Archive - Mar 2012 - Story

Jewelers in India are protesting the tax hike on gold imports and plan to keep their shops closed for two more days. This is India’s first nationwide strike in seven years and shows how important the gold industry is in India. The excise duty hike is expected to lead to less demand however Indian demand may again prove to be robust despite tax increases. PDR Gold Trust, the world's largest gold-backed ETF, said its gold holdings remained unchanged at 1,293.268 metric tonnes for the 5th straight session on Monday, despite the drop in prices last week. Gold will have a “sharp” rally as the U.S. boosts monetary stimulus because of a faltering economy in the coming months, Societe Generale said in a report that was picked up by Bloomberg. Data on U.S. gross domestic product in the first and second quarters will “surprise dramatically to the downside,” the bank said today in a report. Meanwhile, ANZ has said that central bank gold buying may lead to a nominal gold record price in 2012 and prices to average $1,744/oz from $1,571/oz in 2011.

• BHP Billiton sees China iron ore demand flattening (Reuters)
• Australia Passes 30% Tax on Iron-Ore, Coal Mining Profits (Bloomberg)
• State Capitalism in China Will Fade: Zhang (Bloomberg)
• Venizelos quits to start election campaign (FT)
• Fed’s Dudley Says U.S. Isn’t ‘Out of the Woods’ (Bloomberg)
• China Is Leading Foreign Investor in Germany (WSJ)
• Fed undecided on more easing: Dudley (Reuters)
• Martin Wolf: What is the real rate of interest telling us? (FT)

In order to make our reader's experience more enjoyable, we're excited to offer three new features: 

1. Zero Hedge Chat;

2. User Relationships; and

3. RSS Comments. 

While it has no chance of passage, the GOP 2013 budget, details of which have been leaked by the WSJ, proposes slashing corporate and individual tax rates, collapsing the current six tax bracket system into just two tiers (10% and 25%), lowering top corporate tax rate to 25% and scrapping the anachronism that is the AMT, or Alternative Minimum Tax. Finally, the proposed plan would nearly eliminate U.S. taxes on American corporations' earnings from overseas operations: something which companies with foreign cash would be rather happy to hear. Needless to say, Democrats will promptly dead end this budget in the Senate: "The proposal, to be offered by Rep. Paul Ryan (R., Wis.), who has become the Republicans' leading figure on budget issues, has little chance of becoming law soon. While likely to be welcomed by House GOP rank-and-file members, it would be rejected by the Democratic-controlled Senate."

While the college debt bubble has been extensively discussed on Zero Hedge (here, here and here) and elsewhere, the reality is that without college student loans, as cheap as they may be, the vast majority of students would not be able to afford going to college, untenable (and non-dischargeable) post-graduation leverage be damned. Please ignore for a second the reflexivity of this symbiotic relationship - that college is so expensive only because college debt is so easily obtainable (and as noted here, between car loans and student debt, is the primary source of consumer debt in the past year)... That said there are two sides to every story: on one hand students are conditioned to believe that they need college to survive in the current world (with statistics such as these floating out there: drop outs since 2002 have "cost" the nation $3.8 billion in lost income and over $700 million in lost taxes), while on the other hand, the burden of a massive debt load, even if with manageable interest expenses, leave the student burdened with principal amortization which alone has a crippling effect on the individual psychology. Is it time to reevaluate higher education? Look at this infographic from OnlineCollege, which summarizes the side effects of soaring college costs, and decide for yourselves.

When it comes to rescuing an insolvent country, continent, or entire financial system, at the end of the day it is a simple question of maths: is "doing it" cheaper than the alternative. Recall that the IIF was heaping fire and brimstone on bondholders and threatening the world with $1+ trillion in losses if bondholders did not comply. That nobody has any clue just what said costs, and opportunity costs, are, does not matter: the status quo must be preserved at all costs. And the status quo is one of avoiding private losses at the expense of taxpayer capital. Enter Credit Suisse with its back of the envelope analysis of the cost of not bailing out Europe's insolvent PIIGS, and the (taxpayer) cost to "save" them.

Earlier today, Al Arabiya made waves in the energy market following reports that a Russian ship carrying special forces had arrived in the Syrian port of Tartus, previously demonstrated here to be a key strategic asset in the Mediterranean. This news was promptly denied by RIA, which said that "there were no Russian military ships off Syria coast" and that the Iman ship is a tanker which is merely conducting resource support functions. Furthermore, according to the Russian Ministry of Defense, the crew of Iman consists solely of "civilian personnel, which is being guarded." That may or may not be the case, but has not stopped ABC from blasting, minutes ago, a headline that "Russian anti-terror troops arrive in Syria" a development that a "United Nations Security Council source told ABC News was "a bomb" certain to have serious repercussions." Which begs the question: is everyone now dead set on having war in Syria, and by proxy, Iran?

"Whocouldanode?" that Apple would do something like pay a de minimus dividend and begin a modest buyback program? Indeed, initial reactions for the stock seemed to be 'sell the news' but of course, it wouldn't be a day ending in 'y' if Apple didn't close green and sure enough, with seconds to spare, Apple managed to close over $600 for the first time. BofA, not so much. After pinging $10 (a healthy double of recent lows), chatter of a secondary began the process of 'normalizing' its recent behavior (the stock is still up 17% post JPM-divi/Stress test news, a whopping 10% better than any of its peers in that 4 day period). The leak in financials dragged on the S&P which limped back lower to close almost perfectly at its VWAP as NYSE trading volumes (after almost record-breaking high levels on Friday OPEX hedge removal day) dropped back to near their lows . Credit outperformed equities today but its a very 'technical' day for credit in general with the CDS/index rolls tomorrow (meaning the major credit indices will move to new maturities and new components) though HYG staggered notably early in the day. USD and Treasury weakness were the headlines of the day (aside from AAPL of course - which apparently has a great new screen) which of course helped commodities rally with high-beta Silver the best on the day +1.2% from Friday and WTI breaking $108 as Gold limped higher (tortoise-like) over $1660 at the end. VIX rose once again and the term structure flattened a little but once again post-OPEX and futures roll, there are some more difficult apples-to-camels comparisons there. Finally we note average trade size in ES today was its largest since 7/1/11.

No conclusions here, just a simple chart showing monthly Saudi Arabia crude oil production based on OPEC data, which has been rangebound in a tight 8,000 - 9750 tb/d range, superimposed with Brent prices over the past decade. The last time Brent soared to record highs back in the summer of 2008, Saudi production peaked at 9,522 tb/d (despite similar promises for spikes in crude production and exports). During last spring's spike, Saudi produced around 9,000 tb/d. In the past two months, production has been at record highs, even as oil keeps setting new highs, entirely due to liquidity, but not because speculators are evil incarnate as Nancy Pelosi will want her brainwashed fans to believe, but simply because for the most part they are Primary Dealers, and other entities attached at the hip to the Fed, who serve as Ben Bernanke's transmission mechanism of record liquidity being dumped into the system. Our advice: if anyone is hoping that Saudi Arabia can pump the 12,500 tb/d needed if Iran truly goes offline, buy a bike, as failure from Saudi to satisfy lofty demands will promptly send unleaded to new all time highs. Couple that with the Treasury debt ceiling fiasco in 5-6 months, and those Obama InTrade reelection contracts may seem a tad rich.

It is no surprise, given the baying for blood from bond bears, that mortgage rates will come under close scrutiny - especially given the supposed reasoning for much of the various LSAPs has been to keep rates low to 'aid' homeowners (as opposed to flush nominal prices to the moon in every risk asset based on the risk premia-reducing duration-crushing portfolio-rebalancing effect). The effects on various asset classes from the announcement and inception of Operation Twist have been varied with Equities (and until the last month high-yield credit) benefiting the most (nominally). What few have noticed was that mortgage spreads actually raced to record tights and were outperforming (on a beta-adjusted basis) stocks and bonds  into the end of January. Since then, Treasury yields have crept higher and mortgage spreads have leaked wider. The last week or so of dramatic decompression in Treasury yields has seen only a small compression in mortgage spreads leading the all-important (apparently) mortgage rates to rise significantly (now at almost 5-month highs). While the relationship between mortgage applications and rates has become tenuous at best, we suspect the velocity of the rise in the mortgage rate will conversely see a rise in applications in the short-term but obviously over time will only prove to stunt any nascent recovery that the NAHB/NAR believes is in place (and perhaps the weaker than expected Fed data is already showing that). For now, it seems evident that mortgage spreads remain a major outperformer - still relatively narrow on expectations of future QE and being short mortgage rates and long Treasuries (generically) seems as  low cost a way to play disappointment for QE3 as any here.

The muppets must buy. Tangentially, one wonders if it was Goldman's advice that a now post-Jobs AAPL followed to do what the banks did post "Stress test"... or if it was JP Morgan's. One can also hope this report from Boy Genius on the NEW iPad occassionally overheating has nothing to do with anything.

While stocks are surging in nominal terms, the options markets are increasingly pricing in greater and greater downside risk concerns. Currently, we are at record levels for this so-called Skew (meaning the price of downside protection outweighs the cost of upside protection by the most ever). Trade accordingly.

The market is ripping. That much is obvious. What some may have forgotten however, is that it ripped in the beginning of 2011... and in the beginning of 2010: in other words, what we are getting is not just deja vu (all on the back of massive central bank intervention time after time), but double deja vu. The end results, however, by year end in both those cases was less than spectacular. In fact, in an attempt to convince readers that this time it is different, Reuters came out yesterday with an article titled, you guessed it, "This Time It's Different" which contains the following verbiage: "bursts of optimism have sown false hope before... Today there is a cautious hope that perhaps this time it's different." (this article was penned by the inhouse spin master, Stella Dawson, who had a rather prominent appearance here.) So the trillions in excess electronic liquidity provided by everyone but the Fed (constrained in an election year) is different than the liquidity provided by the Fed? Got it. Of course, there are those who will bite, and buy the propaganda, and stocks. For everyone else, here is a rundown from David Rosenberg explaining why stocks continue to move near-vertically higher, and what the latent risks continue to be.