Archive - Mar 2012 - Story

Update 1: WTI touches $110.55 before retracing to just under $110.

Stops triggered following WTI crossing $110. SPR announcement due any minute? Also, we give a CME margin hike a probability of about 60% at this point.

Among the many factors responsible for the jump in WTI to just shy of $109 over the past hour, and Brent to new records in various currencies, is the following news reported so far only by Iranian PressTV: "An explosion has hit oil pipelines in the flashpoint Saudi Arabian city of Awamiyah in the kingdom’s oil-rich Eastern Province." And now back to your regularly scheduled deflation.

The market has decided not to wait for the ruinous aftermath of Stanley Fischer's plan to print money and buy stocks to come to fruition. It is, in fact, frontrunning it by buying that which can not be printed, and is completely oblivious of such anachronisms as cash flows or dividends that will soon be thoroughly debased. EUR Brent just took out all time highs. European inflation to follow.

We were speechless when we read this from Bloomberg...

Back in September, before the transition from then ECB head J.C. Trichet to current Goldman plant and uber printer Mario Draghi we asked whether "Trichet will disgrace his already discredited central banker career by pushing a rate cut before he is swept out of the corner office by Mario Draghi, or will the former Goldmanite Italian become the most hated man in Germany soon, after he proceeds to ease, even as Germany still experiences Chinese inflationary re-exports. The answer will be all too clear in just a few months." Sure enough, following a whopping €1 trillion in incremental liquidity released by the ECB in the three shorts months since Draghi's ascension on November 1, all under the guise that the ECB is not printing when it most certainly is, albeit "hidden" by the idiotic claim that it accepts collateral for said printing (what collateral - Italian and Spanish bonds, which will become worthless the second even more printing is required in a few short months? This is run time collateral that can be issued "just in time" to convert it to even more cash as UniCredit did again today), the answer is becoming clear. Slowly but surely the realization is dawning on Germany that while it was sleeping, perfectly confused by lies spoken in a soothing Italian accent that the ECB will not print, not only did Draghi reflate the ECB's balance sheet by an unprecedented amount in a very short time, in the process not only sending Brent in Euros to all time highs (wink, wink, inflation, as today's European CPI confirmed coming in at 2.7% or higher than estimated) but also putting the BUBA in jeopardy with nearly half a trillion in Eurosystem"receivables" which it will most likely never collect.

Despite groundless media reports that French president Sarkozy, who is up for reelection in April, is gaining on his challenger Hollande who has promised to undo virtually all the European fiscal pacts attained through blood, sweat, tears and countless contradictory headlines (more here), it seems that Sarkozys' appreciation by his fellow citizens has hit rock bottom. As AP reports, "Several hundred angry protesters have booed President Nicolas Sarkozy, forcing him to take refuge in a cafe protected by riot police as he campaigned in France's southwest Basque country." It appears that the European discontent is finally seeping rather aggressively into the core, and the political overhaul which many assume will take the Greek model of bloodless technocratic coups by banker appointed puppets may just not work too well elsewhere. In other news, the French now surrender to the French.

There’s a lot of talk right now, for example, about rising oil prices which have created uncomfortably high gasoline prices. In gold terms, however, gasoline prices are in a deflationary spiral. The chart below shows unleaded gasoline prices in grams of gold since January 1976. Priced in grams of gold, gasoline is near an all-time low. Buffett (and others) argue strongly that investors should be in stocks… that a company like Coca Cola or productive farmland is a better long-term investment than a useless hunk of metal.He’s probably right. Except that the useless hunk of metal isn’t really an investment. It’s an anti-currency… appropriate for those who want to sit out of the market and be in cash without having to be in cash.

Did channel stuffing expert AOL quietly merge with a Government Motors without anyone's knowledge? Because making record amounts of cars only to have them amortize rapidly in showrooms must be some New Normal definition of a recovery.

All this money sloshing around is nothing but kindling. This is enough to start one hell of a large inflationary fire, but probably not until we have a deflationary panic first – which will add even more kindling to the pile. The progression from the $1.5 billion Chrysler rescue to the current multi-trillion dollar worldwide financial support operations seems to parallel the march from the first US forestry service attempts to limit forest fires about a century ago to the far more sophisticated efforts possible today... Studies have shown that the onset of that catastrophe is almost totally unpredictable. By suppressing small fires, the forests approach an unstable state where the dead wood, resulting from the natural cycle of birth and death in the wild, is piled high, ready to explode into flames if the conditions are right. The central banks and other governmental authorities have piled the money so high that bubbles are popping up everywhere. With so many bubbles and so much kindling, volatility in price is a sure thing. As research has shown that the timing of these dramatic breakdowns, whether a forest fire, an earthquake, or a market crash cannot predicted, or mitigated as it runs its course, the time to control these crises is way before they start. The US Forestry Service knows that, please tell Bernanke!

Busy day for our friends from Goldman who are now turning quite bearish it appears following the two GDP cuts earlier.

Earlier we noted how Goldman cut their tracking forecast for Q1 GDP from 2.3% to 2.0% on weaker consumer spending data (which somehow resulted in a surge in consumer confidence: oh well, the US branch of the Chinese Department of Truth has to justify its budget somehow). Not even a full two hours later, the firm has just whacked its forecast for Q1 GDP again, this time on the major ISM miss. And this, ladies and gents, is ultra high frequency economics, where HFT machines push the market up and down without reason, and where this has an immediate impact on economic indicators, all changed around in real time.

The problem for the Fed is that interest rates are already zero, and playing around with bonds and buying more mortgages (the Fed already owns $1 trillion) is ultimately pushing on a string: the Fed can't force all the free money into productive investments, nor can it force banks to lend or consumers to spend. The cliche is "don't fight the Fed;" there is no need to "fight the Fed" because they're busy self-destructing, and all we have to do is watch. Maybe the market will follow Apple in a trajectory to the moon here. If it doesn't, a variety of other models suggests the wheels may fall off the "growth and rising profits forever" story and the market will decline to test recent lows or even hit new lows.

Somehow or another, our earlier joke that the ISM should beat the highest Wall Street estimate quickly became the whisper number, which was to be expected in the aftermath of yesterday's comparable Chicago PMI action. Which is why when the final ISM came at a whopping miss of 52.5, on consensus of 54.5, and down from 54.1, the market was less than happy. It gets worse: while the bulk of major ISM index components dropped in February, with PMI, New Orders, Production, Employment and Deliveries all down (Inventories unch), it was the scariest component that posted a major jump as Prices soared +6 to 61.5, the highest since June. And with Exports and Imports both improving, this proves that already in February rising gasoline prices started impairing US manufacturing. But don't tell that to the cheerleaders: because who was in the top spot of Wall Street "forecasters" if not Joe LaVorgna with his estimate of 56.0 for the ISM. Regardless, expect market sentiment to immediately shift to one that despite what Bernanke said less than 24 hours ago, this miss is an immediate green light for QE3 and the market should close at or near 14,000. Unless, of course, the vacuum tubes realize the minor detail that when David Tepper went "Balls to the Wall" and both bad news and good news meant stock upside, WTI was $85. It is $108 and rising now.

So, yesterday it was revealed that both Goldman and JPM had about 145 billion of “gross” notional outstanding on CDS related to the PIIGS. That means they each had roughly 145 billion of purchases and sales. They spoke about various netting agreements that makes the real number lower. They also mentioned with collateral and on a mark to market basis, the real exposure is far lower. Fine, though I wonder why they don’t execute the “master” netting and get the gross notionals down? Wouldn’t that help the system? If these were cleared or on an exchange, all they would have a single net exposure for each country. The collateral and netting would be handled at the central clearing or exchange. Wouldn’t that be simpler? Safer? The e-mini S&P future contract seems to be able to trade that way just fine, and it is more volatile than CDS on most days. Italian CDS is in 25 bps today – seems like a lot, but the up-front payment to buy or sell Italian CDS has changed by less than 1%.