Crude

Extend-and-pretend won't work for the economy, and it won't work for the Gulf either ...

We have already discussed at length European sovereign spreads, the cost of keeping the PIIGS in the eurozone, the inevitable break-up down the road of the EMU, and how EURCHF is ratting out major stress in the system at a time when everybody is trying their best to look the other way. Today adding to our arsenal of charts highlighting the build of massive distortions in the system, I look at EURCHF against Eurostoxx. A friend of mine sent a chart that got me thinking about quantifying the distortion between the two. In order to compare apples to apples, I compared the 1-month % change of both EURCHF and Eurostoxx normalized using their respective volatility. Basically I divide the 1M % change in Eurostoxx by the VDAX index (equivalent of VIX for the Dax) and multiply it by 100. For EURCHF I use the annualized volatility implied by 1M options.

After WTI passed the $90 barrier with firm determination, as we highlighted earlier, the most recent DOE Crude Oil Inventories number confirms that the far larger than expected draw down is accelerating. As readers will recall, after last week's massive drawdown of 9.854 million barrels which was the largest in 9 years, today's number was another stunner, coming in at 5.333 MM on expectations of 3.4 MM. The result: WTI spikes and is last seen at $90.64. And as a reminder every $1 rise in oil decreases U.S. GDP by $100 billion per year and every 1 cent increase in gasoline decreases U.S. consumer disposable income by about $600 million per year. The move in oil in the past week alone has almost entirely wiped out the most recent stimulus. Furthermore, as we suggest earlier, now that $90 is in the history books, $100 is coming, and may be here within a few weeks. At that point Bernanke may have some problems explaining how he is "100% confident" that the surge in gasoline prices is completely and totally not as a result of his deranged genocidal tendencies.Don't worry though, hedge fund managers around the world will be more than happy to afford the surging prices. Remember: wealth effect!

As West Texas Intermediate is now holding steady over the psychological barrier of $90, more speculators will shift their attention to this latest commodities market, which rumor has it has not been cornered by JP Morgan just yet. As Bernanke's liquidity gushes with no sign of stoppage, expect to see a prompt move into triple digit territory here. For those seeking a good overview of what is happening in he crude space, we provide the following summary note from FMX connect...

A recap of today's activity, as little as it may have been, in stocks, vol, FX, rates and commodities.

• Asian stocks decline on Europe debt concerns, South Korea artillery drill.
• BOE forecast to raise interest rate within 6 months: Confederation of British Industry.
• China drugmakers tumble after report medicine prices to be slashed by 40%.
• China's stocks plunge most in month on North Korea, interest-rate concerns.
• Crude oil trades near $88 a barrel on bets US recovery will raise demand.

Now consider that the real price of oil, when measured as global output vs. global demand on a historic basis should be closer to $60 a barrel than $90 and you have a TRILLION DOLLAR annual scam going on and our joke of a government does NOTHING to prevent it. Oh wait, I'm sorry, they do something...

• Asian stocks, Copper decline before European debt talks; Treasuries gain.
• EU faces `gridlock' on debt crisis; agrees on a crisis- management mechanism in 2013.
• India’s central bank kept benchmark interest rates unchanged after 6 increases this year.
• Oil falls to near $88 in Asia despite plunge in US crude inventory.
• Qatar makes $65B bet it can remake economy in World Cup preparation.
• US foreclosure filings plunge to two-year low as lenders probe practices.
• AAR Corp beats by $0.07, posts Q2 EPS of $0.42. Revs rose 36.0% to $447M.

A slew of very interesting info in today's piece by David Rosenberg. Probably the most interesting data point has to do with further evidence of what as we have been claiming for about two months now, is shaping up to be the "mother" of all margin squeezes. Rosie, always a bond bull, looks at recent moves in bond prices and is confident we may have gone through the capitulation phase. We, on the other hand, are not so sure the capitulation is done, and believe quite a bit more selling may be in stock, as increasing concerns of how the Fed will unwind its books now that pundits have you believe that the economy is improving. Keep in mind: when QE2 (and 2.1 if Jan Hatzius is correct) is done, the Fed will have well over $3.5 trillion in rate-sensitive instruments on their hands. Add this to the annual issuance of about $1.5-$2 trillion in gross debt issuance, and one can see why the supply-demand picture in bonds, far from being determined by economic fundamentals, will be very entertaining in the future.

Following the earlier news from the DOE of a crude drawdown 4 times greater than expected, WTI has exploded by over $2 in the last two hours, and is once again threatening to take out the important $90 psychological barrier. What is the impact of this on the US economy? Oh just $200 billion in GDP. With a minus sign in front: "every $1 per barrel rise in oil decreases U.S. GDP by $100 billion per year and every 1 cent increase in gasoline decreases U.S. consumer disposable income by about $600 million per year." And so, a substantial portion of the "benefit" from middle class tax cut extension has been eliminated almost entirely in just under 2 hours.

Following increasing concerns that China may finally realize that its repeated RRR hikes are insufficient and the PBoC will finally be forced to do the right thing and hike the general interest rate (or depeg the Yuan, but that ain't gonna happen), or otherwise withdraw liquidity, the 7 day Repo Rate has jumped to 3.58, the highest since October 2008, when there was no liquidity in the markets anywhere following the Lehman collapse. This merely indicates that obtaining liquidity in China, either directly or indirectly, is becoming increasingly more costly and problematic. But surely this news, together with the escalating riots in Athens, as well as the fact that gasoline prices this holiday season will be the highest on record, are not only priced in but in fact positive for the US stock market, which now responds to no negative news whatsoever, and jumps on the smallest hint that the latest fiscal and monetary stimulus is trickling through in the economy.

After we reported a week ago that JPMorgan was trying to corner the copper market, many noted this was not surprising, considering the bank's comparable approach in manipulating various other precious metal markets. Naturally, we extrapolated that the main reason why the CFTC continues to refuse to delay implementation of position limits is precisely due to the JP Morgan's need to control commodity pricing precisely due to such manipulative trading practices: "As for the CFTC, we now know why they are so intent on delaying the size limit discussion:
after all, any regulation will be forward looking - better let JPM
accumulate all commodities it can and distribute these via hidden
channels to affiliated subs before the ever so busy Gary Gensler corrupt
cronies decide to raise their finger on what is increasingly an ever
more blatant market manipulation scheme. At least in this case, JPM will
push the price higher unlike what it is doing courtesy of its gold and
silver manipulation. However, the PM market (especially Asian accounts)
will soon make sure Blythe Masters is looking for a job within 3 months
as we predicted a few weeks ago." The only problem with this story is that so far, is that unlike copper, JP Morgan's now legendary paper short in the silver market, long taken for granted by the "less than in mainstream" community, has been persistently ignored by the broader media due to the a lack of concrete evidence. Hopefully that will now change: courtesy of a speech delivered by none other than the CFTC commissioner Bart Chilton, who continues to expose the CFTC and the banker cartel's illegal market manipulation practices, we now have proof that "one trader held over 40 percent of the silver market." As this trader is either JP Morgan directly, or various Blythe Masters proxies, we can only hope that finally the broader outcry against JPM's ongoing attempt to suppress precious metal prices (insert Mike Krieger/Max Keiser "Crush JP Morgan" campaign here) will force the bank to finally unwind its shorts. And if not, perhaps the market speculators will do it for them: as of Friday, the SLV ETF held an absolute record 10,941 tonnes of silver, an increase of 163 tonnes for the week.

• Asian stock markets were mostly lower Friday, on rate hike fears from China.
• China regulators warn of risk linked to real-estate trusts.
• China's trade surplus sharply narrowed in November to $22.9B from $27.1B in Oct.
• India’s factory output grows 10.8%, fastest pace in three months.
• Italy's Draghi warns of risks in ECB bond buying.
• Oil rises to near $89 in Asia as traders eye OPEC crude output policy at meeting.
• US cos held $1.93 trillion in cash and short-term assets at the end of Q3.

Twin deficit day, with import and export prices and consumer confidence sandwiched in between. At 2pm today we get the next POMO schedule, which will likely be larger than the $105 billion purchased in November-December due to a greater amount of MBS prepays. Furthermore, as there is no bond issuance in the next several weeks, the net effect will be a substantial demand squeeze as there is no incremental supply. The Fed will surpass $1 trillion in UST holdings within 10 days.

• Asian stock markets mostly lower after muted performance on Wall Street, oil slides.
• China purchases $3.1B of Japanese bonds as Yen beats Dollar, Euro.
• Euro slips to $1.3209 amid ongoing worries about eurozone finances.
• Consumer credit in US unexpectedly increased in October for second month.
• German exports down 1.1 percent in October following previous month's strong rise.
• Japan’s October machinery orders fell 1.4% from month before. Cons est. 0.1% decline.
• Job openings in US increased in October by 351,000 - the most since Aug 2008.
• Most Asian stocks rise; Won drops on North Korea shelling, Treasuries fall.