Archive - 2011 - Story

The creep ever higher in the short-end of the belly continues, with the first 1%+ 3 Year auction pricing since July, specifically today's $32 billion in 3 Year printed at a 1.027% high yield, a 19% jump in one month. The increase in yield to 6 month highs resulted in an increased in demand as well, with the Bid To Cover coming at 3.057, still lower than the trailing 12 month average of 3.121. As can be seen on the chart below, after Indirects virtually withdrew from bidding in October just as the Fed attempted to make it clear that the short end was going to zero, they have been coming back since, and took down 39.4%, with Primary Dealers being allocated 44.5% and Directs 16.2%. Of the PD bids, we expect that much of the auction will be syphoned right back to the Fed in the next 3-4 months, with all the interest on the auction eventually being remitted back to the Treasury in the latest confirmation that all of US public finance is now a ponzi fraud.

Keynes' key insight was the role central banks and governments could assume to ameliorate specific kinds of financial depressions via borrowing and fiscal stimulus. But politicians found that keeping the spigot open all the time increased their power and longevity in office, and so what was to be used sparingly and infrequently became the default policy. We are now witnessing the exhaustion of permanent Keynesian stimulus. We shall soon see its repudiation as a systemic "solution." Which brings us to everyone's favorite campfire debate, inflation vs. deflation. What this really boils down to is whether the financial world will expire from fire (hyper-inflation) or ice (deflationary death spiral). My own position is that hyper-inflation is first and foremost a political phenomenon--it is necessarily the result of specific political policies and choices.

Much has been said about the parallels and differences between the Japanese and US experience. Today David Rosenberg chimes in in an original fashion, and instead of providing the latest rambling discussion, shares ten simple pictures. Quote Rosie: "Consider the charts below the equivalent of 10,000 words explaining why the U.S. post-bubble economic and financial backdrop is looking more and more like the Japanese experience of the past two-decades."

The backlog of alleged Chinese "scam" stocks is starting to trouble us: not even we suspected when we commenced our little crusade against Sino-fraud, and domestic stock exchange complacency to host said fraud on what are increasingly becoming discredited exchanges, that it would lead to such an explosion in content, confirming time after time, that a material number of Chinese companies, most notably of the reverse merger variety, are nothing short of pure-bred frauds. Today, we present a comprehensive analysis by The Forensic Factor of the most recent Chinese company: Telestone Technologies (Nasdaq:TSTC), that may end up trading 2011 at a far lower price than today. We quote TFF: "While TFF is not calling Telestone a fraud (that is for regulators and class action lawyers to determine), we do believe that Telestone's recent capital raise was completed under the auspices of misleading information, as well as a blatant lack of disclosure replete with forensic discrepancies. As investors undoubtedly learned from RINO, which was halted for three weeks and declined nearly 85%, in the land of Chinese reverse mergers, appearances are not always what they seem." Indeed, a cursory review of the analysis below confirms that there may be quite a few cockroaches hidden and just waiting to have some light shone on them. As always, we only hope to bring attention of those who may have (foolishly) invested their capital in yet another company which may be not all it represents itself to be, and thus prevent up to a complete loss of capital. For that we thank The Forensic Factor and their thorough analysis of the name.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 11/01/11

While commenting on yesterday's NYT joke of a profile of the New York Fed POMO group, we openly mocked the claim by one Mr. Frost who said that when monetizing debt "We are looking to get the best price we can for the taxpayer.” We politely suggested that this is a blatant, tendentious lie, and that in fact the New York Fed merely cares to gift the Primary Dealers with any price it can for their bonds just so it stays on their good side (think Primary Dealer Auction take down over 50%), and after all - it is only money that according to Steve Liesman appears out of thin air. Earlier today, we suggested a simple experiment that would confirm whether or not this is the case: specifically, if any of the monetized bonds by the Fed ended up being on the part of the curve seen as rich to the spline, it would immediately become obvious that PDs, instead of monetizing the "cheap to sector" bonds, or those on which the PDs are making a capital gains profit, are making up for capital losses through side arrangements with the Fed, specifically in the form of wide bid/ask spreads resulting in taxpayer funded commission gifting. Sure enough, this is exactly what has transpired.

One of the first, and arguably most stupid responses following Saturday's tragic shooting news, came from none other than self-appointed economic seer Paul Krugman (whose "government must spend more" ubiquitous retort to everything would have long-since bankrupted the world ten times over and left it with quadrillions of unrepayable debt), who in a post so disjointed and rambling, very unprofessionally decided against waiting for the dust to clear and facts to emerge, and instead proceeded to blame the republicans and the tea party for the tragic events that transpired: "We don’t have proof yet that this was political, but the odds are that it was." Today he proceeds to infuriate his few remaining readers with a blog post which one can say is even more intellectually challenged than its predecessor.

In a rare example of forensic market analysis, the WSJ tackles the topic of market moving info leakage, focusing on some peculiar action ahead of last week's bombastic ADP number which ended up being the traditional contrarian indicator we have been saying for months that it is. The WSJ observes: "Data from two independent sources show that trading in select currencies and future contracts surged in the seconds before last Wednesday's unexpectedly strong private-sector jobs report from payrolls processor Automatic Data Processing Inc., raising suspicions that someone obtained the report ahead of its official release. Analysis of exchange-rate prices from foreign-exchange platform EBS revealed a disproportionately large 0.12-yen spike in the dollar versus the yen in the last tick period before the clock hit 8:15 a.m., the report's official release time. The tick data, provided by CQG, are broken up into small, intraminute periods as per the feed from EBS."And just in case someone is confused how illegal frontrunning works, here is the explanation: "Anybody who placed those orders stood to make large gains in the subsequent minutes as first high-speed trading platforms and then regular investors put through big buy orders after ADP reported an increase of 297,000 in private-sector jobs, nearly triple the consensus estimate for a 100,000 gain." We are confident the regulators are all over this most recent example of the Efficient Market Hypothesis meeting Johnny 5.

Is the biggest driver to GDP growth (aside from the government's transfer payments of course) starting to ebb? November wholesale inventories printed at -0.2%, the first decline since 2009, a miss of expectations of 1.0%, and a drop from October's revised 1.7%.

If you were worried about the Portuguese auction tomorrow fear not! Japan decided to be proactive fighting this latest break-out of European sovereign CDS rates and extend a very unselfish hand. Indeed how could one doubt their good intentions? All they want is to make sure their currency stops appreciating in order to keep the youth unenployment rate in Italy around 29%. Following China's lead Japan announced they would buy European bonds. With only 200% debt to GDP ratio it makes sense for them to go ahead and chip in to help Portugal throw bad money after an even worse structural issue. China gets relatively little bad press for supporting European markets as conventional wisdom assumes their official 20% debt to GDP ratio is accurate. Other analysts much better informed on the subject than I am, in fact some even created a fund dedicated to benefit from when China's economic miracle is exposed for the ponzi scheme it is, claim actual numbers are much closer to 120% but the people's republic uses all sorts of accounting trickery and local government vehicles to disguise the true extent of its indebtedness. Japan however shall not benefit from the general public's stupidity with debt levels well publicized. Indeed as we discussed many times before, Japan's public debt is astronomical...Obviously Japan's announcement had not so much to do with their desire to rescue Portuguese finances, but instead is aimed in my opinion to the obvious secondary effect of weakening the JPY. That will work to temporarily slow down the fall of EURJPY, but when it comes to USDJPY it is exclusively driven by the 2Y UST/JGB rate spread. So if Japan really wants to weaken the Yen they might as well start dumping their 2Y treasuries. With the time interval between solvency crises shrinking exponentially as the eventual end game approaches, I have my doubts as to how much good will come from this touching display of Eurasian brotherly love. Perhaps is this why the Dollar index refuses to trade South this morning... - Nic Lenoir

Since the New York Fed's 20-some year olds who are in charge of the Open Market Operation desk have made it clear it is everyone's patriotic duty to frontrun the Fed, courtesy of their "complex" algorithms, below we present the full frontrunning cheat sheet for today's last for the current schedule $7-9 billion POMO focusing on bond due 2016-2017. Those who wish to take no risk whatsoever should merely buy the 10 Cheapest bonds as predicted by Morgan Stanley's treasury spline. Note that the November CUSIP is now cheapest to deliver and should therefore be on the Exclusions list. Also, not surprisingly the December 7 year auction is sufficiently underwater on a relative cheapness to sector basis, that if any PDs actually offer it for sale, then we know for a fact that the spreads on the bid/ask offered by the Fed are so large they more than offset capital losses on actual exit trades and should be sufficient for Ron Paul to demand a congressional inquiry into just how much the Fed pays the PDs in commission spreads in each and every POMO.

For nearly two years Zero Hedge (and others) have badgered Goldman Sachs for being purposefully opaque in its reporting structure to not allow any transparency in the split between flow and prop trading revenues, instead lumping everything into the ubiquitous "Trading and Principal Investments" segment of which FICC (fixed income, currency, commodity) has always been the dominant vertical for the taxpayer sponsored hedge fund. This is about to change. In a just released 67 page report titled Report of the Business Standards Committee, Goldman announces that going forward this key trading group will now be split into two separate segments: "Institutional Client Services" and "Investing & Lending" which will provide much more detail on how the firm determines its trading revenue, and will allow objective, third party analysts to determine just how much risk the firm takes on from both a principal (taxpayer funded) and agent (dumb mutual fund money) capacity, something which should have been the case long ago, and which we railed about for two years now. We are happy that our railing on this most important topic has been met with success.

It took just three months (and a 50% spike in price) for UBS to do a 180 on silver. In the firm's most recent Silver update from Dominic Schnider of Wealth Management Research, the author now says "Silver prices remain well supported and have been able to trade repeatedly above USD 30/oz." More importantly for those who are concerned that the recent all time high just north of $31 was a one time fluke, fear not: "Temporarily, prices could even hit USD 35/oz on physical interest in the metal due to firm economic activity." Bottom line: "Investors should make use of silver volatility for yield enhancement strategies At levels close to USD 25/oz, we are willing to pick up the metal." Then again, none of this should come as a surprise or even lead one to make investment decisions: after all it was just in September that the same person, in a report titled: "Price strength not on firm ground" said "We expect industrial demand to show some weakness and advise investors to avoid the metal" and concluded "We therefore prefer to be sellers at present levels and would reopen a position at or below 17.5/oz." Merely another confirmation that virtually every sellsider on Wall Street is merely a momentum riding, backward looking, chart monkey, and all those who seek original, contrarian thought are advised to stay very, very far from Wall Street "analysis."

These guys are like gang members, once an academic, always an academic, until the day your policies are adopted by the leading political party and they quickly lead to mass social upheaval and economic turmoil. But even then, only if you belong to the "Right" will you be so disgraced and your academic street cred withdrawn. Lefties are free to rep themselves as hardcore academics all they want, no matter how bad they screw things up. Unless you're Ben Bernanke, or Hank Paulson. Then you just spook dissenters with end-of-the-world rhetoric if you don't get your way. Or baseball bats...The son of two statisticians... I almost feel sorry for him, the poor boy never had a chance.

• NFIB Small Business Optimism comes at 92.6, misses expectations of 94.5 (NFIB)
• Short the Rumor Pays 14% on Takeovers That Don't Happen (Bloomberg)
• Could the U.S. central bank go broke? (Reuters)
• Goldman Sachs Said to Plan Disclosing More Detail on Revenue (Bloomberg)
• Fed's Fisher: Expects Fed Bond Buying Effort To Be Completed (WSJ)
• Fed's Lockhart Sees `Headwinds' for Economy as Growth Accelerates in 2011 (Bloomberg)
• China's FX Reserves Rise By Record $199 Bln to $2.85 Trln Q4 (Market News)
• Chinese Citizens Spent $48 Billion Overseas In 2010 (China Daily)
• Portuguese Bond Sale May Make Bailout `Inevitable' (Bloomberg)
• ECB Intervenes As Debt Crisis Deepens (FT)