Archive - 2011 - Story

Ever since Repo 105 (and long before that), it has been well-known that Primary Dealers enjoy padding their books before the end of every quarter, typically collapsing their asset holdings in the week just before the quarter end in order to have cash on the books, and to make their capitalization ratios appear better than they really are. Well, the "book padding" that just occurred in Q4 2010 was a doozy, with total PD asset holdings plunging by a stunning $126 billion in the past month, the bulk of which was due to a drop in PD holdings of Treasurys. Was this huge selling by the Primary Dealer community, either for window dressing reasons, or due to expectations of future increases in Treasury yields, one of the main reasons for the drop in bond prices? It is unclear, but the massive selling certainly has not helped. And now that window dressing is again over for at least three more months, PD holdings can only go up (or so the myth goes). So with PDs now back with fresh books for 2011, and once again lifting offers, is the sell off in bonds about to be replaced with a major buying spree?

• ECB buying every sovereign bond it can find. Seriously
• Obama Eyeing Internet ID for Americans (CBS)
• US Banks Face Fresh Stress Tests (FT)
• SNB Clarifies Stance On Portuguese Bonds (WSJ)
• Demanding the Mark Back: Opposition to the Euro Grows in Germany (Spiegel, h/t Mark Mansfield)
• Evans-Pritchard: Deepening crisis traps America's have-nots (Telegraph)
• Trade War Looming, Warns Brazil (FT)
• Yellen Speech May Offer `Proxy' for Planned Unwinding of Fed QE (Bloomberg)
• Paul Krugman Channels Jimmy Carter, and The Club of Rome (Forbes)
• Portugal under pressure to seek EU/IMF aid (Reuters)
• China City Set to Tax Residential Real Estate (WSJ)
• "Illusory Prosperity" - Ludwig von Mises on Monetary Policy (Hussman)
• Queensland Floods Within Insurers' Capacity Deluge Worsens (Bloomberg)

It seems at least one person read Buiter's 84-page "Europe is pretty much doomed" (our titling) magnum opus over the weekend. Irish CDS tells the whole story.

Markets finally digest weak jobs data out of US, but it is Europe that has everyone's attention. Asia weakness compounding to problems.

David Rosenberg appeared in the Globe and Mail's Market View segment with a bite-sized, 2 minute segment explaining why he is bullish on the USD (not a big fan of the EUR, and with good reason), and why he continues to be bullish on bonds (although admits that at 2.3% the 10 Year was expensive). A great bullet-point presentation for new to Rosenberg (later today, we will present Jim Caron's latest attempt at redemption, explaining why he sees bond fund flows as indicative of a selloff in bonds. He better get the direction right this year.)

Is it about to be deja vu all over again? The FT reports that "oil markets were braced on Monday for the impact of the loss of up to 15 per cent of US crude after a pipeline leak forced BP, the UK-based oil company, to shut down 95 per cent of production from North America’s biggest field...The leak is in the Trans-Alaska Pipeline System, which carries 14-15 per cent of US crude oil production 800 miles to Valdez, where it is shipped out in tankers. It is the only line carrying oil to market from Prudhoe Bay." And yes: BP will be blamed again: "Prudhoe Bay is jointly owned by BP, with 26 per cent; ConocoPhillips, with 36 per cent; ExxonMobil, with 36 per cent; and others with 2 per cent. BP is the operator of the field." And just as the authorities had managed to put a temporary lid on oil prices: "The cause of the leak is being investigated by state and federal regulators, as well as the company itself, but if it is not fixed within a few days, the incident could put upward pressure on oil prices once more." Time to go through the list of all BP CDS counterparties all over again?

For all seeking a reason why China will never voluntarily drop its CNYUSD peg, and why it will now actively buy PIIGS debt indefinitely, in its attempt to keep its currency low against the EUR and fixed against that ultimate debaser of currencies, just take one look at the December trade surplus. Even as gross trade surged to an all time high with total imports and exports just shy of $300 billion, at $295.2 billion, December's trade surplus plunged from $22.9 billion in November to just $13.1 billion, the lowest since March and April when China actually had a stunning trade deficit, and a nearly 50% miss to consensus which was at $21.4 billion. The total 2010 trade surplus was $183.1 billion, down from $196.1 billion in 2009 and $295.5 billion in 2008. This means China has increasingly less linen (primarily dollars) to recycle in purchasing such items as copper and gold, and, to a much lower degree, US Treasurys. As the charts below demonstrate, the drop in exports was largest to the US (down 16.4% sequentially), the EU (down 11.5%) and, to a lesser degree, the Rest of the World (- 9.1%). Bottom line: should the EUR hit parity with the USD, and should the CNY continue appreciating vs the USD, this trend will get increasingly uglier, slowing down the Chinese economy even more, which in turn will continue to make the case for a China-led rebound ever weaker, and the case for increasing Fed UST monetization ever stronger (in the absence of Chinese purchasing power). Welcome to the connected world, where monetization is really an indication of weakness.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 10/01/11

Liu Wei, a director with China's State Administration of
Foreign Exchange, the foreign exchange reserve manager responsible for administering $2.6 trillion in FX reserves, told Caing.com today that "Quantitative easing carried out by the U.S. Federal
Reserve could exacerbate global currency interventions, hurt the
developed countries and fuel flows of speculative capital into emerging
market economies." Additionally, and contrary to all those who believe that commodity prices have in some cases tripled over the past year based purely on goodwill and not excess money, Wei also said that the Fed's quantitative easing program may have some
stimulus impact on the U.S. in the short term, but also that it could
add to global inflation pressure and fuel asset bubbles "so that the
global economic recovery and growth face greater uncertainty." Pretty much as we have been claiming all along.

Confused by the recent downdraft in the price of (paper) silver... Even more confused by what is happening with the record open interest in the metal? Have no fear. The bears are here, and explain things in their traditionally simple and sound effect-filled way.

The WaPo shares the full criminal complaint with all 5 counts, as well as the affidavit by FBI special agent Tony Taylor which discloses that according to documents seized from 7741 N. Soledad Avenue in Tucson, Arizona, where Lougner resides, that there was an envelope recovered with "handwriting on the envelope stating "I planned ahead," and "My assassination" and the name "Giffords," along with what appears to be Loughner's signature." There goes the temporary insanity defense.

More bad news for the BofA/Wells syndicate. After on Friday two of the biggest mortgage lenders in the world were hit with bad news out of the Massachusetts supreme court, today it is seven of the nation's major pension funds, between them representing nearly half a trillion in capital, which are demanding that "the boards of directors of Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo immediately undertake independent examinations of the banks’ mortgage and foreclosure practices." The coalition of pension funds called for the banks’ Audit Committees to launch independent examinations of their loan modification, foreclosure, and securitization policies and procedures. “This will help to prevent future compliance failures and restore the confidence of shareholders, regulators, legislators and mortgage markets participants,” the coalition advised in its letter. The coalition members’ insistence on immediate action reflects the urgency of their concerns over mishandled mortgages. But Jim Cramer on Friday said there was no urgency, and no reason to be concerned, and that this is nothing but a buying opportunity for the lemmings which jut got one step closer to the cliff.

Keeping track of the pace of US recovery will probably be the main focus of markets. The key US data releases are retail sales, industrial production and CPI, which are all out on Friday. We expect a robust retail sales print for both headline and ex-autos, after the indications from the autos and the same store sales report last week. For CPI (and PPI the day before), we expect a relatively sharp rise on a headline basis, but much more muted gains ex food and energy. As mentioned, concerns in the Eurozone continue to rumble in the background. The Portuguese and Spanish bond auctions planned for this Wednesday and Thursday respectively will be important to monitor.

When it comes to providing analytical perspectives and empirical insights into the realm of sovereign deterioration, few come close to the work of Reinhart and Rogoff. Citi’s Willem Buiter is one such man. In his latest summary piece describing in excruciating detail just how bad things are at the sovereign level (and judging by tonight's opening print in the EURUSD more are starting to realize this), Buiter provides a terrific country by country guide of what is now an insolvent world, starting with the merely extremely risky, going through the backstop-baiters, and finishing with the time bombs that have already gone off and everybody pretends not to care. For those who do care, this is a definitive guide to what each individual European (and not only) country can look forward to in an age of global moral hazard. The only open question: with China's interest now to preserve the Euro's viability, how will Beijing act in the next few months as the eurozone finally starts unraveling.

Following tragic days such as yesterday, some form of levity is always welcome. Which is why we present A. Joseph Cohen's latest. Let the joyous merriment commence.