Guest Post: The Best Looking Horse In The Glue Factory

The politicians and bankers who control the developed world have made the choice to print money and create more debt as their solution to an un-payable debt problem. Europe, Japan, the U.S., and virtually every country in the world want to dev.alue their way out of a debt problem created over the last forty years. It has become a race to the bottom, with no winners. Every country can’t devalue their currency simultaneously without blowing up the entire worldwide monetary system. But, it appears they are going to try. The United States will never actually default on its debts. Ben Bernanke will attempt to default slowly by paying back the interest and principal to foreigners in ever more worthless fiat dovllvvars. This will work until the foreigners decide to pull the plug. For now interest rates are low and the U.S. is the best looking horse in the glue factory. But we all know what happens to all the horses in the glue factory – even Mr. Ed.

Goldman Crashes To Earth: Reports 24% Trading Day Losses In Q2, Compared to 1% In Q1

What a difference a quarter makes. Back in Q1, Goldman reported one (1) day in which it had a trading loss out of 62. It also reported 32 days on which it made over $100 million. Oh how the times have changed. According to the just released 10-Q, Lloyd Blankfein's firm suffered an epic implosion, recording 15 trading day losses out of 63, or a stunning 24% loss rate. And far worse: only 4 days in which Goldman recorded profits of $100 million. And that's why the stock is floundering. The only question is whether this was premeditated to shift the public anger away from Goldman which back in 2010 barely had any trading day losses in the entire year. And if not, what is the systemic change that caused this worst quarterly performance for Goldman in years?

JP Morgan Warns Gold to Go Parabolic and Rise to $2,500 By Year End

This may be a sign that the current sharp rally may have reached its zenith as neither bank has a great track record regarding short term trading calls on commodity markets. In the short term there is the risk of a correction as gold’s rise is now becoming front page (on front page of FT today) and headline news. The fact that silver has fallen in recent days and remains below $40/oz and the fact that gold mining equities have also not risen may also be a warning signal. Gold has risen from below $1,500/oz to nearly $1,800/oz in 5 weeks (since the start of July) and is up nearly 18% in dollar terms.  Therefore, in conventional terms gold is most certainly overbought.  However, we are not living in conventional or normal times and the ongoing global market crash and global currency debasement means that there is a chance that gold will go parabolic as it did in the 1970’s.

Frontrunning: August 9

  • Rogoff: Fed Will Embark on QE3, Act ‘Decisively’ (Bloomberg)
  • China Inflation Quickens to 6.5%, Limits Policy Response to Global Crisis (Bloomberg)
  • ECB Puts Pressure on Italy (WSJ)
  • Chinese Fault Beijing Over Foreign Reserves (NYT)
  • Senate to probe S&P downgrade (FT)
  • Cameron Back to U.K. for Emergency Meeting on Riots (Bloomberg)
  • Trichet Turns ‘President of Europe’ as Debt Crisis Stuns Political Leaders (Bloomberg)
  • Hong Kong Sells Land 33% Below Surveyors’ Estimates Amid Market Turmoil (Bloomberg)

Daily US Opening News And Market Re-Cap: August 9

Markets witnessed a mood of risk-aversion today on the back of growing concerns about a global economic slowdown on the back of a recent US sovereign downgrade, together with ongoing contagion fears in the Eurozone. European equities traded lower during the session, following lower closes to the US and Asian bourses, which triggered market talk of a Euro-wide ban on short selling. The FTSE-100 index breached the key 5000 level to the downside, and registered a 20% drop since Feb’10, as it entered a bear market. Meanwhile, Spot Gold printed a record high at USD 1780.10 per ounce as investors opted for safety of a more tangible asset. Elsewhere, the USD-Index weakened ahead of the FOMC rate-decision later in the session, weighed upon by prospects for further monetary easing by the central bank. Fresh all time lows were observed in USD/CHF and EUR/CHF at 0.7383 and 1.0480, respectively, whereas USD/JPY tested a key level of 76.96, which saw the previous intervention by the BoJ. Weakness in the USD-Index helped EUR/USD and GBP/USD to print session highs, however GBP/USD came under pressure following weaker than expected industrial/manufacturing production data from the UK. In fixed income, the Eurozone 10-year government bond yield spreads observed tightening across the board on renewed market talk of the ECB buying in the Italian and Spanish bonds, which also weighed on Bunds. Moving into the North American open, the focus remains on the FOMC rate-decision to see if the Fed delivers a verdict of further monetary easing owing to the recent S&P rating action on the US, together with low growth prospects in the country. In fixed income, USD 32bln 3-year Note auction is also scheduled for later in the session.

S&P Cuts AAA Rating On Thousands Of Municipal Bonds

The much awaited cut by S&P of thousands of municipal bonds following its August 5 downgrade of the US has arrived. Per Bloomberg: "The rating company assigned AA+ scores to securities in the $2.9 trillion municipal bond market including school- construction bonds in Irving, Texas; debt backed by a federal lease in Miami; and a bond series for multifamily housing in Oceanside, California. Olayinka Fadahunsi, an S&P spokesman, said he couldn’t provide a dollar figure on the affected debt. “It’s expected, but nobody is happy about it,” Bud Byrnes, chief executive officer of Encino, California-based RH Investment Corp., said in a telephone interview. “No one that I know thinks it was justified to cut the U.S. bonds to AA+. Once that happened, you knew that any prerefunded bonds or escrowed bonds would be downgraded too. It’s a domino effect.”" Well, Bud, if you really have so few acquaintances, we suggest you go out more. There are some fun bars on Ventura: give us a call for the low down. As for people who do go out more, here's one: "Chris Mier, a managing director at Loop Capital Markets LLC in Chicago who follows the municipal bond market, said the downgrades made sense, given the federal rating cut. “In order to keep the system logical and coherent, there are going to be a lot of downgrades,” Mier said in a conference call with reporters and clients." Matt Fabian, a managing director of Concord, Massachusetts- based Municipal Market Advisors, a financial research company, said in a telephone interview that he expected “hundreds and hundreds of municipal downgrades,” which may hurt investor confidence. “Treasuries may be able to shake off a real impact from the downgrade,” he said. “Munis, I’m less sure about." That's ok, while nobody has any idea what is coming, that won't stop 99.9% of those on Comcast's financial comedy channel from opining anyway.

Two Previews The FOMC Rate Decision Later Today, In Which Goldman Says "A Little More Easing May Be Needed"

For today's preview of the FOMC rate decision (which should really be called a QE3 decision), we go to RanSquawk which highlights the push and pull mechanics of today's events, and to Goldman which once again makes the explicit clarification that it needs QE3 with the statement that "A bit more easing might be needed in the near term." Yes Goldie, we know you want another year of record bonuses.

RickAckerman's picture

And how did Treasury paper do following Standard & Poor’s bombshell downgrade of U.S. debt?  Why, T-Bonds, Bills and Notes came through unscathed, thank you. Actually, they did much better than that, rallying so sharply yesterday that one might have inferred the U.S. was the last citadel against the panic, confusion and fear that rein elsewhere in the world.

S&P To About Commence Cutting Corporates

Those who were hoping only government and government-related entities are about to be skewered by S&P, we have some unpleasant news: according to Reuters Insider: "Announcements should be expected this morning about effects to corporations from S&P’s downgrade of U.S. credit rating, David Beers, head of S&P’s sovereign ratings." This means financials, the corporate group most at risk to the US downgrade, are about to be shellacked. And, as we pointed out previously, a 2 notch downgrade in Morgan Stanley will result in a $1.4 billion margin call. We haven't done the math on the other TBTFs but something tells us Bank of America is in the same boat (and isn't it ironic if AIG also ends up seeing a collateral spring as a result of the US downgrade). Are we about to see the first (of many) truly unexpected consequence of the US downgrade? Stay tuned.

Date: January 10, 2011; Source: Jim Cramer; Title: "10 Reasons To Buy Bank Of America"

Everyone who may have just heard the unprecedented rant by Jim Cramer bashing Bank of America, now that it is at its multi-year lows, may be a little confused. After all it was just on January 6, 2011, when Bank of America was at its multi year highs, that he released the following "report" titled "10 Reasons to Buy Bank of America." We all enjoy the laugh, but we ask Comcast? Is this is the comedian that CNBC wishes to destroy any remaining viewership it has and commit ratings suicide?

Morgan Stanley Discloses $8.5 Billion In Europe Exposure, 8 Trading Day Losses, Lists Impacts Of US Downgrade On Market And Its Business

Some very interesting data points were disclosed in Morgan Stanley's just released 10Q. First, we learn that in the last quarter, the company which had "blow out" earnings, at least compared to expectations and Goldman, actually was not much to write home about by typical Wall Street standards, with a whopping 8 days of trading losses in Q2. Considering that most Wall Street firms had quarters in a row with no daily trading losses, this is, sadly, quite disappointing. Next, and more important, is that MS has disclosed it has a rather substantial $5 billion in gross exposure to the PIIGS, as well as another $3.5 billion in funding exposure to Europe. Considering that most European banks had already offloaded their PIIGS exposure, at least we now know who they were offloading risk to. Lastly, from the risk factors we read that a US downgrade will likley not be beneficial to Morgan Stanley or the stock market, to wit: "[a downgrade] could disrupt payment systems, money markets, long-term or short-term fixed income markets, foreign exchange markets, commodities markets and equity markets and adversely affect the cost and availability of funding and certain impacts, such as increased spreads in money market and other short term rates, have been experienced already as the market anticipated the downgrade. In addition, it could adversely affect our credit ratings, as well as those of our clients and/or counterparties and could require us to post additional collateral on loans collateralized by U.S. Treasury securities."

Frontrunning: August 8

  • To Reassure Markets, Europe Needs Bigger Bailout Fund, Says Geithner (WSJ)
  • European Central Bank acts to prop up debt of Italy, Spain (WaPo)
  • ECB bond intervention set to spur debate (FT)
  • Debt Issuers Brace for Impact from Downgrade (Reuters)
  • G-7 Seeks to Calm Investor Fear After World Stock Selloff(Bloomberg)
  • S&P Affirming U.S. Short-Term Debt Ratings May Keep Money Markets in Check (Bloomberg)
  • New Rules in Game of Sovereign Debt Risk (FT)
  • Japan Would Sell Yen to Dissuade Speculators (Bloomberg)
  • China Sells Japan Medium-, Long-Term Debt 1st Time in 9 Months (Business Week)