Archive - Mar 2012 - Story

Gold managed a 1.8% surge today (back above $1690 and its 200- and 100-DMAs and its largest jump in 2 months) from Friday's close thanks to the combination of the ECB on Friday and Merkel and Bernanke today assuring the world that anything more than a 2% dip in stocks will not be tolerated. While Silver outperformed Gold from Friday's close, based on its 2-3x beta of the last year this was a notable 'underperformance' as Gold outpaced everything (beta adjusted). Perhaps importantly, the S&P 500 when priced in gold met and rejected resistance at a key level today - even with its nominal 30pt rally off of Friday's S&P lows. Volumes were abysmal with stocks well below YTD average and the S&P futures 20% below average and among the lowest few days' volumes of the year. Credit markets did not participate as exuberantly (though HY outperformed IG as you would expect) but the day seemed split into 4 segments: pre-Bernanke (quiet/sideways), Bernanke to US Open (rampfest, Gold outperforms, TSY rally), US Open to EU Close (TSY selloff notably, equities sideways, Gold rips), and then from EU Close to US Close (Equity/Gold/TSY rally as USD leaked lower). In FX, JPY was relatively stable at its lows after Bernanke's speech as the rest of the majors strengthened versus the USD (as EUR broke above 1.3350 once again). Oil managed a small rally on the day but underperformed the USD's 0.5% weakness from Friday as Treasuries were very flip-floppy today - ending the day with a small twist around 7Y (30Y +3bps). VIX made new lows and closed there as the term structure flattened further to its flattest in almost 4 months (with the largest six-day flatttening in 8 months).

Few men have a resume quite like Jon Corzine.  Not only has Corzine served in the U.S. Senate and been governor of New Jersey, he has also been the CEO of Goldman Sachs and the recently imploded brokerage firm MF Global.   The insider blood filtrated through cronyism and the endless squandering of the public dime flows heavily through his veins. When MF Global went belly up back in the fall, Corzine was finally revealed for the inept, overly connected bureaucrat he really is.  Corruption seemingly follows the former Senator, Governor, and banker like shadows on a sunny day.  Earlier this week, New Jersey was declared the least corruptible state in the union much to the surprise of, well, everyone.  But as the great Jonathan Weil pointed out, the methodology in the study conducted by the Center for Public Integrity was horribly flawed.

Every quarter the Office of the Currency Comptroller releases its report on Bank Derivative Activities, and every quarter we find that the Too Big To Fail get Too Bigger To Fail. To wit: in Q4 2011, of the total $230.8 trillion in US outstanding derivatives, the Top 5 banks (JPM, BofA, Morgan Stanley, Goldman and HSBC) accounted for 95.7% of all Derivatives. In some respects this is good news: in Q2, the Top 5 banks held 95.9% of the $250 trillion in derivatives. Unfortunately it is also bad news, because $220 trillion is more than enough for the world to collapse in a daisy chained failure of bilateral netting (which not even all the central banks in the world can offset). What is the worst news, is that the just released report indicates that in addition to everything else, we have now hit peak delusion, as banks now report to the OCC that a record high 92.2% of gross credit exposure is "bilaterally netted." While we won't spend much time on this issue now, it is safe to say that bilateral netting is the biggest lie in modern finance (read How US Banks Are Lying About Their European Exposure; Or How Bilateral Netting Ends With A Bang, Not A Whimper for an explanation of this fraud which was exposed completely in the AIG collapse). And just to put this in global perspective, according to the BIS in the first half of 2011, global derivative gross exposure increased by $107 trillion to a record $707 trillion. It will be quite interesting to get the full year report to see if this acceleration in gross exposure has increased. Because if it has, we will now know that in 2011 European banks were forced up to load up on several hundred trillion in mostly interest rate swap exposure. Which can only mean one thing: when and if central banks lose control of government bond curves, an rates start moving wider again, the global margin call will be unprecedented. Until then we can just delude ourselves that central planners have everything under control, have everything under control, have everything under control.

It is a fact that when it comes to the oddly resilient Japanese hyperlevered economic model, the bodies of those screaming for the end of the JGB bubble litter the sides of central planning's tungsten brick road. Yet in the aftermath of last month's stunning surge in the country's trade deficit, this, and much more may soon be finally ending. Because as Caixin's Andy Xie writes "The day of reckoning for the yen is not distant. Japanese companies are struggling with profitability. It only gets worse from here. When a major company goes bankrupt, this may change the prevailing psychology. A weak yen consensus will emerge then." As for the bubble pop, it will be a sudden pop, not the 30 year deflationary whimper Mrs. Watanabe has gotten so used to: "Yen devaluation is likely to unfold quickly. A financial bubble doesn't burst slowly. When it occurs, it just pops. The odds are that yen devaluation will occur over days. Only a large and sudden devaluation can keep the JGB yield low. Otherwise, the devaluation expectation will trigger a sharp rise in the JGB yield. The resulting worries over the government's solvency could lead to a collapse of the JGB market." It gets worse: "Of course, the government will collapse with the JGB market." And once Japan falls, the rest of the world follows, says Xie, which is why he is now actively encouraging China, and all other Japanese trade partners of the world's rapidly declining 3rd largest economy to take precautions for when this day comes... soon.

We have discussed the money-on-the-sidelines fallacy a few times recently in the context of the circular money-flows (clear misunderstanding of the idea of a buyer and a seller) as well as mutual fund cash levels, retail sentiment, demographic shifts, and insider transactions. There is mounting evidence, as Morgan Stanley's Michael Wilson notes, that 'make no mistake...institutional investors are all-in' as the rolling beta of mutual funds relative to the S&P 500 tops 1.10x at multi-year highs, institutional investors are most exposed to high beta sectors since MS data began, and long/shorts funds are near their most levered long since MS records began. Combine this with the massive surge in Insider Selling transactions in the last few weeks (apropos Charles Biderman's comments on the rally's support by Insider buying til now) and perhaps bearish retail sentiment will lead this market down as we hope that finally 'money-on-the-sidelines' fades from the parlance of all but the most aged and incompetent of market prognosticators.

As we noted this morning, the hope trade seems to be morphing from 'we don't need no stinking QE' to 'good is good but bad is better' as 14 of the last 16 data points have missed expectations. With a relatively heavy calendar of data this week, we are sure there will be ups and downs and micro-trends to call for the all-in but as Jim Reid if Deutsche Bank notes, this is the start of the point in the year when seasonals have often led to data disappointments over the past decade. The data typically beats expectations between November and January but then disappoints for 8 of the next 9 months with the notable exception of May. Overall its certainly a relationship to have in mind, especially as we travel through a period, theoretically, post maximum liquidity for now. Adding to this concern is the fact that real economic activity has 'improved' less and less with each extreme easing action by the Fed - with 'Operation Twist' barely budging the needle on ECRI's growth index relative to QE1 or 2 - and with economic data missing expectations rather consistently already, history suggests negative returns for the S&P will be evident.

The size and scale of 'current law' expectations for spending in 2012 and 2013 are dramatic to say the least. As Morgan Stanley notes, these are huge economic and political challenges to any deficit reduction - which we discussed last week (courtesy of James Montier) is critical if we are to maintain corporate profit margins. Presenting, with little pomp and circumstance, the US economic fiscal cliff...

In Don Coxe's latest and typically excellent letter, "All Clear?", he highlights the opportunity in precious metals mining companies: "If there were one over-arching theme at the BMO Global Metals & Mining Conference, it was that the gold miners are upset and even embarrassed that their shares have so dramatically underperformed bullion...  "On the one hand, they were delighted in 2011 when it was reported that since Nixon closed the gold window, a bar of bullion had delivered higher investment returns than the S&P 500 for forty years-- with dividends reinvested. But some gold mining CEOs find it an insult that what they mine is more respected than their companies' shares...  "In our view, we have entered the most favourable era for gold prices in our lifetime, and the share prices of the great mining companies will eventually outperform bullion prices." As Don Coxe makes clear, governments are running deficits "beyond the forecasts of all but the hardiest goldbugs five years ago; central banks are printing money and creating liquidity beyond the forecasts of all but the most paranoid goldbugs a year ago." The choice for the saver is essentially binary: hold money in ever-depreciating paper, or in a tangible vehicle that has the potential to rise dramatically as expressed in paper money terms.

For the first time since June 2011, the average price for Gas across the 27 European nations just broke above USD10/gallon. With the US on average above USD4/gallon (at its highest since May), it is perhaps worth looking under the covers at just what nations have been hurt the most in the last year by the money-printing-insanity-experiment rising price of crude. Italy has been hit the hardest with Fiat Uno drivers paying 18% more this year than last for a litre of petrol. As The Economist points out, only the Dutch and Norwegians pay more than the Vespa riders but perhaps it is worthwhile noting just how low (on average) the US price is compared to its global peers (for now) and the fact that only the French are paying less this year than last.

Earlier we presented the view by one of the TBAC's co-chairmen, Goldman Sachs, former employer of such NY Fed presidents as Bull Dudley. Now we present the only other view that matters - that of Fed boss (recall the JPM dividend announcement and how Jamie Dimon pushed Ben B around like a windsock) JP Morgan, and specifically chief economist Michael Feroli who is a little less sanguine than the market about interpreting Bernanke's promise to always support stocks, using the traditional stock vs flow obfuscations which is about as irrelevant as they come. To wit " How one views the word "continued" in this context depends in part on whether it is the stock (or total announced amount) of asset purchases that matter for financial conditions, or whether it is the monthly or weekly flow of those purchases.... according to the stock effect view the end of Twist purchases in June does not amount to a tightening, but rather is a continuation of the current accommodative stance of monetary policy. Thus, "continued accommodative policies" for a stock effect adherent would not necessarily imply an extension of asset purchases beyond June." That said, all of this is semantics. Recall that the US has $1.4 trillion in debt issuance each and every year. Unless the Fed steps in to buy at least a material portion, this debt will never be parked, rendering all other plot lines, narratives and justifications for QE moot.

We have one last chance to restore at least a part of the Bill of Rights. Some members of Congress awakened from their fund-raising somnambulance and proposed the Due Process Guarantee Act which would restore the Bill of Rights to its proper place in US law. So do one thing today for the nation and its liberties: contact your representative and senators to press them to support this bill. Ask them which military or law enforcement agencies requested that Congress nullify the Bill of Rights with the NDAA. Advise them to do the correct thing for once in their sordid little careers and vote for the Due Process Guarantee Act. This page lists other articles about the NDAA and also provides links to find your representative and Senators: It's treason. Call it what it is.

The initial reaction to the release of Bernanke's speech this morning was 'QE3 is on' and this was borne out perfectly in the data. TSYs rallied (with the short-end performing best), the USD dropped and with it commodities soared (though Oil stayed much more in sync with it than we have seen historically) and the nominal price of stocks jumped handsomely. What was most notable though was Gold's outperformance (and Silver given its high-beta juice) compared to other asset classes. Then as the US day session opened, Treasuries turned around with the whole curve rising in yield and the long-end steepening as the correlation-algos stepped in to pull the TSY complex back into a twist around the 10Y (10Y unch from 8amET, 30Y +2bps, 5Y -2bps and Mortgage spreads - which widened initially - are now back to unch from 8amET and well down on the day). Oil and the USD have tracked sideways from the open and aside from a gap up around 10amET (on dismal data we assume locking in more QE hope), stocks have leaked back a little as volume faded. Gold (and Silver), however, have continued to surge - now over $1685 and at near two-week highs as once again the cleanest and largest impact of Bernanke's hint at further debasement is exemplified in the price of precious metals.

For months we have been saying that there is no housing recovery, and what little buying interest there was was driven purely by abnormally warm weather and still record low interest rates. Well, the seasonal aberrations are now over, and normalcy can return, but not before much demand was pulled forward (Cash for Caravans? Money for McMansions? Shekels for Shacks? Dough for Dumps?) to December-February courtesy of "April in January" and mortgage rates soaring to well over 4%, leading to a major tumble in MBA new home and refi mortgage applications (as noted here "So Long Housing - Mortgage Applications Collapse, And Sentiment Update"). So we won't repeat ourselves, intead we will give the podium to CNBC's Diana Olick who now finds empirical evidence of what we have been saying all along. From Olick:  "Housing was charging back. Spring sprung early. Sentiment among home builders doubled in six months. Any talk that the fundamentals might not be supporting the sentiment was met with harsh criticism. And then suddenly it wasn’t. A slew of new housing data last week disappointed the analysts and the stock market, and all of a sudden you started to hear concern that maybe housing wasn’t exactly in a robust recovery. From home builder sentiment to housing starts, to home builder earnings right through to sales of newly built homes, there was not one hopeful headline in any of it (except perhaps if you invest in rentals, as multi-family housing starts made more gains, but that is a contrary indicator to housing recovery)." And from the ground:"And then an email from a Realtor in New Jersey: “Just reviewed March buyer clicks, Google’s analytics on all the sites we monitor – March is turning out to be the weakest month since last October re: Buyer interest."