Archive - Jun 2011 - Story

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.

Just like last year when the first bailout of Greece was met with significant opposition by German constitutional professors, the constitutionality of the upcoming bailout #2 is about to be questioned. Only this time it does not come from powerless academic but from the very top: the Federal Constitutional Court. From Frankfurter Allgemeine (google translated): "The federal government has to explain how the measures are compatible with the Basic Law....The government will have to justify before the court how the measures conform to the stabilization of the European currency with the Basic Law, and possibly with European law. It was originally envisaged in the Second Senate to negotiate in private. But this stance has apparently changed in the course of the discussions." As expected, the fine legal print is once again about to throw a major monkey wrench in the ongoing usurpation of constitutional right by the banking syndicate.

For those who care what is happening behind the scenes even as everyone continues to predict there will be no snags associated with the transition from a QE2 to a non-QE2 world, should look at this brief analysis. On May 26 the Treasury issued $29 billion in 7 Year bonds (Cusip QQ6)- the auction was considered a smashing success by all with the Bid To Cover coming at a record high 3.24 Bid To Cover, and pricing 2 bps inside of the When Issued: an indication of massive demand. Dealers were allocated $11.4 billion and as Stone McCarthy reported: "The $62.3 billion Dealer bid was up from $54.7 billion last month and it was the largest Dealer bid since February 2010." So far so good right? Here is what happened next. On June 1, barely a day after the bonds had settled, Dealers shipped $5.393 billion right back to the Fed (making who knows how much in "fees" in the process) in that day's POMO. And today, just a week after the last 7 year targeting POMO, Dealers sold another $3.168 billion to Brian Sack. Total tally: $8.561 billion monetized by the New York Fed in less than two weeks following the auction. Simply stated: the Dealers' unprecedented interest  in the auction... was transitory. Just two weeks later, the Dealers have flipped back 75% of their entire position in the latest 7 Year On The Run bond. And this is the kind of sleight of hand that allows the Treasury to represent success after success in bond auctions, only to allow the Fed to do the backdoor switcheroo literally hours later, and compensate the conning Dealers for fooling the marks: in this case US taxpayers, naive believers that there is actual interest in US Paper, and of course China and other foreign investors who bought $13.8 billion of the same auction. What happens when Dealers are unable to flip up to 75% of any given bond back to the Fed in under two weeks: stay tuned and find out in precisely 3 weeks.

Just when one thought every imaginable taxpayer bailout scheme had been seen, experienced and in many cases, forgotten, here comes AIG once again. The specifics come from Deutsche Bank's Joshua Shanker initiation of coverage report on AIG (naturally with a Buy rating, $34.00 target price), where within the fine print he notes: "the company believes there may be bargains available from buying RMBS securities from European banks seeking better positioning under Basel III requirements. " Prudently, he adds: "We note that increased yield, in this regard, also carries with it increased risk." Translated this means that AIG is about to do for European banks what the ECB so far has been unwilling and/or unable: namely to transfer the risk associated with European banks' massive ongoing exposure to the continuously collapsing US housing market back to the US taxpayer, in the form of AIG, which was bailed out once, and which will certainly be bailed out again, when the time comes.

So much for transitory inflation as corn prices are again pennies of a fresh all time high. Earlier today an update by the USDA showed that corn stocks will come in much lower than expected at the end of the 2011/12 marketing year at just 695 million bushels: this is far lower than the analysts consensus of 771 million bushels. The spring weather was blamed for the drop: "cold, rainy spring and flooding cut U.S. corn plantings by 1.6 percent, will reduce the harvest by 2 percent and will keep U.S. corn supplies at their tightest level in 15 years through the fall of 2012, the government said on Thursday." Another factor for the record price: surging China demand: "USDA also forecast a hefty increase in corn use by China -- up 8 million tonnes, or 5 percent, this year and up 13 million tonnes, or 8 percent, in 2011/12. China will draw down its stocks rather than import corn, USDA said." Just like in China where record droughts have been replaced with deadly floods, the weather continues to be unusually volatile, not just in the US: "Besides plaguing the eastern Corn Belt, rains and
floods have slashed the rice crop by 5.5 percent since May, USDA said.
Drought in the Southwest would reduce the cotton crop by 1 million
bales, or nearly 6 percent, to 17 million bales, and the rice crop, at
199.5 million hundredweight, would be the smallest in four years." This is probably the latest data the market needed to completely ignore today's worse than expected initial claims data, and go into full "Inflation: ON" mode. In other news, expect Obama to announce the launch of an Adverse Weather Task Force investigating speculative movements in air masses momentarily.

So our Federal Reserve Chairman, with a supposedly Mensa level IQ, declares that prices have risen due to demand from emerging markets. He also declares that US economic growth will pick up in the 2nd half of this year. He then declares that inflation will only prove transitory as energy and food prices will stop rising. I know I’m not a Princeton economics professor, but if US demand increases due to a recovering economy, along with continued high demand in emerging markets, wouldn’t the demand curve for oil and commodities move to the right, resulting in even higher prices? Ben Bernanke wants it both ways. He is trapped in a web of his own making and he will lie, obfuscate, hold press conferences, write editorials, seek interviews on 60 Minutes, and sacrifice the US dollar in order to prove that his economic theories are sound. They are not sound. They are reckless, crazy, and will eventually destroy the US economic system. You cannot solve a crisis caused by excessive debt by creating twice as much debt. The man must be judged by his words, actions and results.

The latest soundbite that should certainly add a few extra points to the S&P now that trading has reverted back to the bizarro zone is the most recent warning from Robert "Case-Shiller" Shiller who said that another 10-25% drop in real home prices would not surprise him at all... or anyone else for that matter except for all those who saw the "official" housing bottom back in 2009.

And another signal of economic slowdown: Wholesale Inventories, that wonderful plug for generic "growth" was unable to keep up with expectations, rising only 0.8% in April, below consensus of 1.0% and down from an upward revised March number of 1.3% (1.1% previously) meaning that Q1 growth may be revised higher at the expense of Q2. Even bigger was the miss in wholesale sales which plunged from 2.9% in March to just up 0.3%, well below consensus of 1.2%. Yet since today is one of those bad news is good news days, expect the Dow to close up triple digits. From the release: The U.S. Census Bureau announced today that April 2011 sales of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations and trading-day differences but not for price changes, were $393.5 billion, up 0.3 percent (+/-0.5%) from the revised March level and were up 14.4 percent (+/-1.4%) from the April 2010 level....Total inventories of merchant wholesalers...were $447.2 billion at the end of April, up 0.8 percent (+/-0.4%) from the revised March level and were up 13.8 percent (+/-1.2%) from a year ago." Lastly, the inventory/sales ratio was unchanged from March, coming at 1.14.

Since "the China Story" is the foundation of global growth, demand for commodities and ultimately, stock market profits, when China's stock market breaks down it behooves us to pay attention. Technical analysis offers a number of tools to help us chart the past and present and calibrate probabilities of what might happen in the future. Much of the time there are no clear signals, and chartists can lose their way trying to discern patterns and trends which may or may not pan out in the future. One classic pattern is a flag or pennant (a.k.a. a wedge). The psychology behind the pennant is rather transparent. Lower highs reflect a decline in Bullish enthusiasm and buying pressure, as every "buy the dip" fails to match the previous dip-buying. he direction of China's market has been decisively signalled: breakdown. In technical analysis, it doesn't get any better than this.

Wondering what lit a fire under the EURUSD? Wonder no more, courtesy of Reuters:

• New bailout for Greece likely to total about EUR 120bln according to Eurozone sources
• New bailout may comprise EUR 30bln from private sector, EUR 30bln from privatisations, up to EUR 60bln from EU/IMF
• Remaining loans from initial Greek bailout would be disbursed alongside new bailout, according to Eurozone sources

And yes, as predicted the final amount will be far greater than previous expectations of under €100 billion.

We have already noted our amusement at Sorkin's inaccurate and dictated defense of Goldman's housing short position previously (apparently the DCF expert has absolutely no understanding of such concepts as DV01, delta, gamma, capital structure priority, gross vs net notional, and exposes so many other misconceptions that we will simply wait for the official Goldman 8K to come out, as opposed to this unofficial one, before issuing out full debunking of any Goldman defense). One thing we did not note, however, that needs disclosure, is the glaring conflict of interest in ARS' puff piece. As Taibbi pointed out, it is none other than Goldman who is a critical backer of Sorkin's Dealbook. To wit: "Barclays Capital, Goldman Sachs, Sotheby’s and Tata Consultancy Services
are charter advertisers for the relaunch of DealBook." Indeed, it is perhaps time to have a disclaimer at the end of every article that there is substantial squid pro quo involved in namesdropping-for-brownnosing modus operandi. But even that is nothing compared to the latest attempt to glorify those who perform god's work on earth. Below is a snapshot of FierceFinance's spirited defense of Goldman Sachs. The author mocks the concept of Sorkin as an apologist for those who enjoy seeing their name in a good light in the NYT and on HBO: "Sorkin might be accused of trying to bolster his base with his report--Wikipedia describe him as "an apologist for Wall Street/Goldman Sachs." I kid you not. But Sorkin makes a lot of sense when discussing how one unit in a very large company may be hell-bent on shorting the market even as another unit in the same company may be stuck with certain securities." It is not the ongoing misunderstanding of previously noted concepts, but the actual advertisement as part of the piece. Once again, we see that only those who directly get funding from Goldman Sachs would be willing to destroy their credibility by coming to its defense.

Regular Zero Hedge readers are aware of our consistent noting how in the past several years, the BLS has relentlessly imposed an guaranteed upward bias to prior initial claims revisions, to the point where it has become a statistical farce (today's upward revision of last week's number from 422K to 426K being just the latest indication). It is thus to our surprise and disappointment to find that even Bloomberg has ceased to keep track of prior revisions: one wonders if the BLS may have had some close conversations with the only media which back in 2009 dared to challenge the Bernanke Put.

Soundbites from the Trichet conference:

• TRICHET: ECB SEES "UPWARD PRESSURE" ON EURO AREA INFLATION
• TRICHET: "STRONG VIGILANCE" NEEDED ON INFLATION RISKS; ECB WILL ACT IN FIRM AND TIMELY MANNER; ECONOMIC UNCERTAINTY REMAINS "ELEVATED"
• SEES 2011 INFLATION AT 2.5% TO 2.7% VS PREV 2.0% TO 2.6% *TRICHET SAYS HIGHER INFLATION FORECASTS REFLECT ENERGY COSTS
  
• TRICHET: COMMODITY, ENERGY COSTS DRIVING PRICE PRESSURES; UNDERLYING PACE OF MONETARY EXPANSION RECOVERING
• TRICHET: UNDERLYING PACE OF MONETARY EXPANSION RECOVERING; MONETARY STANCE IS "ACCOMODATIVE"
• TRICEHT: GREECE NEEDING ABOUT EU45B OF NEW LOANS; GREECE WILL GET EU57B OF LOANS UNTAPPED FROM 2010; RAISE EU30B FROM ASSET SALES THRU '14
• TRICHET: ECB TO SECURE FIRM ANCHORING OF PRICE EXPECTATIONS; ECB "WILL DO ALL THAT IS NEEDED" ON INFLATION
• TRICHET: NON-STANDARD MEASURES ARE TEMPORARY
• TRICHET: ECB TO KEEP FIXED RATE ALLOTMENT TENDER FOR 3 MONTH LTRO OPERATIONS FOR Q3
• TRICHET: ECONOMIC ACTIVITY EXPECTED TO BE SOMEWHAT DAMPENED BY BALANCE SHEET ADJUSTMENT
  

The EURUSD chart looks like an EKG