Archive - 2011 - Story

Something is spooking the reflation trade. While both gold and silver have moved decidedly higher in the past hour, little compares to the fireworks in West Texas, where crude has just gapped up a solid dollar, in what briefly appeared to be an offerless market. Furthermore the move seems contained to WTI: the move in Brent is far more cool and collected, although will likely soon follow and pass the $100 barrier. And while the disconnected between the two (north of $5 recently) has been well noted, if not completely understood, the sudden move in WTI does not seem to have an immediate catalyst: the all critical Chinese CPI/GDP/retail data is not due until tomorrow, so either someone is trying to start a HFT algo melt up in various futures markets, or fat fingers (soon to be denied) are far more prevalent than previously expected.

When we had last checked on the total silver sales by the US Mint earlier today, the amount given was 3,407,000 ounces, a number which we had earlier speculated would be a monthly record if sales were maintained at the current pace. And as the number had not been updated we assumed that "either buying interest has ceased overnight (unlikely), that the
mint is not updating its numbers (likely), or, worse, that the Mint has
now stopped selling any form of silver for reasons unknown." Indeed, the result was the likely one, and following a quick check today on US Mint sales confirms that sales have once again surged following the Mint's delayed update. As of today they stood at a whopping 4,588,000, or nearly 1.2 million ounces sold in a few short days. This represents the biggest monthly total sold by the US Mint going back to 1986 when the Mint disclosed its first monthly sales record... And the month is not even over yet. In other words in just the first three weeks of January, the mint has sold more silver than in any month in its history according to its public records going back 26 years.

I’ve been pouring through the Fed Reserve’s recent release of circa 2005 FOMC meeting transcripts. The most striking observation that one can make is that the consumer - the very lifeblood that determines whether our economy will live or die - has been discarded...The solution is simple, we are broke since we take in with taxes and borrowing less then we owe. Our deficit alone ensures default or Quantitative Easing from now until the wheels come entirely off. It is time we reissue the currency, tie it temporarily and loosely to gold, get our manufacturing jobs back and move on.

The lawsuits over loan level detail continue to come fast and furious. After late last year Allstate sued Bank of America, providing proof that that the Too Big To Fail bank had repeatedly lied about the quality of its loans and broadly misrepresented its loan book to purchasers, today the Fed's favorite bank, JP Morgan, and specifically its EMC Mortgage division, were sued by Wells Fargo (the trustee) of a mortgage portfolio for refusing to turn over documents detailing the quality of loans bought by the trust. Bloomberg reports that Wells Fargo & Co., the trustee, is seeking access to files for more than 2,000 underlying mortgages in the Bear Stearns Mortgage Funding Trust 2007-AR2, according to the complaint filed today in Delaware Chancery Court in Wilmington. “The trustee has repeatedly requested that EMC provide
access to the subject documents,” Wells Fargo said in the
complaint. “EMC has played proverbial ‘rope a dope’ and
otherwise continued to drag its feet, and has produced
nothing.” Reading through the complaint, we find that the same rep fraud that Bank of America continues to be in hot water for (and that seemingly everyone involved, and on the defensive side, believes will eventually get swept under the rug) has been quite rampant at all other banks. Specifically, "on August 31, 2010, the Trustee sent a letter to EMC, notifying EMC that the Trustee had received a letter from the law firm of Grais &  Ellsworth LLP (“Grais”), which represented an investor in the Trust owning 42% of the outstanding face amount of the Certificates in the Trust, dated August 3, 2010 (the “Grais Letter”). The Grais Letter gave notice to the Trustee that Grais had investigated the condition of 1,317 of the 2,049 Mortgage Loans held by the Trust, and determined that EMC appeared to have violated its representations and warranties in the MLPA with respect to 938 of those loans." That's roughly 70%: a number which any jury will find to be beyond statistically significant and will certainly impugn intent to defraud. Not surprisingly, neither JPM nor EMS has scrambled to provide the backup... or any required information.

Update: Steve Jobs is not participating on the earnings call

While Apple's results were surely impressive, and we are waiting for the call Q&A for more details, we may have finally gotten to the proverbial sell the news event in the iconic company. After surging to a high of $357, the stock has since dropped almost back to the pre-halt levels, and at last check was trading at $344.66, granted to after hours volume. The action does beg the question, however: with 190 hedge funds in the name, who will be the marginal buyer especially since with Jobs now gone indefinitely the possibility of another beat's beat is seemingly getting increasingly problematic.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 18/01/11

Apple posts revenues of $26.7 billion on EPS of $6.43. EPS consensus was for $5.38 per share, up from $3.67 per share a year ago, while revenue was expected to be up 55 percent at $24.3 billion. Whisper numbers were as high as $26.3 billion and EPS of $6.29. Apple's own guidance was for $23 billion in revenue and $4.80 in EPS.

• Q1 revenue USD 26.74bln vs. Exp. USD 24.42bln
  
• Q1 Macs sold 4.13mln, up 23%
  
• Q1 iPhone sold 16.24mln, up 86%
  
• Q1 gross margin 38.5% vs. Exp. 37.3%
  
• Q1 iPods sold 19.45mln, down 7%
  
• Q1 iPads sold 7.33mln
  
• Sees Q1 revenue about USD 22bln vs. Exp. 20.87bln, sees Earnings at $4.90
  

Some solid numbers from IBM:

• Q4 revenue USD 29.02bln vs. Exp. USD 28.28bln
• Q4 gross profit USD 14.2bln
• Q4 net USD 5.26bln vs. Exp. USD 5.14bln
• Q4 software revenue USD 7.04bln
• Q4 global technology services revenue USD 10.2bln
• Q4 systems and technology revenue USD 6.28bln
• Q4 gross margin 49.0% vs. Exp. 48.8%
• Q4 global business services revenue USD 4.76bln
• Q4 signed services USD 22.1bln, up 18%
• Sees FY 2011 operating EPS at least USD 13 vs. Exp. USD 12.58
• Has new target operating EPS of at least USD 20 in 2015

Our friends at GoldCore have summarized recent shortages in the silver market and provide some observations on what this could mean for future silver prices. Curiously, the lack of inventory has happened even as the spot price of silver has consistently declined over the past week (if nominally the decline has been very modest). Just as curiously after the US Mint reported a massive surge in buying, the number of January sales has been fixed flat at 3,407,000, where it was a week ago, and indicates that either buying interest has ceased overnight (unlikely), that the mint is not updating its numbers (likely), or, worse, that the Mint has now stopped selling any form of silver for reasons unknown. Although at the end of the day the only question worth asking is whether JPM feels lucky (again): as we posted last week, the firm has received "grandfathering" protection from position limits, arguably the biggest reason for the recent drop in the precious metal price.

While so far the broader US consumer has been insulated from the surge in commodity input prices as supermarkets and retailers continue to believe that things will normalize, and nobody is desperate enough yet to be the first to defect from what has been a comfortable deflationary game theoretical equilibrium (except for the now bankrupt Great Atlantic and Pacifics of the world...it's too late for them), this is no longer the uniform case. Tiffany's has just announced it is raising prices on "most of its jewelry in the last couple of days in a move to help offset higher precious-metal and diamond costs." Dow Jones reports that increases depend on what metals are in the jewelry, a spokesman said, but are not commensurate with the metal-price jumps last year. He declined to be more specific. TIF feels customers are likely to find the moves more palatable than in 2009, when the company didn't raise prices despite higher costs because of the recession. Margins fell as a result. In other words exactly as we have been predicting for almost a year now, as we have been anticipating the liquidity driven inflation now gripping virtually every single commodity.

Laos, with its vast resources and small population, might loosely be considered an agricultural version of Kuwait. But Laos is nowhere near as wealthy, since oil is much pricier than rice, soy, and fish. Given its resources, it certainly seems ironic that the prices of staple foods in Laos, including rice, have soared in recent months, and that the Laotian government is now under intense pressure to "do something" about it. You expect this sort of thing to happen in Algeria, where the population is 35 million, where only 2% of the land is cultivated, and where agriculture makes up but a tiny percentage of the economy... but in Laos? This is akin to finding Kuwaitis unable to afford filling up their cars due to high gas prices. It's unthinkable. Thing is, it's not that there are food shortages in Laos; this isn't an issue where supply has failed to keep up with demand (thus resulting in rising prices). The price hikes are simply another indicator of monetary inflation causing severe price inflation, particularly in the developing world.

Life in Camden, NJ has never been fun. Frequently ranked as America's most dangerous city, whose only claim to fame are the corporate offices of Campbell's Soup, Camden is about to get even more dangerous as it is among the first to experience wholesale cuts to its government labor pool. Bloomberg reports that "as many as 383 workers, representing one-fourth of the local government's work force, are expected to lose their jobs, including about half the police force and one-third of the city's firefighters." It seems cuts have already commenced: "police officers are turning in their badges as part of deep municipal layoffs that began Tuesday." It's a good thing then that unlike the rest of the world, New Jersey does not (yet) have surging food inflation as otherwise one may be tempted to argue this could be a rather interesting hot spot in the future, especially with the local police force deciding to find better pastures even as it starts collecting 99 weeks of unemployment benefits.

According to Bloomberg, in the week ended January 14 S&P 500 insiders sold $163 million worth of stock in 54 separate transactions. They bought exactly $0. That's right, in the last week, there was no insider purchasing. This is the first time in years (and possibly for ever) in which we have seen a week during which there was not one purchase by an insider. Surely, there is no need to comment on this result.

Earlier we reported rumors that the reason for a major and sudden plunge in the 10 Year had to do with a supposed fat finger on Tradeweb. It took the Reuters, which describes itself as "a leading global provider of online marketplaces for fixed income and derivatives" unit just two hours to publish a refutation: "Reports of a multi-billion dollar customer trade error on Tradeweb this morning are completely false. Indeed, Tradeweb has a number of safeguards and warnings incorporated into its electronic markets to prevent 'fat-finger' errors of this type." That's great. So it simply means that our original thesis that vol in bonds (not to mention FX) is now substantially higher than anything than can be experienced in stocks. Thank you Ben for completely inverting the concept of risky assets.

While Zero Hedge is confident that Bernanke will have absolutely no option but to continue with bond monetizations well beyond June, if for no other reason then because foreign Treasury buyers continue to be on a buying strike (except for the "UK" buyers of course) as confirmed by today's TIC data, which coupled with another $3 trillion in deficit funding needed over the next two years, means the Fed will increasingly have to step in and fill the debt issuance void which is now entirely picked up by the Frost-Sack FRBNY dynamic duo. That said there is one major trade off, and it is surging commodity price inflation, which as we have been predicting for over a year, will take the world by storm (literally and metaphorically) as excess liquidity finds new and unmet markets (and leading to such side effects as now well-publicized revolutions). Then again, Ben does not see it and thus it must not exist. By now everyone is aware that Benanke's self delusion is unmatched by any previously in the history of the world, so this can and will go on for a long time, until the same "excess slack" which forced the presidential overthrow in Tunisia reverberates around the developed world. And while we are confident that Bernanke will not stop at anything in his plan of global genocide to provide for infinite banker wealth, others such as David Rosenberg are not quite as sure. Here are Rosie's latest thoughts on the probability of yet another round of QE to follow once the current one is completed in June.