RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 02/03/11
US Defense Secretary Gates says establishing no-fly zone for Libya would require an attack on Libya
As a result, the entire crude complex levitated higher as if HFTed by the Fed's POMO desk.
Update:Fresh Libyan air strike in Brega, bomb explodes next to oil engineering university about 2KM from oil terminal - witness
WTI spikes by $0.70 following reports that a Libya plane has fired two missiles on the town of Brega, which contains a critical oil facility. The fact that Libya is now apparently willing to gamble with its oil infrastructure is precisely the worst case scenario that many have predicted. Stocks, of course, jump on the news too.
Muddy Waters Presents "Irrefutable Evidence Of Securities Fraud" At CCME, Lowers Target Price To $3.54Submitted by Tyler Durden on 03/02/2011 12:09 -0400
One of the most popular feuds against an allegedly fraudulent Chinese company continues as Muddy Waters just raises the bar by several notches: "Muddy Waters, LLC has amassed irrefutable evidence that China MediaExpress Holdings, Inc. (“CCME”) is a substantial fraud, and that management is engaging in a cover-up replete with further dissemination of fraudulent information. In light of the nature of the evidence, we believe that a de-listing from NASDAQ is not improbable; further, we believe that management stands to lose additional credibility. We therefore reduce our estimated value by one-third to $3.54."
Bill Gross Asks The $64,000 Question: "Who Will Buy Treasuries When The Fed Doesn’t?" His Answer: "I Don't Know"; Gross Is Getting Out Of RiskSubmitted by Tyler Durden on 03/02/2011 10:19 -0400
After serving as the inspiration for the Chairsatan's latest appellation with his February missive, Bill Gross now goes for the jugular with the $64,000 question: with "nearly 70% of the annualized issuance since the beginning of QE II
has been purchased by the Fed, with the balance absorbed by those old
standbys – the Chinese, Japanese and other reserve surplus sovereigns.
Basically, the recent game plan is as simple as the Ohio State Buckeyes’
“three yards and a cloud of dust” in the 1960s. When applied to the
Treasury market it translates to this: The Treasury issues bonds and the
Fed buys them. What could be simpler, and who’s to worry? This Sammy
Scheme as I’ve described it in recent Outlooks is as foolproof
as Ponzi and Madoff until… until… well, until it isn’t. Because like at
the end of a typical chain letter, the legitimate corollary question is –
Who will buy Treasuries when the Fed doesn’t?" Bingo, we have a winner. This is precisely the issue that Zero Hedge has been exposing over the past 6 months, and is the reason why the Fed is now locked in a QEasing corner from which there is no exit. To his credit, Gross attempts to provide an answer: "Someone
will buy them, and we at PIMCO may even be among them. The question
really is at what yield and what are the price repercussions if the
adjustments are significant... What I
would point out is that Treasury yields are perhaps 150 basis points or
1½% too low when viewed on a historical context and when compared with
expected nominal GDP growth of 5%." And the stunner: "Bond yields and stock prices are
resting on an artificial foundation of QE II credit that may or may not
lead to a successful private market handoff and stability in currency
and financial markets. 15% gratuities may lie ahead, but more than
likely there is a negative two-bit or even eight-bit tip lying on the
investment table. Like I did 45 years ago, PIMCO’s not sticking around
to see the waitress’s reaction." Translation: Pimco just issued a "sell" rating on everything.
Call it central planning's Pavlovian reaction: the Chairsatan is speaking, which leads to an immediate plunge in the dollar. And as the flight to safety trade now means dump the dollar, nominal assets benefit from the Bernank's third mandate: Russell 2,000 to 20,000, at about the same time as there are 20,000 representatives left of the US middle class.
In advance of the completion of today's POMO we have just one question: will the Fed do its taxpayer fiduciary duty and monetize the cheapest bond (PM6 or the 2.125% of 12/31/2015), which trades 0.7 bps cheap to the sector, or, instead, bend over to Jamie Dimon et al again and instead buy the bond most profitable to flip by the Primary Dealers the just issued QJ2 (2.125% of 2/29/2016), which is actually 0.2 bps rich. Tune in at 11 am to find out.
As Silver Touches $34.90, US Mint Runs Out Of Bullion Blanks, Halts American Eagle Silver Coin ProductionSubmitted by Tyler Durden on 03/02/2011 10:45 -0400
The scramble for non-dilutable currencies hits a frenzy as silver just touches on a fresh 31 year high of $34.90. To commemorate this historic event, the US Mint has halted American Eagle silver coing production, in addition to its ongoing halt of American Buffalo coins: "because of the continued demand for American Eagle Silver Bullion
Coins, 2010-dated American Eagle Silver Uncirculated Coins will not be
produced. The United States Mint will resume production of American Eagle Silver
Uncirculated Coins once sufficient inventories of silver bullion blanks
can be acquired to meet market demand for all three American Eagle
Silver Coin products."
During his presentation to the Senate yesterday (to be followed promptly by another presentation before Congress shortly), Bernanke discussed the impact of the $61 billion spending cut on GDP. In doing so he referenced a report published by Goldman strategists Jan Hatzius and Alec Phillips. He did so incorrectly. And the first thing Hatzius did this morning is to correct the Chairman: "Some have wondered—e.g. in the Q&A portion of Fed Chairman Bernanke’s monetary policy testimony on Tuesday—how such seemingly small cuts could have such a noticeable impact. But it is important to remember that we are talking about a hit to the quarter-on-quarter annualized growth rate of spending here, not about a hit to the level of GDP. For illustration, it is useful to go through a simplified version of the calculation underlying our estimates for the House-passed spending cut." Hatzius clarifies further: "We estimate that the $25bn cut in our budget projections reduces growth in Q2 by around 1 percentage point (annualized); this effect is already incorporated in our forecast that real GDP will grow 4% (annualized). In addition, we estimated that the $61bn cut passed by the House would reduce growth in Q2 and Q3 by 1½-2 percentage point (annualized) in Q2 and Q3. (In other words, relative to the assumptions currently embedded in our forecast, the House-passed package would imply an additional ½-1 percentage point drag on growth in Q2 and an additional 1½-2 percentage point drag in Q3.) Spending would then be maintained at that lower level thereafter, and the effect on GDP growth would dissipate quickly in Q4 and would be essentially neutral by 2012 Q1." So perhaps the Chairman will keep this in mind as this report is surely reference once again today.
If after years of explanations, and cartoons with bears, readers still have not quite gotten the grasp of how QE should work in theory (in practice the only thing about QE is how dramatically its intended and realized goals have diverged) perhaps this animation from the AP will finally put all doubts to rest. So for those still confused by terms such as "money printing", "open market operations", "outright monetization", and "Weimar hyperinflation", this brief and concise clip is for you. And once you see it, forget everything, because what QE2 has done has been precisely the opposite: rates have gone up, but the Fed does not care - as everyone now knows, the Fed's only true goal was to provide Primary Dealers with the capital to bid up stocks. End of story. Lastly, keep in mind, that the Fed is now implicitly funding the US deficit: as it purchases more and more bonds, the interest that is owed to the Fed is subsequently remitted to the Treasury as an actual revenue item, completing the world's most unprecedented Ponzi scheme constructed since the days of Rudolf von Havenstein.
Gold’s all time record nominal high yesterday was barely reported in most of the mainstream business and financial press today - slightly more online but there was little or no coverage in print. This is an indication that gold and silver remain far from the “bubbles” that some have suggested. Speculative manias and bubbles are characterised by mass participation and widespread enthusiasm and “irrational exuberance” by all sectors of society including the media and particularly the retail investor and the “man in the street”. The majority of investors and savers in the western world do not know what gold bullion is and could not tell you the price of an ounce of gold or silver in dollars – let alone in pounds, euros or other local currencies. The majority are unaware of the huge developments in the gold markets (only reported by specialist financial press) such as China’s emergence as one of the largest buyers of gold in the world (see news and our video below) and the fact that central banks and astute hedge funds are some of the largest buyers of gold in the world today.
The February ADP private payroll number came as usual above expectations, printing at 217,000 on consensus of 180,000, with the January number revised up from 187,000 to 189,000. The reason why the market appears to have not only ignored the better than expected data, but traded against it is the following line: "The recent pattern of rising employment gains since the middle of last year was reinforced by today’s report, as the average gain from December through February (217,000) is well above the average gain over the prior six months (63,000)." Alas, checking in with NFP data validates the complete lack of ADP data credibility, which now joins NAR housing data, various diffusion indices and of course consumer confidence data on the trash heap of busted economic indicators.
- Qaddafi Vows Fight to ‘Last Man’ as Rebel Town Is Hit (NYT)
- Jon Hilsenrath: When Will the Fed Tighten? Bernanke Elaborates (WSJ)... hint: Never
- Home Prices in China Increase at Slowest Pace in Six Months, SouFun Says (Bloomberg)
- King Upbeat on Inflationary Pressures (FT)
- More Libyan crude cargoes sail from ports (Reuters)
- Trichet to Talk Tough on Inflation (WSJ)
- House votes for $4bn cuts to avert shutdown (FT)
- China Economist: Yuan 'Has Room to Appreciate' (WSJ)
- Propaganda bureau speaks: Why Obama is a pro-business president per Bill Daley (FT)
Markets mixed this morning with the U.S. up and Europe in negative territory as oil prices rose dramatically and Middle Eastern turmoil raged on. Bernanke spoke yesterday in the semi-annual Humphrey Hawkins speech to Congress, continuing to push Congress to tighten fiscally and to not raise the short term debt limit. While expressing concern for inflation risks, he remained confident that the outlook remains stable for the country. Monetary policy is likely not to tighten until unemployment is subverted and inflation stabilizes toward 2%. Bernanke’s presentation to Congress continues today. Data yesterday showed that manufacturing grew at its fastest pace since 2004, as the ISM Manufacturing Index rose to 61.4 in February v 60.8 prior, putting the U.S. in the head of the pack in the recent manufacturing upswing and causing a sell-off in treasuries. While we do not necessarily believe that a rapidly rising ISM will drive GDP growth above 3%, we do believe that Friday’s payrolls numbers will not echo the prior months disappointment and should print close to the consensus forecasts. Today’s ADP, however, is anyone's guess since the tracking error flipped late last year. The Fed’s release of its Beige Book to this afternoon will provide a more narrative outlook on the current economy.
Chairman Of Libya National Oil Corporation Hopes Oil Does Not Become "Weapon", Sees $130 Price If Libyan Unrest PersistsSubmitted by Tyler Durden on 03/02/2011 08:40 -0400
With US, and now Canadian and Korean warships all converging on Libya, the developed world is certainly sending Tripoli a very loud and clear message. And with Libyan defense forces obviously a joke in comparison to the offensive being slowly mounted against it, one wonders what if any defense tactic the Northern Africa country has. The answer: oil. From Reuters: "Libya hopes tensions with Western countries over a popular revolt in the country do not reach the stage where the Tripoli government considers oil as a political weapon, a top oil official said on Wednesday. Shokri Ghanem, chairman of Libya's National Oil Corporation,
also told Reuters in an interview that Libya's troubles had
created the country's worst energy crisis in decades and Libyan
supply disruptions to world markets could push oil above $130 a
barrel in the next month if troubles persist." Yet as Saudi Arabia has used every chance to make it all too public, the kingdom supposedly has more than enough capacity to pick up the slack, should war break out and Libya go ahead and set fire to its wells. So it is surprising that the Arab League roundly rejected "foreign intervention" in Libya, putting US offensive forces in a tight bind, should it decided to proceed with an attack.