August 25th, 2011
Add the CDS market to the list of participants that is ignoring the biggest development out of Europe in two months: the failure of the second Greek bailout.
- Analysts warn China facing pressure from US, EU debts (China Daily)
- U.S. May Back Refinance Plan for Mortgages (NYT)
- US budget watchdog cuts debt forecast (FT)
- ECB ‘Stands Ready’ to EaseDollar-Market Tensions, Dombret Says (Bloomberg)
- Merkel Rejects Seeking Collateral in European Bailouts as Splits Emerge (Bloomberg)
- Europe Banks Lean More on Emergency Funding (WSJ)
- Apple’s Steve Jobs Resigns as CEO, Will Be Succeeded by Tim Cook (Bloomberg)
- Bernanke Signaling No QE Backed by Higher Data (Bloomberg)
So what to do now? We maintain the forecast we made in 2002 that gold will rise to >$3,000 (and we believe it could be by a wide margin as it is expected to become (it is not yet) a bubble). For the short-medium-term, B. Bernanke speech tomorrow could (we insist on could as we would not be surprised if it is a non-event) be strongly bullish for gold but on the other hand with Paulson funds loosing almost 40% Ytd in some of his funds and the future exchanges around the world hiking margin on gold and silver, we could see further liquidation in the near-term. Liquidation risk is also restraining us from recommending to buy all the gold producers stocks you can at the present time (but we will do it probably this autumn as our gold stock models are on strong buy modes with historic >100% 6 months return).
What would we do? We would sell part of the implied volatility hedge in place (at least 50%) and then we would (using GLD as the basis) risk buy September 160 puts and sell September 150 puts. We would also sell September 180 calls and buy September 192 calls.
Calm before the storm today, with just weekly initial jobless claims (20 out of 20 400K+ weeks with one or two very small exceptions) on the economic docket, ahead of the last bond auction of the week, which should send total US debt on the verge of breaching the provision ceiling of $14.695 trillion.
If we crossed through some spacetime vortex that brought us back in time just two short months ago, to July of this year, today's confirmation that the second Greek bailout has now failed, following the Finnish finance minister's comments that the country will defy Germany and will not give in to demands to abandon its deal for Greek collateral, which in turn has sent the Greek 2 year bond bidless, its yield up 227 bps to an all time record 46.38%, would have been enough to send the futures and the EURUSD plunging. Not today. Instead, the EURUSD soared to a high of 1.4475 overnight, on two things that indicate no marginal improvement in the situation, but no deterioration either, namely: that the ECB continued to buy Italian and Spanish bonds, pushing their spreads to Bunds tighter on the day, and since tighter is the opposite of wider, the market can safely stick its head under the sand. A just as big factor was that borrowing under the ECB's overnight lending facility plunged to a one week low of €42 million after hitting a recent high of €2,822 million yesterday as noted. And with the WSJ noticing this development just a little late (as last week), the contraction, nevermind that another surge in borrowing is coming shortly, has been the big risk on sign for European markets, which in turn have pushed US futures higher, even as the market is getting increasingly nervous that Bernanke could very well disappoint significantly tomorrow. As usual, keep an eye on Libor, OIS spreads, and all other liquidity metrics, which indicate that despite the contraction in the overnight borrowing with the ECB, Europe's liquidity is far from normal.
A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge
Now that Keynesianism has failed (repeatedly and miserably, although certainly not during wartime - during those times it is curiously successful at 'stimulating'), and only those willfully blind refuse to see how this extended slow-motion collapse ends, below we present the latest, 2011 Edition, of the Annual report to Congress revealing "Military and Security Developments Involving the People's Republic of China" or, in short, everything that one needs to know to defend from and/or attack the world's most populous nation. For those short on time, here are the key charts.
That's right: nothing like a little virtually unlimited downside just head of the most groundbreaking (if somewhat priced in) announcement in Apple history. We can only hope this recommendation to sell Apple $300 January Puts, with an initiation date of, well today, was purely a function of impeccably bad timing, because if Apple opens tomorrow at the futures closing price of $357, these will be worth $14.21: a rather unpleasant 30% loss in a few short hours.
A very positive spin on things from the CBO. Of course, politics has nothing to do with it.
Charting The Biggest Structural Problem For US Banks, And What The Market Expects From Jackson Hole, Version N+1Submitted by Tyler Durden on 08/24/2011 21:05 -0400
Sometimes the general public can get confused in attempting to explain the complexities and the inefficiency of the banking sector when one simple chart brings the message home. A chart like that comes from the latest "Eye on the Market" from JPM's Michael Cembalest, who compares total bank deposits ($8.4 trillion), or bank liabilities, and total bank loan (about $2 trillion less) assets, or sources of cash flows that are supposed to fund bank liabilities and generate retained earnings, while the bank performs credit, maturity and risk transformation: a bank's three key functions. As the chart below shows, perhaps the primary reason why the economy is in its current deplorable state, is that instead of lending dollar for dollar to catch up with deposit growth, banks now rely on roughly $1.7 trillion in excess reserves with the Fed, an amount roughly equal to the difference between total deposits and loans, to plug the credibility gap. This also explains why according to Cembalest one of the expectations by the market from Jackson Hole is that IOER will be cut to 0% to promote bank lending, and thus the conversion of reserves into loans (something which the inflationistas out there will tell you is a big risk to a sudden surge in out of control inflation). So how does the Fed's direct intervention in bank balance sheets look like? Here it is.
People seem surprised by the suddenness of the decline in the stock market. It keeps trying to rally, and the rallies keep getting sold. There’s no shortage of worrying circumstances in the real world to explain a fall in prices, and it’s normal for people to disagree about whether they should be going up or down. But the violence of this move has caught many of us by surprise. I don’t think it should have. I think there are good theoretical reasons, very simple, orthodox economic ones, to expect more of the same, to expect equally dramatic, or even more dramatic moves down, going forward. Of course, given the fact that I presumably have some sort of bets on the table, anything I say about that belief, like anything any market participant says, should be taken with a very large grain of salt. On the other side, there’s the danger that I’m merely stating the obvious, and wasting the reader’s time. (But then why are so many of us still long?). Nevertheless, despite the fact that I clearly can’t be trusted, and consequently won’t persuade many people to change their views, and even if there’s nothing startlingly original about what I’m going to say, I think it’s worth laying out what I believe to be the correct explanation of the crash as it’s still happening, so that later on, when we’re tempted to blame various scapegoats – derivatives traders, European politicians, bankers, our neighbors, immigrants, the opposing political party, etc., etc. – we’ll perhaps remember that one of these analyses was predictive of the timing and scale of the event at the time, while the others are invidious reconstructions after the fact.
As the following update from Goldman's David Kostin demonstrates, after dropping to third place with 173 hedge funds owning AAPL (behind Microsoft at 181 and Citigroup at 178) as of March 31, the company that Steve Jobs built was back at the very top of hedge fund holdings with 181 hedge funds holding on to AAPL. The question is what will they do tomorrow and will the first game theory defection bring an end to the fairytale story?
Back Off Banksters! NY AG Eric Schneiderman Fights Back After Being Kicked Off 50 State Robo-signing InvestigationSubmitted by 4closureFraud on 08/24/2011 18:44 -0400
Mr. Schneiderman & his staff, who are aggressively investigating fraudclosure and felony land record fraud, are being attacked and need our support.