"But alas, a minor problem looms. The Treasury will issue $68 billion in net new debt on Monday that the market must pay for."
The week's one stop comprehensive summary of bullish and bearish events.
While equities are credit closed almost unch from last Friday but at their lows/wides of the week, there was plenty under the surface that clearly signals derisking is rife and discrimination active. HY dispersion and CMBX tranches among others point to some cyclical turning points that do not auger well.
The gold-silver ratio (GSR) measures how many ounces of silver one can purchase for an ounce of gold, on a certain date. Reference to the ratio has a long history. One of the first mentions was that upon the death of Alexander the Great, the ratio was 12.5 to 1. During the Roman Empire, the ratio was set at 12. By the late 19th century, the ratio had risen to 15. Interestingly, these historical ratios roughly reflect geologists’ estimates that silver is 17 times more abundant than gold in the earth’s crust. This gives many investors a reason to believe that 17 is the natural balance between these elements, and that eventually the GSR will return to it. Monitoring the GSR is quite popular among gold and silver investors. It seems that whenever it makes a big move, many start drawing conclusions about the direction of the prices of its underlying metals.
Richard Koo's "The World In Balance Sheet Recession" Revised, And The Japanese Electricity Shortfall QuandarySubmitted by Tyler Durden on 05/13/2011 17:15 -0400
Some version of the latest Richard Koo presentation has already circulated in some form or another. The only addition to the core section (which as usual can be summarized with two words: "spend more") is Koo's take on recent developments in Japan, one of which focuses on the historical trade balance in Japan, and the second, far more important one, looks at an issue few have discussed: the role of electricity supply in a post-earthquake Japan. As Koo says, "electricity supply is the bottleneck for Japan's GDP recovery." Indeed, we have yet to hear anyone from Wall Street's rainbow and unicorn drinking brigade come up with an explanation for how this will be circumvented, especially over the summer when the Japanese government predicts a nearly 20% shortfall in electrical supply. And if Japan were to go the alternative route, how long before the current supply/demand equilibrium point in oil and nattie moves materially higher? As for the broader economic impact from the earthquake which is a double whammy, as Koo points, Japanese industrial production has now fallen to the level of 1987. And Wall Street "economists" still believe 2011 global GDP will be unchanged?
Following last week's ECB very dovish conference, in which Trichet was believed to have put any tightening plans in the eurozone on hold for an indefinite amount of time, today's release of very strong core Eurozone data once again brings the specter of a rate hike to the fore, sending the EURUSD notably higher, and of course, leading to a weakening in the dollar. In addition, the already well known schism between Europe's core and periphery continues, following very weak data reported in the austere PIIGS countries, offset by consensus beating growth in Germany and France. From Bloomberg: "Euro-region economic growth accelerated to the fastest pace since the second quarter of 2010, powered by forecast-topping expansion in Germany and France that offset the impact of tougher austerity measures from Ireland to Spain. Gross domestic product in the 17-member euro area rose 0.8 percent from the fourth quarter, when it increased 0.3 percent, the European Union’s statistics office in Luxembourg said in a statement today. Economists had forecast the economy to expand 0.6 percent, according to the median of 31 estimates in a Bloomberg News survey. GDP rose 2.5 percent from a year ago." All of which once again proves that there is no possibility that Germany and France will ever allow a disintegration of the euro, and will continue to bail out all their troubled neighbors as the continued pegging of Germany's red hot economy to such weaklings as Greece is the only factor that matters for the country's export-led growth.
As Foreclosure Activity Drops To 40 Month Low, Delinquent New Yorkers Have Lived Mortgage-Free For Nearly 3 YearsSubmitted by Tyler Durden on 05/12/2011 15:29 -0400
Today's foreclosure update from RealtyTrac is chock full of interesting data, although none of it is surprising. Those who have been following the complete debacle that is the fraudclosure crisis know that over the past 6 months the foreclosure activity has plunged. Indeed in April, total foreclosures, split between default notices, foreclosure auctions, and bank repossessions affected 219,258 properties: a 9% decline from April, a 34% plunge from a year earlier, and the lowest in 40 months! And while REO events (or disposals once a bank has the keys to the property in its possession) took an average of 400 days, up from 340 days a year earlier, and compared to 169 in Q1 2007, it is the length of the foreclosure process that explains not only the persistent surge in retail stocks, but why US GDP is artificially inflated by at least 0.5-1.0% (and likely has a major impact on inflation): from the release: "The average timeframe from initial default notice to REO in New Jersey and New York was more than 900 days in the first quarter of 2011, more than three times the average timeline in the first quarter of 2007 for both states." In other words, once a deadbeat stops paying their mortgage in NY or NJ, it takes nearly 3 years to get them to vacate. It also means that those who stopped paying their mortgages around time Lehman filed are still living mortgage free in the Empire and Garden States! And there are those who wonder why the "squatters rent" amounts to at least $50 billion...
The Residential Real Estate Week in Review, or I Told You We’re In A Real Estate Depression! The MSM is Just Catching UpSubmitted by Reggie Middleton on 05/12/2011 08:59 -0400
Anybody who has been following me since 2006 knows me to be a real estate bear. I was massively bullish from 2000 to 2005, after which I started selling off my investment assets. No, it wasn’t perfect timing, intellect, luck or a gift from God. It’s called a spreadsheet. Simply do the math and the truth will be self-evident!
The recent correction in the commodities markets may be providing Bernake, Geithner and their easy money acolytes with a sense of relief given the relentless run up in prices of raw materials since the announcement of QE back in 2008, but they should not sleep tight just yet. As anyone in the markets will tell you, when any underlying has a price move so vertical in its trajectory it’s bound to face a correction as the smart money, having gotten in for fundamental reasons much earlier along the trend line now wait for the panic buyers or the Johnny-come-lately’s to give the rally that last unsustainable spike to unload their longs and leave the suckers holding $40.00 silver in their purses. So one must step back and take a long view. Although it would appear that those of us who warn that inflation is not just a threat but very much a fact of life now were knee-jerk pontificators jumping on the commodities rally trend for political (read: Fed/Obama bashing) reasons, the analysis is quite sound. Most important, it is methodical not emotional as price surges tend to make investors and analysts from time to time. Here are some facts: even with the inevitable correction in commodities, as of this writing crude oil is 35% more expensive than it was a year ago…advancing with ups and downs along the way from as low as $17.50/bbl in November of 2001 to its current level of over $100/bbl or around a 19% annual appreciation in a decade since the Fed started giving away dollars. Silver 93% Wheat 84% Cotton 100% Coffee 55% Cattle 10% etc etc. Gold is up 22% for the year. More revealing, it is up an astonishing 450% since 2001. In that same decade the USD index against all currencies shed 40% of its value.
Equities continued their path of convergence to credit's recently weak signals today as we saw the largest compression between debt and equity in two months. Up-in-quality and up-in-capital structure very evident as single-name vol rose notably.
And just as Citigroup predicted, US imports surge even as US exports jump to a record $172.7 billion. But the story is once again in the GDP reducing imports which jump by a whopping $220.8 billion, a $10.4 billion jump M/M. The total deficit of $48.2 billion is the highest since the June 2010 spike which hit $49.9 billion. From the release: "Exports increased to $172.7 billion in March from $165.0 billion in February. Goods were $124.9 billion in March, up from $117.8 billion in February, and services were $47.7 billion in March, up from $47.2 billion in February. Imports increased to $220.8 billion in March from $210.4 billion in February. Goods were $187.0 billion in March, up from $176.9 billion in February, and services were $33.8 billion in March, up from $33.5 billion in February. For goods, the deficit was $62.1 billion in March, up from $59.1 billion in February. For services, the surplus was $13.9 billion, up from $13.7 billion in February." Ah, financial innovation being exported as per usual. Look for another round of Q1 GDP downgrades as this number takes out a few basis points in growth. As we know from China that April exports to the US jumped even more, this import surge will likely carry over into Q2 and result in more GDP cuts.
- U.S. post has $2.2 billion loss, warns of Sept insolvency (Reuters)
- Partisan Divides Harden on Debt Accord as Options Are Rejected (Bloomberg)
- EU Slows Drive for More Greek Aid as Merkel Seeks ‘Proven’ Steps (Bloomberg)
- AIG sets $9 billion stock offer, half of expected (Reuters)
- China Inflation Signals More Tightening to Come (Bloomberg)
- Japan Aims for Tepco Compensation Scheme this Week (Reuters)
- U.N.Chief BanCalls forCeasefire in Libya (Reuters)
- Syria Extends Armed Push; EU Sanctions Begin (WSJ)
Gold and silver have extended their recovery and may be headed for the fourth day of gains due to the continuing European sovereign debt crisis, Chinese inflation (+5.3%) and the real risk that rising oil and commodity prices are leading to an inflation spiral internationally and stagflation. German inflation data this morning was worse than expected jumping to 2.7% from 2.3% due to surging energy costs and despite recent strength in the euro. This has led to the euro falling against all currencies and especially against gold. The precious metals are likely to be supported later today when US trade deficit data is expected to be poor with still high oil prices leading to a very large expected deficit of $47.7 billion. This should see the dollar come under pressure and support gold. Stagflation or low economic growth, high unemployment and rising inflation is a clear and present danger to the UK, EU and U.S. economies and other economies internationally. This is especially the case in the UK where house prices have begun to fall again and may be set for sharp falls. Internationally, we are seeing significant debt deflation where the value of goods and assets bought with debt are falling (cars, property etc) while the value of finite, essential goods such as food and energy are rising. Safe haven and inflation hedging diversification into gold is likely to continue as inflation is deepening and there is a distinct whiff of stagflation in the air. It is too early to tell whether the recent sell off is over and a further correction is possible however global macroeconomic conditions suggest that gold and silver bull markets are very much intact. This is especially the case due to continuing Asian demand with gold again being bought on all dips in China, India and the rest of Asia.
Ireland’s government will impose a temporary levy on domestic private pension savings to fund a jobs plan aimed at cutting unemployment and aiding the economic recovery...
Equities outperformed credit today, prompting a re-entry in our relative-value ETF position but while indices show improvement, rotation across sectors, quality cohorts, and capital structures suggest risk appetite is sorely lacking.