Archive - Jul 2011 - Story

• BofA's Mortgage-Bond Pact Draws Challenge (WSJ)
• Greek Rescue Snarled by Sales (WSJ)
• Portuguese downgrade darkens euro zone rescue hopes (Reuters)
• Rare-Earth Prices Decline in China (WSJ)
• Geithner has not told Obama he wants to go (Reuters)
• Bless this mess: AGs, banks near $60B deal on foreclosures (NY Post)
• Orszag: Why We Care About Price of Water in China (Bloomberg)
• How America Ceded Capitalism’s Bastion to German Boerse (Bloomberg)

Last year's Eyjafjoell and the recent Grimsvotn eruptions will have been a walk in the pyroclastic park if, as AFP reports, the most feared of all Iceland volcanoes, Hekla, is indeed about to blow. "Experts say one of Iceland's most feared volcanoes looks ready to erupt, with measurements indicating magma movement, raising fears of a new ash cloud halting flights over Europe. The Iceland Civil Protection Authority says it is closely monitoring the situation. "The movements around Hekla have been unusual in the last two to three days," University of Iceland geophysicist Pall Einarsson said." Hekla's eruption would certainly have far more dire consequences on European airspace than Grimsvotn, which merely succeeded in getting Obama to vacate Ireland sooner than expected: "The volcano, dubbed by Icelanders in the Middle Ages as the "Gateway to Hell," is one of Iceland's most active, having erupted some 20 times over the past millennium, most recently on February 26, 2000. Over the past 50 years, Hekla has gone off about once a decade." And so Europe, once again caught in the maelstrom of a sovereign debt crunch, will be sensitive to headline risk, as the last thing the continent which is now doing all it can to ostracize rating agencies, as if its insolvency is their fault, is a continent-wide grounding of all flights.

Moody's downgraded Portugal's sovereign rating to "junk" status yesterday (Ba2 from Baa1; outlook negative), which promoted risk-aversion during the European session, and weighed on EUR and equities. Bunds traded higher and record widening was observed in the Portuguese/German 10-year government bond yield spread. Meanwhile, the German deputy finance minister said that Germany will put the idea of a bond swap in Greek debt deal back on the table, adding that all options should be considered as rating agencies have signalled that the French model will lead to a selective default. Risk-appetite was further dented after the PBOC raised its one-year benchmark lending and deposit rates by 25 basis points each, effective from July 7th. Moving into the North American open, markets look ahead to Challenger job cuts data from the US, and building permits figures from Canada. In fixed income, Fed's Outright Treasury Coupon Purchase operation in the maturity range of Jan'14-Jun'15, with a purchase target of USD 2.5-3.5bln, is scheduled for later in the session. Markets will keep a close eye on any development with respect to Greek or Portuguese economies.

Forget new job formation. According to the just released Challenger jobs report, job destruction is starting to be an issue again, after the June report disclosed that "the number of planned job cuts announced by U.S.-based employers increased by 4,297 or 11.6 percent to 41,432 in June. The June increase is the second in as many months. Announced layoffs in May were up 2.0 percent to 37,135, after falling to a four-month low of 36,490 in April. The two consecutive months of increased job cuts did little to impact the overall slow pace of downsizing. For the quarter ending on June 30, a total of 115,057 job cuts were announced, down 12 percent from 130,749 in the first quarter and 1.2 percent lower than the second quarter in 2010 (116,494)." The worry is that after troughing in April we are now back to March levels, and just off from 2011 highs reached in February. The states with the biggest YTD layoffs by location are California: 35,114; District of Columbia: 15,771; New Jersey: 13,182; Florida: 13,006 and Texas: 12,165. The largest job cuts in June were not surprisingly in the government sector at 10,176, followed by health care, food, aerospace/defense and entertainment/leisure. Only 7 people were said to be expected to be fired in Real Estate. Overall, an ominous sign ahead of the ADP and the NFP later in the week.

The Moody’s downgrade of Portugal has led to a brutal sell off in Portuguese debt in morning trade which has seen Portuguese 10 year bond yields surge from 11.02% to 12.23%. Yields on Portuguese two-year notes soared 212 basis points to over 15.14 percent. There is increasing speculation that another downgrading of Ireland is imminent and Ireland’s 10 year yield has surged to over 12%. Portugal received a $112 billion loan package only two months ago. It was due to sell 1 billion euros of treasury bills today but the Portuguese government debt agency IGCP said it sold 848 million euros of bills due in October. Portugal is a reminder that Greece is just the tip of the iceberg and Portugal, Ireland, Spain, Italy, Belgium, Hungary in Europe and the U.S. itself face similar challenges, of greater and lesser degrees.

Quiet day today, with just Challenger layoffs data and the non-manufacturing ISM, which incidentally may be a tad more important as services account fof about 70% of the US economy.

The PBoC just announced its 3rd interest rate hike for 2011. In a statement just released, the Chinese central bank hiked its one year benchmark deposit and lending rates by 0.25%. To those following the 1 and 2 Week SHIBOR and repo rates this is hardly a surprise, as the recent liquidity thawing experienced an abrupt reverse in the past two days. In the meantime, expect to see more realization that the Chinese soft landing may be in for some bumpy times.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

The common belief is that long bond holders are suckers that always lose money. But there is no denying their raw total return generating power. Question 1: Total Return, various asset classes: How can the long bond outperform the other, more risky competitors here?

After one group of hackers broke into Fox's twitter account yesterday, today another group returned the favor by converting the president's campaign website to a 21 point summary of politics hosted by, as the Washington Examiner reports, an unnamed "Commy Obama." Among the points clarifying modern political life were the following pearls "1. Politicians and other public servants lie. 2. Politicians tell you what you want to hear and offer to provide things for 'free' to get votes. 3. When government buys, the people pay." And so forth. The full screen shot is below.

Just when one thinks news can't get any more... what's the right word here... here it comes. Per Reuters, Japan has decided to justify the credibility of its nukes, by, get this, performing stress tests. "Japan's trade minister Banri Kaieda said the government would conduct stress tests on all nuclear power reactors in Japan, Jiji news agency reported on Wednesday. The minister also said he would ensure there were no problems with power supplies, Jiji reported." Where does one start here: that the ECB is not the one conducting the tests - after all who has more expertise with stress tests... Or that the tests come after the biggest nuclear catastrophe since Chernobyl: after all what's the downside - one more Fukushima and Japan would convert into the Prypiat level from Call of Duty... Or that the tests will just accidentally forget to test for such 60 sigma events as earthquakes or tsunamis... Or that the announcement comes a day after the Japanese reconstruction minister quit after a week on the job... Or that the ECB will announce it will accept Japan's nukes as collateral until at least 10 major networks show footage of a mushroom cloud.... Or that ISDA will shortly determine that another nuclear explosion is not really a nuclear explosion and that all CDS against nuclear explosions will be null and void as soon as there is an actual explosion... Or that Tim Geithner is currently in Tokyo explaining there is nothing more credible than a stress tested nuke... Or that Basel VIIIXLC will find a NPP safe if its ratio of gamma to alpha radiation is more than 1 megaroentgen, promptly followed by Jamie Dimon bitching to BOJ president Shirakawa that 1 megaroentgen is too much to demand from Fukushima Street.... And it continues. Etc. Etc. Etc.

The CFTC has just released two new reports looking at volume in various commodity futures and confirming what most have already known, namely that under 10% of daily futures volume in the most popular products comes from Large Trader position changes. The balance or well over 90% in most cases, originates from "daytrading" accounts, or said simply, speculators dominate price formation on the margin for the bulk of products, which also means that longer-term equilibrium levels, those determined by supply and demand, are largely washed out when all the daytrading, and thus short-term pricing, mania is factored in. This also explains why moves such as the recent desperate SPR release by the IEA are generally doomed to failure. The CFTC's Gary Gensler said that "The data shows that, in many cases, less than 20 percent of average daily trading volume results in traders changing their net long or net short all-futures- combined positions. The balance of trading is due to day trading or trading in calendar spreads." This is bad news for the hedging departments of commodity firms which deal with actual physical, and thus try to hedge price swings, as long-term price expectations are largely moot when attempting to predict short and medium-term price fluctuations. In fact, bets, even correct ones, may ultimately add to price volatility if caught in a wrong-way position that faces collateral requirements. As to whether this new data will change the administration's approach to artificially setting prices on key political commodities such as oil and precious metal, all signs point to no. This also means that churning HFT parasites, which are part of the non-Large trader universe are likely the most determining marginal price determinants for the bulk of commodities,and yes, that includes ES and interest rate products as well.

"I think that the prices will continue higher. I mean the amount of money printing is unbelievable. I just think you have to take that initial stand in terms of buying it. I use the James Turk analogy: just keep dollar averaging. We have gone up eleven years in a row, this year it looks like it will be no exception; I would certainly think next year will be no exception. If we ever have QE3 announced, I think gold and silver will just go absolutely bonkers here. And so I just think you have got to step in there and own it; we’ve had these fears all the way along. You know, $400, and $500 and $700 and $800 dollar gold, everyone was afraid it was a one-time thing. I don’t think it is a one-time thing, I think it is a secular thing. It’s going to carry on for quite a while here until we find some resolution of these problems. And the resolution probably will be some form of default where people just have to expunge debts that cannot be repaid. So, you have got to be in some asset which will not be affected by that." So predicts Eric Sprott, founder of Sprott Asset Management and famed investor. In this wide-ranging interview, he shares his insights on the precious metals markets - specifically what investors need to be aware of in terms of the way the markets are currently managed (manipulated), the macro outlook for the economy (grim) and the true value of gold and silver (very underpriced; particularly silver).

"General Motors Co. stocked Jim Ellis Chevrolet in Atlanta with plenty of Silverado full-size pickups in early 2011, part of a wager on a strong economic recovery. The strategy is backfiring. “We thought that this year would bring back the kind of economic activity that would translate into us selling more trucks,” Mark Frost, the dealership’s general manager, said in a phone interview. “It’s not happening.” Supply of Silverado has ballooned to 6 1/2 months worth at the dealership, a figure Frost, 52, calls “a little scary.” The Detroit-based automaker, 33 percent owned by the U.S. after its 2009 bankruptcy, has 280,000 Silverado and GMC Sierra pickups on dealers’ lots around the country. If sales continue at June’s rate, that would be enough to last until November." Thus begins a story just published by Business Week covering a topic that Zero Hedge has been pounding the table on since last December, and which just hit an all time record for fresh start Government Motors a few days ago - namely the firm's propensity to dump as much inventory as possible on dealer floors. Granted, many have been quick to mock, ridicule and ignore our glaringly obvious findings (especially since these come at a time when the light vehicle sales SAAR is back to a 10 month low, and likely to plunge once the long overdue inventory liquidation finally takes place), although now that the topic of General Motors' "strategy" of overfilling dealer inventory is front page news, it finally may get the overdue respect it deserves, especially since as Jefferies' Peter Nesvold cautions, this is nothing more than  new GM reverting to the habits of the old one (the one that filed and needed taxpayer bailouts for a few hundred thousand union workers).

Following the earlier news that government retirement accounts have been plundered by the most since the breach of the debt ceiling, it is only fitting that the teleprompter will shortly update the eager public with the latest on the debt reduction efforts. Perform a frontal lobotomy and watch live below.