abdel Salam al-Yamani, head of the Saudi Electricity Company, in Al Mashka, which so far has been captured by only El Economista magazine, has provided the most recent insider confirmation of peak oil: a very troubling development for those who still naively believe that Saudi Arabia has any marginal boosting capacity, or more importantly, is willing to risk pumping more than possible. Yet, caught between a revolutionary rock and various other cartel nut cases, Saudi will soon be forced to sell as much oil as it can in order to placate it increasingly angry population with ever greater and ever more frequent "gifts" buying the transitory admiration of its people.

Gold has risen to new record nominal highs in British pounds and is consolidating just below recent record nominal highs in U.S. dollars, euros and other currencies. The ECB’s rate decision and Trichet’s ‘signals’ saw the euro fall sharply against the dollar and against gold with gold in euro terms quickly rising from €1,050/oz to over €1,065/oz. The fact that these new record highs are just nominal and not more important adjusted for inflation highs is a crucial fact not acknowledged by many commentators and analysts. As ever, it is important to realize that the inflation adjusted high for gold in 1980 is over $2,400/oz. When interest rates do rise, central banks will have to make them very gradual. With inflation and stagflation deepening, negative real interest rates are likely to remain with us for some time which bodes well for gold (and silver). The Titanic analogy grows increasingly apt. The various major currencies all face real challenges and are like various floors on the Titanic. The massive ship is holed and water is flowing into it, gradually affecting all floors of the boat. Gold represents the lifeboat.